Praj Industries Ltd: A Revisit

Praj Industries was advised earlier around  80 ( Click here for earlier study) and I was following it regularly looking for something concrete in its ethanol or other emerging businesses like Hi-purity water, waste water treatment and brewery plants. I have already written about its ambitious plans for 2^nd generation biofuel plants and this is the area which I have always felt can create huge value for Praj if it can develop the technology to create ethanol from agro residue like rice husk, wheat straw, corn straw, cotton straw, Bamboo etc. 

A lot of activity is happening in 2^nd generation front for last one year or so. So last month I made my second entry at 68 and then few days back at 82. Indian Govt has mandated the blending of 10% of ethanol however due to poor state of sugar industry for almost a decade the actual blending was just some 3%-4%. Now sugar industry is reviving fast and soon we’ll see big investments from sugar companies into new ethanol plants which will benefit Praj who is having around 80% share of India’s ethanol market. Govt is also doing some real work on the policy front like freeing the pricing formula for ethanol. Also now Govt has plans to raise the ethanol blending to 22.5% mainly based on 2^nd generation biofuel. 

India generates huge agro waste and biomass which can be used for the production of biofuel. This will save precious resources being spent on oil imports and will also create big employment along with raising the farm income. I am always in favor of using locally available substitute for an imported item even if the local substitute is costly as the same will keep the money (resource) in the country generating employment in this cycle which ultimately will provide benefit to all in some other form like increase in the demand for other products thus promoting further growth, low interest rates due to high savings, availability of risk capital etc. In an economy, one plus one is never two because an economy is never a static entity but it is an ever changing cycle.

Issue of low ethanol production in India

Some people surprise at why India is not being able to produce huge quantity of ethanol when we produce so much sugarcane. Brazil has big ethanol industry which has enabled it to leave its dependence on oil imports and curbing the pollution also. Then why we can’t? Actually the reason here is again the same-Government policies. Most of the times, we are the creator of our mess. In India, Govt only allows the production of ethanol from Molasses which is a byproduct of producing sugar from sugarcane and our “vote bank friendly” govt doesn’t allow the production of ethanol directly from sugarcane in the name of food safety. But our central and state governments fix the price of sugar cane which must be paid by sugar companies to farmers. But due to global stress, prices of sugar was low so after paying high price to farmers our sugar companies sell the sugar below cost!! So they prefer to sell molasses (without any processing at extra cost) or rectified spirit to liquor or other industrial customers rather than selling the ethanol to OMC’s at low regulated price after investing big for ethanol plants. Liquor companies pay them some 20-25% more than the OMC. In countries like Brazil, direct production of ethanol from sugarcane is allowed and prices are linked to petrol to promote more ethanol production while it is quite opposite in India.

Further, molasses is marred by high political mess in India as almost all the states impose curbs on movement of molasses out of the state along with heavy taxes. States mandates the sale of a fixed portion of molasses produced to liquor companies (who return the favor to these politicians). So even the price charged to these liquor companies is lower because here too Government pockets the maximum out of sale of alcohol. In India, almost all of alcohol is made of molasses which costs them some 50 Rs. Per litre and then these liquor companies add some flavors and colors (No maturation) and you have the IMFL ready to be sold at 700-1000 per litre out of which state Govt pockets around 50%!! So its all big mess here although politics and mess will remain together forever.

Huge activity is underway on 2G ethanol front

Praj has developed the technology for 2G ethanol and it is running a demonstration plant near pune with the capacity to produce 1 million litre per year. This plant is based on the patented technology named “Enfinity” developed by Praj after 7 years of efforts which use a mix of enzymes to convert the cellulose of agro waste and residue into glucose which is then used to make ethanol. As per some estimates, by using all of our Agro waste we won’t be required to import oil at all. I also feel that making ethanol from Sugarcane or corn is not a great idea as there is big debate on food vs fuel along with the fact that these crops need big natural resources like water. So I think, if we can produce reliable 2G ethanol from agro waste then this miracle will become real. Enfinity can even manage the tough task of 20% ethanol blending  quite easily.

Indian Govt has given the responsibility of developing ethanol especially 2G ethanol on oil marketing companies like IOCL, BPCL and HPCL. These 3 have big investment plans for the same. In fact, IOCL and BPCL have already entered into partnership with Praj for setting 2G plants. Work is underway for setting up a plant for IOCL in Panipat and Dahej on cost share basis. BPCL has selected Praj as technology partner for setting up one 2G bio-ethanol plant in Orissa having the capacity of 100 kilo litres of ethanol per day. Around 10 to 12 2G ethanol projects are expected to be finalized with average capex of around Rs 600 crore each with each one having the capacity to produce 100,000 litres of ethanol per day. So in the beginning around 5000 cr is at stake and even a moderate success may open the big gates for Praj.

Indian Glycols Ltd is also operating India’s first 2G ethanol demonstration plant at Kashipur in Uttarakhand, with a capacity of 10 tonnes of biomass per day.

Praj has even launched a green fund that will help it take up projects to make second-generation ethanol plants. We’ll see high activity in biofuel segment this year especially when our Govt is serious on curbing pollution and OMC’s have their task cut out as they have entered into partnerships with Praj already. 

Praj has a significant global presence as it is operating in 75 countries and has built big ethanol plants in UK, Germany, Belgium etc. Almost all the ethanol plants in Colombia have been built by Praj and as per management Praj accounts for around 7% of total ethanol produced globally. 

Praj’s waste water and Hi-purity water business is seeing high growth. Tougher standards for Pharma and food and beverages sector are presenting high growth opportunities for Praj.

Today Praj spiked big time by 20% to 106. I still do not know the reason of the same but I always have the faith in companies with high technical abilities as they can turn the tide anytime. Praj with 16 patents approved (80 under approval), 80000 Sq feet R&D centre, nil debt, 1000 cr turnover, dividend yield of 2% even during moderate/low growth period of 5-6 years has enough in it to do the same...the only question is of timing and i feel that the same is near.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)