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) 

Quick Heal Technologies Ltd: Don't loose the Faith So Quick-3rd Part-Results update

In my previous posts on Quick Heal (For Earlier posts, Click here and here) I was expecting it to make a recovery in its business after recent headwinds in the economy….and it has delivered Quick. Quick heal has given good set of numbers in Sep-17 quarter results. I just want to highlight some of the glaring factors:

1.      Topline is flat at 105 vs 106 cr. But it is commendable keeping in view the recent headwinds in the economy due to GST/Demoney, Quick heal revamping its distribution channels, strong competitions as competitors have also upped the ante for marketing and distribution. This flat will look elevated if you compare it with the HIGH market expectations of de-growth. For reasons related to the “Indian-ness” of QH, market had literally thrown it into the dump.

2.     Overall user base witnessed good growth especially enterprise segment which I feel will see high growth in the future. Enterprise segment now has 21% share in the total revenue as compared to 16% last year. This quarter revenue growth in the enterprise segment is 27% while retail segment has de-grown by 7%. However this fall in retail revenues is mainly due to higher demand for low value products as figure of number of retail licenses sold this quarter have increased to 20.26 lac as compared to 19.62 lac last year.

3.     In spite of “visible” flat revenues it has still managed to report higher PBIT figure of 59 cr Vs 55 cr last year. Again this is significant as this was not expected.  I think its profits are impacted due to high focus and expenditure on developing distribution channel to penetrate the tier-2&3 cities.

Distributors and physical distribution reach still is one of the most significant winning factor even when people take “Internet/E-commerce” as a panacea for everything. Even providers of cloud have realized the role of distributors and Our Redington India and global giant Ingram Micro are big players in the distribution of cloud products.

4.      Working capital management has improved big time. QH has managed to bring down the debtors from 95 cr in Mar-17 to 61 cr. This has resulted in the improvement in working capital days from 48 last year to 34 now further improving cash flows.

5.   Now coming to one of the most overlooked fact. QH has around 420 cr in investments and cash in books which is around 30% of the current market value of 1470 cr!! Market has decided to blindfold itself with the “Indian-ness” of QH and ignored the most basic valued factors of a good stock. If we leave this 420 cr out along with related interest income then it means that QH is available at a market value of 1000 cr and its PE will touch 18-20 which is very cheap.

Also this high cash means QH can use this for acquisitions in high tech fields and I have no doubt that very soon we’ll see something big like this coming out.

6.   QH cyber security products have protection from ransom ware and recently when globe was hit by “Wannacry” ransom-ware, No QH client was affected by Ransom-ware. But People raise questions about the technical expertise of QH.  I have explained in my earlier post about the collaboration of QH with Cert-in (Ministry of Electronics and Information Technology) for providing free services for the removal of Botnet in India. But what does it mean?

Why Indian Govt has decided to choose QH for the task if there are so many highly advanced global cyber security firms operating in India especially when most of them are already providing their products FREE? I have seen many people questioning the idea of paying a price for a cyber-security product when these are available free.

Then why QH was chosen? Whether it is because of technical expertise of QH? Whether other high tech free product providers were not willing to provide it free? Or it is because our Govt prefers (or needs) Indian-ness in cyber security? I am leaving it to you people to decide.

7.      I have already shared in earlier posts that Indian Govt will give preference to Indian products. Why?  If we go by the information leaked by Edward Snowden, countries especially US and China are watching, scrutinizing India all the time. In fact India is one of the most watched, and scrutinized nations of the world. Chinese hackers are breaking and stealing information from servers of Indian Govt all the time so easily. And at times when our Govt is dreaming, selling and hoping digital India and smart cities, the threat to our cyber security are serious.

Quick heal was advised recently around 180 and it closed today at 208, up 6%. But it is still way cheap at PE of 20. Promoters have not sold a single share in the IPO, not afterwards…it is investing heavily on brand building…more than any other brand. Better to pick it now before it is too late to HEAL.

(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) 

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Gateway Distriparks Ltd: Enter the Gate; Other stocks covered-Texmaco rail, Titagarh wagons and Hind Rectifiers

Gateway Distriparks (GDPL): This is one of the best plays on the growth of CFS and railway freight. 2nd largest player in railway freight after Concor (Although 2^nd place with wide margin as Concor has some 70% share), one of the biggest player in Container fright stations with annual capacity to handle 624,000 TEU. 

It is also one of the biggest in ICD (Inland container depot), most importantly its ICD’s are located in North-west corridors covering Delhi/Haryana/Gujarat which is the busiest route in India. ITS ICD’s are located near Gurgaon, Faridabad, Ludhiana, Mumbai, and Ahmedabad. It owned the lands of all ICD except Mumbai which is a JV although it is a smaller one. Owned land in these 4 ICD’s is 250 acres!! ICD will help it to capture the growth of containerized cargo post completion of Dedicated freight corridor (DFC).

DFC will be the game changer for Indian railway as it’ll enable Railway to capture the high share in freight business wherein road sector accounts for some 65-70% which is not economical and a big loss to the economy. Network congestion has resulted in the decline of the share of Railway in freight along with the fact that Freight rates are highest in India in order to provide cheap passenger services (which is plain foolish). 

DFC tracks will have average speed of 70-75 km per hour from the current 20-25 km and one rack on the DFC will be able to carry 13,000 tonnes of load compared with 5,000 tonnes by current racks entailing huge cost and time savings.So a major restructuring will happen post DFC. First DFC route is going to be ready in mar-18 from Ateli ( Haryana) to Phulera (Raj) and some major routes by Dec-2018.

So Gateway is best placed to capture this via its railway freight and ICD business which are having high entry barriers due to high setup costs (Land etc.) and long time. Gateway has invested significantly in the past few years in expanding its capacities in CFS/Railway and ICD business the impact of the same will accrue from now on.

Gateway holds 49.25% in railway freight business (GRFL) so its numbers are not getting consolidated with GDPL. Its railway freight business has turnover of around 800 cr and this qtr its NP has grown 140% to 19 cr. So this business will be a huge growth factor. Concor is the biggest player but still I feel GRFL will command premium valuations due to its much higher ROE as GDPL’s rail business is mainly in more profitable North-west corridor which allows for the double stacked cargo trains (GDPL has 67% double stacked cargo) which are more cost effective. 

Double stack trains are being used for nearly 70% of United States’ containerized cargo. But share is very low in India. Although there are weight consideration for tracks but double stack trains are beneficial when cargo is of larger but comparatively lighter weight like cars, automobile and electrical components, consumer goods and pharma products as compared to heavy items like cement/steel etc.

I am having Concor from 400 levels (CMP 1340) but still it is a buy although Gateway is way cheaper at present.

GDPL also holds 40.25% in snowman, earlier it was its subsidiary but GDPL share dropped after the IPO of Snowman. As Snowman is incurring losses for some time so GDPL is not getting much valuation from Snowman but this slowdown in Snowman is just transitory and it’ll see high growth this year. High growth in Pharma, Frozen food, dairy will benefit cold chains along with the govt focus on improving the agro supply chain for farmers.

I picked GDPL around 100 in 2014 but added good qty (as per my Investment target) around 220 last month or so. Its sep-17 qtr results are good. Group (CFS, Rail, Cold chain) turnover is up 10% 347 cr and NP is up 60% at 25 cr although snowman incurred loss of 4 cr. It is available at PE of around 25-30 which is cheap considering high growth future prospectus. Group turnover is around 1300 cr. It is a high dividend player and current yield is around 3% so we can expect high growth in dividend also when it’ll enter into high growth and profitability phase in the future. So today morning picked more at 240 and 260. At 260, it is still one of the great pick in logistic space.

Also going to buy Texmaco rail (CMP 112) and Titagarh wagons (CMP 140) as these two will garner high share in railway and metro sector as the demand prospectus of railway infra will be high. Earlier, these two were just manufacturing wagon which are low technology and commodity type of product but off late these two have augmented their capacities significantly and now they cover almost all the aspects of railway sector from wagon, Locomotive, Installation of tracks, security and electrical system.Apart from Railway, Texmaco is into steel foundry, hydro mechanical, bridges, Rail EPC (Laying of Track/electrical systems after the acquisition of Kalindee) while  Titagarh is also into defense, ship building, construction equipments, tractor segments.

Another stock i like is Hind Rectifier- I like its product profile, technical capabilities, management looks credible. They have good product profile catering to coming growth in railway electrification .They are venturing into new innovative products. Recently they have done right issue for expansion and i think this may turnout to be a very serious player in railway sector. Valuation is looking cheap at market cap of around 150 cr...CMP is around 105...good buy at these levels and at every fall.

(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).

Venky's India ltd: Results Update

Venky’s India has given us great returns so far. It is now trading at 2370; up 12 times from our entry price of around 200 (Click here for earlier Study). But I think it still has quite a way to cover and there is no reason for us to make an exit from the stock. I am still holding it tight.

Now coming to this quarter’s results-it has given a stunning performance. Its turnover is at 588 cr vs 596 cr last year. However its Profit before Tax is at 43 cr vs 1 cr and net profit is at 27 cr vs 35 lac last year!!! So a great jump in profitability. Market can have its own versions about topline figures for QOQ or YOY comparisons but over long term this growth story will gather even faster momentum. Chicken prices are still high but still demand is growing strong which is an indication that long term price trend may sustain at these levels. Apart from high end product prices it is further getting benefitted from falling raw material costs-mainly Soy and Maize. Maize prices have fallen all the way to Rs. 9700 (per MT) in Oct-17 from Rs. 12000 in June-16 (from Rs. 17000 in Oct-12). Similarly soy prices have fallen to Rs. 23300 (Per MT) in Oct-17 from Rs. 31000 in Jun-16.  Prices are likely to stay low due to better realizations globally amid stagnant demand in USA and other developed countries.

The impact of low raw material prices is visible in this quarter results-Raw material cost as a percentage of total turnover is down at 72% this quarter as compared to 81% last year. This is one of the prime factor in high growth in profitability and I think this trend will continue. And another positive thing which I am expecting since last year is the debt reduction. Its total debt has fallen to Rs. 290 cr from 470 cr in Mar-2017 and its interest cost has fallen to Rs. 11 cr this quarter from 20 cr last year and I am expecting debt levels to fall below 150 cr by next year. And with low debt levels I am also expecting high dividend payouts in the future which will further improve the valuation matrix. 

I think Venky will be able to touch NP figure of around 200 cr this year. Its ROE is great at 33%. So in my view Venky being one of the biggest in Poultry in India, high future growth along with superior profitability/Balance sheet profile should command a PE of 30 minimum. Venky is witnessing high growth in its Ready to Eat frozen chicken product business. These are available at every corner of India and I think this segment will see high growth in future. Last year this business clocked Rs. 153 cr as compared to 116 cr in 2016. Venky has an amazing product profile as all the products are interlinked- From one day chicken to full grown layer and Boiler, in house poultry feed business, Refined oil business whose by products are used in feed business. Its annual report is one of the best detailed one.

So at minimum 30 PE, Venky’s valuation is coming around Rs. 6000 cr while at present it is at 3300 cr. So we can expect another double from hereon. So just hold on and respect the humble chicken…

(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).