Praj Industries - Ethanol demand drives sales... - ICICIdirect

Praj Industries reported below expectation Q4FY13 results on the back of sluggish execution though the order book continues to remain healthy (Rs. 870 crore). The topline witnessed a 29.9% YoY decline to Rs. 187.8 crore with margins declining 46 bps YoY to 9.9%. We believe the dip in margins was due to lower execution of international orders (~40%) where margins are relatively higher. We believe that with ~60% of the order book comprising international orders, margins would improve, going ahead. Hence, as execution witnesses an uptick and margins look up, earnings growth would remain healthy at 11.4% CAGR in FY13-15E.

Ethanol business gains share in order book

The new order inflow during the quarter of Rs. 210 crore comprises ~85% of orders from the ethanol & brewery business with ~15% orders from emerging businesses (waste water management). During the quarter, ~86% of sales comprised the ethanol business. We believe that with the 5% blending mandate notification for OMCs from June, 2013 onwards, Praj's ethanol business (setting up distillery and providing equipment) orders would gain traction.

International business growth to aid margins

Currently, Praj's total outstanding order book of Rs. 870 crore consists of ~60% international orders with ~70% of the new order flow being from international operations. During the quarter, Praj received a significant order from Philippines for Rs. 160 crore to set up a 20000 litre/day ethanol plant. With the company's margins from the international business having been higher, we expect margins to improve from hereon. We estimate margins at 10.8% and 11% in FY14E and FY15E, respectively.

Prospects promising; execution needs traction

With the 5% blending mandate announced in India, ~3% ethanol blending programme in final stages in South Africa and Brazil expected to divert higher cane towards ethanol, Praj's long term business prospects remain promising. Hence, as execution gains traction we believe sales and earnings growth would revive. We value the stock at 1x its BV/share and arrive at a target price of Rs. 43. We upgrade the stock to BUY rating.

Source : Equity Bulls

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