Detailed Rationale

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

 

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

 

Revenues are expected to grow by over 50% in fiscal 2022 on a low base and primarily driven by the Bioenergy segment, recovery in performance across engineering and Hipurity segments as well. Order backlog as on December 31, 2021 stood at Rs. 2605 crores as against Rs 1665 crore a year back reflecting healthy revenue visibility over the medium term.

 

Inflationary pressure from key raw materials such as stainless steel is expected to have an overall impact of about 200 bps on the operating margins of the company in the current fiscal. However despite this commodity price fluctuation, operating margins are expected to sustain at 8-9% supported by revision in prices with customers, focus on increasing service based offerings and sale of higher margin performance enhancer products..

 

Financial risk profile should remain supported by minimal debt and liquidity of over Rs. 400 crore as on December 31, 2021. More-than-expected stretch in the working capital cycle or delay in execution for the orderbook will be the key monitorables.

Analytical Approach

For arriving at its ratings, CRISIL Ratings 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)

 

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), Indian Oil Corporation Ltd (for biofuels segment) and increased Government focus for achieving a target of 20% in the ethanol blending programme are expected to be the growth drivers over the medium term.

 

Satisfactory order pipeline

Orders worth Rs 2605 crore as on December 31, 2021, across the three business segments assure medium-term revenue visibility. During the first nine months of fiscal 2022, new order inflow improved by over 65% yoy for ethanol business 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. Order inflow is expected to gradually improve going forward; CRISIL Ratings 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 2021. In addition, the company has a diversified geographical presence with exports contributing 15--20% to the revenue over the five fiscals through 2021.

 

Strong financial risk profile and liquidity

Financial risk profile is likely to remain healthy, supported by adequate cash accrual and negligible debt. Networth stood robust at Rs 739 crore as on March 31, 2021, and is likely to remain over Rs.800 crores over the coming fiscals supported by expected cash accruals of over Rs. 100 crores annually. Debt protection metrics are comfortable, with adjusted interest coverage of 41.7 times and TOL/TNW at 1.06 time, respectively, in fiscal 2021. Liquidity is strong, as reflected in the cash accruals levels, no debt obligation, nil utilisation of the fund-based limits, and a high current ratio.

 

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 90-100 crore per annum over the medium term, sufficient for incurring capex and working capital management. Cash surplus is expected to remain above Rs 250 crore. Bank limit remains fully unutilised for the 12 months through December 2021. Cash and cash equivalents is expected to remain at over Rs. 350 crores on March 31, 2022.

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 nine months ended December 31, 2021  profit after tax (consolidated) stood at Rs 93 crore on a total operating income of Rs 1504 crore as against profit after tax of Rs 29 crore on operating income of Rs 738 crore, respectively, for the corresponding period of the previous year.

Any other information: Not applicable

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