Order flow revival, diversification pays off for Praj Industries

ET Intelligence Group: Engineering and solutions provider to ethanol manufacturers Praj Industries has gained more than 10% in the past few days, despite a 50% drop in December quarter profit. A revival in orders and management confidence that the worst is over have boosted investor sentiment. The company’s diversification in the areas of high-purity water, water treatment and critical process equipment is also reaching a critical mass and is expected to drive future growth.

Once a darling of the markets, Praj Industries languished between 2008 and 2014 as its focus area of ethanol manufacturing faced a severe slowdown. Net profit declined from Rs 153 crore in FY08 to Rs 55 crore in FY14. FY15 has seen a consolidation with net profit for the first nine months rising 17% to Rs 39.7 crore from the year earlier. The slowdown in the core business forced it to diversify into related areas 3-4 years ago, and that’s now gaining momentum.

A jump in orders in the December quarter has improved the outlook. Of the orders worth Rs 1,050 crore it has, 51% were secured in the just-concluded 3-month period.

As a result, orders are more than 25% higher than at the start of the year and give greater visibility to next year’s revenue. Emerging businesses account for more than 40% of these orders.

Earlier this year, the company had started engaging with clients to upgrade its existing ethanol or brewery plants, which has started generating orders.
The company’s second generation ethanol plant will be commissioned in the October-December quarter. Commercial success in this regard will lead to significant future opportunities.

Growth in orders as well as enquiries have improved the outlook for Praj, which has remained a debt-free, cash-rich and dividend-paying company for over a decade. It is currently trading at 18 times profit for the trailing 12 months.

“Praj has extended its expertise in chemistry and processes into new areas like waste water treatment, high purity water, critical process equipment and bio products. Praj’s name is getting accepted in these emerging segments and the plan is to scale up further domestically and internationally. The company is optimistic and is receiving good level of enquiries,” noted a recent report from Kotak Securities, which gave a ‘buy’ rating with Rs 75 as the target price.