Accumulate : Praj Industries Ltd For Target Rs.575 - Elara Capital
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Temporary blip in FY30 journey
Domestic bioenergy segment to take a hit for the next 6-8 months
The government has directed all sugar mills and distilleries not to use sugarcane juice and sugar syrup for ethanol production during ESY 2023-24 (ethanol Supply Year starts in November) with immediate effect. This is due to low rainfall in sugarcane-producing states, raising concerns on adequate sugar output. However, the supply of ethanol from existing offers received by OMC from B-heavy molasses is set to continue. Praj Industries’ (PRJ IN) 75% of orderbook is from the bioenergy segment, which comprises orders for setting up domestic 1G ethanol plants. However, 60-70% of these orders can alternately use starchy feedstock; nonetheless, a slowdown is inevitable, in our view. New domestic order inflow also could slow for the next 6-8 months until clarity emerges for the next ESY 2024-25. International order inflow and execution could be supportive.
2.5x revenue by FY30 with higher exports mix
Our analysis indicates 2.5x revenue growth opportunity by FY30 (vs guidance of 3.0x), led by the engineering segment on the back of a 4.0x rise in manufacturing capacity (targeted to commission the Mangaluru plant by Q4FY24), leading to a shift in revenue toward non-bioenergy to 40% from 25% currently. Since most of this modularized engineering solutions would be exports-oriented with a higher margin potential, we expect EBITDA margin to improve to 12% from 9% in FY23E.
Valuation: retain Accumulate with a lower TP of INR 575
With a 60% market share in the domestic bioenergy segment, international presence across 100 countries with 400 patents and four decades of experience, PRJ offers unique technology solutions for a sustainable green future with a potential of multi-year growth opportunity. We believe near-term correction can be a buying opportunity. In the bioenergy segment (80% of revenue), we expect revenue growth to be muted until FY25, owing to a slowdown in order inflows and execution. However, from FY26, growth would pick up meaningfully on the back of robust opportunity pipeline. We revise down our earnings by 10% for FY24E, 22% for FY25E and 10% for FY26E to factor in the recent government ban. We retain Accumulate with a lower TP of INR 575 from INR 596 based on 30x (from 28x) FY26E P/E, as near-term suppressed earnings are unable to capture future growth potential.
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