Rating Rationale
September 04, 2018 | Mumbai
Praj Industries Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.535 Crore (Enhanced from Rs.415 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 margin moderated to 6.3% and 2.2% during fiscal 2018 and the three months ended June 30, 2018 respectively, from 9% in fiscal 2017 due to higher contribution from less profitable segments, along with lower absorption of fixed costs. Growing investments in the domestic distilleries sector propelled by government policies, higher demand and improved viability of distillery plants will augment order inflows for Praj in the medium term. This along with receipt of orders for new second-generation ethanol segment will support growth in order pipeline. Better order inflow of Rs 328 crore during the first three months of fiscal 2019 and improved demand provides visibility of 9-10% revenue growth and recovery in profitability to 9-10% due to better absorption of fixed costs.

Financial risk profile is robust with liquidity of Rs 288 crore as on June 30, 2018. More-than-expected delay in improvement in operating performance, or build-up of order pipeline shall be key monitorables.

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 the company's strong financial risk profile. These strengths are partially offset by exposure to cyclicality in the capital goods industry, and to project related 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; rated 'CRISIL A+/Stable/CRISIL A1'), Praj Engineering & Infra Ltd (formerly Pacecon Engineering Projects Ltd), and five overseas execution subsidiaries - Praj Far East Co Ltd (Thailand), Praj Far East Philippines Ltd Inc (Philippines), Praj Industries Namibia Ltd (Namibia), Praj Americas Inc (USA), Praj Industries (Africa) Pty Ltd (South Africa).

* Goodwill arising out of consolidation of Praj's subsidiaries has been amortised over five years.

Key Rating Drivers & Detailed Description
Strengths
* Established market position: Praj has a 70% market share in the domestic ethanol plant installation and equipment business and 65% share in 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 5 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 in the medium term.

* Satisfactory order pipeline: Orders worth Rs 812 crore as on June 30, 2018 across the three business segments provide revenue visibility. During fiscal 2018, order inflows declined by over 20% for domestic ethanol business due to weak capital expenditure (capex). However, improving demand and support from recent government policies is likely to benefit Praj's bioenergy segment'reflected in 70% of order inflows from this segment in the first three months of fiscal 2019. Although order inflow is lower than the historical average, it is expected to gradually improve going forward. CRISIL will continue to monitor the developments on this front.

* Healthy diversity in revenue profile: Praj has diversified into water and wastewater management, critical process equipment, bio-nutrients, hi purity systems with the objective of reducing its dependence on core business of ethanol-based products.  These areas, which are divided into two business divisions - hi-purity and engineering business -, contributed 48% to the consolidated revenue for fiscal 2018 against 44% in fiscal 2017.

* Strong financial risk profile: A robust networth, negligible debt and strong liquidity and debt protection metrics contribute to the healthy financial risk profile. As on March 31, 2018, networth stood at Rs 631 crore and debt was negligible. The strong cash accruals are largely sufficient to meet capex and working capital requirements. Additionally, the company reported liquid surplus of Rs 288 crore as on June 30, 2018.

Weaknesses
* Exposure to cyclicality in the capital goods industry: Praj operates in the inherently cyclical capital goods sector, where demand is dependent on the 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 on account of economic slowdown, which led to fewer orders from developed countries. Further, in fiscal 2017, 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 mitigating the impact of any adverse movement in raw material prices.
Outlook: Stable

CRISIL believes that Praj's established market position in the domestic distillery and brewery installation business, improving order pipeline for second-generation ethanol units and growing revenue diversity will help improve its operating performance over the near term. CRISIL also believes that the company will maintain its financial risk profile over the medium term, backed by steady cash accruals, prudent funding for capex programmes and strong liquidity.

Upside scenario:-
* Increase in scale of operations driven by improved business diversity and profitability
* Sustenance of strong financial risk profile.

Downside scenario:-
* Continued weak operating performance or lower-than-expected improvement in scale of operations, profitability and consequently cash accrual over the near-to-medium term
* Weakening of capital structure because of larger-than-expected debt-funded capex or elongation of working capital cycle.

About the Company

Incorporated in November 1985 as Praj Counseltech Pvt Ltd, 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 52% of consolidated revenue in fiscal 2018); b) Hi Purity Systems, accounted for 19% of consolidated revenue; c) Engineering business accounted for 29% ' 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 three months ended June 30, 2018, profit after tax (consolidated) stood at Rs 3 crore on a total operating income of Rs 192 crore as against Rs 0.41 crore and Rs 186 crore, respectively, for the corresponding period of the previous year.

Key Financial Indicators
As on/ for the period ended March 31 2018 2017
Revenue Rs crore 964 812
Adjusted Profit after tax Rs crore 34 38
APAT margins % 3.6 4.7
Adjusted debt/Adjusted networth Times 0.01 0.01
Interest coverage Times 68.26 69.48

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon rate (%) Maturity Date Issue size (Rs.Cr) Rating Assigned with Outlook
NA Cash Credit NA NA NA 18.00 CRISIL AA/Stable
NA Letter of credit & Bank Guarantee* NA NA NA 517.00 CRISIL A1+
*Interchangeable between bank guarantee and letter of credit
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
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  20-08-18  CRISIL AA/Stable  23-08-17  CRISIL AA/Stable      09-11-15  CRISIL AA/Stable  CRISIL AA/Stable 
            08-02-17  CRISIL AA/Stable           
Non Fund-based Bank Facilities  LT/ST  517.00  CRISIL A1+  20-08-18  CRISIL A1+  23-08-17  CRISIL A1+      09-11-15  CRISIL A1+  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 15 CRISIL AA/Stable
Letter of credit & Bank Guarantee* 517 CRISIL A1+ Letter of credit & Bank Guarantee* 400 CRISIL A1+
Total 535 -- Total 415 --
*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 rating short term debt

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