Financial Highlights:

Q1FY25 Result Highlights
Praj Industries delivered a steady set of numbers for the quarter ended Q1FY25. Consolidated revenues saw a degrowth of 5% YoY to Rs.699 cr as soft execution in Bioenergy (-14.2% YoY to Rs500 cr) offset strong growth in Engineering (+42.3% YoY to Rs1.4bn). HiPurity grew 7.9% YoY to Rs530mn. Domestic/exports mix came in at 77%/23% (vs 83%/17% in Q1FY24). Gross margin jumped to 52.7% (vs 40.3% in Q1FY24) because certain site expenses were classified under other expenses. Excluding this, gross margin improved by ~400bps (200bps from higher engineering & exports; 200bps from softer input costs). Consolidated EBITDA witnessed a robust growth of 23% YoY to Rs.92 cr. EBITDA Margin expanded 291 bps at 13.16% owing to a higher share of exports & engineering and softer input costs, partly offset by higher employee costs and other expenses. PAT surged 43% YoY to Rs.84 cr as the higher operating profit was partly offset by a spike in D&A expenses and higher interest costs.

The Improvement in EBITDA Margin is on account of moderation in input cost as also the composition of revenue. The order intake during the quarter was Rs. 8.88 billion, with 58% of the domestic market. Of the total order intake, 52% came from Bioenergy, 38% from engineering, and the balance 10% from PHS business. The order backlog as of 30th June 2024 is at Rs. 40.44 billion comprising 67% of domestic orders. Cash in hand as of June 30, 2024, is Rs. 8.3 billion.

Key Conference call takeaways

1G Domestic

• Delays in execution and order finalization due to the general elections and uncertainty around the use of B-heavy molasses and FCI rice as feedstock.
• Bulk of orders came from starchy feedstock (~75%). The domestic inquiry pipeline continues to be strong in alternative feedstock such as maize (where availability is improving).
• Praj has established a Centre of Excellence & Innovation with Vasantdada Sugar Institute to develop alternate feedstock. A healthy pipeline of 1G domestic ethanol business.

SAF

• Praj is in talks for at least 6 projects globally. With mandatory 1% SAF blending in India by Jan-27, some traction will build up towards the end of the year.
• Awarded a contract for full scale engineering and modulization of a SAF project in the United States.
• Praj is in discussion with half a dozen SAF projects worldwide.

Low-carbon ethanol (LCE) in US

• Received a major order for modularization of an alcohol-to-jet SAF project in the US. SAF production will be the main demand driver for LCE.
• At least 20 plants in the US will have to be converted to LCE over the next 4 years, with an opportunity size of $10-20mn per plant for Praj. However, the industry is still awaiting clarity on the IRA 45Z notification.
• US Government plans for 3 billion gallons of SAF by 2030.
• Expectation for 2 billion gallons of low-carbon ethanol.

Energy Transition &Climate Action

• Completed first order from MangaluruGenX facility. Execution in GenX should ramp up from H2 but could take 2 years to reach peak revenue of ~Rs20bn as the order book needs to build up first.
• ETCA applications include blue/green hydrogen, waste to energy, green ammonia, etc. Praj offers modular solutions as well as equipment (heat exchangers, columns, reactors).

2G Ethanol

• IOCL Panipat plant recommissioning is in progress, and will hopefully be commissioned by the end of the year.
• Praj has also commenced a feasibility study for a straw-based ethanol plant for a Spanish MNC.

Brazil

• Grain-based ethanol is gaining increasing acceptance.
• Discussions ongoing with several customers for engineering + supply orders. Model is a bit different – first engineering is done, and then project cost is evaluated. Working with BE8 (a leading player in Brazil) has opened up new opportunities for Praj.Strong leads for ethanol projects based on grain in the Brazilian market.

Compressed Bio-gas (CBG)

• Healthy domestic inquiry pipeline given CBG blending will be mandatory in 18 months. Inquiry pipeline developing for CBG projects.
• Overall ecosystem is not smooth, with some issues yet to be resolved regarding supply chain, feedstock, etc. Overall opportunity is bigger than ~Rs.375bn driven by CNG vehicles, SATAT scheme, etc.
• Praj to be the global headquarters for the Global Bioenergy Alliance (GBA).
• Clear mandate to blend CBG into CGD networks.
• Expecting activity to build up in the second half of the year.

• Services grew ~2x YoY, with healthy growth in order books in domestic and international markets. Biogenic CO2 capture is gaining traction. Praj has won orders from Thailand and Zambia.
• HiPurity Solutions Strong traction in high-capacity fermenters. Praj is setting up a large fermentation complex for a reputed pharma company in South India.
• Capex – Capex is pegged at Rs.75-100 cr in FY25 on GenX facility, PLA pilot projects, and IOCL JV. Capex could be partly funded by external funding.

Other Key Highlights

• Increasing traction for offerings expected to drive future growth.
• Setting up a pilot plant in the US for testing RNG generation from waste-stream.
• Praj is the first Indian company to develop technology for Lactic Acid and Lactide.
• Order intake during the quarter was Rs. 8.88 billion.
• Order backlog as of 30th June 2024 is at Rs. 40.44 billion.
• Positive outlook for domestic bioenergy business once feedstock challenges are resolved.
• Expectation of higher order booking performance by year-end compared to previous years.
• Expectation of gradual revenue generation from the Mangalore facility in the second half of the year.
• Export business Management is Working on improving the share of international business. Positive outlook based on the current pipeline.
• Management is confident about the future growth and opportunities.

Outlook & valuation

Praj Industries reported steady earnings growth for the quarter ended Q1FY25. The company's focus on new technologies, including 2G ethanol, SAF, bio-manufacturing, and multi-feedstock plants, is commendable. Praj, as a leader in biofuel technology, is poised to capitalize on the emerging prospects in Bio-mobility, Bio-CNG, and RCM due to the worldwide emphasis on sustainability. The company's position as a leader in the domestic ethanol market, with a market share of approximately 50-55%, is noteworthy. The company boasts of a robust balance sheet and a scalable business model. Order book stands at Rs.40.4bn (1.2x TTM revenue) with a mix of 71%/6%/23%% in Bio Energy/Engineering/HiPurity (vs 78%/5%/17% in Q1FY24) and 67/33% in Domestic/Export (vs 78%/22% in Q1FY24). We believe margins are improving due to the increasing share of exports and services.

While some feedstock and supply chain issues still need to be resolved in India’s CBG ecosystem, the enquiry pipeline is strong. Meanwhile, grain-based ethanol continues to gain traction in India and Brazil as an alternative to sugar-based ethanol. Low-carbon ethanol opportunity driven by SAF in the US is worth up to $400mn for Praj over the next 4-5 years. The company is also seeing a healthy uptake in high-capacity fermenters and ZLD modular solutions.

We remain positive on PRJ in the long run given 1) its leadership in domestic ethanol (50-55% market share), 2) its large domestic CBG pipeline, 3) its healthy export outlook in Engineering driven by ETCA, 4) focus on new technologies such as 2G ethanol, SAF, bio-manufacturing, and multi-feedstock plants, and 5) improving margins owing to the growing share of exports & services. At a CMP of Rs.698, the stock is trading at 30x FY26E. We maintain a HOLD rating on the stock.