Praj Industries Ltd A perfect blend PhillipCapital (India) Pvt. Ltd. Engineering: Company Update 27 November 2014

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1 Praj Industries Ltd A perfect blend PhillipCapital (India) Pvt. Ltd. Engineering: Company Update 27 November 2014 We visited Praj Industries R&D centre in Pune and had detailed interaction with the management. We reiterate that Praj remain a conviction buy under Kaizen philosophy. The focus on non ethanol emerging business has started yielding result and would provide new growth trajectory for the company. The recent order of Rs 2.35bn will help the company to establish as a key player for process equipment and Systems in the Hydrocarbon sector. In High Purity business, it is now focusing on providing complete solution to Pharma, Life sciences, Healthcare & Cosmetics industries increasing business opportunities for the segment. The company has completed front capital expenditure in research and development centre, manufacturing along with new office building and is ready for new growth orbit. Emerging Business gaining traction: Critical Process Equipment & Systems (CPES) has received an order of Rs 2.35bn is from QGIT, the main contractor for Petrobras in Brazil. Praj will provide detailed engineering, procurement, manufacturing of skids along with all related equipment and order will be completed in ~11 months at its new facility in Kandla, Gujarat. High Purity business has increased its offerings from process solutions provider a complete solution provider to Pharma, Life sciences, Healthcare & Cosmetics industries. It has successfully demonstrated the technology for treating waste water for textile industry and is looking for major opportunities in chemical industry, fertilizer, Pharma and Clean Ganga river project. Revenue from emerging business is expected to grow at CAGR 36% from Rs 2.7bn in FY14 to Rs 6.97bn in FY14 contributing 47% of revenue in FY17 compared to 28% in FY14. Recovery in Brewery business: Praj Industries reported strong consolidated revenue growth of 36.4% during 2QFY15 on back of growth in brewery segment. It has successfully commissioned the brewery in Namibia, Africa for a global brewing major resulting in revenue of Rs 7.95bn in 2QFY15 compared to Rs 78mn in 2QFY14. Second export order form Heineken from its Myanmar plant will be commissioned in 2HFY15. Domestic brewery market should maintain growth of 10 12% and it is planning to replicate its success in breweries in the international market. USA could be major market for Second Generation Bio ethanol plant: The Company is working on second generation bold on demo plant at Nagpur, Maharashtra with an investment of Rs 750mn and is expected to complete in 2HFY16. It will use non food based feed stock like Bagasse, Cane trash, Corn cob etc. The commercial success of second generation of bio ethanol plant would be game changer for the company. Valuations: At CMP of INR68, stock is trading at 14.7xFY16 earnings and P/BV of 2XFY16. Praj aspires to be a major player in the environment, energy and agri process led applications providing integrated solutions including plant, equipment and products. We maintain our valuation at 14xFY17e with target price of Rs 95 per share. BUY PRJ IN CMP RS 68 Target Rs 95 (+40%) Company Data O/S Shares (Mn) : 177 Market Cap (Rs bn) : 12 Market Cap (USD bn) : Wk Hi/Lo (Rs) : 79 / 40 Liquidity 3m (USD mn) : 1.4 Face Value (Rs) : 2 Share Holding Pattern, % Promoters : 33.0 FII / NRI : 8.7 FI / MF : 15.4 Non Promoter Corp. Holdings : 14.8 Public & Others : 28.1 Price Performance, % 1mth 3mth 1yr Absolute Rel to BSE Price Vs. Sensex (Rebased values) Apr 11 Apr 12 Apr 13 Apr 14 Praj Ind BSE Sensex Source: PhillipCapital India Research Other Key Ratios Rs mn FY15E FY16E FY17E Net Sales 10,384 12,341 14,906 EBIDTA 844 1,213 1,765 Net Profit ,208 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: PhillipCapital India Research Est. Vikram Suryavanshi ( ) vsuryavanshi@phillipcapital.in Please refer to Disclosures and Disclaimers at the end of the Research Report.

2 Emerging Business gaining traction Critical Process Equipment & Systems (CPES) has received an order of Rs 2.35bn is from QGIT, the main contractor for Petrobras in Brazil. Praj will provide detailed engineering, procurement, manufacturing of skids along with all related equipment and order will be completed in ~11 months at its new facility in Kandla, Gujarat. Praj Industries further raised its holding in the subsidiary Praj HiPurity Systems Ltd by acquiring additional 10% stake for Rs. 204mn. With this, the company now holds 80% stake in Praj HiPurity Systems Ltd at a total consideration of Rs. 1.18bne. High Purity business has increased its offerings from process solutions provider a complete solution provider to Pharma, Life sciences, Healthcare & Cosmetics industries. Complete solution provider in Hi Purity Source: Company It has successfully demonstrated the technology for treating waste water for textile industry and successfully commissioned a Zero liquid discharge (ZLD) system for the largest terry towel manufacturing facility in the world. This is Praj s 7th installation in the textile industry. The company is looking for major opportunities in chemical industry, fertilizer, Pharma and Clean Ganga river project for water & wastewater solutions business. Management is positive on medium term business outlook and seeing improvement in order enquiry. Revenue from emerging business is expected to grow at CAGR 36% from Rs 2.7bn in FY14 to Rs 6.97bn in FY14 contributing 47% of revenue in FY17 compared to 28% in FY14. 2 of 7

3 USA could be major market for Second Generation Bio ethanol plant: The Company is working on second generation bold on demo plant at Nagpur, Maharashtra with an investment of Rs 750mn and is expected to complete in 2HFY16. It will use non food based feed stock like Bagasse, Cane trash, Corn cob etc. The commercial success of second generation of bio ethanol plant would be game changer for the company. The company is having technology partner for process development and USA could be major market for second generation bio ethanol plant. Modernization and service revenue from existing customers Praj is targeting 15 20% revenue from providing services and modernization to its existing customer base of ethanol manufacturers. It has set up a separate team for creating service opportunities with existing ethanol plant in domestic and international market. Some of the plants provided by Praj are now ~20 25 years old and provide opportunities in multiple feedstock, energy and steam saving and yield improvement. The company is also looking at annual maintenance contracts for existing plants and also retro fitting existing capacities for expansion. Valuations: At CMP of INR68, stock is trading at 14.7xFY16 earnings and P/BV of 2XFY16. The company has strong balance sheet with zero debt and enjoys leadership position in ethanol and brewery market. Praj aspires to be a major player in the environment, energy and agri process led applications providing integrated solutions including plant, equipment and products. We maintain our valuation at 14xFY17e with target price to Rs 95 per share. 1year PE Band chart 300 Price (Rs.) 8X 12X 16X 20X Apr/04 Sep/04 Feb/05 Jul/05 Dec/05 May/06 Oct/06 Mar/07 Aug/07 Jan/08 Jun/08 Nov/08 Apr/09 Sep/09 Feb/10 Jul/10 Dec/10 May/11 Oct/11 Mar/12 Aug/12 Jan/13 Jun/13 Nov/13 Apr/14 Sep/14 Source: Company 3 of 7

4 Financials Income Statement Y/E Mar, Rs mn FY14 FY15E FY16E FY17E Net sales 9,858 10,384 12,341 14,906 Growth, % Total income 9,858 10,384 12,341 14,906 Raw material expenses 4,791 5,005 6,022 7,341 Employee expenses 1,240 1,339 1,527 1,756 Other Operating expenses 2,961 3,196 3,579 4,044 EBITDA (Core) ,213 1,765 Growth, % (4.2) (2.6) Margin, % Depreciation EBIT ,468 Growth, % (8.7) (4.4) Margin, % Interest paid Other Non Operating Income Pre tax profit ,168 1,713 Tax provided Profit after tax ,268 Others (Minorities, Associates) Net Profit ,208 Growth, % (10.9) (6.4) Net Profit (adjusted) ,208 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY14 FY15E FY16E FY17E Cash & bank Debtors 3,203 3,414 4,057 4,901 Inventory 2,221 2,289 2,540 2,867 Loans & advances 2,493 2,543 2,594 2,646 Other current assets Total current assets 8,589 9,028 10,011 11,516 Investments Gross fixed assets 4,358 5,008 5,658 6,008 Less: Depreciation 1,132 1,375 1,653 1,950 Add: Capital WIP Net fixed assets 3,241 3,649 4,020 4,073 Total assets 12,740 13,328 14,563 16,121 Current liabilities 4,287 4,552 5,410 6,534 Provisions 2,124 2,337 2,570 2,827 Total current liabilities 6,411 6,888 7,980 9,362 Non current liabilities Total liabilities 6,701 7,203 8,330 9,763 Paid up capital Reserves & surplus 5,470 5,535 5,600 5,665 Shareholders equity 6,039 6,125 6,233 6,358 Total equity & liabilities 12,740 13,328 14,563 16,121 Source: Company, PhillipCapital India Research Estimates Cash Flow Y/E Mar, Rs mn FY14 FY15E FY16E FY17E Pre tax profit ,168 1,713 Depreciation Chg in working capital Total tax paid Cash flow from operating activities 118 1,023 1,322 1,774 Capital expenditure Chg in investments Cash flow from investing activities Free cash flow ,424 Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Cash flow from financing activities Net chg in cash Valuation Ratios & Per Share Data FY14 FY15E FY16E FY17E Per Share data EPS (INR) Growth, % (10.9) (6.4) Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) (0.7) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Fixed capital/sales (x) Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Total debt/equity (%) Net debt/equity (%) (6.2) (7.9) (8.4) (13.0) Valuation PER (x) PEG (x) y o y growth (1.8) (3.2) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) of 7

5 Recommendation History B (TP 93) B (TP 95) /1/2014 2/12/2014 3/27/2014 5/15/2014 6/26/2014 8/8/2014 9/23/ /13/2014 Source: PhillipCapital India Research 5 of 7

6 Management Vineet Bhatnagar (Managing Director) (91 22) Kinshuk Bharti Tiwari (Head Institutional Equity) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles Engineering, Capital Goods Pharma Dhawal Doshi (9122) Ankur Sharma (9122) Surya Patra (9122) Priya Ranjan (9122) Hrishikesh Bhagat (9122) Retail, Real Estate Banking, NBFCs Infrastructure & IT Services Abhishek Ranganathan, CFA (9122) Manish Agarwalla (9122) Vibhor Singhal (9122) Neha Garg (9122) Pradeep Agrawal (9122) Varun Vijayan (9122) Paresh Jain (9122) Technicals Midcap Subodh Gupta, CMT (9122) Consumer, Media, Telecom Vikram Suryavanshi (9122) Naveen Kulkarni, CFA, FRM (9122) Production Manager Jubil Jain (9122) Metals Ganesh Deorukhkar (9122) Manish Pushkar, CFA (9122) Dhawal Doshi (9122) Ankit Gor (9122) Database Manager Cement Vishal Randive (9122) Vaibhav Agarwal (9122) Oil&Gas, Agri Inputs Gauri Anand (9122) Sr. Manager Equities Support Economics Deepak Pareek (9122) Rosie Ferns (9122) Anjali Verma (9122) Sales & Distribution Corporate Communications Ashvin Patil (9122) Sales Trader Zarine Damania (9122) Shubhangi Agrawal (9122) Dilesh Doshi (9122) Kishor Binwal (9122) Suniil Pandit (9122) Sidharth Agrawal (9122) Execution Bhavin Shah (9122) Mayur Shah (9122) Dipesh Sohani (9122) SINGAPORE Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel (1) Fax: (1) Contact Information (Regional Member Companies) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, C Block, 2 nd Floor, Modern Center, Jacob Circle, K. K. Marg, Mahalaxmi Mumbai Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) of 7

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