PC - Ideas - Praj Indsutries - Sep 2014backoffice.phillipcapital.in/Backoffice/Research... · Kaizen 3. Praj is developing technology to commercialize bio fuels from non-food materials

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measuring growth | PRAJ Industries September 29, 2014

Praj Kaizen thesis Praj Industries is a story of multi-year compounding of revenue and earnings growth driven by new product developments, entry into new markets, and technology. Praj industries has three growth engines developed internally, which are unlikely to be impacted by the changing market environment. It has weathered business cycles and has come out bigger, sustainable, and diversified by creating new markets and business segments consistently. These growth drivers are providing medium-term to long-term visibility. Praj is entering a virtuous cycle in terms of growth and cash flow.

1. Core business of ethanol and brewery technology has seen multiple cycles and it

has emerged stronger and better. The business has become a cash cow now. 2. With the expertise of brewery technology, the company has developed newer

capabilities and technologies like waste water treatment, critical process equipment, and HiPurity Systems as part of its emerging businesses. These will see 32% CAGR over the next three years and contribute 47% of its consolidated revenue by FY17. It is investing cash from emerging businesses to develop new verticals such as livestock health and nutrition products, which will provide long-term growth and a new growth cycle.

3. Praj is developing technology to commercialize bio fuels from non-food materials

like- cellulosic material. It is setting up commercial demo plant over next 10-12 months and its success will take the company into a new growth orbit and provide nonlinear growth

All the above drivers are internal and will lead to continuous improvement in its revenue trajectory. In totality, adding the three revenue drivers, Praj will deliver revenue and earnings growth of 15% and 23% respectively over FY14-17

Vikram Suryavanshi | [email protected] | + 9122 6667 9951

September 29, 2014

Phillip Kaizen

We at PhillipCapital are presenting stocks with sustainable growth prospects generated by internal drivers.

改善 Kaizen in Japanese stands for “continuous improvement” or “philosophy of improvement” derived from the words Kai, which means “change”, and Zen which means good. It involves all employees from the CEO to the assembly line workers. Kaizen was first implemented in several Japanese businesses after the Second World War, influenced in part by American business and quality management teachers who visited the country. It has since spread throughout the world and is now being implemented in environments outside of business and productivity.



Praj Industries Limited a perfect blend

• Praj is knowledge based company and has experience and developed

expertise in bio-processes, engineering and project development. It has set up modern research and development centre “Praj Matrix” as backbone of

technology development. • The company is market leader in bio-fuel technology with 65% market share

in domestic ethanol market along with strong presence in international market. It had export 52% revenue from export in FY14.

• Praj has diversified within its core competency into emerging businesses like industrial water treatment, critical process equipment’s and bio products.

Emerging business is providing sustainable strong growth in medium to long term with focused growth strategy for each segment.

• The revenue contribution from emerging business grew from 18% in FY13 to ~28% in FY14 and would increase to ~47% by FY17.

• Praj has consolidated market in domestic brewery market and is now focusing on growth opportunities in international brewery market.

• Praj is working on second generation bolt on demo plant with investment of ~INR750m and is expected to complete over next 10-12 month. It will use

non- food based feed stock like Bagasse, Cane trash, corn cob etc. Valuations At CMP of INR61, stock is trading at 13.5xFY16 earnings and P/BV of 1.8XFY16.

The company has strong balance sheet with zero debt and enjoys leadership position in ethanol and brewery market. Praj aspires to be a major player in the

environment, energy and agri process led applications providing integrated solutions including plant, equipment and products. The commercial success of

second generation of bio-ethanol plant would be game changer for the company. We have valued at 14xFY17e with target price of Rs 93 per share.

Key Data

CMP (Rs) : 61

Target (Rs) : 93 (52%)

RECO : BUY

Bloomberg : PRJ IN

Market Cap (Rs bn) : 11

Market Cap (USD bn) : 0.2

Stock Performance

O/S Shares (Mn) : 177

52 - Wk Hi/Lo (Rs) : 79/ 36

Liquidity 3m (USD mn) : 1.2

Shareholding Pattern (%)

Promoters : 33.0

FII / NRI : 8.7

FI / MF : 15.4

Non Promoter Corp. Holdings : 14.8

Public & Others : 28.1

Price Performance (%)

1mth 3mth 1yr

Absolute -2.5 -14.8 67.7

Rel to BSE -2.6 -19.4 34.4

Valuation Summary Rs mn FY13 FY14 FY15E FY16E FY17E Net Sales 9,191 9,858 10,384 12,341 14,906 EBIDTA 904 867 844 1,213 1,765 Net Profit 706 629 578 800 1,179 EPS, Rs 4.0 3.5 3.3 4.5 6.6 PER, x 15.3 17.2 18.7 13.5 9.2 EV/EBIDTA, x 11.3 12.1 12.3 8.5 5.7 P/BV, x 1.9 1.9 1.8 1.8 1.8 ROE, % 12.4 10.8 9.8 13.4 19.6 Debt/Equity, % 2.4 3.7 3.6 3.6 3.5

Source: Company, PhillipCapital India Research Estimates


Emerging businesses to provide secular growth Praj has re-aligned its business model and business mix over the past five years to create

sustainable businesses. It has developed an additional revenue stream through

“emerging businesses” started in 2009, which contributed 28% of its revenue in FY14.

Emerging businesses is an extension of Praj’s core competencies in biotech, engineering,

manufacturing, and process and project integration.

Its emerging business unit consists of 1) water and waste-water treatment, 2) Praj HiPurity

Systems (earlier Neela systems), and 3) Critical Process Equipment and Systems (CPES).

We estimate the contribution from these businesses to touch ~47% in FY17e and this

increased contribution should reduce Praj’s business cyclicality risk. The emerging

businesses segment has a diversified customer base in sectors such as oil and gas, sugar,

textile, beverages, pharmacy, cosmetic, agro chemical, high-end industrial products, and

biotech.

1) Praj HiPurity Systems

Praj renamed its 70% subsidiary Neela Systems Limited as Praj HiPurity Systems

Limited. It offers equipment and standalone systems for treating wastewater sources

from various focused segments. The offerings are customized to the clients’

requirements for treating streams from chemical, hotel, dairy, hospital, and food and

beverage industries.It has put in place a strategy to: 1) increase wallet share by

offering integrated solutions that will cover end-to-end process plant, 2) increase

international business by focusing on key geographies and accounts, and 3) build a

strong services business.

2) Critical Process Equipment & Systems (CPES) Praj started this division to explore its fabrication, design and engineering skills. It

has almost all the required approvals for business and now is pre-qualified to work

with global players.

CPES has now significantly moved ahead on the value chain from the first stream of

‘built to print’ to ‘design to build’ and ‘skids & systems’. The company has now

started designing and manufacturing products for oil and gas and other industries

which involve high-skill engineering and fabrication with better value addition. The

CPES business has clients from the oil and gas industry, global EPC companies, and

pharmaceutical manufacturers.

3) Water and wastewater systems

Praj offers an entire range of technologies for industrial waste water treatment. With

environmental norms becoming more stringent and increasing shortage of fresh

water, more companies are reducing water usage by re-cycling and re-using. Praj has

successfully demonstrated the technology for treating waste water and recycle

odorless, colorless and pathogen free for alternate use in textile hub Tiruppur, Tamil

Nadu and other parts of India. The “Clean Ganga” river project that was recently

announced by government could provide opportunities for the company. The project

will rejuvenate 2,500km long Ganga with 118 towns having waste water treatment,

sewerage infrastructure at estimated cost of Rs 510bn.

4) Livestock Health and Nutrition product It is new initiative for company with extension of emerging business. Praj is

developing biotech products involving application of modern biotechnology for the

industrial production of chemical substances and bio-energy, with less waste and

reduced energy consumption. It has experience and expertise in microbiology in its

existing businesses of distillery and brewery co-products and using Praj Matrix - the

R&D centre for development of biotech products. The company has set up good

manufacturing practices (GMP) compliant manufacturing facility at Jejuri, near Pune

and has launched products in the poultry and aqua segment as food additives. It has

clear roadmap over next five year to develop this business to significant size.


First generation ethanol – story not over yet! Domestic market to provide opportunities Praj successfully capitalized on growth opportunities provided over FY04 –FY09 by the

first phase of ethanol blending with petrol with the government’s 5% blending mandate.

It demonstrated its strength by capturing around 75% of India’s market and reported

revenue CAGR of 53% during the growth phase of FY04-09. Within the same time frame,

it also expanded in international markets with around 30% market share in the regions

that it is present in, i.e USA, Africa, South East Asia. The ethanol blending and demand

for ethanol plant slowed down post 2009 because of cyclical nature of sugar industry

leading to volatility in ethanol supply.

The success story of ethanol blending in Brazil can be replicated in India. The production of

bio-ethanol from sugarcane is most efficient and economical and both countries are among

the larger producers of sugarcane worldwide. Brazil started ethanol blending in 1980 and

over a period of time, was able to demonstrate successful ethanol blending on a

commercial basis. Flex-fuel cars that can use either ethanol or blended gasoline account for

about 57% of Brazil’s total car fleet and 92% of new vehicles sold in Brazil are flex-fuel cars.

In the US, ethanol blending is done to the extent of 10% while in Brazil the corresponding

figure is 25%. Considering the fact that India is the world’s second largest sugarcane

producer, its blending record of just about 2% is below par.

The government of India made 5% blending of ethanol mandatory with a view to take it

to 10%. India consumes ~22 bn litres of Petrol (Gasoline) annually and ethanol blending

of up to 5% can potentially replace more than one billion litres of imported oil (forex

savings of ~USD800m). We believe the next level of growth will continue from increased

acceptance on a commercial basis.

The government’s decision in 2013 to allow sugar companies to participate in tenders

based on competitive bidding vs. the earlier method of fixed pricing for ethanol blending

has enhanced the viability of ethanol manufacturing. Enabling policy changes and

development of infrastructure over a period of time should once again kick start growth

in ethanol blending.

India monthly gasoline consumption (000’tons)

Source: Ministry of Petroleum and natural Gas

Ethanol price in India (Rs per ltr), blending becoming an attractive option

Source: Annual reports of Balrampur Chin, industry, PhillipCapital India Research

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Export opportunity: Emerging markets are focusing on ethanol blending The world ethanol production is 23.42bn gallons with around 90% of total output from

three regions - USA (56%), Brazil (27%), EU (6%). The first generation ethanol market is

well developed in the USA and Brazil and has now started picking up in the rest of world.

Considering the benefit of ethanol blending on a commercial basis as well as a renewable

fuel, 62 countries now have active ethanol blending programmes, providing export

opportunities for Praj. It is focusing on the emerging economies of Latin America and

South East Asia and upcoming ones such as Africa.

The European Union is the third-largest market for ethanol in the world with a production

of 1.37bn gallons. Through its Renewable Energy Directive (RED), it has laid down the

path for renewable energy feedstock and is encouraging blending of biofuels up to 10%

by 2020 from the current 5%. South East Asia and Africa are emerging as growing

markets for ethanol blending (along with EU countries) and are planning to increase their

blending percentage. Africa has an advantage of preferential treatment with the EU and

also of lower cost this is expected to lead to pick up in ethanol trade from Africa to EU.

Number of countries following ethanol-blending programme

Source: PhillipCapital India Research, Industry

Services to generate recurring revenue from existing customers Praj is targeting 15-20% revenue from providing services to its existing customer base of

around 300 ethanol manufacturers. It has set up a separate team for creating service

opportunities with existing ethanol plant in domestic and international market. Some of

the plants provided by Praj are now ~20-25 years old and provide opportunities in

energy saving and yield improvement. The company is also looking at annual

maintenance contracts for existing plants and also retro-fitting existing capacities for

expansion.

Brewery business to see incremental growth from international markets Praj is a technology and engineering solutions provider to the brewery industry and

enjoys a 65% market share in the domestic brewery market. It provides brewery plants on

a turnkey basis, which includes engineering, supply of process equipment, support for

commissioning, and project management. The company also adds value by integrating

new equipment with existing systems. Praj has 25 years of experience and has worked

with most domestic and international players such as United Breweries, SABMiller, Crown

Brewery (Anheuser Busch – InBev), and Heineken. It has undertaken R&D initiatives in this

field through its ‘Praj Brewery Laboratory’ set up in accordance with EBC standards. Praj

has a detailed understanding of different raw materials, by-products formation, and

reaction kinetics, which help it design plants to specific standards. India’s beer market

saw an average 11% volume CAGR over the past 5 years. Praj has started becoming an

international brewery supplier and has received orders from two of the top-five global

brewers — it received an order from SABMiller for completing brewery plant in Namibia

(worth Rs 540mn) and an order from Heineken for its Myanmar plant. Praj has got a good

foothold in two of the growth markets for breweries — South East Asia and Africa. With

more than 100 successful brewery plant completions and experience of working with top

players, the company is planning to replicate its success in breweries in the international

market.

44%

21%

19%

16%

EU region

Americas

Asia Pacific

Africa


Second-generation ethanol Praj is developing a technology for commercially using cellulose (basically fibre, non-food) material to produce ethanol under its Praj Advanced Cellulose

Ethanol program (PACE). It has a laboratory plant at its Praj Matrix Research centre (common innovation centre for all business units), Pune for testing second

generation ethanol process. The company is setting up a commercial demo plant to produce ethanol from

multiple feedstock including corn cobs, corn stover (leaves and stalks of maize left in a field after harvest), and bagasse (fibrous matter that remains after

sugarcane or sorghum stalks are crushed to extract their juice) — all non-food material. The commercial plant is a ‘bolt-on’ model i.e using existing ethanol

plant /parts of sugar mill to save on the cost and time by using common process equipment. The commercial success of second generation ethanol plants would

be a huge opportunity for the company as they can run on multiple feed stocks and give multiple outputs.

Scalability of business Praj is a technology and process-oriented company — this means that in a cycle upturn, it can quickly scale up its operations. In the FY05-09 business cycle in

ethanol, its revenue grew four times to Rs 9.5bn while profits grew by almost three times to Rs 1.3bn with a RoCE of `34%. The demand recovery in ethanol

and brewery in emerging markets would significantly improve its return ratios going ahead. Its new businesses (critical process equipment and high-purity

systems) are also asset light. The company is focusing on its industrial water and waste water business which are usually working capital heavy. However, Praj is

taking water technology through the EPC route and is focusing on an asset light model.

Return ratios over different cycles, expect to recover

Source: Company, PhillipCapital India Research

Financials We expect revenue CAGR of 15% to Rs 14.9bn over FY14-17 driven by 36% CAGR in emerging businesses. Revenue from its ethanol segment should see a marginal CAGR of 2% over FY14-17 to touch Rs 6.95bn in FY17. We expect a 10% decline in the ethanol segments revenue to Rs 5.85bn in FY15, considering 28% decline in 1QFY15 order book to Rs 7.3bn (BTB at 1.25x TTM revenue). Ethanol business has delivery cycles of 12-14 months which is higher compared with 3-4 months in HiPurity Systems and 5-9 months for process equipment and water business. We have assumed order intake of Rs 6bn in FY15 and Rs 6.6bn in FY16 for its ethanol segment. We estimate the brewery segment to report revenue CAGR of 18% over FY14-17e to Rs 976mn. The revenue contribution from emerging businesses should increase from 28% in FY14 to 47% in FY17. Operating margin has declined from a peak 22% in FY08 to 8.8% in FY14 with slowdown in ethanol and brewery segments and also due to the initial setup expenses for emerging businesses. However, Praj has achieved critical mass in emerging businesses over the past four years and has got approved licenses for critical process equipment – this should help to scale up operations and improve margins.

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Asset Turnover ROCE (rhs)


Segmental revenue growth trend


EBITDA margins to bottom out at 8.1% in FY15


Earnings CAGR of 25% over FY14-17


Margins in high-purity are significantly higher at 22-25% and they are likely to remain at

these levels in the future. The margins in ethanol and brewery are expected to remain at

around 10% while margins in critical process and industrial water should recover

significantly when these businesses scale up. Overall we expect profits to increase at

CAGR of 23% from Rs 629mn in FY14 to Rs 1.17bn.

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Valuations Praj with technology base and fabrication skills offers significant scalability. Attractive return ratios, strong balance sheet, and a scalable model have helped

the company to get premium valuations in past. In the last 5 years, Praj has traded at a P/E of 12-20x and average EV/ EBIDTA of around 11x. The company

has created emerging businesses to capitalize on its engineering strength, which will provide growth in the medium term. The investment in second-generation

ethanol and next-horizon bio-products will provide sustainable growth opportunities over the medium to long term. The management has created

multiple growth drivers to reduce cyclicality of revenue and focus on export opportunities — this will drive earnings growth and valuations.

At the current price of Rs 61, the stock trades at 9.2x our FY17 expected

earnings and 5.7x EV/EBIDTA. We have valued the company at 14x our FY17 EPS of Rs 6.6 to arrive at a price target of Rs 93. We are initiating coverage with

a BUY rating.

1-year forward P/E chart


1-year forward EV/EBITDA chart



Business Risks Food verses fuel issue Currently the raw materials used for commercial production of ethanol are corn,

sugar cane, and beet. The increasing demand for these crops is pushing up their prices and this may lead to crop diversification (farmers will shift to these cash-

rich crops resulting in lower production of other food grains and raising the concern over availability of food). While this issue is not significant at present,

the commercial viability of non-food raw material is necessary to increase biofuels production significantly.

Saturation in the US for 1st generation ethanol The US is a major market for ethanol and Praj has a significant exposure in this market. Current ethanol manufacturing capacity in the US is around 15bn gallons

per annum vs. production of around 14bn gallons per annum. The ethanol is manufactured from corn and 40% of total corn production is used to produce

ethanol. The US government has limited ethanol from corn to current levels due to food-inflation concerns and the food versus fuel issue. Additional growth will

come from second-generation fuel ethanol, which we believe would take time to be viable on a commercial basis.

Resistance from oil marketing companies Ethanol blending is done before the oil is pumped out in petrol pumps and the network is controlled by oil marketing companies. Insufficient infrastructure is

adding to the cost of biofuels blending, leading to resistance by oil marketing companies. The policy support and tax benefits could lead to commercial

viability for ethanol blending in India.

Success of cellulose technology We believe the successful commercialization of the biofuels from cellulose (non-food items) will lead to a quantum leap in biofuels growth. The demand for

biofuels may be fulfilled without raising many concerns about food. Praj is spending on R&D and commercial plant for Cellulose technology. However

delay in commercialization or early adoption of technology by competitors can hamper Praj’s growth. The raw material availability at a large scale and on

consistent basis is not tested and could impact the commercial development of cellulose technology.


Company Background Praj started its operations in 1984 with the objective of providing technologies in fermentation, distillation, and waste-water treatment to the Indian distillery

industry. The company established a research and development centre in 1991 and patented its technologies and processes for ethanol manufacturing. It

diversified into brewery engineering, plant and equipment in 1993. After

capitalizing on the growth in ethanol and breweries, the company diversified into related activates, which it has classified under emerging businesses.

Its businesses are now structured into two broad categories - 1) Core, which is

ethanol and breweries and 2) Emerging, which is water, critical process equipment, and high purity system

Ethanol & Brewery

Ethanol-‐ 1st and 2nd Generation, Brewery

ethanol (beverage, fuel, industrial, pharmaand perfumery) and brewery plants

encompassing range of technologies and

systems for water & wastewater management

Water and Waste Water

Water and Waste Water treatmnt plants

for Industires

industrial applications for high quality water, complex effluent

treatment including recycle, reuse and zero liquid discharge

plants.

Critiacl Process Equipmet

for high end equipment & system mainly for oil & gas, petrochemical,

fertilizer, chemicals industry

demonstrated capabilities wherein it

supplies critical process equipment & systems to a number of domestic and global

players

High Purity Systems

providing hi purity water and hygienic

systems

providing end-‐to-‐end solutions for the pharma, biotech, food & beverage

sector.

Bio Products

livestock feed health & nutrition business

also working with biochemicals and human health & nutrition products

which are presently in different stages of development

Core Business Emerging Business


Ethanol and brewery Praj provides complete solutions for ethanol manufacturing plants from concept

to commissioning, feedstock handling, and wastewater management. It controls around 75% of the domestic market and about 30% of the international biofuels

technology market in the regions that it operates in. It has transformed into a global company with around 600 clients in more than 60 countries across 5

continents. Praj provides fermentation systems, including technology packages for multiple

feedstocks such as cane-molasses, cane juice and filtrate, starch-based raw materials such as corn, sorghum, wheat, tapioca, and tropical sugar beet. It

provides one of the lowest costs of production by having higher alcohol yield, higher energy and water efficiency, and by providing effective water

management including recycle and reuse and zero liquid discharge.

Praj scalable and diversified business model


It has a manufacturing and research and development facility at Pune, Maharashtra, and two manufacturing units in Kandla, Gujarat. The facilities are

accredited with ISO 9001-2000 and ASME 'U' & 'H' stamp for pressure vessels and heating boilers. It has core expertise in bio-processing and comprehensive

understanding of feedstock diversity and use. Praj benefits from its thirty years of expertise in scaling up biochemical plants, global experience of process

integration and execution and expertise of process optimization.

Second-generation Biofuels It has accelerated the process of adopting non-food raw material such as sweet sorghum to ethanol and extracting biodiesel from Jatropa. It integrates the

entire value chain for sweet sorghum and Jatropa, right from cultivation practices to wastewater treatment. It has developed the biodiesel technology in-

house, which is able to handle different agri-based raw material.

Praj is developing a technology for the commercial use of cellulose material to produce ethanol under Praj Advanced Cellulose Ethanol Program (PACE). It is

setting up a commercial demo plant in India to produce ethanol from multiple feedstock including corn cobs, corn stover, and bagasse. The commercial plant

will be a ‘bolt-on’ one which will make it easier for sugar companies to reduce cost and time (if they choose to install it) by using common process equipment. Development of Second generation bio-fuels



Praj Matrix - R&D Centre Praj’s R&D division is designed to provide environmentally friendly solutions. Its R&D lab

at Pune called ‘Matrix’ engages in the development of bio-based technologies and has a

certificate from the department of scientific and industrial research (GoI). It has also

received the status of a private-sector biotech park from the Government of Maharashtra.

This R&D centre is built on five acres with a built up area of 85,000 sq. ft. at a capital

expenditure of around Rs 1.2bn.

Praj Matrix: Focus areas


Praj Matrix has a 9,000 sq. ft. clean-room facility with six research laboratories for

conducting microbiology and molecular biology research. It has the infrastructure to

handle aerobic, micro aerobic, and strictly anaerobic microorganisms. R&D centre has

fully automated fomenters from a scale of 2 litres up to 100 litres for rapid process scale

up and validation.

The research centre has a ‘lignocelluloses (biomass)-to-bioethanol’ pilot plant with a

capacity of 1-1.5 tonnes per day of feedstock. It can use sugarcane bagasse, corn cob,

grasses, corn stover, rice straw, wheat straw, wood chips and other agricultural biomass

residues. This plant is capable of end-to-end trials including feedstock handling, pre-

treatment, enzymatic hydrolysis, and fermentation.

Focus areas for research and development Centre- Praj Matrix

Source: Company: PhillipCapital India Research

Bio FuelsEthanolAdvanced Jet fuelsDrop in Fuels

Bio ChemiclesPentose SugarsHexose SugarLigniinGlycerol

Bio ChemiclesPentose SugarsHexose SugarLigniinGlycerol

Advanced Strain DevelopmentPathway Engineering and Genetic Modification of micro-‐organisms for the production of Bio-‐Fuels and Bio Chemicals.

Molecular andMicro biology

Bio-‐Process Technology

Scale-‐up and process

engineeringAnalytical Sciences

Chemicals Sciences Biologists

Chemists Engineers

Engineeredmicrobes

NovelAnalytical Methods

Fermentation and

separation technologies


Emerging Business Critical Process Equipment and Systems Praj established a dedicated business unit in FY10 to offer “Critical Process

Equipment & Systems” (CPES) to various process industries such as oil & gas, refineries, petro-chemicals, chemicals, food, pharma and biotech. CPES

undertakes end-to-end projects for process skids and packages (for easy transport and installation).

Praj offerings in critical Process equipmets Static Equipment Process Systems Reactors / Fermenter Distillation System

Pressure Vessels Separation System

Separators / Scrubber/ KOD Evaporation System

Heat Exchangers (Shell & Tube) De-hydration System

Columns & Towers Solvent Recovery Plant

Process Skids Turnkey Process System / Plants

Source: PhillipCapital India Research

Manufacturing Capabilities __________ SEZ Kandla __________ Particulars Pune Unit Unit 1 Unit 2 Total are (sq mtr) 20,000 30,000 21000

Covered are (Sq mtr) 10,000 15,000 9750

Shell Rolling thickness 35 mm 35 mm 120 /150 mm

Shell Diameter 5 mm 6.5 mm 8.5 mm

Shell Lenght 20 mm 50mm 50 mm

Dished Thickness 30 mm 30mm 120 mm

Dished Diameter 5 m 6 m 6 m

Lifting Capacity 100 ton 200 ton 300 ton

Source: Company

Praj has developed a multi-disciplinary engineering team and a well-equipped

heavy fabrication shop to cater to the demand of the oil and gas, fertilisers, refineries, chemicals, petrochemicals, food, pharma, and biotech industries. Two

of its facilities are near the port in the Special Economic Zone (SEZ) of Kandla in Gujarat. Praj has a manufacturing capacity of 16,500 ton per year.

High-purity systems Praj HiPurity Systems Limited (formerly Neela Systems Limited), provides value-added solutions to the pharmaceuticals, biotechnology, cosmetics, food and

beverage industries. It offer integrated solutions which help to optimize the investments of the clients and is a leading organized solutions provider in India

with a wide range of solutions for the high-purity sector. Its major services include water treatment solutions and modular systems, wastewater treatment

solutions, and process engineering and design. It understands the specific requirements of customer industries, particularly from the regulatory perspective

and adding value.

Biotech products Its bio-products division is engaged in monetizing the work of its research

laboratory, Praj Matrix, by bringing the agro-based bioprocess technologies to the market. Biotech products seek to replace or reduce the use of fossil-based

products. It has developed livestock health and nutrition products, which are in commercial production and sale. These products help enhance milk production

while keeping the livestock healthy. Praj Matrix has a pipeline of these products and processes under development. For this purpose, Praj has set up a 65,000

sq. ft. Good Manufacturing Practice (GMP)-compliant production unit, which is currently producing performance enhancers for distilleries and livestock health

and nutrition products. The production unit, located near Pune, is designed to


world-class standards in hygiene. It complies with Kosher and Halaal certifications.

The division manufactures performance enhancement for poultry (layers and

broilers) as well as dairy animals. These are food additives used for animals weight gain, improved egg production, high milk productivity with high fat &

SNF content.

Bio product roadmap


Bio Products offerings by the company - 1) Poultry: Layers and broilers

2) Dairy: Cow, calves and pregnant cows 3) Fodder: Green fodder / silage application in milch cattle

Quarterly Financials Rs mn Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Total Revenue 1,731 1,942 2,691 3,494 2,213 YoY growth -13.6% -11.2% 13.6% 31.3% 27.9% Raw material cost 732 879 1,307 1,873 1,211 Raw material % of Sales 42.3% 45.3% 48.6% 53.6% 54.7% Employee Cost 263 331 321 325 313 Other expenditure 718 644 735 865 601 Total Cost 1,712 1,854 2,363 3,063 2,125 EBITDA 18 89 328 431 88 EBITDA margin (%) 1.1% 4.6% 12.2% 12.3% 4.0% Depreciation 54 56 67 60 93 EBIT -35 33 261 371 -5 Interest 3 2 5 5 6 EBT -38 31 256 365 -11 Other income 101 43 58 36 50 PBT 62 74 314 401 38 Tax 17 16 87 85 30 Tax rate (%) 26.8% 21.5% 27.7% 21.2% 78.1% PAT 46 58 227 316 8 Less: Minority interest 1 -2 7 13 13 Forex gain / (loss) -13 4 22 -95 29 Extraordinary item - - - - - Reported PAT 31 65 243 208 25 EPS-adjusted (Rs) 0.3 0.3 1.2 1.7 -0.0 EPS-Reported (Rs) 0.2 0.4 1.4 1.2 0.1 Order book 10,100 9,900 8,750 8,200 7,300 Source: Company


Annexure I: Biofuels Biofuels are made from renewable resources such as agricultural products. Specifically,

they are transportation fuels and include bioethanol and biodiesel. Bioethanol is blended

with petrol while biodiesel is blended with diesel. The technology for bioethanol is well

accepted while for biodiesel, it is still at a nascent stage. Conventionally, ethanol has

been produced from sugar-bearing feedstock such as cane, beet juice, and molasses, or

from starch-based feed stock such as wheat, corn, or even tubers such as cassava

(tapioca). The application of alcohol as transport fuel has created a need for newer

energy feedstock such as sweet sorghum. Biodiesel is made from non-edible oil seeds or

waste oil. These could be Jatropa, Karanji, or waste oil from restaurants, etc. The

biodiesel can be blended with ordinary diesel in any proportion or it can be used 100%

as a fuel.

Ethanol Ethanol (CH3CH2OH) is a liquid alcohol, a group of chemical compounds whose

molecules contain a hydroxyl group, -OH, bonded to a carbon atom. Ethanol is produced

from the fermentation of sugar-using enzymes and specific varieties of yeast. Glucose, the

preferred form of sugar for fermentation, is contained in both carbohydrates and

cellulose. Carbohydrates are easier than cellulose to convert to glucose. The organisms

and enzymes for carbohydrate conversion and glucose fermentation on a commercial

scale are readily available.

The ethanol molecule contains oxygen, which allows the engine to more completely

combust the fuel, resulting in fewer emissions. Since ethanol is produced from plants that

harness the power of the sun, ethanol is also considered a renewable fuel. Therefore,

ethanol has many advantages as an automotive fuel. Adding ethanol to gasoline

increases the octane number — a measure of the fuel's resistance to pre-ignition or

engine "knock." However, a 10% ethanol blend contains about 97% of the energy of

"pure" gasoline, which could increase fuel consumption by about 2-3%; the energy loss is

partly offset by the increased combustion efficiency of the engine. There is no engine

modification required for ethanol-blend petrol up to 20%.

Ethanol-manufacturing process The grains classified as starch is suitable for ethanol production (see table below). The

starch is hydrolysed into dextrin, which is converted into glucose and ethanol

simultaneously. After cleaning and milling raw material, slurry is prepared using recycled

steam generated during distillation and evaporation. This is followed by cooking, where

the slurry is cooked by steam injection in the presence of liquefying enzymes. In the

saccharification and fermentation, dextrin is converted into glucose by saccharifying

enzymes and ethanol is produced by employing yeast in fermenters. After taking ethanol,

the remaining material is further processed to get valuable by products such as distiller’s

grain, which is used as a feed ingredient for livestock. The manufacturing plant can be

configured to operate on multiple feed stocks with little modification.

Ethanol manufacturing Process chart


Ethanol growth analysis The world ethanol production has increased from 10.7bn gallons (40.7bn litres)

in 2004 to 23.4bn gallon (88bn litres) in 2013 (implied CAGR of 9%) because of ethanol blending in gasoline. The US accounted for 57% of the world’s ethanol

production in 2013, while Brazil was the second-largest producer with a 26% contribution. The growth was led by strong demand in the US for fuel blending.

US ethanol production increased from 3.5bn gallons in 2004 to 13.3bn in 2013 — a CAGR of 16%.

Ethanol global production

Source: PhillipCapital India Research, www.ethanolrfa.org.

We have divided ethanol growth drivers into three stages — mandatory

requirement, commercial viability, and technology innovation. We believe the growth in the initial stage was driven by environment issues such as reducing

carbon dioxide emissions and other greenhouse gases. Ethanol has worldwide acceptance as an eco-friendly fuel and will be used to replace lead and MTEB in

gasoline as an octane booster and oxygenate. US mandated the use of oxygenated fuels with a minimum of 2.7% by volume and the countries which

are not very high gasoline consumers such as Peru and Colombia in South America have announced ethanol programmers.

Once the infrastructure for ethanol blending is in place, the ethanol blending programme is expected to move to the next stage — voluntary blending —

depending on economic viability — to reduce the dependence on fossil oils, as seen in Brazil. Success in commercial production of biofuels will come by

improving the efficiency level, where the cost of production will be lower than the present raw material use.

Ethanol three stage growth analysis


In stage 1, the demand for ethanol is generally driven by mandatory blending because of environmental issues. The demand for biofuels stems from the

energy crisis and environmental degradation. Use of fossil fuels releases carbon dioxide while burning and increases global warming. Ethanol-blended gasoline

and ethanol-blended diesel are considered viable alternatives to further lower emission levels. Ethanol as a techno-commercial viable oxygenate is mixed with

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Mandatory requirementEnvironmentalsubsidy benefit

Stage -‐ II

Commercial viabilityDue to high gasoline prices and improved yield

Stage -‐ III

Technology innovationCommercializsationof Cellulosie cellulose technology

Period

Ethanol Production


petrol to meet the oxygenate requirement under the current fuel specifications instead of methyl tertiary butyl ether and ethyl tertiary butyl ether, a known

groundwater contaminant Subsidy support: Along with environmental issues, countries are also looking at

ethanol blending to ease pressure on gasoline prices. To successfully implement blending and create sufficient infrastructure, most countries are giving incentives

in the initial stage. While some ethanol-producing states offer tax incentives for gasoline blended with ethanol and for ethanol production, which vary from US$

0.10 to US$ 0.40 per gallon. Canadian provinces promote ethanol use as a fuel by offering subsidies of up to 45 cents per gallon of ethanol. The US

administration has been supporting the farm sector by providing a subsidiary in the form of tax credit equivalent to US$ 0.12 per litre (Rs 5.52 per litre).

Stage 2: The mandatory blending requirement in the initial stage will act as a

floor and not a ceiling for ethanol, considering growing appetite for energy. The price of fossil fuel could increase substantially if we could not find a source of

cheap energy alternative. The floor price of ethanol is likely to be set by the variable cost of producing an incremental gallon of ethanol. The variable price

for ethanol mainly depends on the price of raw material –corn or sugar cane. As production capacity increases, ethanol prices will continue to trend downwards

until they are parallel to or correlate with raw material prices. To understand cost economics in medium term with existing technology and raw material, we

have studied economics for ethanol blending in India, Brazil and USA.

Stage 3: We believe the commercial viability of manufacturing ethanol from non food raw material would be significant driver in future. Emerging technology and

production process will overcome many of the present limitations on commercial and technological production of bio ethanol from cellulose. Substantial

reductions in ethanol production costs may be made possible by replacing existing raw materials with less expensive cellulose-based feed stocks. Cellulosic

feed stocks include agricultural wastes, grasses and woods, and other low-value biomass such as municipal waste. Although cellulosic materials are less

expensive than corn, they are more costly to convert to ethanol because of the extensive processing required. Cellulose enzymes used to convert cellulose to

sugar are currently too expensive for commercial use. The development of economically viable technologies that can break the cellulose into the sugars

that are distilled to produce ethanol can take the ethanol blending into next orbit.

Annexure II: Ethanol blending experience in India Beginning January 2003, the government mandated the use of 5% ethanol

blend in automotive fuels in India through its Ethanol Blending Programme (EBP). It started with bending mandate in nine states and four union territories

with ethanol demand of ~370mn litres with fixed price of Rs 14.5 per ltr. The decline in sugar production in 2003-2005 created a shortage and resulted in less

than 1% overall blending. During 2006-09 the ethanol blending extended to twenty states and eight union territories with annual demand moving to ~650mn

litres – and the price was fixed at Rs 21.5 per litres. During the 2009-12 the fixed price increased to Rs 27per litres and in November 2012, the

government announced a few recommendations to boost ethanol blending. In order to maintain competitiveness with other end-user industries, the

government allowed prices of ethanol used for blending to be market driven. As per the new mechanism, OMCs will float tenders annually and sugar companies

can quote the price at which they are willing to supply ethanol at the depot. Secondly, the government permitted non-uniform blending, by allowing

up to 10% ethanol blending in a particular state.

Currently, the overall blending rate in India is around 2% and if actual blending is increased to 5%, around 1bn litres of ethanol would be needed. India

produces ethanol as a sugar manufacturing by-product and would need sugar


production of ~25 million tons or more to fulfil 5% blending, considering the demand for molasses from the chemical and liquor manufacturing sector as well.

Ethanol availability with sugar production


The increasing ethanol blending augurs well for the profitability of sugar

companies. OMCs — Indian Oil, Hindustan Petroleum and Bharat Petroleum — had come out with a tender to procure 1.33bn litres of ethanol to implement the

mandatory 5% blending programme. As against fixed pricing, the government has allowed sugar companies to participate in tenders based on competitive

bidding, which has resulted in better realization of ethanol.

Cost economics in ethanol blending Ethanol blending is successful in Brazil and the US, with blending to the extent of 25% and 10%, respectively. The fuel blending has led to a sharp increase in ethanol production in the US — from 3.5bn gallons in 2004 to 13.2bn gallons in 2013. Brazil has developed flexi-fuel cars, which can run on any combination of petrol and ethanol and currently about 90% of its new cars are flexi fuel. India: The ethanol is produced from Molasses which is a bi-product in sugar manufacturing from sugar cane. Molasses prices in India are volatile and vary widely with the sugar cycle –they are also significantly different in different part of the country due to state controls on molasses movement. The average molasses prices in India vary from Rs 3,000 per metric ton to Rs 6,000 per metric ton in different states. Considering, molasses price of Rs 5,500 per ton, the variable cost for ethanol works out at Rs 26 per litre. Oil marketing companies have agreed to buy ethanol at Rs 41 per litre. Considering these dynamics, we believe ethanol blending through the by-product route is viable and will continue.

Ethanol cost analysis from direct cane conversion


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Ethanol cost analysis from molasses


The government may also allow the direct conversion of cane into ethanol (as done in Brazil) to increase ethanol production. The cane costs vary between Rs

2,000 per ton to Rs 2,800 per ton in different states. For direct conversion of sugar cane to ethanol, ethanol priced at Rs 415 is viable if the cane cost is lower

than Rs 2,500. However, since cane in India is used for making sugar and ethanol is bi-product, our analysis shows the direct conversion of cane into ethanol is

viable if cane cost is de-controlled or sugar prices remain lower than ~Rs 27 per kg.

Cost economics in Brazil Brazil produces around 6.2bn gallons of ethanol from sugar and uses around 50% of its cane output for ethanol manufacturing while rest is used for sugar

production. Its cane cultivation is spread over 10.3mn hectares and its sugar factories are able to produce ethanol or sugar depending on requirements.

Brazil is the lowest-cost producer of ethanol (USD 0.5 per litre) due to better ethanol recovery and low cane cost. Ethanol blending is viable when crude

prices are above USD 80 per barrel (equivalent ethanol price USD 2.4 per gallon.

Ethanol cost analysis from direct conversion of Sugar cane


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Molasis price Rs per ton

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Ethano

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Cane cost USD per ton


Cost economics in the US Ethanol in the US is not used as a fuel extender but as an oxygenate additive for pollution control. The amount of ethanol used in blends is 10% for cities

needing carbon monoxide control in winter months and 5.7% in the reformulated gasoline mandated for sale in smog areas such as California. The

US administration has been supporting the farm sector by providing a subsidiary in the form of tax credit equivalent to USD 0.12 per litre (Rs 4.8/litre).

US manufacture ethanol mainly from corn and uses around 40% of the country's

corn production to make the fuel. It is the largest market for biofuels — seeing stabilization at 13-14bn gallons per year. Corn prices vary from USD 2 per bushel

to USD 6 per bushel, while ethanol selling price is around USD 2.5/gallon. The conversion cost from corn to ethanol is around USD 0.6 to USD 0.7 per gallon.

The variable cost study shows the blending will continue below USD 5 per bushel at prevailing prices. Crude prices above USD 95 per barrel make ethanol

blending economical in the US.

Ethanol cost analysis from Corn


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Financials Profit & Loss As at 31st Mar, Rs mn FY14 FY15E FY16E FY17E Net sales 9,858 10,384 12,341 14,906 Growth, % 7 5 19 21 Total income 9,858 10,384 12,341 14,906 Raw material expenses -4,791 -5,005 -6,022 -7,341 Employee expenses -1,240 -1,339 -1,527 -1,756 Other Operating expenses -2,961 -3,196 -3,579 -4,044 EBITDA (Core) 867 844 1,213 1,765 Growth, % (4.2) (2.6) 43.7 45.5 Margin, % 8.8 8.1 9.8 11.8 Depreciation -238 -242 -278 -297 EBIT 629 602 935 1,468 Growth, % (8.7) (4.4) 55.3 57.0 Margin, % 6.4 5.8 7.6 9.8 Interest paid -14 -15 -16 -17 Other Non-Operating Income 238 238 250 262 Pre-tax profit 852 824 1,168 1,713 Tax provided -204 -214 -304 -445 Profit after tax 648 610 865 1,268 Others (Minorities, Associates) -19 -32 -65 -89 Net Profit 629 578 800 1,179 Growth, % (10.9) (8.1) 38.3 47.3 Net Profit (adjusted) 629 578 800 1,179 Unadj. shares (m) 177 177 177 177 Wtd avg shares (m) 177 177 177 177 Source: PhillipCapital India Research, Company

Cash Flow Y/E Mar, Rs mn FY14 FY15E FY16E FY17E Pre-tax profit 852 824 1,168 1,713 Depreciation 238 242 278 297 Chg in working capital -746 146 144 158 Total tax paid -226 -190 -269 -394 Cash flow from operating activities 118 1,023 1,322 1,774 Capital expenditure -532 -650 -650 -350 Chg in investments 719 258 120 0 Cash flow from investing activities 187 -392 -530 -350 Free cash flow 305 631 792 1,424 Equity raised/(repaid) 74 65 65 65 Debt raised/(repaid) 74 0 0 0 Dividend (incl. tax) -461 -461 -524 -628 Cash flow from financing activities -364 -396 -459 -563 Net chg in cash -58 236 334 861 Source: PhillipCapital India Research, Company


Balance Sheet As at 31st Mar, Rs mn FY14 FY15E FY16E FY17E Cash & bank 572 691 748 1,058 Debtors 3,203 3,414 4,057 4,901 Inventory 2,221 2,289 2,540 2,867 Loans & advances 2,493 2,543 2,594 2,646 Other current assets 100 102 104 106 Total current assets 8,589 9,038 10,043 11,578 Investments 910 652 532 532 Gross fixed assets 4,358 5,008 5,658 6,008 Less: Depreciation -1,132 -1,375 -1,653 -1,950 Add: Capital WIP 16 16 16 16 Net fixed assets 3,241 3,649 4,020 4,073 Total assets 12,740 13,339 14,595 16,182 Current liabilities 4,287 4,552 5,410 6,534 Provisions 2,124 2,337 2,570 2,827 Total current liabilities 6,411 6,888 7,980 9,362 Non-current liabilities 290 315 350 401 Total liabilities 6,701 7,203 8,330 9,763 Paid-up capital 355 355 355 355 Reserves & surplus 5,470 5,535 5,600 5,665 Shareholders’ equity 6,039 6,136 6,266 6,420 Total equity & liabilities 12,740 13,339 14,595 16,182 Source: PhillipCapital India Research, Company

Profitability, Productivity, Liquidity and Valuation Ratios Y/E Mar, Rs mn FY14 FY15E FY16E FY17E Per Share data EPS (INR) 3.5 3.3 4.5 6.6 Growth, % (10.9) (8.1) 38.3 47.3 Book NAV/share (INR) 32.8 33.2 33.6 33.9 FDEPS (INR) 3.5 3.3 4.5 6.6 CEPS (INR) 4.9 4.6 6.1 8.3 CFPS (INR) (0.7) 4.4 6.0 8.5 DPS (INR) 2.2 2.2 2.5 3.0 Return ratios Return on assets (%) 5.2 4.8 6.3 8.3 Return on equity (%) 10.8 9.8 13.4 19.6 Return on capital employed (%) 7.9 7.2 9.7 13.6 Turnover ratios Asset turnover (x) 1.6 1.4 1.6 1.9 Sales/Total assets (x) 0.8 0.8 0.9 1.0 Sales/Net FA (x) 3.2 3.0 3.2 3.7 Working capital/Sales (x) 0.4 0.4 0.3 0.3 Fixed capital/Sales (x) 0.1 0.1 0.0 0.0 Liquidity ratios Current ratio (x) 2.0 2.0 1.9 1.8 Quick ratio (x) 1.5 1.5 1.4 1.3 Interest cover (x) 43.7 39.8 58.9 88.0 Dividend cover (x) 1.6 1.5 1.8 2.2 Total debt/Equity (%) 3.7 3.6 3.6 3.5 Net debt/Equity (%) (6.2) (8.1) (9.0) (14.0) Valuation PER (x) 17.2 18.7 13.5 9.2 PEG (x) - y-o-y growth (1.6) (2.3) 0.4 0.2 Price/Book (x) 1.9 1.8 1.8 1.8 Yield (%) 3.6 3.6 4.1 4.9 EV/Net sales (x) 1.1 1.0 0.8 0.7 Source: PhillipCapital India Research, Company


Contact Information (Regional Member Companies) SINGAPORE | MALAYSIA | HONG KONG | JAPAN | INDONESIA | CHINA | THAILAND | FRANCE | UNITED KINGDOM | UNITED STATES | AUSTRALIA | SRI LANKA PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013. Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

Management (91 22) 2300 2999(91 22) 6667 9735

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Engineering, Capital Goods Oil&Gas, Agri Inputs Production ManagerAnkur Sharma (9122) 6667 9759 Gauri Anand (9122) 6667 9943 Ganesh Deorukhkar (9122) 6667 9966

Manish Agarwalla (9122) 6667 9962 Hrishikesh Bhagat (9122) 6667 9986 Deepak Pareek (9122) 6667 9950Paresh Jain (9122) 6667 9948 Database ManagerPradeep Agrawal (9122) 6667 9953 Infrastructure & IT Services Pharma Vishal Randive (9122) 6667 9944

Vibhor Singhal (9122) 6667 9949 Surya Patra (9122) 6667 9768Consumer, Media, Telecom Varun Vijayan (9122) 6667 9992 Sr. Manager – Equities SupportNaveen Kulkarni, CFA, FRM (9122) 6667 9947 Retail, Real Estate Rosie Ferns (9122) 6667 9971Vivekanand Subbaraman (9122) 6667 9766 Midcap Abhishek Ranganathan, CFA (9122) 6667 9952Manish Pushkar, CFA (9122) 6667 9764 Vikram Suryavanshi (9122) 6667 9951 Neha Garg (9122) 6667 9996

CementVaibhav Agarwal (9122) 6667 9967Sales & Distribution Kinshuk Bharti Tiwari (9122) 6667 9946 Sidharth Agrawal (9122) 6667 9934 Sales Trader Zarine Damania (9122) 6667 9976Ashvin Patil (9122) 6667 9991 Bhavin Shah (9122) 6667 9974 Dilesh Doshi (9122) 6667 9747 Shubhangi Agrawal (9122) 6667 9964 Dipesh Sohani (9122) 6667 9756 Suniil Pandit (9122) 6667 9745Kishor Binwal (9122) 6667 9989 Execution

Mayur Shah (9122) 6667 9945

Vineet Bhatnagar (Managing Director)Jignesh Shah (Head – Equity Derivatives)

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