PRAJ Industries – Long Term Analysis

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PRAJ Industries Ltd. - Innovative solutions, Bio-ethanol, Bioethanol plants, Biodiesel plants, Alcohol plants, Distillery plants, Fermentation plants, Distillation column, Molsieve plants, Fuel Ethanol, Bionutrients, Brewery plants, Bioprocesses, Engineering, Customized Engineering, Customized Manufacturing, Zero-pollution system, Vinasse Treatment, Effluent Treatment

Q1. What is the business of PRAJ Industries?

PRAJ Industries provides plants and equipments to the alcohol/fuel ethanol manufacturers, bio-diesel, brewery manufacturers. It also provides Industrial water and waste water treatment solutions. Apart from this, PRAJ provides bio-nutrients for e.g. Fermentation Performance Enhancers to boost ethanol production. Also, it provides Agro Energy consultation.


Q2. Does PRAJ Industries has identifiable durable competitive advantage?

PRAJ Industries addresses the need of the entire value chain for alcohol, ethanol and beer production. The company focuses on clean energy solutions, which has great future potential since the entire world is favouring the alternate energy security. The technical expertise and knowledge gained by PRAJ over the last 25 years along with significant investment in R&D will provide the necessary moat for the company. Also government policies all over world are favourable to the PRAJ business.


Q3. Does the company have high demand growth? Will it obsolete in next 20 years?

The alternate energy resources are being sought after by the entire world especially bio-fuels & ethanol based energy resources. The demand for energy is every rising and the traditional sources of fossil fuels are feared to be depleting very fast. PRAJ Industries get 50% revenues from domestic and remaining from world markets. Apart from the existing products, if PRAJ is successful in producing ethanol from non-food materials, that would make it a significant player in alternate energy resources. Hence from a product perspective the company should not only be existing but rising rapidly in the next two decades.


Q4. Does the company allocate capital exclusively in the realm of its expertise?

If we look at the milestones achieved by PRAJ Industries since its inception, it has judiciously utilized to acquire companies related to its business and to forge partnerships to gain market leadership in various countries. This is a good observation in terms of management focus on the primary business of the company.


Q5. What does the quantitative analysis of the company indicates?


Net Sales have been growing at more than 22% for the past 10 years except in last two years. The last two years were tough due to global recession and the issue existed with entire industry. The CAGR growth of Net Sales over past ten years has been more than 30%. It is a positive trend.


Earnings per Share have been positively growing within acceptable limits. Although last two years have been terrible with negative growth rate for EPS. The CAGR growth of EPS over past ten years has been closer to 50%. I am bit dis-appointed by this strange volatility. It is a negative trend but not alarming.


Return on Invested Capital have extremely positive trend with year on year growth of 15% or more. It is a positive trend.


Profit After Tax has good positive trend over the last ten years. It is a positive trend.


Debt/Net Profit Ratio has been almost NIL. It is extremely positive trend.


Dividends payouts have not been very exceptional, but they have been regular and consistent. This indicates the management willingness to share the profits but ploughing back the majority of earnings back into business. It is extremely positive trend for long term value.


My Fair Value Calculation has been :

image

Q6. What are the current or potential risks for the company?


Risks for the company involves the following:


  • The bio-fuel/ethanol business is mostly controlled by government in many countries and government laws may become hindrance.

  • Research into newer and viable technology to produce ethanol from non-food materials is an essential requirement. This Forbes article indicates the challenges ahead for PRAJ Industries although the article is very pessimistic about success of PRAJ Industries.

  • Competing with other companies in global arena will not be easy without significant research breakthrough.

Summary: I feel that PRAJ Industry is a good investment for next 2-3 years, but it needs to be seen whether PRAJ Industries can provide significant breakthrough in the research in these coming years. This will decide the fate of the company. The current stock is under-valued. The management has been prudent and focussed entirely on the primary business of the company. The management is capable and focussed towards optimal capital usage with organic growth. The business diversifications are also based on the current expertise of the company.


Disclosure: I have small position in PRAJ Industries at the time of writing.


Standard Disclaimer: The information contained herein is based on my analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.

How to start investing in stocks?

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Starting investments in stocks is not easy, especially with recent market crash, it would seem more like gambling than investment. It is well known that the greatest stock market myth is that stock investing is a form of gambling.

This can not be more untrue.


Photo courtsety J Kelley


If you want to start investing in stock market, there is a great trepidation, because it looks extremely complex. There are so many terminologies like P/E ratio, dividend yield, bull and bear market etc which imply lots of learning new things. But still you want to start quickly, because everyone seems to be making good money from stock market, except you. You do not want to be left behind right!!


So how do you start? The first thing to ensure is that you have the temperament (essentially patience and hard-work) for direct stock investing, since not everyone is cut out for it and if your are not made for it, then it is not necessarily a bad thing. You can invest in other avenues like mutual fund which can give you exposure to stock investment.


Okay, so you still want to directly invest in stocks! Great, so let us get started step-by-step on how to start investing in stock market.


Trader Vs Investor

I discussed about this in my earlier post comparing with the analogy of trader, with housing agents and investor, with end-user of a house. In short,


Trader: A trader will buy stock and sell it within a very short time to make quick profit. A day-trader tries to do this with-in a single day, while a swing trader tries to do it across several days predicting the “swing” of the stock market.


Investor: On the other hand an investor puts his money for buying a business rather than looking for short term profits. The short term for a investor typically ranges from 2-3 years with an eye on 5-10 years of investment. As Value investment guru, Warren Buffet says


Our favourite holding period is forever.


I assume that you chose to be an investor rather than a trader. So how to start investing in a stock for long term investment?


The first key principle to keep in mind is that you should equate investing in stocks to buying a house property. The stock investments need similar amount of hard work and patience that you would do for buying that near perfect house in a near perfect locality at a reasonable price with a reasonable expected growth of the price of the house. So when you invest in stocks, it takes hard-work and patience to find a near perfect stock at a reasonable discounted price with a reasonable expected growth of the price of the stock.


Step-by-Step guide to start investing in stock market


Step 1: Get yourself a demat account. The simplest way is to call up your bank, who would surely help you in getting you a demat account. You can also visit your bank website to get details. For example, ICICI bank provides the demat services.


Some more details:

Demat account can be thought of similar to your saving bank account but instead you can keep your stock shares into the demat account. There are only two depositories in India (NSDL and CDSL), but to make it easy for you, they have many depository participants (similar to bank branches) across India. Also most probably your bank will be one of them and hence visiting your bank is the simplest way to open a demat account.


With a saving bank account, you take the pain of deposit/withdrawal of your money, but with demat account you need a broker (who is member of the stock exchange) who can buy/sell shares on your behalf. Almost all banks who offer demat services would have mechanism of assigning brokers (most would open a brokerage account as well). When you visit a bank for demat account, they will by default also open a brokerage account for you with the bank so that you can buy/sell the stocks. Keep in mind that brokerage services are not free and every broker will charge you some amount for brokerage.


There are hundreds of companies/banks offering demat/brokerage services, and it is very difficult to choose the best. The choice is typically based on brokerage fees and how frequently you intend to transact in stocks. If you search Google, you will find lot of people comparing brokers in India, for example, check this link for one such site.


My recommendation: As a long term investor, the actual brokerage charges can be recovered over a period of time and hence you should choose your bank (where you have saving account) for the demat account, since they can link your bank account, demat account and brokerage account all in one. Once you learn more, you can change your broker.


Step 2: It is important that you find yourself a mentor, be it a friend, relative or even an online blogger whom you have read consistently for a long period. Tipguy is one such person. A mentor typically is a great resource who can act as a springboard for you to enter the chaotic world of investing.


Step 3: Learn through the help/demo, about placing orders from your stock broker. It is important to learn the various terminologies used while buying stocks before you start your investment journey. As an example, the long term investor is looking for “delivery based” option, which imply that the shares needs to be delivered to the demat account. Also whether you want to place a “market” order (implying using whatever market price of the stock at buying time) or a “limit” order (transaction happens only if the market price satisfies the given limit). Here is how ICICI order page looks like:image

It will take some time to understand these various terminologies and you have to be patient and get help from your mentor to learn these things.


Step 4: Now that you are all set to start your journey, you need to find the right stock to buy. This step is the biggest step since it involves:


  • Understanding your goals of investment
  • Understanding and accepting the risks involved and potential gain
  • Learning to short-list the types of business you want to invest
  • Learning to analyze the business to find potential winners as per your goals and risk profile
  • Putting your money into the near perfect business stock
  • Reviewing and re-analyzing your investment over a period of time.

The problem in executing Step 4 is at multiple levels including the chaotic environment created by millions of stock related websites, newspapers, magazines and the media channels. Some tips to execute Step 4 are listed below:


  • Read, Read and Read the excellent investment books. For e.g. The Little Book (Rs 189 only), The Dhando Investor, The Intelligent Investor (Rs 509), The New Buffetology. Also read excellent blogs like Tipguy, Jago Investor, SubraMoney, Value Investor, InvestingValues.

  • Learn to separate the wheat from the chaff. Learn to skip the various emotions generated by the media related to market crashes, specific company issues etc. It is important to be aware of the latest happenings but also important to not get carried away by it.

  • For at-least two years, invest only that much amount which you are willing to loose entirely. Think of this money as a course fee you are giving for learning stock investing.

  • Invest only in minor amount, never with big amount in single shot. Although most value investor talk about “big bets in small number of stocks”, to begin with you should invest “small bets in small number of stocks”. I recommend not investing more than Rs 10K for the first two years and not more than 4 stocks. In the meantime you should read, read more and understand and review your investments.

  • As Warren Buffet says “Wide diversification is only required when investors do not understand what they are doing”, so keep in mind, not to invest in more than 4-5 stocks while you are still learning and as your confidence and understanding grows you can devise your own mechanism of investing and you may remove this restriction.

  • Also learn not only to buy, but when to sell as well.

  • Keep in mind that similar to buying a house, there is no need to time the market for buying stocks. It entirely depends on available cash with you, the goal you have in mind, your risk profile and available stock at appropriate price that you are willing to pay.

  • Stock buying is a very subjective matter and depends on the requirements of the person buying, so never put your money just because someone else has done. It is much better to donate the money to a charity than buying stocks based on hot tips.

Failed to file Income Tax by the deadline, so what!

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Income Tax by Jeremy Brooks.These are taxing times, especially since the Income Tax filing deadline is so near. In case you don’t know the IT-return filing date has been extended till 4th Aug 2010. So there is still hope that if you could not file the Income Tax return by 31st July, you have few more days to go.


It is said that “There are only two things in life which are inevitable : Death and Income Tax”. If death comes calling there is no escape, but fortunately there is some breather if you fail to file your income tax by the deadline.


Picture courtsey Jeremy Brooks


So what really happens if you fail to file the IT-return by the due date (4th Aug this year)? So IT sleuths are not coming to your house, nor you will be put in the jail or be asked to pay heavy penalty. Actually, nothing significant happens if you fail to meet the deadline, so do not panic at all.


When it comes to filing your Income Tax returns, the tax laws are not so stringent. Let’s first understand the terminology:


Income Year: The year in which you earn income. This year’s income you are liable for tax.


Assessment Year: The year in which you need to file the return or assess your income. The assessment year is next year of the Income Year.


Case 1: No Net Taxable Payable


Net Taxable Payable is any tax after the TDS/Advance Tax paid. In such case, there is no penalty for filing tax return till the end of assessment year.

For example: Income Year: 2009-2010 Assessment Year: 2010-2011. So if you fail to file IT return by 31st July 2010, you can still file it by 31st March 2011 without any penalty. Anytime, after that you need to pay a penalty of Rs 5000


Case 2: You have some Net Taxable Payable


If you have some Net Taxable Payable, the only difference with case 1 is to pay an additional 1% per month penalty on the Net Taxable Payable.

For example: Income Year: 2009-2010 Assessment Year: 2010-2011 Net Taxable Payable = Rs 1000. So if you fail to file IT return by 31st July 2010, you can still file it by 31st March 2011 with penalty of 1% per month on Rs 1000. Anytime, after that you need to pay a penalty of Rs 5000 + 1% per month on Rs 1000


In case you have any losses to carry forward, you can not if you do not file your IT return on the due date. The only exception is the losses due to “Income from house property”, which can be carry forward irrespective of whether you filed your return on due date or not.


It is known that IT department has started some random check on taxpayers (computer randomly selecting a taxpayer). The IT department can ask the taxpayer for proof of various income through investment, fixed deposits, stocks etc.


Consequences of not declaring miniscule income


So what happens if you “forget” to declare those small miniscule income like Fixed Deposit Interest or Bank Interest? For e.g. you accumulated an interest through FD/Saving account interest and fail to declare it to the IT department, with Rs 1000 as tax payable pending. In that case:


1) You are liable to pay a penalty of Rs 1000 – Rs 3000 (100% – 300%) of the tax not declared.


2) The interest on Rs 1000 @ 1.5% per month simple interest from the due date of tax filing to the date it is discovered that you missed declaring the income tax


3) If by adding this undisclosed income, you change the tax bracket (e.g. if your declared income falls on the border of 20% bracket and when adding this new undisclosed income you fall in 30% bracket), then additional penalty is applicable.


The interesting aspect is that most people file through CAs or Online tax websites or tax consultants. But when the above case happens with you, then you can not blame any of these agents. You and only you are entirely liable for such missing from IT return.


So don’t consider IT return filing as just another formality, take extra care to ensure it is error free.