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Published on 15/01/2018 2:42:54 PM | Source: GEPLCapital Ltd

Buy Praj Industries Ltd For Target Rs.151.00 - GEPL

Posted in Broking Firm Views - Long Term Report| #GEPLCapital Ltd #Praj Industries Ltd #Engineering Sector #Broking Firm Views Report

Company Snapshot

Praj Industries Limited (PRAJ) is ventured into bio technology and engineering with the presence all over the world. With beginning as a supplier of ethanol plants, today Praj is a globally leading company with a bouquet of sustainable solutions for bioenergy, high purity water, critical process equipment, breweries and industrial wastewater treatment. Headquartered in Pune, India, Praj has spread its presence across the globe with more than 750 references in more than 75 countries.

Investment Rationale

Unique business matrix gives an edge to a company over its peers

Praj has carved a unique position in the world of ethanol technology by virtue of its expertise which cuts across a variety of sugar to starch based feedstock, collectively called as 1st generation feedstock. Praj is one of the handful of companies in the world to successfully develop and demonstrate 2nd generation ethanol technology using agri-residue. Praj has developed technologies for several clean, renewable fuels and chemicals viz. BioCNG, Biobutanol etc. which have the potential to redefine the global energy matrix. In addition; Praj has developed expertise in processing multiple feedstock to produce a variety of grades of ethanol. After fuel, major applications of ethanol include beverage and industrial. Depending on the soil-climate condition, feedstock can be sugarcane juice, molasses, and different kinds of grains like corn, wheat, rice or tubers like cassava.

Robust Business structure makes Praj more safe and lucrative bet Praj’s joint development agreement with Gevo Inc., USA enters commercialization phase for the production of iso-butanol from molasses, with Gevo expected to be the primary off-taker, marketer and initial distributor for iso-butanol produced from the plants in India. This will boost the export oriented business. The Initiatives of government of India like swacch bharat, Scrunity on Pharma companies provides huge opportunity to scale up the business. The company said it has aggressive plans to grow its high purity business. Also, the measures like zero liquid discharge policy will provide opportunity with limited competition. The company plans to increase the revenues from its emerging businesses to 50% from present 26%.

Improving financials will make Praj more promising Praj has very strong fundamentals which makes stock very lucrative. The company has posted stellar EBITDA margin growth in last three years. EBITDA margins grew from 9.6%in FY15 to 11.5% in FY17. The PAT margins have remained stable at around 6.17FY17. The ROE of company has grown from 8.93%in FY15 to 20.25% in FY17. ROCE has grown from 12.7% in FY15 to 24.6% in FY17. These strong fundamentals have shown the company has strong upside potential and prove a safer bet.

Valuation

At CMP of `121, Praj Industries Ltd (PRAJ) is trading at 48.6x its FY17 EPS of `2.5 which is at an attractive valuation. With strong margin improvement and strong return ratios, We expect stock to trade at 43.2x its FY19E EPS of `3.5. We assign a BUY rating on the stock with a price target of `151 which is more than 25% upside from current levels.

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