Praj Industries Ltd (PRJ IN) Transformation story on track

Transcription

1 INSTITUTIONAL EQUITY RESEARCH Praj Industries Ltd (PRJ IN) Transformation story on track INDIA MIDCAP ENGINEERING Management Meet Update Our visit to the company s research and development (R&D) centre Praj Matrix in Pune and detailed interaction with the management has further strengthened our conviction. R&D work on second generation ethanol and bio product development is at a critical stage and will create new opportunities over the medium term. The focus on non ethanol emerging businesses has started yielding results and should provide a new growth trajectory along with margin improvement. With clarity on operating leverage and capital efficiency, we have raised our FY16/17 earnings estimates by 20/13%. We maintain BUY with revised target price of Rs 125 (Rs 90 earlier). Praj Matrix an untold story Praj has invested US$ 25mn in an R&D lab at Pune called Matrix, which is engaged in the development of bio based technologies and products. Matrix is certified by the Department of Scientific and Industrial Research (GoI) and has received the status of a private sector biotech park from the Government of Maharashtra. It is working on livestock and health nutrition, human health and wellness products and industrial biochemicals. It is working on second generation ethanol since 2006 and has seen significant breakthroughs in handling different feedstock. It is successfully operating a pilot plant at the R&D centre and has government approval for setting up a demo plant. So far a cost centre, the R&D centre is expected to generate revenue through technology licensing for bio products (probiotics, proteins, omega 3 and vitamin E) and contract research work in industrial bio chemicals. Emerging businesses are playing out as expected Praj has realigned its business model and business mix over the past five years to create sustainable businesses. The management maintains a strong outlook for its emerging businesses that started in 2009 and expects 50% revenue contribution in FY17 vs. 31% in FY15. All three businesses are scalable and their focus on export will be an incremental driver. In High Purity, Praj is focusing on providing complete solutions to pharma, life science, healthcare, and cosmetics industries, thereby increasing its business opportunities. First generation ethanol strong commitment in the domestic market The government is committed to the successful implementation of 5% ethanol blending in petrol and then taking it to 10%. Government has de linked the ethanol blending programme from oil price volatility with fixed price tenders at an attractive rate of Rs 42/litre. It has also waived off excise duty of 12.3% on ethanol and asked sugar mills to convert distilleries into zero discharge. The international market is likely to remain volatile; however, we see opportunities in SEA and Africa where the company has already established itself. Fuel blending is drawing interest in the EU with a new directive for 7% blending. Thailand and Mexico are implementing ethanol blending of 10% and 6%. Meanwhile, Praj has significantly de risked its business from oil price volatility its order book has only 9% exposure to pure fuel based ethanol plant orders. Control on cash flow, continues to maintain strong balance sheet Praj s balance sheet improved in FY15 with better working capital management. Net working capital (excluding cash) declined to 9.4% of sales in FY15 from 16.2% in FY14. The company is giving a corporate guarantee (instead of retention money) and is selective with its customer profile. Lower execution cycle in emerging business should support cash cycle. Valuations: At a CMP of Rs 95, the stock is trading at 13.7x FY17 earnings and FY15 P/BV of 2.8x. Praj aspires to be a major player in environment, energy, and agri process led applications. The commercial success of the second generation of bio ethanol plants would be a game changer for the company. We have revised our valuation to 18x FY17E (earlier 15x) with a target price of Rs 125 (Rs 90 earlier). 1 July 2015 BUY CMP RS 95 TARGET RS 125 (+31%) COMPANY DATA O/S SHARES (MN) : 177 MARKET CAP (RSBN) : 17 MARKET CAP (USDBN) : WK HI/LO (RS) : 99 / 55 LIQUIDITY 3M (USDMN) : 2.3 PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % PROMOTERS : 34.0 FII / NRI : 11.2 FI / MF : 15.5 NON PROMOTER CORP. HOLDINGS : 12.6 PUBLIC & OTHERS : 26.8 PRICE PERFORMANCE, % 1MTH 3MTH 1YR ABS REL TO BSE PRICE VS. SENSEX Apr 13 Apr 14 Apr 15 Praj Ind Source: Phillip Capital India Research BSE Sensex KEY FINANCIALS Rs mn FY15 FY16E FY17E Net Sales 10,119 11,941 15,007 EBIDTA 844 1,241 1,877 Net Profit ,231 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: PhillipCapital India Research Est. Vikram Suryavanshi ( ) vsuryavanshi@phillipcapital.in Page 1 PHILLIPCAPITAL INDIA RESEARCH

2 Change in estimates We have raised our EBITDA estimates by 15%/ 11% in FY16/FY17 with clarity on operating leverage and capital efficiency in business. The company is expected to perform better on operating parameters with margin improvement associated with cost control and increased business scale. FY15 margins look depressed due to onetime cost ~Rs 380mn including (1) consultancy fees for value maximization and (2) provisions and write off on contract settlement. We also expect operating leverage available from upfront employee addition. We now expect FY16/17 EBITDA margins of 10.4/12.5% vs. earlier estimates of 9.1/11.5%. The company has tax benefits on R&D expenditure and SEZ units in Kandla and we have lowered tax rate to 26% from 28%. We expect the stock to rerate with increased cash flow and return ratios We have revised our valuation to 18x FY17E (earlier 15x) with a target price of Rs 125 (from Rs 90 earlier). Change in estimates Earlier Revised Ch% Rs mn FY16E FY17E FY16E FY17E FY16E FY17E Revenue 11,852 14,700 11,941 15,007 1% 2% EBITDA 1,083 1,691 1,241 1,877 15% 11% Margins (%) % 15% PAT 648 1, ,231 20% 16% EPS (Rs) % 16% Source: PhillipCapital India Research Estimates Praj Matrix an untold story Praj s R&D division is designed to provide environmentally friendly solutions. It is built on five acres with a built up area of 85,000 sq. ft. at a capital expenditure of around Rs 1.2bn. Praj Matrix has a 9,000 sq. ft. clean room facility with six research laboratories for conducting microbiology and molecular biology research. It has the infrastructure to handle aerobic, micro aerobic, and anaerobic microorganisms. It has ~150 employees in R&D including 20PHDs and 94 technologists from biology, chemistry, and engineering. It has five centres of excellence (COE) focusing on 1) chemical science, 2)molecular and microbiology, 3) bio process technology, 4) scale up and process engineering and 5) analytical science. The R&D centre has fully automated fomenters from a scale of 2 litres up to 100 litres for rapid process scale up and validation. Page 2 PHILLIPCAPITAL INDIA RESEARCH

3 Praj Matrix adding new segment in emerging businesss Source: Company The research centre has a lignocelluloses (biomass) to bioethanol It can use sugarcane bagasse, corn cob, pilot plant with a capacity of 1 tonnes per day of feedstock. grasses, corn stover, rice straw, wheat straw, wood chips and other agricultural biomass residues. This plant is capable of end to end trials including feedstock handling, pre treatment, enzymatic hydrolysis, and fermentation. The company is working on developing bio products leveraging its R&D strength for Livestock, Health and Nutrition. It is close to commercial stage for Probiotics, Proteins, Omega 3 and Vitamin E. Livestock, Health and Nutrition market is ~Rs 100bn in South and South East Asia and is growing at CAGR of 10%. R&D center is expected to generate revenue through technology licensing for bio products and contract research work in industrial bio chemicals. Bio Product development pipeline Source: Company Page 3 PHILLIPCAPITAL INDIA RESEARCH

4 Financials Income Statement Net sales 9,858 10,119 11,941 15,007 Growth, % Total income 9,858 10,119 11,941 15,007 Raw material expenses 4,791 5,060 6,090 7,774 Employee expenses 1,240 1,331 1,438 1,581 Other Operating expenses 2,961 2,884 3,172 3,775 EBITDA (Core) ,241 1,877 Growth, % (4.2) (2.6) Margin, % Depreciation EBIT ,447 Growth, % (8.7) (26.0) Margin, % Interest paid Other Non Operating Income Pre tax profit ,098 1,719 Tax provided Profit after tax ,272 Others (Minorities, Associates) Net Profit ,231 Growth, % (10.9) (27.6) Net Profit (adjusted) ,231 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Cash & bank ,353 1,864 Debtors 3,203 2,805 3,599 4,728 Inventory 2,221 2,272 2,552 2,884 Loans & advances 2,493 1,447 1,476 1,506 Other current assets Total current assets 8,589 7,523 8,979 10,981 Investments 910 1,579 1,284 1,284 Gross fixed assets 4,358 4,527 4,977 5,377 Less: Depreciation 1,132 1,510 1,904 2,335 Add: Capital WIP Net fixed assets 3,241 3,033 3,089 3,059 Total assets 12,740 12,135 13,352 15,323 Current liabilities 4,287 4,280 5,005 6,167 Provisions 2,124 1,325 1,431 1,546 Total current liabilities 6,411 5,605 6,437 7,713 Non current liabilities Total liabilities 6,701 5,765 6,630 7,958 Paid up capital Reserves & surplus 5,470 5,867 6,191 6,793 Shareholders equity 6,039 6,370 6,722 7,365 Total equity & liabilities 12,740 12,135 13,352 15,323 Source: Company, PhillipCapital India Research Estimates Cash Flow Pre tax profit ,098 1,719 Depreciation Chg in working capital Total tax paid Cash flow from operating activities 118 1, ,539 Capital expenditure Chg in investments Cash flow from investing activities Free cash flow ,139 Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Cash flow from financing activities Net chg in cash Valuation Ratios Per Share data EPS (INR) Growth, % (10.9) (27.6) 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) (13.3) (18.0) (23.7) Valuation PER (x) PEG (x) y o y growth (2.5) (1.3) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Page 4 PHILLIPCAPITAL INDIA RESEARCH

5 Management Vineet Bhatnagar (Managing Director) (91 22) Kinshuk Bharti Tiwari (Head Institutional Equity) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles Economics Midap Dhawal Doshi (9122) Anjali Verma (9122) Amol Rao (9122) Nitesh Sharma, CFA (9122) Infrastructure & IT Services Portfolio Strategy Banking, NBFCs Vibhor Singhal (9122) Anindya Bhowmik (9122) Manish Agarwalla (9122) Deepan Kapadia (9122) Pradeep Agrawal (9122) Technicals Paresh Jain (9122) Logistics, Transportation & Midcap Subodh Gupta, CMT (9122) Vikram Suryavanshi (9122) Consumer, Media, Telecom Production Manager Naveen Kulkarni, CFA, FRM (9122) Metals Ganesh Deorukhkar (9122) Jubil Jain (9122) Dhawal Doshi (9122) Manoj Behera (9122) Database Manager Oil&Gas, Agri Inputs Deepak Agarwal (9122) Cement Gauri Anand (9122) Vaibhav Agarwal (9122) Editor Pharma Roshan Sony Engineering, Capital Goods Surya Patra (9122) Ankur Sharma (9122) Mehul Sheth (9122) Sr. Manager Equities Support Hrishikesh Bhagat (9122) Rosie Ferns (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) 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, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, 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) Page 5 PHILLIPCAPITAL INDIA RESEARCH

6 Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence/Conflict: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its employees, directors, or affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd may not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd. which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker dealer, Marco Polo Securities Inc. ("Marco Polo").Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai Page 6 PHILLIPCAPITAL INDIA RESEARCH