BUY

Initiating Coverage Praj Industries Ltd Target Price

20th Sep, 2021 Capital Goods 422

Stalwart of Bio-Economy Revolution! CMP as of 20th Sep, 2021)

We initiate coverage on Praj Industries Limited (PRAJ) with a BUY CMP (Rs) 347
recommendation and a Target Price (TP) of Rs 422/share, implying an upside of Upside /Downside (%) 22%
22%. Praj is well-placed to take advantage of shifted global focus on the decarbonization theme High/Low (Rs) 407/64.6
on account of its key competitive strengths such as a) Market leadership position in the domestic
1G Ethanol and frontrunner in 2G Ethanol space b) Capability to produce the highest yields of Market cap (Cr) 6371
CBG vis-à-vis its peers by leveraging its proprietary RenGas technology, c) Improvement in Avg. daily vol. (6m) Shrs. 28,72,380
working capital post management changes. We expect the company to report
No. of shares (Cr) 18.36
Revenue/EBITDA/PAT CAGR of 33%/37%/41% over FY21-FY23E driven by increase in
orderbook, operational leverage and a debt free balance sheet. This will lead to a significant Shareholding (%)
improvement in ROE/ROCE to 18.8%/24.8% in FY24 from 10.7%/14.7% in FY21 derived from
Dec-20 Mar-21 Jun-21
178% increase in the overall profitability.
Promoter 32.9 32.9 32.9
Investment Thesis
FIIs 12.3 11.6 13.1
 Ethanol Blending – Necessity of the Future: Praj is one the leading developer of Ethanol
MFs / UTI 14.3 14.7 6.8
plants in the country with ~65% market share. The government is taking focused initiatives to
reduce carbon emissions and help the economy grow sustainably. The success of the Banks / FIs 0.3 0.0 0.3
Ethanol Blending Programme (EBP) has led the government to prepone its EBP target of Others 40.2 40.7 46.9
20% to the year 2025 from 2030 earlier. The government entities such as DFPD and
Financial & Valuations
MoP&NG are accountable for taking concentrated efforts to bring the necessary
infrastructural change. So far, DFPD has approved 238 projects which will increase ethanol Y/E Mar (Rs Cr) FY21 FY22E FY23E
production capacity by 583 Cr litres and sanctioned a loan amount of ~Rs 16,000/ Cr. Net Sales 1,305 2,033 2,545
Furthermore, we foresee robust demand for 1G Ethanol plant in international markets from EBITDA 112 172 247
countries entering EBP as well as for 2G Ethanol plants from the Euro region due to the RED Net Profit 81.06 266 327
2 programme.
EPS (Rs.) 4.42 7.36 10.47
 Compressed Bio-Gas (CBG) – A hidden trump card: CBG is the technological boon PER (x) 75 45 32
expected to bring independence to oil-importing agrarian economies. It converts agriculture EV/EBITDA (x) 54 35 24
residue and other waste products to environment-friendly high-calorie energy molecules. ROE (%) 11% 16% 19%
Keeping this in perspective, the government has started the SATAT scheme which plans to
Key Drivers (%) (Growth in %)
set up 5,000 CBG plants by 2023-24 with a production target of 15 MMT. Letter of intent for
Y/E Mar FY22E FY23E
600 CBG plants and MoUs for 900 plants have already been given. A total of 1,500 CBG
plants are at various stages of execution which will require an investment of Rs 30,000 Cr Net Sales 56 25
according to MoP&NG. Praj with its technological prowess and a proven track record will be a EBITDA 53 44
key beneficiary of these projects. It is already developing 3 large-scale CBG projects across Net Profit 67 42
the country. ESG disclosure Score**
Environmental Disclosure N/A
 Renewable Chemical Materials (RCM) and Engineering Zero Liquid Discharge (ZLD)
Score
Business: RCM business is expected to be the company’s next big growth driver and it is Social Disclosure Score N/A
investing proactively in the R&D to capitalise on this opportunity. Against this backdrop, Bio- Governance Disclosure Score N/A
plastics and Hydrogen are likely to be the leading candidates to be launched in the medium
Total ESG Disclosure Score N/A
term, driving the company’s growth prospects further. Moreover, stricter government
Source: Bloomberg, Scale: 0.1-100
regulations in India (as it participates in Paris Climate Accords) will require adherence to **Note: This score measures the amount of ESG data a company reports
publicly and does not measure the company's performance on any data point.
stringent water emissions rules and thereby compel manufacturing entities to All scores are based on 2020 disclosures
implement/modify ZLD facilities. This, in turn, is expected to bode well for the company’s ZLD
business. Axis vs Consensus

Outlook & Valuation – Initiate with BUY EPS Estimates 2022E 2023E

We expect Praj to be a key beneficiary of multiple tailwinds provided by the bio-economic Axis 7.36 10.47
revolution, giving revenue visibility for the next 3-5 years. This, coupled with the company’s focus Consensus 8.37 -
on driving international revenues would lead to a sustained period of high revenue growth as well
as margin improvement as operating leverage kicks in. Currently, the stock is trading at 47x Mean Consensus TP (12M) (Rs) 457
FY22E PE and 33x FY23EPS. We initiate coverage on the stock with a BUY rating and
value the company at 40x FY23E PE to arrive at a target price of Rs 422/share, implying an Relative performance
upside of 22% from the CMP.
425
Key Financials 325
(Rs Cr) FY20 FY21 FY22E FY23E FY24 (E) 225

Net Sales 1,102 1,305 2,033 2,545 3,040 125

EBITDA 78 112 172 247 292 25

Jan-20 Jun-20 Nov-20 Apr-21 Sep-21
Net Profit 70 81 135 192 226 Praj Industries BSE Sensex
EPS (Rs) 3.85 4.42 7.36 10.47 12.30
P/E (x) 14.3x 44.0x 45.2x 31.8x 27.1x Source: Capitaline, Axis Securities

ROE (%) 9.62% 10.66% 15.95% 19.42% 18.84%

Prathamesh Sawant, CFA
ROA (%) 5.85% 5.88% 7.99% 9.96% 10.11% Analyst
Source: Company, Axis Research
[email protected]

1
Financial Story In Charts
Exhibit 1: Order book Expected to Grow at 22% CAGR Exhibit 2: Revenue to Post a Healthy Growth Rate

5,000 80.0% 5,000

4,000 60.0% 4,000
3,000 40.0% 3,000
2,000 20.0%
2,000
1,000 0.0%
1,000
0 -20.0%
FY20 FY21 FY22 FY23 FY24 FY25 0
(E) (E) (E) (E) FY20 FY21 FY22 (E) FY23 (E) FY24 (E) FY25 (E)

New Orders New Order Growth Bio-Energy Engineering HiPurity

Source: Company, Axis Securities Source: Company, Axis Securities

Exhibit 3: Improving trend in EBITDA & EBITDA Margin Exhibit 4: Encouraging growth trend in PAT

400 10.0% 12.0% 300 80.0%

9.7% 9.6%
8.6% 8.4% 10.0% 250
300 7.1% 60.0%
8.0% 200
200 6.0% 150 40.0%
4.0% 100
100 20.0%
2.0% 50
0 0.0% 0 0.0%
FY20 FY21 FY22 (E)FY23 (E)FY24 (E)FY25 (E) FY20 FY21 FY22 (E)FY23 (E)FY24 (E)FY25 (E)

EBITDA EBITDA Margin PAT PAT Growth

Source: Company, Axis Securities

Exhibit 5: Improving profitability leading to superior return ratios Exhibit 6: Revenue/EBITDA/PAT Growth Trend

66.7%
80 30.0% 150% 15.1%
25.0%
60 52.7%
20.0% 100% 42.2%
3.2% 17.5%
40 15.0% 44.2%
43.9% 18.1%
10.0% 50% 24.3%
20 25.2%
5.0% 55.8%
18.4% 19.6%
0 0.0% 0% 19.4%
FY21 FY22 (E) FY23 (E) FY24 (E) FY25 (E) FY21 FY22 (E) FY23 (E) FY24 (E) FY25 (E)

ROE % ROCE % P/E Ratio Revenue EBITDA PAT

Source: Company, Axis Securities

Exhibit 7: Order book Growth Rate & Improving Order book Size Exhibit 8: Order book: Segment Revenue Break Up

5,000 4,345 60.0% 5,000

226
4,000 3,637 50.0% 4,000
56.8% 217 473
2,673 3,050 209
40.0% 420
3,000 3,000 228
1,970 30.0% 373
35.7% 195 332
2,000 2,000 3,646
20.0% 159 545 2,999
1,000 1,000 2,115 2,468
19.3% 19.5% 10.0% 345
14.1% 752 1,230
0 0.0% 0
FY21 FY22 (E) FY23 (E) FY24 (E) FY25 (E) FY20 FY21 FY22 (E) FY23 (E) FY24 (E) FY25 (E)

Orderbook Orderbook Growth Bio-Energy Engineering HiPurity

Source: Company, Axis Securities

2
Company Overview
Praj Industries Ltd. – India's leading company in industrial biotechnology, is globally known for its TEMPO
(Technology, Engineering, Manufacturing, Project management, and Operations& Maintenance) capabilities. For Praj ranked 8th in the
list of Top 50 hottest
over three decades, the company has focused on environment, energy and farm-to-fuel technology solutions.
companies in Advanced
Praj aims at sustainable de-carbonization through circular bio-economy by deploying its proprietary biofuel Bio economy in 2019
technology solutions. The company’s business can be divided into three business segments: released by the
industry's leading
1) Bio Energy Business – Consists of the Bio-MobilityTM platform which offers technology solutions publication Biofuels
globally to produce renewable transportation fuel.. Digest, USA. Only Asian
company in Top 10.
 1G Bio Ethanol - Transforming first-generation agri feedstock (sugars found in sugarcane
juice, molasses, starchy grains, and tubers) into bioethanol, Leveraging its R&D capabilities,
Praj has registered several patents in this technology.
 2G Bio Ethanol- Praj offers end-to-end solutions to set up bio-refineries based on its
proprietary enfinityTM - 2G lignocellulosic ethanol technology. This technology is currently
being deployed at 4commercial-scale bio-refineries in India. Praj also intends to handle the
O&M of these bio-refineries. Furthermore, this technology is considerably more sustainable
than 1G Ethanol with 80% less water requirement and much higher Ethanol yield than 1G
technology.
 Renewable Natural Gas (CBG) Technology – Praj has developed and commercialised a
proprietary renewable gas technology – RenGasTM, and has commissioned it over 40 plants
in India. It is the highest yielding BioGas RenGas technology with 30% lower operating costs
due to its unique microbial cultures. Moreover, the process creates value-added manure with
organic certificates as a byproduct while advanced biogas cleaning techniques gives pure
methane.
 Bio-diesel Technology – Praj has developed Ecodiezel enzymatic technology to produce
biodiesel from feedstock such as used cooking oil, palm fatty acid, palm stearin, and tallow,
among others. It not only offers the flexibility of feedstock but also has a lower operating cost,
resulting in more profitable projects. (This technology is not yet commercially feasible)
 Sustainable Aviation Fuel Technology – This is a replacement for high-cost aviation fuel.
The Praj-Gevo innovative process uses iso-butanol produced from renewable sources (e.g.
Sugars and Starch and Biomass) as feedstock to produce SAF. Iso-octane is another high-
value co-product used as fuel for F1 racing.

2) Engineering Businesses – Praj's engineering businesses comprise Critical Process Equipment,

Skids, Brewery plants, and Wastewater treatment solutions.
 Critical Process Equipment and Skids – Products under this segment are used in sectors
such as Oil & Gas, Refineries, Petrochemicals, and Fertilizer, among many others. The
company offers a range of static equipment such as pressure vessels, reactors, shell & tube
heat exchangers, columns, and other proprietary equipment as per the client design
requirements.
 Brewery plants – Praj integrates hygienic engineering with consistency in plant performance
and cost-effectiveness. The service offerings include pre-feasibility to complete plant and
technical audits to balancing equipment.
 Wastewater treatment plants (ZLD Business) – Praj offers integrated energy-efficient
solutions for effluent recycling and zero liquid discharge for various industrial applications.
The company’s strong experience of treating the most challenging wastewater enables it to
offer highly optimized systems with lower footprints and optimized operating costs.

3) Hi-Purity Business – Praj Hi-Purity Systems Limited (a wholly-owned subsidiary) provides value-
added and end-to-end integrated solutions to the Pharma, Biotech, and Wellness industry. These
include water treatment solutions, modular processes systems, wastewater treatment solutions,
process engineering, as well as design capability, ensuring superior service to clients.

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Ethanol Blending – Need of the Future
 What is Ethanol Blending Programme: Blending Ethyl Alcohol (Ethanol) is an organic man-made
chemical compound that can be mixed with petrol or used independently in combustion engines.
Ethanol Blending Programme (EBP) is mixing Ethanol with Petrol.

 Why EBP: The governments across the globe are judiciously aiming to control business impact on the
India’s net import of
environment by reducing collective carbon footprint and Green House Gases (GHG). Ethanol is a much petroleum was 185
cleaner burning fuel having high octane value and significantly less GHG emission and can be blended MMT at a cost of $ 551
with petrol or used independently. Furthermore, the Ethanol production process creates a win-win Bn in 2020-21. Most of
the petroleum products
scenario for all stakeholders.
are used in
transportation. Hence, a
India spent $101.4 Bn on crude oil imports in FY2019-20 and $111.9 Bn in FY2018-19. With every successful E20 program
can save the country
dollar increase in the crude oil price significantly raising India’s annual import bill to the tune of Rs
US $4 Bn per annum,
10,700 Cr, EBP has the potential to play a crucial role in reducing India’s reliance on crude oil import. i.e. Rs 30,000 cr.
EBP is also expected to reduce carbon emissions along with empowering farmers by increasing rural
income.

 Ethanol Blending Programme (EBP) in India: The EBP program, started in few states in 2003,
eventually spread across the country by 2019. During the Ethanol Supply Year (ESY) (December to
November) 2018-19, ~189 Cr ltr of ethanol was supplied by sugar mills and grain-based distilleries to
OMCs, thereby achieving a 5% blending target. In ESY 2019-20, 173 Cr ltr of ethanol was supplied for
blending with petrol to achieve 5.6% blending. In the current ESY 2020-21,~32 Cr ltr ethanol is
contracted to be supplied to OMCs to achieve the 8.5% blending target. As of 26th Apr’21, ~349 Cr ltr
ethanol has been allocated by OMCs to sugar mills/distilleries, out of which contracts of ~302 Cr ltr has
been signed by distilleries and 124 Cr ltr has been supplied.

Exhibit 9: EBP History

400 EBP History 8.50% 10.00%

8.00%
300
5.00% 5.00% 6.00%
4.22%
200 3.51%
4.00%
2.33% 2.07%
100 1.53%
2.00%

0 0.00%
2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21

Qty Supplied (crore Lit) Blending %age PSU OMCs

Source: AMFI, Company, Axis Securities

Efforts are being made by DFPD and MoPNG/OMCs to ensure the achievement of blending targets. Also, in the
next ESY 2021-22, it is likely to supply more than 400 Cr ltr of ethanol to OMCs to achieve 10% blending. Seeing
the progress and the need for a blending programme, the government has preponed its E20 (20% Ethanol
blending with petrol) target to the year 2025 from 2030 earlier.

4
Impact of EBP on Indian economy
 Forex Savings and cost-effective – Ethanol fuel is one of the least expensive energy
sources(depends on demand-supply dynamics which is mitigated through blending) especially in
Agrarian economies. Ethanol blending reduces the import of Crude Oil, thus reducing the country’s
forex bills. With most of the petroleum products being used in transportation, a successful E20 program
can save the country $4 Bn per annum, i.e. Rs 30,000 Cr. Furthermore, Ethanol production can be one
of the least expensive energy sources in India considering abundant farming of key raw materials such
as Sugar cane, paddy grain, and maize.
 The Environmental Impact – Use of E20 fuel in 2 and 4 wheeler vehicles reduces vehicular emissions
of Carbon Monoxide (CO) by 50% and 30%, Hydrocarbons (HC) by 20% and Oxides of Nitrogen (NOx)
by 10% (in 2-W).
 The Rural Impact– The EBP in India has helped Sugar companies to reduce cane arrears to farmers
by shifting the excess capacity to Ethanol blending. The programme also plans to set up additional 400
refineries in the next 5 years which will lead to significant employment opportunities in India from
setting up refineries, supply chain of raw material, and various other fronts of the whole segment.

In light of the above-mentioned advantages, the Indian government has been focusing on developing the
infrastructure and pushing the Auto Industry towards FFVs to achieve the EBP targets. The groundwork has
already been started with DPFD, MoPandNG, and NITI Aayog pushing the OMCs and Auto industry to work
towards developing the necessary Ethanol infrastructure and demand in the country.

Proof of Feasibility: Brazil Case Study

Oil Crisis triggering Ethanol Program: Arab countries hiked crude prices from $3/bbl to $12/bbl in 1973
resulting in an oil crisis, shot-up inflation, and high unemployment rates across the globe, including Brazil. In
response to this adverse economic crisis, Brazil implemented Ethanol Blending by leveraging prevailing collapsed
sugar prices and set up distilleries to reduce dependence on Crude Oil imports. So Brazil came up with idea of
Ethanol Blending because of 2 reasons: 1) Oil Crisis to reduce dependence on Crude Oil & 2) Sugar prices
collapsed due to new substitute sugar use on USA & Europe. Brazil started focusing on Ethanol Programme by
supporting sugar sector, setting up distilleries. This This Ethanol program resulted in the country’s sugarcane
production increasing by 50% and Ethanol by 500% to 280 Cr litres. Furthermore, also pushed the auto industry
to produce vehicles that could run on Ethanol led to the launch E100 vehicle in 1976 first E100 vehicle was
launched Fiat 147. Brazil started making Ethanol only vehicles and by 1985, 96% of vehicles in the country were
ethanol-powered. by then Brazil’s Ethanol production shot up to 1,280 Cr Litres in only nine years from 1976 to
1985.Everything was going well until this point until 1986 crude prices fell, making ethanol vehicles less
economical and Sugar prices started increasing making it less incentivized to produce ethanol which led to
ethanol shortages and further increased price of ethanol. Even after all this Brazil has managed to save $55 Bn in
Oil Imports from 1975-2002. Later due to political instability the EBP programme in Brazil was muted.

Launch of Flex Fuel Vehicles: Brazil introduced Flex Fuel Vehicles (FFVs) that could take in a combination of
fuels in 2003 at competitive rates through collaboration with several automotive companies to revive the EBP
program. This resulted in over 73% of new vehicles sold in Brazil being flex-fuel vehicles. The consumers could
use fuels based on what was economical to them. Since 2003, Brazils carbon emission has declined by 515 Mn
tons and it has saved billions of dollars in Import bills as well. The country is currently following a 27% EBP.

5
The government support to bring traction to setting up capacities

 The government notified two interest subvention schemes for molasses-based distilleries in July’18 and
Mar’19 to enhance ethanol production capacity in the country. Under the aforesaid scheme of DFPD,
interest subvention at the rate of 6% per annum or 50% of the rate of interest charged, whichever is
lower on the loan sanctioned, was borne by the central government for 5 years. DFPD approved 368
projects for setting up of new distilleries/expansion of existing distilleries. Loans amounting to about Rs
3,600 Cr has been sanctioned by banks to 70 sugar mills so far and resultantly, 31 projects have been
completed creating a capacity of 102 Cr litres. The capacity of molasses-based distilleries has reached
426 Cr litres. 39 more projects with a capacity of 93 Cr litres are likely to be completed by Mar’22 which
will bring cumulative capacities to about 519 Cr litres. In the year 2017-18, the installed capacity of
molasses-based distilleries was around 278 Cr litres. Praj is the fron runner for majority of the expected
capex of these Ethanol plants.

Ethanol Supply target for 20% blending by 2025-26

Ethanol Supply (in Cr. Lt.) Fuel ethanol Other uses Total

(A) From sugar sector 550 134 684

(B) From grain/ maize etc. 466 200 666

Total Supply 1016 334 1350

Capacity Augmentation

Ethanol Capacity (in Cr. Lt.) Molasses based Grain-based Total

Existing ethanol/alcohol capacity 426 (231 distilleries) 258 (113 distilleries) 684

93 (will be added
Capacity addition from sanctioned projects
by March 2022) 0 93

New capacity to be added 241 482 723

Total Capacity required by Nov 2026 to

760 740 1500
reach 1350 Cr litres supply

Source: NITI Aayog

Additional capacity (90 % of 1500 = 1350) has been taken to account operational efficiency, raw material availability in various parts of the country due to
natural calamity etc., increase in demand in ethanol due to economic factors and anticipated demand for ethanol in flex-fuel vehicles. To achieve blending
targets, DFPD is making concerted efforts to enhance the ethanol distillation capacity in the country. For this, the government had invited applications from the
entrepreneurs under the ethanol interest subvention schemes in Sep’20 during a window of 30 days. Thus far, 238 projects for a capacity enhancement of 583
Cr litres with a loan amount of about Rs16,000/- Cr have been approved by DFPD. It is expected that at least 400 Cr litres capacity would be added to these
projects by 2024.

 These initiatives and focus on grain-based distilleries the government will diversify the geographical
production of ethanol from sugar-based ethanol produced mainly in three states viz Uttar Pradesh,
Maharashtra and Karnataka. Transporting ethanol to far-flung states from these three states involves
huge transportation costs. By bringing new grain-based distilleries to the entire country would result in
the distributed production of ethanol and would save a lot of transportation costs and therefore costs to
retail users. It would also prevent delays in meeting the blending target and would benefit the farmers
across the country.
 From a recent statement from a BPCL Director, “OMC’s are now close to procuring Rs 20,000 Cr worth
of Ethanol as refining industry has increased the storage capacity to 15 inventory days. He also
mentioned that BPCL is planning to set up 3-4 more plants for Ethanol. The government is taking the
effort to remove the impediments in the transportation of ethanol across states” Praj has developed
Ethanol plant for BPCL(and other OMCs) earlier & therefor more likely to receive further projects.

6
  The government has also fixed remunerative prices of ethanol derived from various feedstocks. It has
also mandated OMCs, being the assured buyer for ethanol, to purchase Ethanol from distilleries.
Demand visibility for the next 5-10 years makes these ethanol projects viable and profitable.

Ethanol Production Route ESY18 ESY19 ESY20 ESY21

C Route 40.9 43.7 43.75 45.69
B Route 52.43 54.27 57.61
Sugarcane Juice Route 59.48 62.65
Damaged food grains / Maize 51.55
Ethanol from surplus rice with FCI 56.87
Source: NITI Aayog
*Y/E November: The government allowed Ethanol from Food Grain Route in ESY21
This is the average cost per MT of various feedstocks across the country, prices vary in different states for the raw material based on availability and state
subsidies resulting in average profitability across the country.

Ethanol Revenue Mechanism Breakdown

Cost/MT Ethanol Ex-Mill Gross

Revenue to
Feedstock of Feedstock Yielded/MT Ethanol Price Profit/MT of
Mill
(INR) of Feedstock (Rs/Litre) Raw Material
Sugarcane Juice/ Sugar/ Sugar Syrup* 2850 70 62.65 4,386 1,536
B Molasses 13500 300 57.61 17,283 3,783
C Molasses 7123 225 45.69 10,280 3,157
Damaged Food Grains (DFG) 16000 400 51.55 20,620 4,620
Ethanol from surplus rice with FCI 20000 450 56.87 25,592 5,592
Maize** 15000 380 51.55 19,589 4,589

 Ministry of Environment, Forest and Climate Change has also streamlined the process of getting
environment clearance (EC) for ethanol projects. Department of Financial Services and State Bank of
India have also issued Standard Operating Procedure (SOP) for sanctioning and disbursal of loans for
ethanol projects which would expedite sanctioning and disbursal of loans. This would significantly
facilitate faster augmentation of Ethanol distilleries in India, thereby supporting robust demand for the
company’s products and services.

7
Bio-Ethanol - The market size of opportunity

1G Ethanol - As of 2020, there are 684 Ethanol distilleries set up in India, out of which 426 are sugar-based
while 258 are grain-based. The government's target of E20 blending would demand production of ~1000 Cr Litres
of Ethanol for blending purposes and ~400 Cr litres for other domestic purposes. This whopping increase in ~8000-9000 Cr market
opportunity visible for
demand would require ~800 more distilleries to be set up across India which will augur well for the company’s
Praj Industries over
growth. next 3-4 Years, just
The average cost of setting up a mid-size distillery is in the range of 100-200 Cr (i.e depending upon the from the domestic 1G
Ethanol business.
automation, discharge process incorporated, geography etc) This translate to ~12,000-14,000 Cr of Capex
requirements. Praj Industries currently has ~65% market share of the domestic 1G Bio Ethanol market. Assuming
65% market share, this translates to ~8,000-9,000 Cr top-line opportunity for the company over the next 3-5
years. Its sharp focus on improving its technology, optimising process flow via data analyses and standardisation,
and consistent R&D investments have helped the company gain the technological edge and thereby maintain and
improve its market share.

1G – Ethanol Capex example – Balrampur Chini Plant - The plant is expected to generate annual revenue of
around Rs 650 Cr and has a cash pay-back period of fewer than 4 years.

The board of Balrampur Chini Mills approved the revised Capex of Rs 425 Cr for the 320 kilolitres per day (KLPD)
distillery plant. It had earlier approved a Capex of Rs 320 Cr for the aforementioned capacity addition project. The
increase in Capex to the tune of Rs 105 Cr is mainly owing to the inclusion of 20 KLPD of extra-neutral alcohol
(ENA), higher storage capacity for raw material and finished goods, a sharp rise in steel prices and change in
designs of equipment to bring in more efficiency and embrace automation.

2G Ethanol – While1G Ethanol plants utilize feedstock such as cereals, sugarcane juice, and molasses as raw
materials, 2G plants utilize surplus biomass and agricultural waste/residue. Moreover, no company globally has
yet commercialised the 2G Ethanol plant profitably, Praj expects a breakthrough soon and is one of the closest
contenders in the race.
“India’s state-run refiners are going slow on plans to build second-generation or 2G ethanol plants and will
instead set up a first-generation or 1G plants, which are more cost-effective,” (as per commentary by the officials
from oil marketing companies such as Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and
Hindustan Petroleum Corp. Ltd (HPCL)). They find setting up 2G plants unviable as being expensive than 1G
plant. A 2G plant requires an investment of 1,000 Cr compared to a 100-200 Cr investment for a 1G plant.

International Opportunity – Canada has planned an E15 blending programme rollout which it will eventually
increase to E25, opening up a huge market for Praj and its international peers. Europe, too, is planning to add an
equal amount of 2G Ethanol capacity to its existing 1G Ethanol capacity. It has undertaken RED 2, Renewable
Energy Directive, which has set a new binding renewable energy target of at least 32% by 2030, with a clause for
a possible upwards revision by 2023. Similarly, many countries across the world are focusing on reducing their
carbon footprint and opening tremendous opportunities for players such as Praj across various segments.

8
Compressed Biogas (CBG) – A hidden trump card in hand
 CBG is purified and compressed biogas produced through a process of anaerobic decomposition from
Praj has developed the
various waste/biomass sources such as agriculture residue, sugarcane press, mud and spent wash of highest yielding
distilleries and sewage water, and bio-degradable fractions of industrial waste. Biogas, which yields at
least 30% more CBG
 Advantages of CBG – Research suggests that CBG, offers ~10% higher calorific value than CNG and
than any other player
can be used as green fuel in automotive, industrial and commercial sectors. in the market and also
 Praj’s Technical Superiority – Praj has developed and commercialised its proprietary renewable gas reduces operating cost
by 30% because of its
technology, RenGasTM, commissioning over 40 plants in India. It is the highest yielding BioGas
unique microbial
(RenGas) technology with at least 30% higher CBG yields than any other player in the market and also cultures.
reduces operating costs by 30% because of its unique microbial cultures. The process also creates
value-added manure that can be organically certified as a byproduct. Advanced biogas cleaning
techniques gives pure methane.
 The Plan–The Ministry of Petroleum and Natural Gas (MoPNG) has signed MoUs with leading Oil &
Gas Marketing companies and technology providers to establish Compressed Bio-Gas (CBG) plants
across India under the Sustainable Alternative towards Affordable Transportation (SATAT) initiative.
The MoUs have been signed with energy companies JBM Group, Adani Gas, Torrent Gas and Petronet
LNG for setting up of CBG plants, and with technology providers in CBG sectors, Indian Oil, Praj
Industries, CEID Consultants and Bharat Biogas Energy for facilitating the availability of technology for
the projects.
 Development so far: Minister of Petroleum and Natural Gas said, “Letter of intent for 600 CBG plants
have already been given and MoUs for 900 plants have been signed, a total of 1,500 CBG plants are at
various stages of execution. Rs 30,000 Cr of investment is envisaged in these 900 plants. A project
requires a 12-month cycle to set up and start functioning.The Indian government under the SATAT
scheme envisages setting up 5,000 CBG plants by 2023-24 with a production target of 15 MMT. It is
expected to create both greener fuels and also new employment opportunities in rural belts. The
government has offered a procurement price of Rs 46 till the year ESY 2024 with takeoff assurance of
10 years plus GST. “Nowhere in the world such program exists, this is the first time program of this
scale and this size is attempted by the policymakers” – MD, Praj Industries Ltd.
 The Hurdles - India does not have a strong established gas infrastructure, shortage of storage space,
segregation of wastes, unavailability of raw materials and lack of established biomass pricing
mechanism has slowed implementations. Regulatory approvals and financing are other major
hindrances. Although the government is handling to solve these issues on the war front, the
government also needs to solve issues around the taxation of digestrate, certification of digestrate.
Storing gas is difficult, therefore simultaneous development of infrastructure and supply capacities
should take place to benefit the end consumers.
 Praj Development in CBG Business - Praj received a prestigious breakthrough order from HPCL in
Q4FY21 for setting up the CBG project at Badaun in Uttar Pradesh. The project will produce CBG from
rice straw feedstock with a processing capacity of 35,000 metric tonnes of rice straw as feedstock and
will generate over 5,000 metric tonnes of CBG annually. In addition, the project will also generate
23,000 metric tonnes of high-quality solid bio-manure and over 35,000 metric tonnes of liquid bio-
manure for ferti-irrigation. The project has the potential to save over 15,000 metric tonnes of CO2
emissions per year.
 Current Status - Praj is also commissioning around 40 plants in India. One of the plants has started
production and is currently operating at around 70-80% capacity. The gas produced at the Praj CBG
plant is currently sold at various IOCL gas outlets and customers have already started using it.

9
Exhibit 10: EBP History

Source: AMFI, Company, Axis Securities

Indian Oil retail outlet at Talegaon Dabhade in Pune is one of the first fuel stations in the country selling CBG.
Indian Oil has initiated the sale of CBG inSeptember 2019 as 'IndiGreen'.

What can be the size of CBG opportunity?

The government plans to set up 5,000 plants across India by 2023-24 with a production target of 15 MMT. If we
consider the MoP&NG assumption of Rs 30,000 Cr investment for 900 plants, we can expect an investment of
around Rs 1,65,000 Cr over the next 3-5 years.According to Praj, “This translates to an opportunity of Rs.
1,75,000 Cr”, Shishir Joshipura, MD, Praj. Praj’s technical superiority in CBG technology would make sure it
seizes a larger pire of this opportunity in the coming future.

The technology is already used in various countries internationally (especially in cold countries for heating
purposes), by purifying the gas it can be used in vehicles. Hence, this can also generate further demand
internationally.

10
Well-positioned to handle demand scale!
The company faces significant market opportunity size when all its business segments are combined. Keeping
this in view, the management has been proactively investing in building the necessary capacity and bandwidth to
handle anticipated huge demand and a possible J curve scenario.
It is investing in R&D and Engineering upgrades with help of the IT systems to augment its capabilities, a few of
which have been mentioned below:

 Standardisation of certain engineering processes which can be offered across a variety of customers to

reduce project run-time and costs as well as improve internal efficiencies by leveraging . For eg. Praj has the

its technical knowledge of installing over 175 distillation towers having varying capacities, geographies, raw

materials, and characteristics. Using this data and experience to standardize certain processes will help in

improving its project run time thereby leading to cost savings and efficiency in operations

 Simultaneously the company is also focusing on manufacturing by improving the process flow,

modernisation of equipment, applying automation technology and process digitalization for better

monitoring of the process flow and efficient production.

 Outsourcing low value-proposition segment of the business to external vendors as these segments or

processes don’t require superior technical expertise. While this could have a marginal impact on margins, it

provides a significant advantage in terms of topline and cash flow improvement owing to efficient working

capital. The company will focus on high value add propositions and IT protected parts of the business where

it has technical prowess.

11
RCM and Engineering Business
RCM Outlook: Praj uses its special domain knowledge and understanding of fermentation and engineering to
come up with a molecule demonstrating the highest scope of future sustainable growth. The company is
partnering with various international players such as JEVO and SEKAB to find the commercial feasibility and
sustainably of such molecules. The bioplastics and hydrogen are the front runners having tremendous industrial
applications. Globally, RCM can be a ~$75 Bn opportunity and Praj is envisaging to take a piece of this pie. The
company has proactively invested in R&D and can successfully capitalise these investments to attain commercial
feasibility. However, we haven’t factored in any of this possible growth in the company's financial models and we
believe that any advancement in these spaces would significantly improve the company’s growth prospects
further.

Engineering businesses: Praj's Engineering businesses comprises Critical Process Equipment and Skids,
Brewery plants, and Wastewater treatment solutions (ZLD).Wastewater treatment plants (ZLD Business)-Praj
offers integrated energy-efficient solutions for effluent recycling and zero liquid discharge for various industrial
applications. The company’s strong experience of treating the most challenging wastewater enables it to offer
highly optimized systems under Engineering businesses with lower footprints and optimized operating costs.
Furthermore, the government’s stringent regulations imposed on manufacturing facilities with an aim to reduce
their footprints are creating building blocks for the ZLD business. Companies across sectors such as Chemicals,
FMCG, and Energy businesses need to follow the stricter mandate of ZLD to receive operating permissions for
their manufacturing facilities. The company expects good growth in this vertical as these regulations are strictly
implemented and become more stringent over the years.

Critical Process Equipment and Skids – These serve vital sectors like Oil &Gas, Refineries, Petrochemicals,
and Fertilizer, etc. Praj offers a range of static equipment like pressure vessels, reactors, shell and tube heat
exchangers, columns and other proprietary equipment as per the client design. Praj also undertakes end-to-end
projects for modular process skids and packages, FEA (Finite Element Analysis), Process and Thermal Design
and Piping Design and Stress Analysis, and design skids using software like Plant 4D and PDMS.

HiPurity Business – Praj HiPurity Systems Limited (a wholly-owned subsidiary) provides value-added solutions
to the pharmaceuticals, biotechnology, and wellness industry and offers end-to-end, integrated solutions such as
water treatment solutions, modular process systems, wastewater treatment solutions and process Engineering
and design capability to ensure superior service to clients.

12
Positive resonance: Change in top management
Every individual at Praj
The company appointed Mr. Shishir Joshipura as CEO and MD in Apr’18 and Sachin Raole as CFO in Jan’17, who have is dedicated towards
spearheaded important changes along certain dimensions of the company’s functioning and work culture. purpose of the
organization, which is
 Focus on Free Cash Flow: Every business vertical is given Cash Flow targets and expected to perform sustainable future.

individually while managing their cash flow self-sustainably.

 Focus on High potential geographies - Move to Brazil, USA and Canada for 1G ethanol, Eurozone for 2G
Ethanol, ZLD in India, and focus on CPS (investing to get the strategic supplier status).

 Focus on bringing technology to the market - Commercializing the developed technologies and bringing
the innovation to the market to capitalizing on them. Praj has used its fermentation expertise to join hands with
the international player which has helped it advance the commercial feasibility of producing 2G Ethanol.

 Focus on Execution - Creating a process flow once the order is received, de-bottlenecking processes, shift
from team effort to driven effort where people are accountable for their responsibilities, creating key positions
to monitor the change, shift from monthly review to weekly review, resolving supply chain issues including
order offtake from customers to free up factory space. The shift from monthly to weekly review has helped the
company for closer monitoring of the execution flow.

 Focus on Employees - The management started creating a sense of involvement and satisfaction among
employees with a drive towards the purpose to curb employee attrition.

13
Outlook and Valuation
We initiate coverage on PRAJ with a BUY recommendation and value the stock at PE of 40x FY23E to
arrive at a TP of Rs 422/share, implying an upside of 22% from CMP. PE of 40 is at a discount of ~15% to Uniquely positioned
the current 45x FY22 earning. While FY21 operations were impacted owing to the COVID-19 led adverse player in its business
segment gaining moat
commodity price fluctuations, the company’s outlook over FY23-25E continues to be positively supported by a)
from its technological
Strong push on Bio-Ethanol in Indian as well as international markets; b) Commercial feasibility of 2G ethanol prowess and
driving further demand in the ethanol space; c) Singficantly large CBG opportunity; d) Sharp focus on new engineering
product development in renewable chemical materials space; and e) Visible margin improvement owing to the capabilities

management’s focus on execution, international business growth, and operating leverage.

We expect Praj to report Revenue/EBITDA/APAT CAGR of 22.7%/32.6%/37.5% respectively over FY21-

FY24E driven by order book growth and efficient execution as well as improvement in the company’s
Gross Margins with new contracts. We believe the company is well placed to take advantage of multiple
tailwinds and is uniquely positioned in its business segment having moat from its technological prowess
and engineering capabilities. The expected future growth justifies the valuation and makes a compelling
investment opportunity. The premium valuations are justified in our view given the large headroom for
growth.

Exhibit 11: FWD PE BAND (x) Exhibit 12: FWD PE CHART (x) –

500 Praj Industries 12M Fwd PE Band 55 Praj Industries 1Y Fwd PE Chart
400 45
300 35
200 25
100 15
0 5
Jul-19

Jul-20

Jul-21
Jun-19
Aug-19
Sep-19

Jun-20
Aug-20
Sep-20
Mar-19

Nov-20
Dec-20
Jan-21

Jun-21
Aug-21
Apr-19

Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20

Oct-20

Feb-21
Mar-21
Apr-21
May-19

May-21

Jul-19

Jul-20

Jul-21
Jun-19

Jan-20

Jun-20

Jan-21

Jun-21
Aug-19
Sep-19
Nov-19
Dec-19

Aug-20
Sep-20
Nov-20
Dec-20

Mar-21

Aug-21
Mar-19
Apr-19

Oct-19

Feb-20
Mar-20

Oct-20

Feb-21
May-19

Apr-20
May-20

Apr-21
May-21
Price 30x 35x 40x 45x Mean Mean+1Stdev Mean-1Stdev PE

Source: the company, Axis Securities

14
Management Profile
Key Management Personnel Experience

A first-generation techno-entrepreneur, Dr Pramod Chaudhari founded Praj in 1983. With a strong belief in the
Dr. Pramod Chaudhari
principle of triple-bottom-line, his business model is inherently scalable, replicable and sustainable. Praj
Executive Chairman
fostered the emergence of advanced technologies in certain Bio-Energy and allied spaces. As India’s biggest
IIT, Bombay,
Biofuel Technology company, Praj has footprints in over 83 countries, across five continents. Dr. Chaudhari
Harvard Business School
has recently received the Prestigious ‘George Washington Carver Award 2020’ by BIO-Impact, Washington
DC, USA – he is the first Indian to receive this global honour.

Mr. Shishir has over 35 years of rich experience in varied fields of engineering ad possesses a strong business
and leadership record. He began his career with Thermax Ltd and held several key positions to rise through
Shishir Joshipura
the ranks to become Executive Vice President and Global Head of Cooling & Heating business. Before joining
CEO & MD
Praj, he served as Managing Director of SKF India Ltd from 2009 to 2018. Under his leadership, SKF
B.Tech (Mech), BITS Pilani
consolidated its position as the leading manufacturer of bearings, seals, lubrication systems, mechatronics,
Harvard Business School and services. He is also the Founding Director for Alliance for Energy-Efficient Economy (AEEE) – an industry
think-tank and policy advocacy organisation for energy efficiency in India.

Mr. Sachin is a Cost Accountant and Chartered Accountant with 22 years of experience in varied fields of
Sachin Raole
CFO and Director – Finance finance and accounts. He has worked in the areas of divestment, mergers and acquisitions, financial
and Commercial restructuring, treasury, accounts, and taxation. He has very rich experience in the wide spectrum of finance
CA and ICWA across industries; manufacturing, project, financial services and pharmaceutical. Additionally, he also has
experience in heading Human Resources, materials, IT, legal and secretarial.

15
Key Risks & Mitigation

 Weak Balance Sheet of Sugar Companies: Most of the small sugar companies do not have the necessary
balance sheet strength to invest in Ethanol plants. However, government assistance and revenue visibility from
tie-ups with OMCs is increasing the number of entities undertaking capital expenditure for setting Ethanol
plants.

 Fluctuation in input costs: Fluctuation in input costs such as steel affects the cost structure and consequently
the profitability of the company. Since Praj enters into fixed-price contracts, any rise in raw material prices
affects Praj’s gross margins. To reduce this, it is focusing on reducing the time lag between order inquiry and
order execution.

 Dependence on Water intensive crops: Both Sugar and Paddy are water-intensive crops. It is estimated that
sugarcane and paddy use 70% of the irrigated water of the country combined. Keeping in mind the need for
water conservation, it is advisable to shift some of the areas under sugarcane to less water-intensive crops by
providing suitable incentives to farmers. The Task Force on sugarcane and sugar industry constituted under
Member of Agriculture department from NITI Aayog, has suggested ways to minimize water consumption
through various means to encourage farm diversification. This may lead to a reduction in the supply of raw
material for plants in future and adversely impact the setting up of Ethanol plants. Crops being water-intensive
also makes the IRR of the Ethanol projects dependent on the monsoon. However, from a broader time frame
perspective, it may not have much impact on Capex decisions by companies.

 Co-dependence on Auto Industry: The Ethanol initiative is also dependent on technology adoption in the auto
industry as the program moves beyond 10% EB levels. Although we believe that this particular risk will be
mitigated as there has been a very clear directive from the government (Road & Transport Minister) to move
towards flexi fuel vehicles to accommodate the EBP mandate.

 Dependence on Government Actions: Praj is significantly dependent on the government regulations and
initiatives for the domestic part of its ZLD business, CBG business, and Bio-Ethanol business. However, with
these businesses being inevitable needs of the future, we see no threat in execution, especially with the
increasing pressure from Paris Agreement and other International ESG bodies.

16
Ethanol Blending Programmes around the world
Roadmap / Mandate for ethanol blending in various countries
Country Roadmap / Mandate for ethanol blends Program Implementation by Vehicle Type

The national policy of Brazil originally

Mainly flex. Motorbikes
started in 2015continues. The mandate is National biofuels policy Ministry of mines and
Brazil and other two-wheeler
to blend 18-27.5% of ethanol in gasoline. (Dec 2017) energy (MME)
engines use E27
This is currently at 27%.

The clean air Act requires EPA to set the

Renewable Fuel Standards (RFS) volume Renewable fuel Environmental
Primarily normal; Flex
United States requirements annually. EPA updates standard (RFS) protection agency
for E30 or E85 only.
volume requirements each year based on program (EPA)
fuel availability

EU aims to have 10% of the transport fuel

Renewable energy
European Union (EU) of every EU country come from renewable European commission Flex and normal
directive
sources, such as bio-fuels by 2020

In September 2017, the Chinese

government announced legislation
National energy
China proposing the use of ethanol in fuel for all Fuel quality standards Primarily normal
administration
of China with the target of 10% ethanol
blending

Alternative Energy Development Plan

(ADEP) targets the share of renewable and
Thailand alternative energy from biofuel to increase ADEP Ministry of Energy Primarily normal
from 7% of total fuel energy use in 2015 to
25% in 2036

Source: Company, Axis Securities

17
Financials
Profit & Loss (Rs Cr)
Y/E March FY20 FY21 FY22E FY23E FY24E
Net sales 1,102 1,305 2,033 2,545 3,040
Raw Material 552 736 1,246 1,476 1,779
Employee benefit expenses 164 172 186 211 240
Other Expenses 308 284 429 611 730
EBITDA 78 112 172 247 292
Other income 30 26 33 33 33
PBIDT 108 138 205 280 325
Depreciation 22 22 21 21 21
Interest & Fin Chg. 3 3 3 3 3
E/o income / (Expense) - - - - -
Pre-tax profit 83 113 180 257 302
Tax provision 13 32 45 64 76
RPAT 70 81 135 192 226
Source: Company, Axis Securities

Balance Sheet (Rs Cr)

Y/E March FY20 FY21 FY22E FY23E FY24E
Share Capital 37 37 37 37 37
Reserves & Surplus 683 765 857 1,049 1,275
Total Equity 720 803 894 1,086 1,312
Total Non-Current Liabilities 32 27 27 27 27
Trades Payable 187 342 447 530 638
Other Current Liabilities 197 376 376 376 376
Total Current Liabilities 409 764 870 953 1,061
Total Capital Employed 1,162 1,594 1,791 2,066 2,400

Net Block 217 206 205 202 200

Goodwill 63 63 63 63 63
Total Non-Current Assets 382 358 357 354 352
Cash 46 101 68 183 354
Inventory 111 129 201 231 268
Receivables 330 453 613 746 875
Investments 124 295 295 295 295
Total Current Assets 780 1,235 1,434 1,712 2,048
Total Assets 1,162 1,594 1,791 2,066 2,400
Source: Company, Axis Securities

18
Cash Flow (RsCr)
Y/E March FY20 FY21 FY22E FY23E FY24E
Net Profit before Tax 83 113 180 257 302
Depreciation 22 22 21 21 21
Working Capital Changes -76 116 -126 -80 -57
Tax Paid -18 -15 -45 -64 -76
Cash From Operating Activities 15 225 -1 102 158
Cash From Investing Act 62 -164 14 15 15
Cash Flow from Financing -98 -6 -46 -2 -2
Change in Cash -21 54 -33 115 171
Opening Cash 64 46 101 68 183
Closing Cash 46 101 68 183 354
Source: Company, Axis Securities

Ratio Analysis (%)

Y/E March FY20 FY21 FY22E FY23E FY24E
Operational Ratios
Gross profit margin 50% 44% 39% 42% 42%
EBITDA margin 7% 9% 8% 10% 10%
PAT margin 6% 6% 7% 8% 7%
Growth Indicators
Sales growth -3% 18% 56% 25% 19%
EBITDA growth -2% 44% 53% 44% 18%
PAT growth 3% 15% 67% 42% 18%
Efficiency Ratios
Total Asset turnover (x) 0.9 0.9 1.2 1.3 1.4
Inventory turnover (x) 4.7 6.1 7.5 6.8 7.1
Sales/Working Capital 4.4 5.0 4.5 5.1 5.5
Liquidity Ratios
Total Debt/Equity(x) 0.0 0.0 0.0 0.0 0.0
Total Asset/Equity(x) 1.8 2.0 1.9 1.9 1.8
Current Ratio(x) 1.9 1.6 1.6 1.8 1.9
Quick Ratio(x) 1.6 1.4 1.4 1.6 1.7
Interest Cover(x) 25.2 39.3 60.0 86.5 102.2
Per Share Data
Earnings Per Share (Rs) 3.85 4.42 7.36 10.47 12.30
Valuation Ratios
Adjusted PE (x) 14.3 44.0 45.2 31.8 27.1
Price / Book Value(x) 1.4 4.5 6.8 5.6 4.7
EV/Net Sales(x) 0.9 2.6 3.0 2.4 2.0
EV/EBITDA(x) 8.9 24.9 35.1 24.3 20.6
EV/EBIT(x) 11.1 29.6 32.8 23.2 19.8
Return Ratios
ROA 5.8% 5.9% 8.0% 10.0% 10.1%
ROE 9.6% 10.7% 15.9% 19.4% 18.8%
ROCE 11.4% 14.7% 20.9% 25.5% 24.8%
Source: Company, Axis Securities

19
 Praj Industries Chart and Recommendation History

(Rs)

Date Reco TP Research

13-Sep-21 Buy 492 Initiating Coverage

Source: Axis Securities

20
About the analyst

Analyst: Prathamesh Sawant, CFA

Email:[email protected]

Sector: Sugar, Textile & Midcap Opportunities

Analyst Bio: Prathamesh is a CFA with 4 years of experience in Equity Market/Research.

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21
 DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

SELL Less than -10%

NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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22