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varindermann
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Quote varindermann Replybullet Topic: Ethanol to fuel Praj's growth
    Posted: 10/Nov/2006 at 12:52pm

 

Praj Industries is into manufacturing plant and equipment for Ethanol and Brewery Industry. They are very well recognised for their expertise in both the fields worldwide.

Lets have a look at their financial performance-

                            FY '05-'06    Half year   Full Year             

                                                 '06-'07       '06-'07(Exp.)   '08-'09(Exp.)
 
Sales(Rs.)              267.49 Cr.     228 Cr.          450 Cr.              1000 Cr.
 
Net Profit (Rs.)       24.40 Cr.       25.89 Cr.       45 Cr.                 100 Cr.
 
EPS (Rs.)                  3.01              3.10             5.38                  11.95
 
PE Ratio
(at Rs.195)              64.78                                 36.25                 16.31
 
 
The sales assumptions made above are based on an interview given by Mr. Pramod Chowdhry (chairman of Praj Ind.). If possible please go through the interview to get an insight into their plans.
 
I have reached Net Profit figure assuming that their net profit margin would stay at 10%. 
 
Already they have an order book of Rs. 600 Cr. and they are still getting orders as they have acquired a company in the USA- the biggest market for ethanol plants. They plan to be No.1 in the world in Ethanol plant setup market by 2001. So there is huge potential in the international market for Praj. Domestically as well Govt is thinking of mixing 10% Ethanol to Petrol. That would result in huge demand for Ethanol plants in India. So everything seems perfectly placed for Praj to grow at CAGR of 40% for the next two year i.e. till 2009.
 
My only concern is high PE ration of 64.78 (Trailing) but if they manage EPS of 5.38 in 2006-07 PE would come down to 36.25.  Praj is fully priced at these levels but growth prospects are phenomenal. If we assume it would trade at a PE of 40 in 2009 then at that time price would be Rs.478 that is 145% higher from current price of Rs. 195.
 
Basant Ji, what is your take on my analysis and the future of the stock?
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Quote varindermann Replybullet Posted: 10/Nov/2006 at 1:01pm
 Correction:
 
There is a typing error in my analysis. Praj plans to be NO. 1 world wide in Ethanol plant setup market by 2009 and not 2001 as wrongly typed.
 
Sorry for the mistake.
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Quote Bobby Replybullet Posted: 10/Nov/2006 at 2:06pm
Praj Industries, the Rs 267-crore ethanol and brewery technology major, recently used some of the private equity it raised last fiscal for its Rs 22.5-crore acquisition of CJ Scheider Engineering Co Inc (CJS), a US-based provider of detailed engineering services to the biofuel industry, including ethanol plants.

Source ET dated Oct 31
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Quote tigershark Replybullet Posted: 10/Nov/2006 at 2:16pm
all that you have said is fine but what if oil slides below 50 that could just postpone cos investing in ethanol plants.similarly hydrogen powered hybrids like the toyata prius could be developed real quick.i would love to see your projections come true but would be wary of making a fresh investment at the current levels.i do own praj
understanding both the power of compound return and the difficulty getting it is the heart and soul of understanding a lot of things
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Quote basant Replybullet Posted: 10/Nov/2006 at 3:30pm
Praj should rock if the Govt. allows a 25% mixture withe diesel as in Brazil but even otherwise it should do well. Frankly I have just seen the company in an overview or on business model basis but as tigershark says unless crude hits US $ 75 and stays there the govt would not allow that - as they say necessity is the mother of all inventions.
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Quote varindermann Replybullet Posted: 10/Nov/2006 at 3:32pm
Even if oil slides below $50 it cannot reach level of Ethanol price. Roughly, Ethanol will be sold at Rs. 21-22/ litre so it will still be far below prevailing petrol prices. Moreover, its will be necessary for fuel companies to mix ethanol into petrol - ITS NOT AN OPTION so demand will be there.
Worldwide big investments are being made into ethanol production and we have just started it in India. In USA alone ethanol requirement will double by 2010 from current levels.  In Brazil vehicles are running with 100%  ethanol.
 
The biggest advantage for a country like India will be reduced oil bill as India is one of the largest importer of oil so even if we manage to reduce our oil import by 10% it will be huge savings. Thats why Govt. is planning to make it mandatory to use 10% ethanol.
 
Worldwide countries are trying to reduce their dependence on oil. I have read in an article that Sweden is working towards being an oil free economy by 2015. They are planning to introduce ethanol in a big way.
 
As far as the question of other alternative fuels is concerned. They will also co-exist with ethanol but not replace it. Hydrogen fuel cannot be used to power the vehicles that are already there on the roads but ethanol can be used with minor adjustment to current engines. To replace every vehicle in the worl with Hydrogen powered vehicles will take decades, so it wont be possible practically. However no kind of  adjustment will be required to current engines with ethanol content of 10% in petrol.
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Quote varindermann Replybullet Posted: 10/Nov/2006 at 3:39pm
Basant Ji I have a question for you-
 
Do you think a company like Praj growing at 40% CARG for next 2-3 years can command a PE multiple of 40+ ?  If not what is your view on it.


Edited by varindermann - 10/Nov/2006 at 3:42pm
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Quote basant Replybullet Posted: 10/Nov/2006 at 4:24pm
All the points that you make are valid but the Govt. does not seem bothered. How many of our Mp's know the constituents of current account. Even the ones from Harvard (PC) cannot implement what they paid millions to read.
 
Anything that is influenced by global factors, Govt is always priced at lower PE's so I would not bet on a PE of more then 25 because markets do not like uncertainities and the most uncertain things are:
1) Govt. behaviour - at least in India
2) Global commodity prices.
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