Why Indiabulls Sec is betting on Praj Inds?

Praj Industries, a small cap company provides turnkey plants and equipments for fermentation and distillation systems used in bio fuels processing, primarily which are ethanol related.

Sabyasachi Ganguly, Analyst, Indiabulls Securities and author of a report on how the ethanol business is likely to benefit Praj Industries, says that Praj is expected to grow 25-30% on a compounded annual growth rate.

In an interview with CNBC-TV18, Ganguly spoke on why Indiabulls Sec is betting on Praj Industries.

Q: Could you take us through this 25-30% CAGR that you are estimating for Praj Industries in particular and your estimates on how ethanol business is going to go forward in the next 3-4 years?

A: To set the background, in the last 30 years there have been only two years during which total energy consumption in the world declined, those two years were 2008-09. So despite the decline in total world energy consumption, the consumption of ethanol as fuel increased. Not only ethanol but all the renewable fuels consumption increased. They defined the total energy consumption trend.

Also, if you consider the 1990s and the first decade of this century, you will find that in the 1990s whenever the price of oil used to go up the world used to get enthusiastic with ethanol as substitute for petrol and when prices of oil used to go down, things used to go back to square one.

But by the turn of this century, the world’s environmental consciousness increased to an extent. And that despite the fluctuations in oil prices, it appeared that the governments of the world were determined to implement their strategy to incrementally replace petrol with ethanol.

Therefore we see for the past 10 years from 2000 to 2010, the consumption of ethanol fuel has increased year on year regardless of oil price volatility. That is the first point that the consumption of ethanol is increasing in defiance of oil prices or oil price trends or total energy market trends.

Secondly, the world is running out of oil, and as per present estimates the run will run out of commercially viable oil in the next 45 years. Let us assume that there will be good discoveries in the next few years. But despite this, one day the consumption of the, the availability of commercially viable oil will stop.

The 45-year timeframe can be expanded to 50-55 years, so the world has to search for an alternative fuel. And the most practicable fuel for the automotive industry is ethanol. Ethanol has a long history of use in the early part of the previous century; it just has to be revived.

Q: That point is taken but how do you play it in the stock markets, if you can tell us why you would bet on Praj Industries and why only on that?

A: Let me first tell you that we have not done a fundamental analysis of Praj Ind, we have looked at the global ethanol sector and we have seen how this theme could be played in India. The estimate is that between 2009 and 2015 there will be an increase of 80% in world ethanol consumption as a fuel and the world does not have that much capacity as of now.

So capacity addition is to be called for. We have done our research which shows that a total capacity of 41 billion US gallons per year will have to be in place by the year 2015. Now that calls for almost 80% increased capacity between 2010—2015. So there is tremendous scope for ethanol plant and machinery suppliers, technology suppliers, these plants have to be created. In India the company that looks well placed to take advantage of the demand on arisen is Praj Ind.

We have calculated that even if you take Praj’s global market share of 6% as in 2007-08. Even if you assume the market share will not increase, we find that of the total USD 17 billion to be invested in ethanol plant and machinery worldwide, 6% of that works out to around Rs 47 billion.

That adds ups to a CAGR of 30% between 2010 and 2015 just from Praj’s ethanol segment. We are not counting Praj’s other segments like bio-nutrients, waste water recycling etc which are new segments for the company, which will contribute increasingly to the Company’s topline. So, if we just take ethanol, it stands to gain Rs 47 billion at very conservative estimates between 2010 and 2015 and that is approximately 25-30% CAGR.

We think this is an underestimate because Praj has already initiated moves to invigorate its global marketing camping, so 6% is a very conservative market share that we have taken.

source: moneycontrol