Rating Rationale
November 05, 2020 | Mumbai
Praj Industries Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.535 Crore
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities of Praj Industries Limited (Praj).
 
Operating performance of Praj may improve in the second half of fiscal 2021 due to steady order flow and healthy orders worth Rs 700 crore in the first half of fiscal 2021. This is despite a 38% decline in operating performance in the first quarter of fiscal 2021 owing to the economic slowdown that resulted from the nationwide lockdown imposed by the government to curb the spread of Covid-19. Operating margin is projected at 6-8% for fiscal 2021, driven by increased execution of international orders. This is despite loss at operating level in the first quarter owing to continuing fixed costs during lockdown. Pick-up in utilisation levels, supported by increase in order inflows, will be a key monitorable. Nevertheless, a strong capital structure and adequate liquidity should continue to support the business.
 
Earlier, operating performance saw a marginal moderation in fiscal 2020 with revenue declining 3% year-on-year (yoy), driven by weaker demand scenario in the HiPurity and Engineering services segments and the pandemic-led disruptions. Operating margin declined by 60 basis points yoy to 7.4% due to increase in lower-margin orders in HiPurity and Engineering segments.
 
Financial risk profile should remain supported by minimal debt and liquidity of Rs 341 crore as on September 30, 2020. More-than-expected delay in improvement in operating performance or build-up of order pipeline shall be closely monitored.
 
The ratings continue to reflect Praj's established market position in the ethanol project and process engineering business, satisfactory order pipeline and improving diversity in revenue profile. The ratings also factor in a strong financial risk profile. These strengths are partially offset by exposure to cyclicality in the capital goods industry and to project -risks.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Praj and its subsidiaries because of the operational and financial linkages between them. Further, all the entities are under a common management. The subsidiaries are Praj HiPurity Systems Ltd (previously, Neela Systems Ltd; 'CRISIL A+/Stable/CRISIL A1'), Praj Engineering & Infra Ltd (formerly Pacecon Engineering Projects Ltd), and four overseas execution subsidiaries - Praj Far East Co Ltd (Thailand), Praj Far East Philippines Ltd Inc (Philippines), Praj Americas Inc (USA) and Praj Industries (Africa) Pty Ltd (South Africa)

Goodwill arising out of consolidation of Praj's subsidiaries has been amortised over five fiscals through 2019.

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 750 references in more than 70 countries and across five continents. The company provides end-to-end solutions, which include process technology and equipment (distillery and brewery segments) and 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 profile. Additionally, new collaborations such as Gevo Inc, USA (for Sustainable Aviation Fuel), Sekab E-Technology AB, Sweden (producing biofuels using forest residue feedstock) and increased Government focus for Compressed Bio Gas (CBG) are expected to be the growth drivers over the medium term.
 
* Satisfactory order pipeline
Orders worth Rs 1408 crore as on September 30, 2020, across the three business segments assure medium-term revenue visibility. During the first half of fiscal 2021, new order inflow improved by over 14% yoy for ethanol business to Rs 436 crore owing to favourable policies being announced by the government and increase in demand for pharmaceutical grade alcohol amid the rising need for sanitisation amid the ongoing pandemic.  Continuing improving demand and support from recent government policies is likely to benefit Praj's bioenergy segment'reflected in 61% of order inflows from this segment in the first half of of fiscal 2021. The same is also reflected in increasing order backlog to sales ratio trend increasing to 0.98 time in fiscal 2020 from 0.74 time in fiscal 2018. Hipurity and Engineering segments also contributed 12% and 27% respectively to the order inflow in H1FY21 showing healthy diversity. Order inflow is expected to gradually improve going forward; CRISIL will continue to monitor any development on this front.
 
* 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 core business of ethanol-based products.  These areas, which are divided into two business divisions ' HiPurity and Engineering businesses -, contributed 39% to the consolidated revenue for fiscal 2020. In addition, the company has a diversified geographical presence with exports contributing 30-40% to the revenue over the five fiscals through 2020.
 
* Strong financial risk profile
Financial risk profile is likely to remain healthy, supported by adequate cash accrual and negligible debt. Networth stood robust at Rs 656 crore as on March 31, 2020, with gearing at 0.00 time. Debt protection metrics were comfortable, with adjusted interest coverage and net cash accrual to adjusted debt ratios of 32.55 times and infinite times, respectively, in fiscal 2020.
 
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 Praj's topline and its profitability. 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.
 
* Exposure 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 12-24 months, fluctuations 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 partially mitigating the impact of any adverse movement in raw material prices.
Liquidity Strong

Liquidity is likely to remain healthy. With no debt repayment obligations, cash accrual (post dividend) is projected at Rs 40-50 crore per annum over the medium term, sufficient for incurring capex and working capital management. Cash surplus is expected to remain above Rs 200 crore. Bank limit remains fully unutilised for the 12 months through September 2020. Cash and cash equivalents were Rs 341 crore as on September 30, 2020.

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
* Sustenance of financial risk profile at healthy levels

Downward Factors
* Continued weak operating profitability and consequently 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 and caters mainly 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 61% of consolidated revenue in fiscal 2020); b) HiPurity Systems, accounted for 11% of consolidated revenue; c) Engineering business accounted for 28% ' 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 the oil & gas, petrochemical, fertiliser and chemicals industries), and brewery plants and equipment.
 
For the six months ended September 30, 2020, profit after tax (consolidated) stood at Rs 0.89 crore on a total operating income of Rs 390 crore as against profit after tax of Rs 25 crore on operating income of Rs 506 crore, respectively, for the corresponding period of the previous year.

Key Financial Indicators
As on/for the period ended March 31 2020 2019
Revenue Rs crore 1102 1141
Adjusted profit after tax (APAT) Rs crore 70 68
APAT margins % 6.4 6.0
Adjusted debt/adjusted networth Times 0.00 0.00
Interest coverage Times 32.55 146.96

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon rate (%) Maturity Date Issue size (Rs.Cr) Complexity Level Rating Assigned with Outlook
NA Cash Credit NA NA NA 18.00 NA CRISIL AA/Stable
NA Letter of credit & Bank Guarantee* NA NA NA 517.00 NA CRISIL A1+
*interchangeable between bank guarantee and letter of credit
 
Annexure - List of Entities Consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Praj Hipurity Systems Ltd 100% Wholly-owned subsidiary
Praj Engineering & Infra Ltd 100% Wholly-owned subsidiary
Praj Far East Co Ltd 100% Wholly-owned subsidiary
Praj Far East Philippines Ltd Inc 100% Wholly-owned subsidiary
Praj Industries Namibia Ltd 100% Wholly-owned subsidiary
Praj Americas Inc 100% Wholly-owned subsidiary
Praj Industries (Africa) Pvt Ltd 100% Wholly-owned subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  18.00  CRISIL AA/Stable      04-12-19  CRISIL AA/Stable  04-09-18  CRISIL AA/Stable  23-08-17  CRISIL AA/Stable  CRISIL AA/Stable 
                20-08-18  CRISIL AA/Stable  08-02-17  CRISIL AA/Stable   
Non Fund-based Bank Facilities  LT/ST  517.00  CRISIL A1+      04-12-19  CRISIL A1+  04-09-18  CRISIL A1+  23-08-17  CRISIL A1+  CRISIL A1+ 
                20-08-18  CRISIL A1+  08-02-17  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 18 CRISIL AA/Stable Cash Credit 18 CRISIL AA/Stable
Letter of credit & Bank Guarantee* 517 CRISIL A1+ Letter of credit & Bank Guarantee* 517 CRISIL A1+
Total 535 -- Total 535 --
*Interchangeable between bank guarantee and letter of credit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Engineering Sector
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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