Praj Industries: R&D gains to turn things around

Pune-based Praj Industries is yet to overcome some of the problems encountered by it. Although the leading provider of engineering and technological solutions for ethanol manufacturing posted a 31% rise in its quarterly net profit to Rs 39.6 crore for September 2009, the driving force has been other income and foreign exchange gains, while operations continued a weak march.

The company���s net sales for the quarter stood at Rs 200.7 crore, which were marginally better than the corresponding quarter of last year. Still, the company witnessed a 10% jump in its raw material cost. Despite a 3% Y-o-Y fall in employee cost and a 17.7% reduction in other expenditure, the operating profit for the September 2009 quarter was 7% lower on Y-o-Y basis to Rs 40.4 crore.

Praj Industries booked a foreign exchange gain of Rs 50 lakh on account of restatement of advances received from customers in foreign currency against a loss of Rs 11.3 crore in the September 2008 quarter. At the same time, the other income that represented income on investments and a reversal of doubtful debt provision, posted a 77% jump to Rs 9.8 crore, thanks to both these factors. Pre-tax profits rose 34.4% to Rs 48 crore, which translated into a net profit growth of 31% despite a slightly higher effective tax rate of 17.5% compared with 15.6% last year.

The company had a tough year in FY09 ��� particularly its overseas subsidiaries ��� due to the economic turmoil. As a result, it wrote off Rs 11.2 crore last year towards permanent diminution in the value of its investments in subsidiaries. At the same time, the company���s standalone profits for the year, too, dipped 15.5% to Rs 129.7 crore. Praj is almost debt-free with a cash balance of around Rs 130 crore, according to the FY09 consolidated balance sheet.

Bio-fuels are driven more by mandates resulting from the government policies for climate change mitigation. The year 2008 witnessed a strong 38% jump in ethanol consumption over 2007, mainly driven by the US. Several countries in Europe and South-East Asia are currently in the process of implementing bio-fuel consumption mandates, which can result in a steady flow of orders for Praj Industries in the coming months.

With these numbers, the company���s per share earnings for the trailing 12 months now stands at Rs 7.6. At the current market price of Rs 96.5, the scrip is now trading at a price-to-earnings multiple of 12.7, which appears to be fair valuation.

Praj Industries, which annually doubled its net profits between FY03 and FY08, has hit a rough patch in the past 18 months. While an economic revival globally will lift the performance of its subsidiaries and improve the growth outlook, the next phase of high-speed growth can be seen only once its investments in the R&D start to pay off.