Jitendra Kumar Gupta Moneycontrol Research
India’s largest ethanol equipment maker Praj Industries continues to witness good traction, which is a good sign and confirms that a structural turnaround in the business is taking hold.
During the June quarter, the company’s ethanol revenue grew by a strong 89 percent on a year-on-year (YoY) basis. The domestic business saw a spurt of 18 percent YoY in revenue.
However, because of the flat growth in the export business and decline in other segments such as brewery and high purity, the overall revenue grew at a meagre 10.4 percent to Rs 211.6 crore.
Thankfully, because of the operating leverage and lower raw material cost as a percent of sales, the company was able to report a cool 48.8 percent jump in EBITDA. Input prices rose by just 3.1 percent YoY, which led to better margins. During the quarter under review, operating margin increased by 80 basis points to 3 percent.
Higher operating profit and income from investments drove up profits. The company is sitting on liquid investments and net cash of Rs 310 crore in the books as a result of higher cash generated by the business. In the June quarter, the company earned Rs 8.3 crore of other income, up 144 percent YoY. This rubbed off on reported profit, which zoomed 151 percent to Rs 8.8 crore.
Key negatives
On a standalone basis, the ethanol player reported net profit of Rs 11.5 crore as against Rs 8.8 crore on consolidation because of the losses incurred by its subsidiaries.
Barring the financial performance, which was reasonably good, the company saw a drop in new orders. Order inflows fell by as much as 48.8 percent during the three months to June. The management attributed the fall to a seasonally weak quarter and delays in decision making in its user industries as well as liquidity constraints in the market.
Outlook and valuations
The end market is expected to rebound soon, which means more business enquiries now. Ethanol blending in fuel also promises to be a growth opportunity, which has hit 6.2 percent as against 4.2 percent a year ago. The government looks to take the figure to 20 percent, which can spell more opportunities in coming years.
Moreover, the current order book at Rs 886 crore, up 9 percent, provides good revenue visibility. In terms of valuations at current market price of Rs 121, the stock is trading at 16 times its FY21 estimated earnings, which is reasonable, considering the cash in the books and opportunities in the sector.
The ethanol market is in for better prospects as oil PSUs are adopting such technologies. The management commentary reflects that.
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