Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of Praj Industries Ltd (Praj).

 

The ratings continue to reflect the sustenance in the performance of Praj, given the healthy orderbook owing to the increasing focus of the government on ethanol blending and established market position in the ethanol project and process engineering business. The ratings also take into account the satisfactory order pipeline, healthy diversity in revenue profile and strong capital structure marked by nil debt and robust liquidity. These strengths are partially offset by exposure to cyclicality in the capital goods industry and to project risks.

 

Revenue remained flattish in the nine months of fiscal 2024 due to policy changes (government capped the use of both sugar syrup and B-heavy molasses for diversion for ethanol production), which led to shift in execution for some projects as the customers had to reassess their projects. Order backlog stood at Rs 3,950 crore as on December 31, 2023, as against Rs 3,380 crore a year earlier, reflecting healthy revenue visibility over the medium term. Operating margins have improved to 10% in the first nine months of fiscal 2024 as compared to 8.1% in the corresponding period of the previous fiscal due to softening of material cost, change in sales mix (higher exports and engineering services) and expected to remain at 10-11% in the medium term.

 

The financial risk profile remains supported by nil debt and strong networth of over Rs 1100 crore as on September 30, 2023. Liquidity is aided by cash and equivalents of Rs 640 crore on the same date. Sizeable stretch in the working capital cycle or delay in execution of orderbook will be key monitorables.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Praj and its subsidiaries because of the operational and financial linkages between them; all the entities are also under a common management. The subsidiaries are Praj HiPurity Systems ('CRISIL AA-/Stable/CRISIL A1+'), Praj Engineering & Infra Ltd, Praj Genx Ltd and three overseas execution subsidiaries - Praj Far East Co Ltd (Thailand), Praj Far East Philippines Ltd Inc (Philippines), and Praj Americas Inc (USA).

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position: Praj has been an undisputed market leader in the domestic ethanol plant installation and equipment business and the domestic breweries installation segment. The market position is also supported by its global presence with over 1,000 references in more than 100 countries and across five continents. The company provides end-to-end solutions, which include process technology and equipment (distillery and brewery segments), wastewater treatment technology and critical process equipment. Further, successful commercialisation of demonstration second-generation ethanol plant and order execution for upcoming plants in India will benefit the business. Additionally, collaborations such as Axens, France (for Sustainable Aviation Fuel), Sekab E-Technology AB, Sweden (producing biofuels using forest residue feedstock), Indian Oil Corporation Ltd (for biofuels segment) and increased government focus for achieving a target of 20% in ethanol blending by fiscal 2025 are expected to be the growth drivers for the medium term.

 

• Satisfactory order pipeline: Orders worth Rs 3,950 crore as on December 31, 2023, across the three business segments assure medium-term revenue visibility.  Rising demand and support from recent government policies should benefit the bioenergy segment of Praj. Order inflow is expected to gradually improve and any development in this front will remain closely monitored.

 

• Healthy diversity in revenue profile: Praj has diversified into water and wastewater management, critical process equipment, bio-nutrients, HiPurity Systems with the objective of reducing its dependence on the core business of ethanol-based products. These areas, which are divided into two business divisions – HiPurity and engineering contributed 20-25% to the consolidated revenue for the first nine months of fiscal 2023. The company also has diversified geographical presence, with exports contributing 15-20% to the revenue over the five fiscals through December 2023.

 

• Strong financial risk profile and liquidity: Financial risk profile remains healthy, supported by adequate cash accrual and negligible debt. Networth stood robust at Rs 1100 crore as on September 30, 2023. Debt protection metrics were comfortable, with adjusted interest coverage ratio of 68.7 times in fiscal 2023. Total outside liabilities to tangible networth ratio stood at 1.51 times as on March 31, 2023. Liquidity is strong, reflected in cash and equivalents of ~Rs 640 crore as on September 30, 2023, absence of any repayment obligation, and nil utilisation of the fund-based limit.

 

Weaknesses:

• Exposure to cyclicality in the capital goods industry: Praj operates in the inherently cyclical capital goods sector, where demand is dependent on the capital expenditure (capex) cycle of its end-user industries. Any slowdown in the growth prospects of end-user industries affects the topline and profitability of Praj. For instance, revenue fell in fiscals 2010, 2011 and 2013 owing to overall global economic slowdown, which led to fewer orders from developed countries. Further, in fiscals 2017 and 2020, weak capex momentum resulted in lower revenue from operations. This also impacts the working capital cycle, which gets stretched significantly due to slow project execution during economic slowdown.

 

• Susceptibility to project-related risks: Business is exposed to project-related risks such as fluctuations in input prices. As the average duration of a project is 12 months, volatility in input prices during this period impacts cost, and therefore, profitability. Further, turnkey projects in India normally do not contain escalation clauses. However, Praj collects advance payment in most of the fixed price contracts and has prudent purchase policies in place, thereby mitigating the impact of any adverse movement in the cost of raw materials.

Liquidity: Strong

Liquidity is strong, marked by cash and cash equivalents of ~Rs 640 crore as on Sept 30, 2023. In the absence of any repayment obligation over the medium term, the cash accrual (post dividend) of Rs 250-300 crore per annum will be sufficient to meet the capex and working capital requirements. Bank limit remained unutilised for the 12 months through Feb 2024.

Outlook: Stable

Praj should continue to benefit from its established position in the domestic distillery and brewery installation business, improving order pipeline for second-generation ethanol units and growing revenue diversity. Financial risk profile should remain strong, supported by steady cash accrual, prudent funding for capex programmes and strong liquidity.

Rating Sensitivity factors

Upward factors

• Substantial and sustainable increase in revenue and profitability, resulting in cash accrual of Rs 300-400 crore per annum.
• Financial risk profile remains healthy.

 

Downward factors

• Continued weak operating profitability and a consequent decline in cash accrual
• Larger-than-expected, debt-funded capex, leading to gearing above 1 time

About the Company

Incorporated in November 1985, Praj is promoted by Mr Pramod Chaudhari and associates. In 2007, the manufacturing facility was commissioned in the special economic zone in Kandla (Gujarat). In 2008, Praj started its pilot plant to carry out research and development (R&D) on second-generation cellulosic ethanol technology at Praj Matrix R&D Center. In 2012, Praj acquired 50.2% stake in Praj HiPurity Systems Ltd and subsequently raised its stake to 100% in 2015. This company manufactures and sets up water treatment plants and modular process systems; it mainly caters to the pharmaceuticals, biotechnology, cosmetics, and food and beverages industries.

 

There are three business segments: (a) bioenergy business (involves process design, engineering, fabrication, and commissioning of ethanol plants), accounted for 74% of consolidated revenue in fiscal 2023); b) HiPurity Systems, accounted for 7% of consolidated revenue; c) engineering business accounted for 19% – this segment has three sub-divisions: water & waste water treatment (operates in the industrial waste water systems), critical process engineering (provides high-end equipment and systems finding applications in industries such as oil and gas, petrochemical, fertiliser and chemicals industries), and brewery plants and equipment.

Key Financial Indicators

As on/for the period ended March 31	Unit	2023	2022
Revenue	Rs.Crore	3582	2333
Adjusted profit after tax (APAT)	Rs.Crore	240	150
APAT margin	%	6.7	6.4
Adjusted debt/adjusted networth	Times	0.00	0.00
Interest coverage	Times	68.7	89.4

*The company has achieved revenue of Rs 2,448 crore with PAT margin of ~10% in 9M FY24.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	18	NA	CRISIL AA/Stable
NA	Letter of credit & bank guarantee*	NA	NA	NA	517	NA	CRISIL A1+

*Interchangeable between bank guarantee and letter of credit