Stock Idea | With a 3-fold jump this year, this smallcap has everything going for it

NEW DELHI: What Larsen & Toubro (L&T) is to India’s infrastructure problems, Praj Industries, a smallcap company, is to India’s increased thrust on biofuel generation.

The government has set an ambitious target of 20 per cent ethanol blending in petrol by 2025 in order to minimise import bill and reduce carbon emission. But this will require a lot more ethanol production than what the country produces today.

Ethanol is usually produced by the sugar mills as a byproduct. It can also be produced directly from starchy feedstock. With increasing demand, both methods are set to gain traction. And, a capacity expansion is needed rapidly.

This is where Praj Industries comes in. This nearly four-decade-old construction and engineering company is one the leading developers of ethanol plants in the country with 65 per cent market share.

Investors have already identified the opportunity that the company presents. The stock has climbed nearly three times this year. And, analysts see up to 35 per cent more potential upside from current level.

The confidence in the company's prospects is also reflected in high institutional ownership of the stock at 20 per cent. These investors have better capability and resources to analyse fundamentals of companies than most retail investors.

What is working?
In order to make sure the government’s ethanol blending target is achieved, India will need to produce 1,500 crore litres of ethanol a year. This is more than double of the 684 crore litres of existing capacity.

The government has announced a loan interest subsidy for those expanding and setting up new plants. It has already approved 238 projects, which will increase ethanol production capacity by 583 crore litres, and sanctioned a loan amount of Rs 16,000 crore.

“Praj Industries is the frontrunner for the majority of the expected capex of these ethanol plants,” said Prathamesh Sawant, an analyst at Axis Securities, which initiated coverage on the stock earlier this week.

Besides, the company is also a big player in the emerging compressed biogas (CBG) segment. CBG is a technological boon expected to bring independence to the oil-importing agrarian economies. It converts agriculture residue and other waste products to environment-friendly high-calorie energy molecules.

The government has started plans to set up 5,000 CBG plants by 2023-24 with a production target of 15 MMT. Praj with its technological prowess and a proven track record will be a key beneficiary of these projects. It is already developing three large-scale CBG projects across the country.


The company management is confident. “Biofuels are at an inflection point and there is no doubt in my mind that it is an idea whose time has come. Your company is in the pole position to capitalise on the unfolding opportunities and propel itself into a new growth orbit,” Pramod Chaudhari, Executive Chairman, Praj Industries, said in the latest annual report.

Moreover, increased focus on zero liquid discharge and renewable chemical materials is also expected to be a big growth driver for the company in the coming years.

Earnings outlook
The stock is thinly tracked. The Refinitiv database says only two analysts track the company. The consensus shows the company is expected to increase its earnings per share (EPS) three-fold to Rs 13.75 in FY23 from FY21's reported EPS of Rs 4.42.

The company's topline, which surprised positively during FY21, is also likely to more than double by FY23. Analysts expect revenue of Rs 1,871 crore in FY22 and Rs 2,688 crore in FY23 against Rs 1,305 crore reported for FY21.

Analyst take
In the last four years, the company has delivered more than analyst expectations three times. This, along with growth opportunities available for the company, has not gone unnoticed. Analysts are bullish on the stock with the consensus rating being ‘strong buy’.

Analysts' median price target for the stock is Rs 442.50 in 12 months with the high estimate being Rs 452 and the low estimate Rs 433. This means a potential upside of 29-35 per cent from last close.

Sawant of Axis Securities values the company at 40 times expected FY23 earnings to arrive at a target price of Rs 422 per share.