The Hindu Business Line : Praj Industries: Buy

Investments can be considered in the stock of Praj Industries, a leader in biofuel technology, with a 2-3 year perspective. The company is well placed to benefit from the robust demand outlook for ethanol equipment and technology, arising from the increasing popularity of ethanol blending programmes worldwide. Praj's technological expertise and execution skills, in combination with its increasing foothold in large markets such as the US, Brazil and Europe are positives for earnings. At the current market price, the stock trades at about 24 times its likely FY08 per share earnings.

The demand for ethanol plant solutions is likely to remain on an uptrend given the increasing acceptance of ethanol programmes in several countries. The progress of the Energy Bill in the USA, a guideline for 10 per cent biofuel blending in the European Union and an estimated doubling of ethanol production in Brazil over the next three years underscore the strong demand environment. In the strong demand scenario, Praj's ability to break into and establish presence in these markets would be crucial. In this respect, Praj's acquisition of US-based CJ Schneider and its joint venture with Netherlands-based Aker Kvaerner for European markets, as also a strong export order book inspire confidence. The perceptible shift in sales-mix in favour of exports, which enjoy higher margins, also points to improved earnings growth. While an increasing international exposure would make Praj's earnings susceptible to currency fluctuations, the company does have an active hedging policy to mitigate such risks. In the domestic market, consolidation and enhanced investments in the breweries sector offers opportunities for the company, amidst delays in the ramp-up of the ethanol-blending programme. This apart, any breakthrough on the bio-diesel biodesiel front could also help revenues.

For the quarter ended June 2007, the company's revenues grew by about 72 per cent while net profits grew by about 90 per cent, based on sustainable earnings. Operating profit margins were flat at about 14 per cent, comparing poorly with FY07 margins of about 17 per cent. However, this appears attributable to the differing product-mix from quarter to quarter and holds scope for improvement. Praj's earnings are sensitive to regulatory changes in the ethanol policy of countries such as the US, Brazil and EU. Any unprecedented increase in steel prices and global technological advances in biofuels could pose risks to our recommendation.

Srividhya Sivakumar

More Stories on : Stocks | Recommendation | Engineering

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page