Praj Industries Ltd: One of the few Biotech Experts in India

I am watching this one for last 5-6 years with only one thing forcing me to remain as a watcher and that was its business model which at that time mainly was about complete equipment design and erection of Ethanol producing plants. At that time Ethanol production was about producing the same from Corn, Sugarcane etc. which was forcing us to choose between food or feed-stock thus raising the pricing of these foods. Although it’s technical expertise even at that time was undeniable but my concern was scalability of its business of Ethanol.

I was negative on oil prices since long as I could see the coming storm of Shale, sand oil, Solar and wind power coupled with emergence of new sources of oil mainly from big oil importers like Brazil, india. So oil was bound to be burnt with only question of when and it is happening now and I do not see any near term revival in fact for very long term or never even if big oil producers cut their supply because their disruptive power is slipping down. We are sure to see new innovative power sources in the future also.

Low oil prices can negatively impact the prices and demand for Ethanol. Although demand for Ethanol is mainly due to blending mandate due to environment concerns but low oil prices act as a disincentive for using ethanol and oil retailers can avoid using it. But this food or feedstock equation was a big negative for Ethanol players as any surge in the prices of Corn/Sugar could easily force governments to slow their Ethanol plans. So only thing that could have saved Praj was meaningful diversification and it just did that. I had just forgotten about Praj but that day while studying United Breweries I came to know that Praj is now one of the biggest brewery plant providers in india and growing fast globally.

Praj’s inherent strength was always high quality research capabilities in Biotech arena. Everything we know about life is biotechnology. Everything which comprises us, the humans, physically (Leave consciousness if you feel it) is biotechnology where various microorganisms and Enzymes act as manufacturing units to produce the building blocks of life in various forms at the earth. So if we can understand this we can create a new world where even death will be a passé but this is the most daunting task; decoding the creature’s plan.

Curd and alcohol was our introduction to Biotech process although milk itself is biotechnology. Biotechnology is about microorganisms transforming something into something very different; sometime it is very simple and most of the times very complex. First generation ethanol is simple as it is made from easy sugars like corn and sugarcane. But Praj has invested huge amount of efforts in developing second generation cellulose based ethanol production technology which uses bio waste materials like agri waste like, wood chips etc which are not competing with our food. For this Praj is collaborating with global experts like Gevo and Qteros.

Actually the starches in Corn etc are easily converted into sugars by simple enzymes and sugars are then fermented into alcohol. But this is competing with our food and not viable. Other option was celluloid, the fiber that forms plant structure and is found in virtually every plant, flower, tree, grass, and bush is by its very nature evolved to withstand decay. But the enzymes needed to release sugars from cellulose to be fermented into ethanol were inefficient and expensive as starches of celluloid’s are very hard to be converted into sugars.  But using cellulosic materials don’t create a food-versus-fuel scenario.

So huge research is being undertaken to engineer Enzymes with synthetic DNA (or DNA taken from other species) into microbes that are being developed in labs and are being designed to break down certain types of biomass, such as woodchips, corn stalks, or other cellulosic biomass and also to increase the rate at which they are broken down into sugars that can then be fermented into ethanol or other types of fuels. These microbes would become “living chemical factories” that can be engineered to pump out almost any type of fuel or industrial chemical.

Praj Industries began construction of second generation cellulosic ethanol demo plant at Sangli (Maharashtra) in August 2013. The plant, which is South Asia's first cellulosic ethanol demo plant, will operate on different varieties of biomass with a capacity of 100 dry tonnes of biomass per day, which includes agricultural wastes such as corn stover, cobs and bagasse. Praj has core expertise and experience is in process and integration engineering, as well as equipment and system manufacturing.

Today, the cellulosic ethanol technology has become a reality with the first commercial plant already operational in Northern Italy by Beta Renewables. This plant primarily produces bioethanol from agricultural residues like wheat straw, rice straw and energy crop using enzymatic conversion. These plants are working like refineries and they are producing a variety of bio products which can cater to a variety of industries.

But I am not counting my cells on this ethanol story. Ethanol is more about environment concerns and self independence in oil particularly in the current and coming era of low oil prices. This technology may or may not be a commercial success although the chances are very high for a success. But it just shows the technical prowess of the Praj which counts Rakesh jhunjhunwala and Vinod khosla (Former Sun Micro-systems co founder turned venture capitalist) as promoters.

Praj is using its core competence; Biotechnology, to venturing into areas of water and waste water treatment and other bioproducts related to animal health and nutrition. Earlier it was getting all of its revenues from ethanol business but now it is getting around 70% from ethanol and breweries business with 30% from water and critical process equipment business. Its turnover is 1011 crores with operations in 60 countries getting 50% of its turnover with net profit around 76 crores.

I am very optimistic about water business. Industries are finding very hard to get fresh water approvals for their plants as water is already scarce to meet the human requirements. We are very careless in using water wisely and situation is getting grave globally. Senseless usage of water in Punjab and Haryana is a prime example of this and sometimes I fear that mass extinction due to water scarcity will be the waking call for us because we are unable to be wise now. So apart from using water diligently another way is to stopping of industrial pollutants into water resources. So industries are required to be Zero discharge which requires high technological treatment of used water. Praj is having great expertise in this and in fact it has revived dead textile units of Tirupur for not meeting pollution norms by equipping their plants with its Zero Liquid Discharge (ZLD) systems.

Praj is also expected to get huge orders from Ganga Action Plan.

So I think its Breweries and water business will see huge future growth. It is having its own R&D centre, Praj Matrix, which has got around 11 patents. It is still debt free in spite of intensive investments in research and plants. It is paying regular dividends for last 12 years and dividend yield at current market price is 2%. It is now adequately diversified to withstand any shock in any of its business areas.

India is still poor in valuing research based companies. Biocon is the prime example of this. We still focus on end product success which is wrong and do not suit to a value investor. By the time, research efforts are succeeded, we will not be there to enjoy the success as valuations will touch skyrocket by then. Sooner or later a research focus company will find success in any of its ventures.

I am yet to study its products and business model fully as these require very detailed study but I think it is still worthy of investment.

Current market price is 82/-

(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)