Summary: Praj is in WOW shape in terms of its financial condition, but the stock price is already reflecting that fact. The price is decently good despite very poor last FY. The present stock price, thus, DOES NOT give much margin of safety and so one has to realize that one is investing in this company only with an expectation of great financial future (in terms of revenue and margins). There is no opportunity worth exploiting if someone is under the impression that the company is getting priced much below its value.

My Holdings:

My Present Holdings
Avg. Purchase Price	Holding period	Highest Purchase Price	Lowest Purchase Price	Unrealized Profit/Loss
74.68	LT  1 Year	77	74	4.78%

About PRAJ:

 The company is a manufacturer of distillation/dehydration/wastewater treatment plans for breweries and bio fuel manufacturing companies across the world.  Apart from manufacturing these solutions to process industries, Praj is also into manufacturing of catalysts for bio nutrients manufacturers.

PRAJ’s Ecosystem:

For a lay investor like me, the business to which Praj belongs to looks like high tech/R&D based industry but in reality it is hardly that. The company is more similar to a project management/turnkey solutions provider company where it builds plants and distilleries for its clients. In its business, the product that Praj develops (like a distillery) is based on a site and its development is as per the requirements of the specific customer. The revenue earned, therefore, is directly dependent on the progress of the project within a specified time, and most of the projects can be delivered within max 1.5 year timeframe. If looked in this point of view, Praj can be assumed to be similar to a heavy engineering company because there the orders are large and sporadic rather than small and continuous and rarely any project takes many years to complete.

In such an ecosystem, a company can rarely grow by making volume business. Instead the business is earned more as a repeat business or through referrals based on quality of work done for others. Also,  Praj is more into the development of plans rather than maintenance. As a consequence, one can deduce that the business of Praj is dependent to a big extent on discretionary expenditure by its clients.

PRAJ’s position in its ecosystem:

In order to understand how Praj is doing in this ecosystem, I believe one can look at 2 things. One, we can look at Praj’s customers. Praj claims that its customers account for 10% of world ethanol population. That is impressive, especially given that ethanol production industry is highly fragments. Apart from this, I have little knowledge of its customers and so I am willing to ignore this claim. Two, we can look at Praj’s size in the Indian industry and compare it with an expanded list of heavy manufacturers (industrial equipments, boilers, turbines and engines). The list below is the same one I used for my BEML analysis. In this regard, we see that Praj is a middle tier company which lies 13^th on a list arranged by the decreasing order of the average sales in the last 3 FY. (A caveat: this is a table on standalone results and not on consolidated ones).

For the purpose of this analysis, I concede that I am not that knowledgeable about how high up Praj is in its ecosystem. The indicators I have a at best suggesting a middle tier company that claims to make a quality product for its customers. Hence for this analysis, I will try to cover this handicap by trying to put extra premium on the other qualities I look for in a safe investment.

Top companies in Industrial Equipment/Boilers/Turbines/Engines/Construction Equipments industry arranged in decreasing order of their average last 3 FY sales (Rs. Cr)

Company Name	Industry group	Main product/service group	Avg Sales
Bharat Heavy Electricals Ltd.	Boilers & turbines	Prime movers	35706.9
Suzlon Energy Ltd.	Boilers & turbines	Wind turbines (Wind electricity generator)	5039.6
Thermax Ltd.	Boilers & turbines	Steam boilers	3749.1
Cummins India Ltd.	Engines	Internal combustion engines	3647.9
B E M L Ltd.	Construction equipment	Earth moving machinery	2926.7
Lakshmi Machine Works Ltd.	Industrial machinery	Textile spinning machines	1661.4
Mcnally Bharat Engg. Co. Ltd.	Construction equipment	Material handling equipment	1406.9
Tecpro Systems Ltd.	Construction equipment	Material handling equipment	1399.7
Greaves Cotton Ltd.	Engines	Diesel engines	1331.2
Elecon Engineering Co. Ltd.	Construction equipment	Material handling equipment	1155.7
Alfa Laval (India) Ltd.	Industrial machinery	Machinery used in food & beverage industries	879.2
V A Tech Wabag Ltd.	Industrial machinery	Water treatment plants	667.2
Praj Industries Ltd.	Industrial machinery	Brewery machinery	663.2
Walchandnagar Industries Ltd.	Industrial machinery	Industrial machinery	649.8
T R F Ltd.	Construction equipment	Material handling equipment	645.8
Action Construction Equipment Ltd.	Construction equipment	Mobile cranes	539.1
Ion Exchange (India) Ltd.	Industrial machinery	Water treatment plants	521.2

Consolidated or Standalone?

We have to use consolidated statements in case of Praj about 20% of their sales comes from subsidiaries and that can hardly be ignored.

When one buys the shares of a company, one is buying into income derived by the core company (standalone) + all its subsidiaries (consolidated) in the proportion in which those subsidiaries are owned. Praj has 5 subsidiaries (it has announced a 6^th one in Sept which is also a 100% subsidiary) as per its last FY annual report and of those 3 are having 100% ownership (one of these three is actually 99.53% owned). For all practical purposes, while reporting each line item of these subsidiaries should be combined with each line item of the standalone company (both in Balance Sheet and P&L) to come up with a consolidated figure. The remaining 2 subsidiaries are also more than 50% owned and for them also same process should be arrived at, but the minority interest should be removed from income and added to liabilities).

The consolidated balance sheet for the company follows these principles and is able to give a clear picture of how the subsidiaries combine with the overall balance sheet of the company. For this analysis I am using the consolidated sheet as reported by the company.

Reported Financial Performance:

The in the last FY2010-11, the company’s total revenue and PAT decreased on a YoY basis, but the reduction in PAT reduced by 50% where as the revenue dropped by about 10%. Upon investigating, one can see that this is due to increased inventories and sundry debtors that had reduced the cash flow from operations to a great extent. In terms of company itself, the previous recession lasted longer for its clients.

Below is a high level view of the company’s finances as reported In its annual report (consolidated)

FY	2008-09	2009-10	2010-11
Net Sales (Rs. Cr)	954.22	734.44	664.93
Reported pat (Rs. Cr)	117.54	119.83	57
Average Net Worth (Rs. Cr)	392.39	481.38	543.37

Free Cash Flows to Equity Owners:

 Along with the above finances, one can look at the below measures from the company’s annual financial statements (consolidated).

FY	2008-09	2009-10	2010-11
Cap Ex	30.22	-9.04	15.43
Dep + Amortization	8.87	10.74	11.2
Absolute change in Non-Cash W/C	-63.8	54.89	-42.99
Total Increase in Debt	16.53	-18.16	0
Total Increase in Deferred Tax Liability	1.82	1.22	0.81

 One can see that the company’s Non-Cash working capital is really fluctuating from a year to year basis. Within the details of the balance sheet, one can see that in 2010-11 there was a huge amount of money blocked in trade receivables and inventory. To take care of such fluctuating performances on Working Capital, I have normalized the Non-Cash working capital over the past 6 FY.

Also, on the debt side, the big positive is that the company is a zero debt company for now. In fact the company took some debt 2 years ago but paid it back in full the next year.

When I normalized the above factors and calculated the FCFE, I get the following data (all amounts in Rs. Cr and for consolidated):

Average last 3 FY Sales	784.5
Net Profit (latest)	57.0
Cash Value	426.3
Latest FCFE after Normalization of Debt and Capex	50.2
Latest FCFE before Normalization of Debt and Capex	14.4
Average FCFE after normalization for the past 3 years	87.7
Average FCFE before normalization for the past 3 years	82.3

Clearly for PRAJ, one can see that the last year’s performance was much worse than he previous years. That tells us that last year has truly been one poor year and that single performance can be discounted, if other parameters are good.

Fit vs Flab:

The Company is in WOW condition. It is a zero debt company, despite being in business similar to heave engineering. It has been this way in its bad years too. It means that if time comes, the company has a LOT of leverage to borrow its way out of tough situations. When one looks at the latest financials, one will find:

1. Current assets are also much greater than current liabilities.

There is no need to look at interest coverage as the company is not carrying ay debt. In terms of Fir vs. Flab question, I believe that the company is in great shape.

Ownership Structure:

25.23% of the company is in the hands of its promoters. This to me is great as if the company performs poorly consistently; it can be bought by someone who can run it better.

Return on Net Worth: 

The PBIT/Avg. Net Worth for PRAJ has fluctuated between 106% and 11.9% in the last 6 FY and was more than 60% in 3 of these 6 years.  If one discounts the latest year’s performance, one can see there is little to be worried about.

Value Judgment:

Based on my analysis till now, I can conclude that PRAJ has a lot of positives going for it. It has been a financially sound company with great profitability. However its historical performance is tainted by its recent bad form. However, no company is worth paying infinite price and so one has to understand how the price compares with the inherent value of the company.

The BSE closing price on 14^th October was 78.25 for PRAJ. When compared with various parameters I believe dictate the worth of a company, we see:

Company	Praj Ind
Latest BSE closing Price	78.25
P/E Reported	25.38
P/FCFE Updated (After Normalization – Latest)	20.33
P/FCFE Updated (Before Normalization – Latest)	70.70
P/FCFE Updated (After Normalization – Last 3 FY Avg)	11.64
P/FCFE Updated (Before Normalization – Last 3 FY Avg)	12.40
P/Trailing 4 Qtr Earnings	13.18
P/Bv	2.66
Current Assets > Current Liabilities	TRUE
Interest Coverage	6466

 Despite the recent set of poor results, the company is trading at 12.4 times of its last 3 years average FCFE (net of cash) and at 2.6 times its book value. In terms of value, I believe the market knows the worth of the company and is factoring its great fiscal health and possibilities of a good future in the price already. The company, if looked this way, is being priced at par with its value.

On the basis of this, in terms of its future stock price:

• If the company posts stellar results in the coming months (like it did 3 years ago), then the price will go up. But only a mere set of good results will not yield a great upside.
• Also, unless the company truly messes up its coming quarters, there is not a significant downside on prices here.

In terms of investment opportunity, I think the company is great, but it does not have a sufficient margin of safety here. There is little to exploit in terms of valuations right now. A new investor will not have a major downside, but should we aware that the market is already incorporating the current great qualities of the company in the price.

Verdict:

Any other company would have been over valued on a similar set of nos. But Praj does not look overvalued due to the stellar condition it is in. As in investor, one gets swayed by the adjectives analysts use for a company and so it is easy to look at the good qualities of Praj Indstries. However, one needs to be aware that as of now, there isn’t enough sufficient margin of safety in terms of investment and one has to really bank on stellar performance in coming quarters to make profits.

Note on options:

Praj has this habit of floating ESOPS for its employees. It is great for the employees, but not so much for investors like you and me. Many of the earlier option plans of the company expired without many employees exercising them. That may have got to do something with the option price being high and the subsequent bad performance of the company driving the stock price low. Now the company has issued new ESOPs and these should be at lower prices.

 However, despite this, the total no. of options in force is about 2% of the total no. of shares and the no. of options exercisable this FY  2011-12 is even less. Due to these low nos, I am not considering the option price into the valuations of the company.

Personal Note on PRAJ:

Praj is one of those companies that have given profit to me even though the broader market turned very bad. When I had invested in Praj, it did not satisfy my original notions of an undervalued company. The price to book value ratio was above 2 and the P/E was also high. At that time I had  invested in Praj purely because the historical average FCFE and because the company was absolutely debt free company. It was an experiment from my side where I was trying to convince myself that if the company is in stellar shape, then its basic notions of value have to be different (and higher) than an average company.

Lesson learnt:

• There is nothing better than a company that is in pristine shape in terms of its finances and it is a good investment even though it may be slightly overvalued as per normal benchmarks of valuations.