Praj Industries’ Q4Y17 PAT was 30% below consensus as revenue tumbled 13% on account of weak global ethanol market. On the positive front, during the quarter, the company inked two MoUs with OMCs for 2G ethanol plants entailing Rs8bn potential. Execution of the much delayed Rs2 billion plus Petrobras order has been postponed to Q3FY18, which is a key monitorable. We envisage Praj’s focus on scalable businesses like high purity, critical process equipment and 2G ethanol to be key growth drivers over the next 2·3 years. Maintain ‘Buy’.
Praj’s Q4FY17 revenue fell 13% primarily led by 16% dip in the ethanol business (primarily exports). In the domestic ethanol market, blending is still at ~4% versus the 10% mandate. We estimate this, along with fall in global commodity prices, to keep H1FY18 revenue and order intake growth subdued. However, emerging businesses like high purity and CPE continue to gain traction riding stringent FDA norms / compliance and domestic refinery expansion & modification. Hence, we estimate these businesses to clock 20% revenue CAGR over FY17-19.
The government’s ambitious plan to cut oil imports 10% by FY22 and increase ethanol blending to 20% could open up opportunities to set up 12 2G ethanol production plants. Also, IOCL and BPCL recently selected Praj as their technology partner for setting up two 2G ethanol plants in India worth Rs6.5-7.0 billion each, wherein Praj’s scope is pegged at Rs3.5-4.0bn each. Once these translate into firm orders, we estimate the company’s order book to double to ~Rs19bn.
Praj’s current order book visibility at ~1x FY17 revenue could catapult in FY18 on 2G ethanol plants’ order wins. We trim FY18E EPS 20% as we build in delays in execution of the Petrobras order (20% of order book). The key risk to our earnings estimates remains deletion of the Petrobras order from the order book. We introduce and roll forward our target price on FY19E EPS, which yields revised target price of Rs93 (earlier Rs104).
In FY17, Praj retained market share in core ethanol business as well as other businesses. The company achieved milestone developments in 2G ethanol technology, some of which are: Praj’s own and India’s first integrated 2G bio-refinery demonstration plant started in May 2017.