Stock To Buy: Company With Robust Orders, Healthy Tender Pipeline, Market Leadership

Prabhudas Lilladher is betting on the stock of Praj Industries for a decent up tick in the stock from current levels. The firm has initiates coverage on Praj Industries (PRAJ) with 'BUY' rating at target price of Rs.507 valuing it at PE of 30x FY24E.

A perfect blend of Bioenergy businesses

According to Prabhudas Lilladher, PRAJ is well poised for growth in the coming years given 1) its strong leadership in domestic ethanol plants (~60-65% market share), 2) prominent global presence in more than 100 countries and 3) significant focus on future-ready technologies like 2G ethanol (orders for three 2G based ethanol plants), Compressed Bio Gas (CBG) (opportunity of 5,000 CBG plants) & Sustainable Aviation Fuel (SAF) and 6) diversification in Wastewater Treatment (ZLD), Critical Process Equipment's & System (CPES) & HiPurity business.

"We anticipate PRAJ's Revenue/PAT CAGR at 17.4%/29.3% over FY2022-25E led by robust order book, healthy tender pipeline, strong market leadership, pickup in execution, better operational efficiencies and well managed working capital cycle. The stock is currently trading at a P/E of 31.5x/23.1x on FY23/2 4E earnings. Initiate ‘BUY," the brokerage has said.

E20 blending mandate to expand addressable market by Rs 70 bn

PRAJ has 60-65% share in development of Ethanol plants in India and will likely see order inflows of Rs40-50bn over next couple of years from Govt. mandate to prepone blending to 20% from 2030 to 2025. "It has an expertise in wide variety of feedstock such as sugar and starch with focus on developing technologies that can offer ethanol plants with high alcohol yields, good profitability and low consumption of water & power. E20 will require an incremental capacity of 10.2bn litre (5bn already tendered out) which will expand addressable market by Rs 70 bn with combination of green field & brown field expansion and sustain growth in coming years," the brokerage has said.

Diversifying into emerging opportunities across business verticals

With an eye to de-risk itself from ethanol segments and utilizing its technical & knowledge expertise, PRAJ has successfully ventured into emerging business verticals such as HiPurity systems and Engineering business (which includes Brewery plant, Critical Process Equipment & Systems and Wastewater Treatment). As on FY22, HiPurity systems/Emerging business segment contributes 9%/20% of total sales.

Opportunities beyond 1G ethanol blending

According to Prabhudas Lilladher, PRAJ is developing technologies beyond E20 ethanol blending. It has successfully developed 1) 2G ethanol plant capable of processing multiple feedstock (orders for three 2G based ethanol plants) 2) RENGAS that produces cost effective Compressed Biogas (CBG) (Govt. of India plans to set up 5,000 CBG plants with a capex of ~Rs2trn, in future) 3) PRAJ is also developing technologies for Biodiesel, SAF and Marine fuel. "We believe, any favorable development on financial assistance for CBG plants, improvement in project viability on 2G plants, will aid PRAJ gain further traction in Bioenergy space," the brokerage has said.

Export opportunities in Brazil and Europe

Europe offers growth opportunity as it will likely add ~50 2G ethanol plants (~2.8bn liter capacity by 2030) using forest and agriculture residue as a feedstock. PRAJ is amongst a few companies globally with this 2G technology. Brazil also decided to install 1G corn based ethanol plants, which provides an opportunity size of ~5bn liters over next 5 years. "We believe PRAJ being a leading player in Bioenergy space is well poised to tap these opportunities," Prabhudas Lilladher has said.