Shareholders with a long-term perspective can continue to hold the stock of Praj Industries, a leading engineering solutions provider to ethanol plants worldwide. The company, whose growth prospects are largely intertwined with the increasing acceptance of ethanol-blended petrol and bio-fuels the world over, stands to benefit immensely from the firm oil price outlook for the medium term.
On the global front, while Praj’s already established presence in markets such as North America, Brazil and the EU lends growth potential, back home, the proposed introduction of 10 per cent mandatory blending of ethanol with petrol could help support domestic growth.
At the current market price of Rs 186, the stock trades at about 20 times its likely FY-09 per share earnings.
While in the last few days, crude oil prices have retreated from record levels, the possibility of its price settling below the comfortable $70 mark over the medium-term appears remote, making a case for staying invested in the stock. Global demand drivers
High crude oil prices, which threaten to leave most of the global economies parched for fuel, is expected to drive the demand for alternative fuels. This, in turn, would benefit Praj, which has a significant presence in the ethanol-based fuel markets such as North America, Brazil and the EU. That said, in the North American market, however, a lot would hinge on the economic viability of corn-based ethanol.
While the US Energy Bill specifies corn ethanol use up to 15 billion gallons, which is almost double the current installed capacity in the country, corn prices will have to ease out to make way for increased corn ethanol production. That corn prices have begun to trend downwards in recent times may provide the much-needed push to demand, as crush margins would also begin to improve slowly.
Praj, however, has also introduced cane-based ethanol technology in the US; its first plant in Louisiana, based on sugarcane juice, is currently under construction. If the latter technology gains acceptance in the US market, it would pave way for Praj to make deeper inroads into the country.
In the EU, Praj had set up presence through its joint venture company, BioCnergy Europa B. V., with Aker Solutions (60:40) last year. The joint-venture company has already made a beginning with a contract (valued at Rs 120 crore) for the design of a plant that will produce approximately 400 million litres of fuel ethanol per year for Vivergo Fuels.
Besides this, Praj has also contracted orders from European sugar majors such as British Sugar, Suedzucker and Danisco.
The Brazilian market, which is poised to scale significant growth (from the current 20 billion litres capacity to over 35 billion litres by 2012, as per industry estimates), also holds tremendous growth opportunity for Praj.
Praj Jaragua Bioenergia, its joint venture company with Brazil-based Jaragua Equipamentos, is expected to help Praj tap business opportunities in Brazil’s ethanol market. Praj may also benefit from the Brazilian government’s move to mandate 2 per cent bio diesel blending by 2009, which is slated to go up to 5 per cent by 2012.
While the Brazilian JV has so far not made any significant progress since its formation in December last year, it may only be a matter of time before it begins to contribute significantly to Praj’s coffers.Domestic demand drivers
The demand scenario in India is also likely to remain upbeat, with sugar companies ramping up distillery and ethanol capacities to cater to high demand potential. The capex in this segment by the sugar companies could well continue or even increase significantly with the proposed introduction of 10 per cent ethanol blending in petrol. These bode well for Praj, which derives close to 50 per cent of its revenues from the domestic market. Further, the opportunities in the breweries segment (Praj commands 50 per cent market share in the brewery equipment market) also appear promising for Praj. In the financial year-ended March 2008, the turnover from Praj’s brewery equipment segment doubled over that of the previous fiscal.Results scorecard
For the quarter-ended June 2008, the company reported 11.8 per cent increase in revenues, driven primarily by a higher share of engineering sales vis-À-vis equipment sales. This helped improve margins by about 4.6 percentage points to 19.3 per cent.
The quarter saw ethanol distillery projects contribute over 85 per cent to the topline, whereas the brewery projects made up for the rest. But forex losses during the quarter dented its earnings, which fell by 12 per cent.
The coming quarters may continue to see a healthy growth in revenues, considering that Praj’s current order-book is pegged at about Rs 950 crore (48 per cent from exports and the rest domestic).
In terms of risk, since Praj is a net exporter, any undesirable fluctuations in currencies may hamper its profitability. That apart, any sudden fall in oil price or global technological advances in biofuels that Praj is unable to access, also pose a risk to Praj’s earnings.
On the global front, while Praj’s already established presence in markets such as North America, Brazil and the EU lends growth potential, back home, the proposed introduction of 10 per cent mandatory blending of ethanol with petrol could help support domestic growth.
At the current market price of Rs 186, the stock trades at about 20 times its likely FY-09 per share earnings.
While in the last few days, crude oil prices have retreated from record levels, the possibility of its price settling below the comfortable $70 mark over the medium-term appears remote, making a case for staying invested in the stock. Global demand drivers
High crude oil prices, which threaten to leave most of the global economies parched for fuel, is expected to drive the demand for alternative fuels. This, in turn, would benefit Praj, which has a significant presence in the ethanol-based fuel markets such as North America, Brazil and the EU. That said, in the North American market, however, a lot would hinge on the economic viability of corn-based ethanol.
While the US Energy Bill specifies corn ethanol use up to 15 billion gallons, which is almost double the current installed capacity in the country, corn prices will have to ease out to make way for increased corn ethanol production. That corn prices have begun to trend downwards in recent times may provide the much-needed push to demand, as crush margins would also begin to improve slowly.
Praj, however, has also introduced cane-based ethanol technology in the US; its first plant in Louisiana, based on sugarcane juice, is currently under construction. If the latter technology gains acceptance in the US market, it would pave way for Praj to make deeper inroads into the country.
In the EU, Praj had set up presence through its joint venture company, BioCnergy Europa B. V., with Aker Solutions (60:40) last year. The joint-venture company has already made a beginning with a contract (valued at Rs 120 crore) for the design of a plant that will produce approximately 400 million litres of fuel ethanol per year for Vivergo Fuels.
Besides this, Praj has also contracted orders from European sugar majors such as British Sugar, Suedzucker and Danisco.
The Brazilian market, which is poised to scale significant growth (from the current 20 billion litres capacity to over 35 billion litres by 2012, as per industry estimates), also holds tremendous growth opportunity for Praj.
Praj Jaragua Bioenergia, its joint venture company with Brazil-based Jaragua Equipamentos, is expected to help Praj tap business opportunities in Brazil’s ethanol market. Praj may also benefit from the Brazilian government’s move to mandate 2 per cent bio diesel blending by 2009, which is slated to go up to 5 per cent by 2012.
While the Brazilian JV has so far not made any significant progress since its formation in December last year, it may only be a matter of time before it begins to contribute significantly to Praj’s coffers.Domestic demand drivers
The demand scenario in India is also likely to remain upbeat, with sugar companies ramping up distillery and ethanol capacities to cater to high demand potential. The capex in this segment by the sugar companies could well continue or even increase significantly with the proposed introduction of 10 per cent ethanol blending in petrol. These bode well for Praj, which derives close to 50 per cent of its revenues from the domestic market. Further, the opportunities in the breweries segment (Praj commands 50 per cent market share in the brewery equipment market) also appear promising for Praj. In the financial year-ended March 2008, the turnover from Praj’s brewery equipment segment doubled over that of the previous fiscal.Results scorecard
For the quarter-ended June 2008, the company reported 11.8 per cent increase in revenues, driven primarily by a higher share of engineering sales vis-À-vis equipment sales. This helped improve margins by about 4.6 percentage points to 19.3 per cent.
The quarter saw ethanol distillery projects contribute over 85 per cent to the topline, whereas the brewery projects made up for the rest. But forex losses during the quarter dented its earnings, which fell by 12 per cent.
The coming quarters may continue to see a healthy growth in revenues, considering that Praj’s current order-book is pegged at about Rs 950 crore (48 per cent from exports and the rest domestic).
In terms of risk, since Praj is a net exporter, any undesirable fluctuations in currencies may hamper its profitability. That apart, any sudden fall in oil price or global technological advances in biofuels that Praj is unable to access, also pose a risk to Praj’s earnings.
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