Fundamental Pick of the Week

Date: 20 Jun, 2008

Every week ICICIdirect research team will select a stock based on fundamental and/or technical parameter, which is
likely to return 20% over a 3-6 month perspective.

Praj Industries Ltd. (PRAIN) Current Price: 195 Target Price: 235

Potential upside: 20% Time Frame: 3-6 mths

Praj Industries (PIL), a leading manufacturer of ethanol and brewery plants with the domestic market share of 80% and 50%
respectively, and a global market share of 8%, is well poised to leverage on the capacity expansion from these segments on the
back of high crude price. We expect net sales and net profit to rise at CAGR of 25.2% and 31.8% over FY07-10E respectively.

Company Background

Praj Industries (PIL) was established in 1984 and became a public limited company in 1993. It is a technology and solution
provider for ethanol, brewery and related bio-cycle solutions. The company is in the business of design, manufacture, supply
and commissioning of fermentation and distillation equipment for manufacture of alcohol and ethanol. The company is in the
process of identifying the high yielding seeds to produce ethanol. It is also looking at the new ways to produce ethanol and
alcohol through new technology for which it has invested Rs 31 crore towards the expansion of its new R&D (Research &
Development) facility. The company has commissioned a Greenfield plant at Kandla SEZ (Special Economic Zones) by
investing around Rs 170 crores.

Rising crude prices to boost ethanol demand

Rising crude prices (above ~US$130/barrel) would be the key demand driver for alternative fuels like ethanol. In India, demand
for ethanol is expected to rise from 650 million litres to 2,139 million litres in FY12 (factoring 10% blending from current 5%).
Worldwide, demand is expected to rise from 50.9 billion litres in 2006 to 120 billion litres in 2015. PIL, with more than two
decades of experience and strong technological capabilities, is well positioned to leverage on the incremental demand.

Sugar companies to expand ethanol capacity

With uncertainty related to sugar prices, sugar manufacturers are likely to focus on profitable by-products such as ethanol for
revenues and profit. This would also induce them to invest in ethanol capacities, which would be a demand driver for PIL.

Brewery industry growing at robust pace

PIL is among the top global companies involved in supplying equipment for distilleries and is the leader in India with a 50%
market share. The domestic brewery industry is growing at a robust 20% annually and PIL's ability to benefit from such a
healthy demand scenario appears promising. According to a Crisil study, the Indian brewery market is growing at more than
20% annually. This has induced many domestic and foreign players to announce capacity expansion programme. By Sept
2007, 36 new beer and alcohol projects had been announced with a project outlay of Rs 1,488 crore. PIL is well positioned itself
to leverage upon growing beer and alcohol market with the 50% of the market share.

Strong order book to drive top line growth

PIL's current order book stands at Rs 950 crore. Riding the growing demand from the user industry, we expect a 35% CAGR in
the order book over the next three years, driving growth in top line. Around 60% of the order book comprises international
orders, which is equally distributed between Europe, US and South East Asia shielding from any exuberant currency
fluctuation. About 15% of the order book is for brewery plants. Out of the balance, 60% is for ethanol plants using grain
feedstock and the rest for plants using non-grain feedstock. Non-grain feedstock includes sweet sorghum. The company's
focus on the international market has increased as several countries have increased their consumption of ethanol in order to
reduce their dependency on crude.

Foray into bio diesel technologyLeveraging its over two decades of experience in agri-business process of renewable
biofuels, PIL has developed technology for bio-diesel production. The company is also developing technology for bio fuels
complex where one can produce both bio-ethanol and bio-diesel. Other than concerns over crude prices, many countries are
addressing pollution fears by switching from crude based fuel to biodiesel. The technology leverage would help company to
enter into bio-diesel plants capacities as many countries are now moving from crude to bio-diesel.

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Fundamental Pick of the Week
Risk and Concerns
Business runs on new orders
The major order book going forward is from new capacities and not from the replacement of existing facilities as the plant life
is around over 15 years. Any delay or non execution of proposed new capacities will impact PIL's order book and thereby
sales.

High raw material cost could put pressure on margins

Any drastic increase in raw materials like steel and other metals can put pressure on margins.

Financials
For the full-year FY08, the company registered robust growth on the back of increasing orders from overseas market. Top-line
grew 15.5% to Rs 701.6 crore from Rs 607.4 crore in FY07. EBITDA margin improved to 20.3% from 17.3%, boosted by
operational efficiencies and enhanced high-margin overseas orders. The company generated more than 50% of its revenues
from overseas orders. Bottom-line grew 77.2% to Rs 153.5 crore from Rs 86.7 crore led by the improvement in EBITDA
margin and lower tax provisions for its facility in the Kandla SEZ. Net profit margins improved to 21.9% from 14.3%. Other
income grew from Rs 8.9 crore to Rs 37.5 crore on the back of higher forex gains and treasury income. Going forward, we
expect a 25.2% CAGR in net sales over FY07-10 from Rs 586 crore to Rs 1,151.1 crore led by expansion in domestic and
overseas markets. We expect EBITDA margins to maintain going forward, from 20.3% in FY08 to 20.6% in FY10 as new
capacities would operate at optimum level. Going forward, we expect a 31.8% CAGR in bottom line over FY07-10E to Rs 198.2
crore in FY10E mainly backed by growth in EBITDA margin.

Key Financial Ratios

2007/03 2006/03 2005/03 2004/03 2003/03
EPS 10.31 3.01 26.82 10.03 2.99
CEPS 10.69 3.34 29.23 11.97 4.96
Book Value 17.67 6.77 52.02 37.47 32.52
Dividend/Share 2.7 1.26 10.8 4.5 0
OPM 18.2 13.58 12.83 11.25 9.42
RONW 56.34 43 50.51 26.87 12.52
Debt/Equity 0 0 0 0.15 0.32
Ratio 0.83 0.91 1.11 1.34 1.43
Interest Cover 36.52 12.29 12.79 8.75 4.3

Valuations

The future prospects of the company are promising on the back of the following reasons: (1) High crude prices which would
support 10% ethanol blending, a key positive for Praj Industries; (2) Soaring order book; (3) The contribution from high-
margin overseas business to increase from 50% in FY08 to 60% in FY09 and (4) Technology development to use non-food
grain feed stock to produce ethanol as well as bio-fuel, thereby expanding business opportunities. We are raising our price
target from Rs 203 to Rs 235 by valuing the stock at 21x FY10E EPS of Rs 10.8 and Rs 9 towards investment value.

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Fundamental Pick of the Week

Technical Outlook

The intermediate term downtrend finally found its feet at 100 levels which happened to be the 62% retracement on higher
degree charts. The sharp recovery from the lows spelt the underlying bullishness and also indicated that the uptrend is
building up here.

However currently the stock seems to be witnessing some selling pressure quite in line with the market as a whole. While
looking at the oscillators we find that most of them are placed in to the positive zones. It is quite probable that the market may
take some time to put in fresh momentum which can drive the prices up. But considering the big picture as being positive, this
can be one of the pick to look during the dips. The immediate support comes around 165 levels. One can expect a target
around 230/250 in the coming months.

Fundamental Pick 3
Fundamental Pick of the Week

ICICIdirect Research Desk

ICICI Securities Limited,

Mafatlal House,
Ground Floor,
163, H T Parekh Marg, Mumbai - 400 020
research@icicidirect.com

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