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 :
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.