Reduce Praj Industries; target of Rs 82: KRChoksey

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Reduce Praj Industries; target of Rs 82: KRChoksey

KRChoksey is bearish on Praj Industries and has recommended reduce rating on the stock with a target of Rs 82 in its July 26, 2011 research report.

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KRChoksey is bearish on Praj Industries and has recommended reduce rating on the stock with a target of Rs 82 in its July 26, 2011 research report.

"Praj Industries, top line has grown 75% Y-o-Y during Q1FY12 but has shown degrowth of 19% Q-o-Q. Out of total top line of Rs 164 cr, 79% came from Fuel Alcohol segment , 14% came from Breweries segment and remaining 7% from new initiatives like waste water treatment and customized plant & equipment. Y-o-Y growth looks magnified due to low base effect as Q1Fy11 was a bad quarter for Praj Industries."

"In spite of no meaningful change in revenue composition during the quarter between domestic and export ( 34:66) raw material cost has gone up by 201 bps on Q-o-Q basis. Employee cost during Q1FY12 has gone up by 300bps Q-o-Q as company has hired additional people and made provision for staff bonus . The combined effect of these two has led to 54 bps contraction in OPM ( 8.18% vs 8.72%) on Q-o-Q basis. Going ahead operating leverage is expected to come into play which along with improved working capital management is expected to enhance FY12E OPM to 11.2% The company has added Rs 265cr new orders during the quarter taking total outstanding order book to Rs 850 cr as on June 30,2011 compared to Rs 750 cr on March 31,2011.The order book is to be executed between 9months -18 months."

"The order book is divided equally between domestic and overseas with scale tilting in favour of export market. 85% order book comprises of ethanol while remaining is equally divided between breweries equipment and new initiatives ( waste water treatment).South& Central America, Africa and S.E Asia are key contributors to order book. The ongoing financial crisis in US and Europe has put question mark on project funding in these countries. The end of Blenders Credit in US from July 31,2011 is real bad news for conventional Bio ethanol producers and may lead to reassessment of planned investment in the sector. Ligno cellulosic ethanol is still some times away. In this scenario we are very cautious about maintenance of current run rate of new order booking."

"The company is now providing for tax at 21% compared to 11% average tax rate in FY11. They seem to prepare to pay MAT for FY12. Also other income for Q1FY12 stands at 4.43cr which is 15% down Q-o-Q. The combined impact of these two has led to net margin going down to 8.30% which is a contraction of 174bps Q-o-Q. Company has spent Rs 11 cr on capex during Q1FY12 against annual guidance of Rs 60 cr. Kandla facility for process equipment will get commissioned by Sep-Oct 2011 against earlier guidance of July 2011. Bio consumables plant at Jejury will come on stream by Second half of FY12 as scheduled. Delay in plant erection should have minor negative impact on business volume during FY12."

"Our revised calculation suggests Fy12 top line will grow by 27% while bottom line will grow by 28% y-o-y. At the current market price of Rs 90, the stock is trading at 24xFY12PE which looks stretched due to lack of firm revenue visibility and uncertainty in global economic environment. We revise our 12 month price target to Rs 82 valuing the company at 22xFY12PE and we maintain REDUCE on Praj Industries," says KRChoksey research report. '

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To read the full report click on the attachment