There are not many listed non-technology, non-pharmaceutical companies in India that can boast of earning a majority of their revenue from exports. But one which can – Praj Industries – has not really been setting Dalal Street on fire; what with its revenues stagnant and profits lower as compared to what they were five years back. Does this mean one should write off Praj or is it time to trust the management and bet on a turnaround?

Shakti Shankar Patra | @TheDollarBiz

A couple of months back, a few minutes before 2 PM on the 9th of June to be precise, an announcement hit the stock exchanges. As per the announcement, India’s most celebrated investor Rakesh Jhunjhunwala and his wife Rekha had divested a majority of their holding in Praj Industries – over 1.45 crore shares, representing over 8% of the outstanding shares of the company – via open market transactions. This brought an end to an era of over a decade, when the Jhunjhunwalas were Praj’s biggest non-promoter shareholders. The reason, why this should be of great importance to anyone even remotely interested in Praj, becomes clear by taking a look at the company’s shareholding pattern. At the end of Q1 FY2015, the promoter and promoter group, held just 32.96% share in the company. While this is a significant improvement from the 23.02% they held five years earlier, it still doesn’t answer the question as to why should outsiders trust a company, when promoters themselves don’t seem to like it enough to hold a majority!

Lost decade

Praj is one of those companies, which once exhibited immense potential, but somehow has failed to live up to it. It basically is an amalgamation of two businesses – the core ethanol and brewery business and the emerging business, which includes Critical Process Equipment and Systems Division, the Water and Water-waste Treatment Division and Praj HiPurity Systems (erstwhile Neela Systems). In fact, going forward, its Executive Chairman Pramod Chaudhari feels that it will be recognised as a bio-engineering specialist and the new emerging businesses will contribute almost 50% to revenue, with the rest coming from the core engineering business of setting up beer and ethanol plants.

While getting into new and emerging businesses that have growth potential cannot be questioned, the fact remains that Praj, at least in the last few years, is suffering from an identity crisis. The market just doesn’t know which segment the company should be categorised in! While this is bad enough, the fact that the identity crisis has been accompanied by extremely poor financial performance has made matters only worse. For example, in the last five years, Praj’s sales have grown at a CAGR of 0.28%, profits have more than halved and ROCE (Return on Capital Employed), a measure of efficiency, has dropped 80% – numbers that are bound to give nightmares to even the biggest of optimists. So, what exactly went wrong with Praj in the last few years? And more importantly, are some of these damages reversible?

Praj Industries roughly spends about 2% of its revenue on R & D and has set up a state-of-the-art R & D centre near Pune by spending over Rs.100 crore 

The rising sun

Despite a significant rise in the contribution of other businesses to total revenue, particularly in FY2014, the bread and butter for Praj is still the ethanol business, which contributed more than 2/3rd to revenues last year. And with the BJP-led government (which had initiated the process of ethanol blending with petrol in 2003) back in power, there are expectations that ethanol blending will be taken up more seriously and gradually scaled up to 20% by 2017 (from the current mandate of 5%). If this becomes a reality, the chances of which are very high looking at India’s burgeoning trade deficit, Praj Industry’s revenues are bound to get a major boost. Even on the exports front, from which Praj earned over 56% of its revenues in FY2014, it has set its eyes on geographies like Mexico. The Latin America nation is expected to need 1.5 billion liters of ethanol per year (at a 3% blending mandate for about 50 billion liters of petrol consumption per year). Africa, too, has the potential of being a major market for Praj Industries, with 12 African countries ratifying ethanol blending recently and the company having recently successfully commissioned a distillery in Sierra Leone. When it comes to the brewery business, with beer consumption in India growing at double digits for the last five years, things are not looking too dark for Praj, particularly since it is already in the process of setting up two plants for beer majors Heineken and SABMiller in Myanmar and Namibia respectively.    

Save Ganga

While things might be looking brighter for Praj’s core ethanol and brewery businesses, the fact remains that they have always looked so and if the company can really turn a corner, it has to do it via its emerging businesses. And Prime Minister Narendra Modi making all the right noises about cleaning up River Ganga means Praj Industries might just have stumbled upon a treasure, with it having ramped up its industrial waste-water treatment capabilities substantially over the last few years. Similarly, with Indian pharmaceutical companies being on the constant radar of the USFDA, a lot of opportunities should soon open up for Praj HiPurity Systems, which is in the business of providing value-added solutions to pharmaceutical, biotechnology and  the food & beverage industries.  

Cutting costs

While all these opportunities, if properly tapped, should go a long way in helping Praj’s topline, there’s no way that a company can turnaround significantly operating at single-digit margins, which has been the case for Praj for over four years now. To find what needs to be done if Praj has to improve on the operational efficiency front, we went through the Annual Report of the year when it last had an EBITDA (earnings before interest, taxes, depreciation and amortisation) margin in the teens – FY2010. And some of the cost escalations that have happened in these four years are simply shocking. For example, while in FY2010, other expenses that include overheads like site expenses, freight and transport and sales commission etc., were just 15.5% of net sales, by FY2014 they had shot up to over 25%. And there is no way a company can be as profitable as earlier if it spends 10 paisa more for every rupee worth of sales. Similarly, when it comes to wages, salaries and bonuses, while in FY2010, they accounted for about 9.3% of Net Sales, in FY2014, they accounted for over 12% of net sales – another sign that expenses are rising and Praj, probably, doesn’t have the pricing power as it used to have half-a-decade back.

Bottom line

With increased focus on ethanol blending all over the world and attention in India on cleanliness – as was evident even in India’s PM’s speech on I-Day – higher revenues shouldn’t be an issue for a company like Praj Industries. What it really needs to do, however, is focus on cost-controls if it wants the Jhunjhunwalas of the world to come back to it. What should also work in favour of Praj Industries is the fact that it spends tonnes of money on R&D, which if you believe market grapevine, is going to pay off very soon and help Praj emerge as a solid bioengineering specialist.  

“Our critical process equipment business has unlimited demand”- Gajanan Nabar, CEO and Managing Director, Praj Industries.

The most exciting of stories are those about comebacks, or in business parlance, turnarounds. And having taken it upon himself to script one big comeback for his company is Gajanan Nabar, CEO and Managing Director, Praj Industries. Speaking exclusively to The Dollar Business, Nabar reflects on the things that have gone wrong in the recent past, but more importantly, sounds extremely confident and optimistic about the future.

Sachin Manawaria | @TheDollarBiz

Gajanan Nabar, CEO and Managing Director, Praj Industries.

TDB: For an average investor, categorising Praj Industries into one particular sector has become difficult. Can you address this confusion for our  readers?

Gajanan Nabar (GN): Praj is recognised as a bioengineering specialist engaged in environment, energy and agri-processing led solutions. It is recognised for its credible strength in innovation driven technologies, integration engineering and delivery excellence, including manufacture and supply of critical equipment and project management. Praj already has a very strong recognition as a global supplier for ethanol and brewery plants and is fast gaining recognition for its critical process equipment & systems, water & wastewater treatment systems and for high purity systems for pharma, biotechnology and cosmetics applications under PrajHiPurity Systems Limited (formerly Neela Systems Limited).

TDB: Please elaborate a bit more on what exactly you mean by a bioengineering specialist.

GN: We call ourselves bioengineering specialists as many of our businesses have biotechnology elements in them. Ethanol too, being a biomass based process involving bio-fermentation and application of micro-organisms, qualifies as an industrial biotechnology business. Taking forth from there, we are also looking at monetising the work of Praj Matrix, our R&D Centre. One such business which is still in the incubation stage is the Livestock Health & Nutrition business. We have developed several probiotic and immune-enhancer products that improve livestock health and productivity. It is being manufactured at our biotech production unit at Jejuri, near Pune. As a business, ethanol as well as water and wastewater solutions can directly be categorised as environment businesses. At the same time, ethanol is also a form of energy used in transport fuels.  Going forward, we will look at more and more businesses that would be pursued under these verticals.Other than this, Praj is also scaling up the 2nd Generation Cellulosic Ethanol Process. 2nd Generation ethanol is produced from agricultural residues like bagasse, cane trash, corn cobs, corn stover and even wood chips. Praj is in the process of setting up a 50 tonne/day demonstration plant. The objective is to enhance the viability of 2G cellulosic ethanol process developed at the one ton biomass/day pilot plant located at Praj Matrix, our R&D Centre, and demonstrate the same for the benefit of the industry.  

TDB: You have said that in the future, about 50% of your revenue will come from your Emerging Business. By when do you think this will be a reality and how scalable are these businesses?

GN: Emerging Business includes Critical Process Equipment & Systems, Water & Wastewater Treatment Systems and PrajHiPurity Systems. These businesses currently account for 28% of the topline (FY2014). These businesses address a range of industries and can be taken to the international markets. In fact, these businesses do have an international revenue stream as well and we have plans to scale them up in the very near future. Critical Process Equipment & Systems business chiefly addresses the oil & gas, petrochemicals and fertilisers and the chemicals industries. Much of the business is from EPC companies or multinational firms sourcing from India for projects overseas. In fact, we see no restriction on the demand side for this business. We expect these businesses forming 50% of our enhanced revenue over the next three years.

TDB: If one discounts inflation, Praj Industries’ revenue growth has actually been negative in the last five years. What have been the main reasons for this? What kind of growth can we expect in the next five years?

GN: On an average, 50% of our revenue comes from the international market. Since 2008, several major international regions have seen a slowdown in new capex formation. Further, over the past two years, India too has been seeing a similar situation.

TDB: Along with revenue, even margins have taken a beating and you are now barely operating at 9%. Do you have a strategy in place to go back to the 15%-20% margin range?

GN: Yes, we do have a strategy in place. Going forth, we will look at increasing revenue and margin through enhanced business from the Emerging Business group; through internationalising emerging businesses rapidly and through modernisation and retrofit business in the 1st generation ethanol and also taking the brewery business overseas.

TDB: In FY2014, over 56% of your revenue came from abroad. Which geographies are contributing to the incremental growth and which markets do you think hold potential?

GN: Most of the international business comes from South East Asia, Africa and South American region.

TDB: You have been emphasising a lot on R&D. Give us an idea of your R&D spend over the years and your plans, if any, to monetise them.

GN: On an average, we invest up to 2% of our revenue on R&D. Other than that, we have invested nearly Rs.100 crore in a state-of-the-art R&D Centre in Pune called Praj Matrix. The R&D Center has three broad work streams. One supports the current businesses through analytics and development of new technologies. The second is working on the 2nd Generation Cellulosic Ethanol Programme. And the third is working on the future pipeline of bio-products. Of these, Livestock Health & Nutrition product is already commercialised.

TDB: Would you like to talk about any other strategy initiative that could enhance earnings visibility of the company going forward?

GN: We recently undertook a value maximisation exercise in consultation with a renowned MNC consulting firm. The exercise is currently underway.