Praj Industries is well-positioned to benefit from India's Ethanol Blending Program (EBP), as the country aims to achieve a 20% blending rate by 2025-26 from 10% currently, according to domestic brokerage firm Systematix Institutional Equities.
Praj Industries is a small-cap stock with a market capitalization of ₹6,430 crore. The company is a global leader that offers a range of sustainable solutions for industries such as bioenergy, high-purity water, critical process equipment, breweries, and industrial wastewater treatment.
With its dominant share of more than 50% in 1G ethanol and its status as the only player in 2G ethanol, Praj Industries is poised to take advantage of the rising demand for biofuels, including ethanol blending in diesel and flex-fuel engines.
In addition, the company is also scaling up its non-bioenergy business by establishing a strong foothold in the modularization business for its Critical Process Equipment & Skids (CPES) segment, expanding offerings from its HiPurity business, and leveraging its multi-disciplinary engineering strengths and expertise in manufacturing to tap export opportunities, said Systematix Institutional Equities.
The company has been maintaining a consistently strong order book with steady order inflows across quarters. It has a 50-55% market share in new order inflows in the industry. As of December 31, 2022, its order book was more than 1x TTM revenue, amounting to ₹33.8 billion.
The bioenergy sector forms the dominant share of the order book, accounting for 81% of the total, followed by the engineering sector, which accounts for 18%. The HPS segment constituted a mere 1% share.
Rising demand for ethanol beyond E20 gives a potential order inflow visibility of ₹60–70 billion over the next 5 years. As a result, the brokerage has projected a revenue CAGR of 29% for PRJ between FY22 and 25E, said the brokerage.
India’s ethanol market was valued at $2.8 billion in 2021 and is expected to touch $5.6 billion by 2027 at a 12.7% CAGR, as per industry reports. The oil marketing companies (OMCs) had set a target of 10% blending for Ethanol Supply Year (ESY) 2021-22, which was achieved by June 2022, surpassing the originally planned date of November 2022.
OMCs have now targeted a 20% blending and even if this target were to be sustained at 20% until 2030, the country would require 11,900 million litres of ethanol. Other industries like chemicals, cosmetics, and alcohol would generate an additional 4,000 million litres of demand, as per Niti Aayog.
Therefore, the brokerage believes that a total requirement of 15,900 million litres would result in a $16.5 billion economic opportunity for ethanol.
Further, the Indian government has directed the automobile industry to launch flex-fuel cars, which could consume up to 85% ethanol. In such a scenario, we expect ethanol consumption to triple and the industry to expand to USD 40–45 billion by 2030, it added.
Meanwhile, the company's capability to customise solutions for international markets is gaining acceptance. The company has already tasted success with its first breakthrough order from Brazil, while several other Latin American countries are witnessing increased demand for ethanol, and the company is well poised to strengthen its leadership position in these markets, the brokerage highlighted.
Adding to that, the company is also positioning itself to tap into the growing Sustainable Aviation Fuel (SAF) market, as major aviation companies commit to using SAF to reduce carbon emissions. With over 60 industry leaders joining the SAF initiative, including Air France and Boeing, PRJ aims to capitalise on the rising demand.
In light of all growth factors, the brokerage has initiated coverage on the stock with a "buy" rating and a target price of ₹458 apiece, signalling a potential upside of 30.81% from the stock's current market price.
In the last three years, the company shares have grown exponentially from ₹52.50 apiece to ₹350, delivering a stellar return of 566%.
5 analysts polled by MintGenie on average have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
