Praj Industries Limited (PRAJIND) Earnings Call Transcript & Summary

Good day, everyone. We welcome you to this conference call organized to discuss Praj Industries' operating performance and financial results for Q3 and 9 months FY '21, which were announced yesterday. On this call, I have with me Mr. Shishir Joshipura, CEO and MD; and Mr. Sachin Raole, CFO and Director of Finance and Commercial. Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. Documents relating to our financial performance were e-mailed to you. These documents, along with our quarterly results presentation, have also been posted on our corporate website. I would like to hand over the floor to Mr. Joshipura for his opening remarks.

Good morning and season's greetings. Wish you a very happy and prosperous New Year. I welcome you to Praj Industries' earnings calls for quarter 3 and 9 months for FY '21. I trust all of you had the opportunity to go through our results presentation for the quarter and 9 months ended 31st December 2020. I do hope that you and your family members are safe and healthy. It is once again our pleasure to connect with all of you. I will briefly be covering the quarterly business highlights and industry developments, following which Sachin will take you through the financials. Let me start by sharing some very good news with all of you. Praj Industry is ranked second in the list of world's 50 hottest companies in Global Bioeconomy for 2021 by the U.S.-based Biofuel Digest in low-carbon fuels and renewable chemicals category. This list represents companies who are making outstanding contribution to bioeconomy by developing and deploying sustainable decarbonization solutions using innovative technologies that help conserve the environment. In addition, Praj has also secured third rank in the newly introduced bio-design and engineering category that recognizes hottest companies for their capabilities in innovation and services in commercial-scale operations and products. This is the first time any Asian company has secured top ranking in the most coveted list of hottest companies in the advanced global bio-economy. These rankings are at the back of our #1 ranking among the best places to work in the advanced bio-economy in 2020, which was announced last year. Praj also bagged CII Industrial Innovation award for 2020 in manufacturing large enterprise category for our SHIFT technology. Praj has developed a Synchronized High Brix Fermentation Technology, or SHIFT, for sustainable ethanol production that offers higher user benefits with reduced effluent treatment costs as well as process water requirement in fermentation. Let me now move to perspective on the business environment. We believe that the economy for majority of segments that we serve is staging a V-shaped recovery. Domestically, the operating environment is steadily improving and economic activities have picked up across several sectors. And with vaccination now a definitive solution, we expect recovery across the board as the year progresses. Agriculture sector is also showing signs of robust growth, with 2 healthy crop cycles of kharif and rabi boding well for the overall economic revival. The union budget presented at the back of the unprecedented year signals sustainable and predictable growth of the economy. Government's emphasis on improving manufacturing sector and infrastructure investments will drive economy further. In the bio-energy sector, the domestic market, we are seeing significant momentum with a slew of positive and structured measures announced by the Center to boost ethanol consumption and production in India. The current average ethanol blending rate as of December 28 stands at 6.05%. However, some states like Uttar Pradesh, Maharashtra, Karnataka and northern states of Delhi, Punjab, Haryana and Uttarakhand have already achieved blending rates of 9% to 10% as of January 11. OMCs have allocated about 310 crore liters for 2021 marketing year, including about 39 crore liters from damaged good grains and surplus rice. This would enable ethanol blending of around 7% to 8% for the 2021 year. The government has signaled serious intentions to decarbonize the transportation sector by advancing 20% ethanol blending target to year 2025. This is expected to lead creation of nearly 1,000 crore liters per annum of additional ethanol capacity. In order to encourage ethanol production in more uniform way across the country, the Cabinet announced a modified scheme to provide financial assistance to distilleries producing first-generation ethanol from surplus public spoiled grains with barley maize, corn and rice, including cereals. Total of 368 distilleries have applied for a soft loan of about INR 19,000 crores. In the last 2 years, 76 ethanol projects were sanctioned that will add around 200 crore liters of ethanol capacity. 31 projects with capacity of 100 crore liters are already complete, while the rest are expected to be completed by end of March '22. The government has also notified modified interest subvention scheme for setting up grain-based distilleries, public expansion of existing grain-based distilleries. State governments and union territories have also been requested to help entrepreneurs secure land to set up distilleries and provide quick environmental clearance. The government announced further enhancement of ecosystem for gas distribution by adding 100 cities to the CGD network in the recent budget. This will also pave way for economic dispensing of CBG. On the whole, increased focus on clean and green mobility builds a very positive momentum, and we are witnessing a decisive shift towards renewables across India. Praj remains a frontrunner to capitalize on this growing opportunity. Let me now take you through the highlights and developments for the quarter. On the bio-energy front, we have witnessed nearly doubling up of our inquiry base. Customers are increasingly interested in setting up ethanol-based plants -- ethanol plants using B-heavy molasses and/or syrup as feedstock. Ethanol production using sugar syrup will soon be a reality. Our unique and pathbreaking bio-syrup technology solution that enables year-round ethanol production on syrup is attracting a lot of interest from our customers, and the first installation running on this technology will soon be a reality. We are also witnessing very high interest for grain-based ethanol plants following the government announcements regarding the use of surplus grains. Customers in international markets are also bringing back -- they are bringing back their plants back to negotiating tables as the COVID crisis begins to subside. On the 2G front, execution of the first 3 plants in the country is on course. Our offering along with SEKAB in the forest residue to ethanol segment is generating significant interest in Nordic countries, and inquiries from there are progressing very constructively. On the CBG front, in November 2020, Praj entered in a nonbinding MoU with Ministry of Petroleum and Natural Gas for providing technology support to CBG projects under the SATAT scheme. The main objective of this MoU is to facilitate technology support to the entities for setting up and commissioning of multi numbers of eligible and qualified CBG plants and their continuous operation for production of CBG and organic compost manure under the scheme. We inaugurated our CBG demonstration plant in the hands of Union Minister, Shri Prakash Javadekar, located at our R&D campus. The plant deploys Praj's technology, which utilizes the proprietary microbial consortium made from the feedstock such as agri residues and press mud. Overall, we are seeing promising opportunities for our Bio-Energy business across both the domestic as well as international markets. On the Engineering business, our wastewater treatment business has received an order worth INR 226.9 crores from Indian Oil Corporation Ltd for execution of water and wastewater treatment system, including 0 liquid discharge system for their acrylic/oxo-alcohol project in Gujarat. Praj will treat water from entry into the pipe to the exit from the pipe and save 4.7 million liters per day of water through recycling and 0 liquid discharge. The schedule time of completion for this project is 16 months. On the CPES front, we continue to strengthen our relationship with select global technology and EPC player. And we have bagged several repeat orders during the quarter from our customers indicating their faith in our capabilities. The Brewery business still does not see a growth in the domestic market as the domestic market is still not recovered with no new green or brownfield projects announced, and we expect the recovery time to be almost 12 months in this segment. On the PHS front, the continued focus on health care has resulted in good traction in both domestic and international markets. And we have created some important breakthroughs with leading business groups and leading pharma players in India as well as abroad. Praj is fully prepared to execute the opportunities that are arising from various favorable developments across all our business segments. On the operational front, all our facilities are operating at normal levels now, and we continue to ensure safe working environment for our people. With this, I will now hand over to Sachin for his comments on the financial performance.

Thank you, Shishir. Just to give a brief about the financials, total income from operations for the quarter stood at INR 347.78 crores as compared to INR 300.34 crores in Q3 FY '20, delivering a growth of 16%. EBITDA grew by 59%, stood at INR 39.79 crores as against INR 24.99 crores in the corresponding period of the last year. PBT came in at INR 38.78 crores in Q3 FY '21 as compared to INR 24.33 crore in Q3 FY '20, again, up by 59%. Profit after tax stood at INR 28.16 crore in Q3 FY '21 as compared to INR 20.67 crore in Q3 FY '20. For 9 months FY '21, income from operations was INR 737.57 crore as against INR 806.64 crore in 9 months. EBITDA for the period under review stood at INR 44.16 crore as against INR 49.78 crore. PBT stood at INR 39.92 crore as against INR 51.46 crore in 9 months of FY '20. PAT was INR 29.05 crore as against INR 45.57 crore in 9 months of FY '20. Export revenue accounted for 31% in Q3 of FY '21. Of the total revenue, 71% was from Bio-Energy, 17% from Engineering and 12% is from PHS business. The order intake during the quarter was INR 605 crore, with 83% coming from the domestic market. Of the total order intake, 41% came from Bio-Energy, 50% from Engineering and balance 9% from PHS business. The order backlog as of 31st December 2020 stood at INR 1,665 crore comprising of 81% of the domestic orders. Cash in hand as on 31st of December stood at INR 400 crores. With this, I will conclude my remarks. Thank you for joining. We would now be happy to discuss any questions, comments or suggestions you may have.

[Operator Instructions] The first question is from the line of Sandip Sabharwal from Asksandipsabharwal.com.

I think in the last quarter, I asked you a question on how Praj is doing well always for employees and customers and when they will start generating some money for shareholders. I guess the journey has begun now. So congratulations on that. My question to you at this stage was that you have announced significant orders last quarter. I think -- I'm not sure whether it was the biggest quarter ever, but I guess it must be near that. And there have been several announcements. In fact, I have attended a few conference calls of some sugar companies also, and just one sugar company announced 2 new plants. So there seems to be a lot of momentum there. So in terms of any -- in terms of -- like you said, there's a doubling of inquiry pipeline. So what kind of numbers would that indicate in terms of not the order flow you will get but in terms of customer inquiries? And secondly, on the 2G front, new order flow on the existing executions, we don't see that, at least you have been top of that. Any indications on that -- when the next stage of that will come up?

So as I mentioned, in a way of speaking, almost 1,000 crore liters per annum kind of capacity is getting unleashed with this slew of measures that are announced. So that's a very significant number that needs to get built between now and next 3 years. So as you rightly said, there will be a lot of activity around the natural owners of these plants with the sugar mills. But of course, now we will have also the grain-based ethanol plants added to the whole sequence. So obviously, the momentum is expected to increase in speed and tempo. What's very important from our perspective, we understand, is that there's a very clear, stable, sustainable future direction that is made available for ethanol producers so that they know that there is a very definitive business proposal that they can go forward with and need -- they need not have any apprehensions about what happens at the end of 1 year. The government has announced a 5-year tender for procurement. There's a big push on ethanol side. And I think all the indications, actions are indicative of the fact that there is a serious story unfolding here on improving the availability of ethanol in the country by pushing the domestic production. And we clearly see a significant change in the inquiry level, as I mentioned, as they have nearly doubled in the last quarter, so which itself is a good indication. And I think it's not that they've just indicated and stopped, this is a journey that is continuing and we are expecting to see very positive developments out of this.

On the 2G front?

Yes. On the 2G order inflow, as we had mentioned, the first 3 projects are under construction, so -- and they were built under a special program. So they will have to be commissioned. I think that's a very important milestone that needs to be achieved. So as I mentioned, the construction continues at full speed, and we are expecting the first commissioning, which is still some time away, to be about 18 months away from now. And then only we can expect the India story to start unfolding on the 2G side, unless some other interventions happen in between, but this is what our expectation is. On the European front, we are expecting the forest residue-based ethanol plants to take off early. There's some very positive and constructive dialogue that we are engaged in right now. And as and when they do result into something that is worth mentioning, we will come back to you.

And on the 3 orders which you're executing right now, there will be some residual order flow you would also be expecting, right? Because from the initial mention of what could be the order flow from a particular 2G order to actually what you have got, I think there's still a significant gap.

Well, there is not a significant gap. We have orders and we announced them for licensing, engineering as well as for critical equipment for all the 3 projects. We had some additional inflow coming in for one of the projects. And our ability to participate in those tenders also depends on the route which each of these public sector units are adopting for execution of the projects. For example, in Indian Oil, we are also the EPC managers for the job. So that means that we -- while we can be the EPC managers for the job, we cannot supply anything beyond the critical equipment. So there are rules that we have to follow. That may not be true for other 2 cases where we are not the EPC managers. So it will depend on what is the overall structure of the project that each of the customers decide. And based on that, it will progress. We already have these additional contracts for one of these projects.

What would be the cash on the books right now?

INR 400 crores.

The next question is from the line of Vivek Ganguly from Nine Rivers Capital.

I have 2 questions. And you actually spoke about it in the call, but it wasn't very clear. So on the number of distilleries who have applied for loan applications, who have applied with the banks for interest subvention, you said there were 368. And how many of those have been completed? And how many have been sanctioned?

So 368 distilleries applied for the loan. 76 have been sanctioned so far. Okay?

Yes.

It will add about 200 crore liters of capacity. Of this, 31 are already completed. And the balance we expect to complete by March of '22.

Okay. And so 76 has been -- so of these, how many have you all -- are you all participating in?

So our market share is about 2/3.

Okay. Okay. Got it. And you also mentioned about the blending being preponed, 20% blending being preponed to FY '25.

Yes.

So that would translate into about 1,000-odd crore liters of new capacities?

Yes. The new capacity that we require to meet that target would be -- is 1,000 crore liters per annum.

Right. Got it. And right now, our current capacity is in India at -- when we are doing about 6.5%, 7%?

The current capacity is around 350 crore liters.

Okay. It's at 6% or 7% odd.

That's correct.

Right, right. Okay. And on SATAT, what is the kind of traction you all are seeing? Have you all started -- because you all were doing some -- not under the SATAT scheme, but earlier also, you all were executing such projects from breweries where the waste was being used to generate feedstock gas. But any on SATAT, in particular, have you started getting into commercial relations with anybody? Or is it still odd...

Yes. So you are very correct. So we have built over 55 plants in the distilleries for biomethanation, which produces gas. In that case, it was mostly used for internal energy consumption, okay? The SATAT program is very different. It says not only the biogas, but you further purify it to a grade where it can be used as automotive fuel, which is very different than the normal biogas. So that scheme was launched. There were a number of initiatives that were subsequently sort of brought about as the supplementary rules to that scheme based on the market feedback that was available and what the promoters wanted, what the project developers wanted, what the regulatory agencies wanted. And I think the ecosystem is being constructed right now in a very, very favorable fashion. We are currently building to India's first 2 commercial-scale plants. First of them will go on stream in April, and another one another 3 months down the line, one in north of India in April and the one in south of India 3 months down the line further to that. So that is what will happen. We are seeing increasing traction, but this is the first time that such overall eco-structure is being imagined and created both so customers are also wanting to see the future or prospective customers saying, "Let me understand how this whole thing works." Because gas selling is very different than ethanol selling. Gas production is very different than ethanol production. So there are questions around how things work. And I think that is why a real term demonstration is very, very critical and which is just about 60 days away. So we are very, very hopeful. And from all the dialogues that we are building with customers, and they are saying, "Let me see the proof. And once that is there, then I will know how the whole thing works." So it's not only about a technology or handling or management or operations, but the overall ecosystem, how the evacuation takes place, what happens to the gas system -- gas ecosystem getting built up, et cetera. So I think that is -- these are initial days for that but very, very promising because government is giving a lot of emphasis on development of CBG as a very, very important element of the gas part of the economy in the overall energy mix.

Right. And on EU, these could largely be your 2G ethanol technology platform?

Sorry, could you please repeat your question?

For the EU market, when you're talking of forest or farm-based, forest residue-based ethanol plants, these would be using your 2G tech.

That is right. That is for second-generation technology, yes. And especially for farm residues, as I mentioned, you would be aware, we had announced a collaboration with a company called SEKAB.

But any -- so is it because of the overall economic condition that there is a slowdown? Or do you all expect something to happen in those markets?

So for Europe, the RED II Act is very clear now, so it is under implementation. The unusual 2020 has really put some of the programs -- it pushed them a little bit backward because there was a much more urgent and bigger problem to be solved across the globe, and Europe was no exception. So I think what has happened is it's pushed it by 1 year, almost a year back, but it is restarting again.

So it seems like we lost the connection for the current participant. We move to the next question from the line of Manish Goyal from Enam Holdings.

Yes. Very congratulations on many achievements and awards, sir. Sir, I just have a little longer-term question on our R&D center. I just want to get a sense as to what kind of investments we have been incurring on a regular basis, on an annual basis. And how do we see that going forward? And I do recollect that in past, when we had inaugurated this center and we had kept certain milestone in mind as to by a certain time frame, by, say, maybe that's quite old, but 2012, '13, we were looking to make it as an independent business division and emerge as a profit center. So in so many years, we have done so many innovations, have generated IPs. So what's the plan over there? Like are we also looking to kind of monetize some of our IPs? Are we looking to partner with some global major? If you can share your thoughts, that is one broad question. And second question is on how do we see our user client base changing over medium to long term? Like point is that lowering our dependence on direct government policy-driven businesses like now the biofuels, but we have initiated a lot of other businesses like process equipment, wastewater, brewery was always there. And adding to that is pharma or HiPurity solutions, 0 liquid discharge. So just want to get a sense over the next 3 to 5 years, how do we see this landscape emerging for us going forward.

So thank you. So first of all, I'm not aware of any declaration that we made around structuring the R&D the way you described it. But moving on from there, if you really look at the 2 platforms that we have, bio-mobility and bio-prism, and that is what our R&D is actually enabling us to do, to create solutions on the bio-mobility platform. So obviously, we'll continue to do so. You saw the 1G ethanol came out. Now it is, of course, very stable and very, very mature. The 2G whole story that you saw developing out of that, now the CBG work that they are doing. This is all on the bio-mobility platform. They're working on sustainable aviation fuel for which we created the first process in India in collaboration with Gevo, and we have given our samples, and they have now been approved by Indian Air Force. On the same platform, we'll continue to build some other solutions on the -- in very, very close working with ARAI. That was the MoU that we had announced in the last quarter. So we are working on different fronts. And the bio-mobility, we'll also be looking at the future fuel, as we would call it, ultra advanced biofuels, which will emerge over a period of time in form of hydrogen, biomethanol. Many of these things will develop as we go forward. So very strong focus on bio-mobility. They are also equally focused on the new platform that we unveiled last year on bio-prism, which is around all renewable chemicals materials. So very clearly, they will continue to build solutions that are -- that the demand of the market, they will create the new interventions. That is the whole purpose of R&D. And as I said in the past as well that they are very clearly focused on creating solutions that create commercial value, so for both us and our customers. So that is how it will continue to proceed. On the business front that you asked, yes, we are very, very specific that we would like all our businesses to grow to their potential. And the route that -- for example, for the 0 liquid discharge business, we are saying that the business needs to gain traction, not only by building a me-too plant but by creating a differentiated offering to the customer, leveraging the tremendous strength that the organization has got on the microbiology side and use that knowledge and strength to actually create solutions for customers for problems for which there are no solutions today or for which there are very expensive solutions, how do we bring that down. So similarly, we are also looking at creating differentiated solutions for new emerging companies on the technology side, globally who are trying to create some new solutions on the new needs of new energy forms, how can we help them configure their plants and systems so that they become very competitive in a very, very short period of time. So that's the focus that our CPES business is doing. The PHS continues to serve the pharma and health care segment, which, of course, right now is witnessing a very increased focus and activity level. Brewery, of course, very specific to breweries, but there also -- while India, for the next 12 months, we do see what I would call is very, very subdued activity, but we are not sitting. We are actually utilizing this time to build our presence in African market, which comes at a very different cycle than India, and we have tasted some early success there. So we continue to build our businesses as we move forward.

Okay. And on the CBG, just to clarify, you mentioned we are building 2 plants. And first plant is likely to come up when, sir?

The first plant will be commissioned in April of this year.

Okay. And second one, sir?

Another 3 months down the line.

And what will be the -- material will be -- like is it press mud or agri waste as well? What is it based on?

So the one in South India is exclusively on press mud. The one in North India is press mud as well as bagasse, a mix of both.

[Operator Instructions] The next question is from the line of Kirthi Jain from Sundaram Mutual Fund.

Congratulations for a wonderful [indiscernible]. Sir, my question -- first question is with regard to the inquiry pipeline you mentioned, sir. Sir, the inquiry pipeline you mentioned is the pending stock of inquiry as on December end you were trying to build? Or is it the inquires during the period you're trying to build, sir?