Greetings from Team Carnelian.
It has been our consistent endeavor to give investors a flavour of our investing style through stories and case studies.
“Imagination allows you to think of the journey worth making. Motivation gets you started. But it's patience and perseverance that gets you there.”
- Ernie J Zelinski
In this letter, we would like to highlight a company which was work in progress for more than a decade and was labelled as an average play by many; but it’s fascinating to see how this company which was ready with capability got a huge boost when a combination of two magic moments – structural change in industry and change in leadership, came together.
We are talking about Praj Industries, which is on the cusp of a golden era. It is very important to understand that this development was not overnight. Praj was preparing itself to be at the forefront of technology ahead of everyone matching global standards, despite not so good traction in business parameters.
Let us look at Praj’s journey through the following:
1) Historical perspective
2) Technological edge & capability
3) Transformation of Industry structure
4) Leadership transformation
A. Historical Perspective Praj started as an agro based process Company in 1985, by Dr. Pramod Chaudhari, an IIT Mumbai alumni. Over the years, it transformed and evolved itself from an ethanol to bio-energy to a bio chemical company and now into a leading global player in the complete bio-economy space working with global players like DVO Inc, Gevo, Sekab, Lygos etc. Since inception Dr. Chaudhari aimed at building a company with a technological edge – he took lead in in-house development of ethanol related and starch-based technologies garnering a large market share in this space. Further, he built this company with a team of people who were more driven by purpose and committed to the cause of technological competence and excellence, one of the primary reasons company has many executives who have been with the company for more than 20 years, providing stability and steering innovation. Praj’s capability was also validated by the fact that it received early investments from marquee investors such as Vinod Khosla (venture capitalist and founder of Sun Micro systems) and ICICI Ventures. During the last economic cycle (2003-2008), Praj thrived on international business with high quality and profitability. Post GFC, it focused on technology development to transform the Indian industrial structure.
It turned out that that it was an effort way ahead of its time and readiness of the market place. Hence 2010 - 2020 was a lost decade for Praj as evidenced below on business parameters largely on account of the macro environment, industry structure and readiness of the market it was operating in.
“The greatest thing in this world is not so much where we stand as in what direction we are moving.”
- Johann Wolfgang von Goethe.
Even when the business dynamics were not supporting, Praj, under the leadership of Dr. Chaudhari had the courage, conviction and capacity (both emotional and financial) to build futuristic capabilities, which is now helping to re-shape its destiny. It continued investing in the Praj matrix - technical collaborations, ventured into new avenues (zero liquid discharge, critical process equipment, acquisition of Neela systems - a high purity water system). The direction was very loud clear – “build a technological edge & capabilities”
B. Technological edge & capabilities
Since inception Praj has demonstrated the DNA of a technology company and we are impressed by its technological progress which has benefitted a broad range of industries in addition to its focus on building a sustainable eco system for which it has received global recognition including the George Washington Carver Award-2020 for Innovation in Industrial Biotechnology and Agriculture by Biotechnology Innovation Organization (BIO) and IOWA Bio was presented to Dr.Pramod Chaudhari (the only Indian & second Asian to receive this award).
Besides, it also has some remarkable futuristic technology tie ups and collaborations with global leaders, few of which are highlighted below:
Praj Matrix – common innovation engine for all business units
Praj has continuously been working on development of technologies and platforms across bio process technology, chemical science, molecular & micro-biology. Over the last 10 years Praj has spent more than 2.5% of its revenue on R&D with more than 100 scientists working on breakthrough technologies. Effectiveness of its efforts can be gauged from the number of patents it is filing each year (131 last year) and total patents outstanding (84). It has developed some great platforms like Bio-Mobility, Bio-Prism which will be a game-changer for Praj. The chart below clearly highlights the width of research and industries Praj is going to impact.
Source : SOIC
C. Industry structure transformation and tailwind (Magic Moment 1)
Fortune favours the prepared minds, while Praj was preparing itself for a larger play, gradually lot of policies in India have started falling in place. Increased environmental concerns globally have also started working well in favour of Praj.
1)Praj–Bio–Mobility (opportunity size of over USD 13bn): The Bio-MobilityTM platform promotes the use of renewable resources to produce carbon neutral transportation fuel across all modes of mobility (surface, air and water). As part of this platform, Praj deploys its biofuel technologies for the transportation sector, playing a crucial role in mitigating the dangers of climate change.
Bio-Mobility – ethanol blending program (National Bio-fuel policy – 2018)
To reduce carbon foot print and provide the much-needed support to farmers and the sugar industry, the government has brought about various policy measures to accelerate the ethanol blending programme. Key notable measures were,
1) Ethanol can be extracted from sugarcane juice and B-molasses
2) Assured pricing of ethanol
3) Assured offtake of ethanol by OMC
4) Tri-party arrangement among OMC, banks and sugar mills for credit facility
Impact of policy on ethanol blending – blending has already crossed 7%
Further as recent as 03rd June, 2021, the Govt. has advanced the deadline for attaining upto 20% ethanol blending with petrol by 2 years from 2025 to 2023 providing further impetus.
Globally, lot of countries are encouraging higher ethanol blending. For example, Brazil plans to move towards 100% ethanol fuel from present 27%. Europe also intends to embark on accelerated adoption of 2G post 2022.
SATAT Initiative - Sustainable Alternative Towards Affordable Transportation (2018)
The Ministry of Petroleum in 2018 announced to setup 5000 CBG stations to produce compressed bio gas (CBG) from agri waste. It is estimated to be a USD 20bn opportunity which when fully implemented, will benefit Praj, who is ready with proven technology.
Praj – high purity water systems
Praj has developed the capability to supply critical equipment’s and 40 different applications required by biopharma, sterile formulations topical & orals, cosmetics & personal care and nutraceutical industry across the world. It has over 70 references worldwide and has worked on 70+ US FDA approved sites, again a high growth and a big focus area for the Company. One of Praj’s core strength is understanding of fermentation, which is a big opportunity in the execution of complex injectable systems and vaccines in biopharma.
Zero liquid discharge treatment
Praj has developed capabilities to offer zero liquid discharge for complex industrials spanning across industries including oil & gas, textiles, chemical, steel & power, food & breweries, etc. It has started gaining traction in this segment too which is visible through a recent big order win from one of India’s oil majors.
Critical Process equipment
Praj is currently working with global leaders in the green and clean tech space, which is a high potential segment considering potential corporate capex in India and increased focus on sustainability.
All the above segments have further got tailwinds on account of,
Covid and China +1 Shift
The Pandemic has accelerated significant investment in vaccine manufacturing and injectables space; Praj is well placed to capture this opportunity and we believe , this business can see a 5-10x growth in medium term; additionally, increasing use of Bio-similars in the overall pharma space will benefit the Company on account of increased equipment requirement. China+1 Shift will also provide a major boost to critical process equipments and waste water treatment business on account of higher capex in India.
2) Praj - Bio-Prism – diverse industrial application:
Praj’s Bio-Prism platform comprises of bio-industrial products, food ingredients and agri-suppliments. These products have applications across industries including automotive, packaging, furnishing construction, agriculture and food sectors.
Renewable Chemical Material (RCM):
RCM’s are produced from bio based feedstocks and are sustainable alternatives to products currently made from fossil fuels-the Global RCM market is estimated to be USD 65bn and is growing @ 11-12% p.a. It is estimated that 90% of the fossil chemicals can be produced through the RCM route, thereby proving a high growth potential.
Bio Bitumen - developed a technology to produce bio-bitumen based on lignin:
Praj has developed a proprietary process (under patenting) to convert crude lignin into bio-bitumen which has the potential to replace fossil-based bitumen and offer eco-friendly green bitumen. Lignin is one of the co-products from 2nd generation ethanol plants, paper making and also from compressed biogas plants.
Changes in the industry structure like global focus on reducing carbon footprint, US backing of Paris agreement, emerging trends of bio plastic and focus on environmentally friendly industrial processes will all benefit Praj due its technological prowess and advancement in these areas.
D. Leadership transformation (Magic Moment 2)
“An organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.”
– Jack Welch, former CEO of General Electric
For Praj’s technological capabilities major credit goes to Dr Pramod Chaudhari. Under his leadership, a strong foundation for a purpose driven organization focused towards the goal of sustainable future was built.
Under his aegis Praj has achieved significant technological milestones. To better monetize and execute Praj’s potential he brought in Mr. Shishir Joshipura as the CEO of the company.
This, for us was a double magic moment, Industry tailwinds coupled with great leadership.
Mr. Shishir Joshipura has an exemplary leadership track record in his previous stints (SKF and Thermax). While technology continues to be looked after by Dr. Chaudhari, business scale-up is driven by Mr. Joshipura. Similarly, Mr. Sachin Raole, CFO was instrumental in bringing about a lot of cultural transformations. Based on our interactions with them, we strongly believe they make a formidable team. They meet all the parameters of our IMPRESS framework. We rate them 5 out of 5 on our framework.
This team has brought about significant transformation at Praj over the last 3 years and energised the entire organization towards a goal with lot more emphasis on focus, speed and accountability. Some notable actions are:
1) Independent sustainable business units: Each BU was re-oriented with lot more focus on business development along with accountability clearly defining the segments they serve, what value they deliver and business they bring. Business unit leaders were made accountable for their P&L independently.
2) Focus on high potential geographies/segments: Team and business development strategies were formulated to capitalise on opportunities in high potential geographies like Brazil, Europe etc. in a focused manner rather than scattered efforts all over the globe.
3) Faster & time bound commercialization of technology: The team focused a lot on doing research with time bound commercialization in mind. Time to market and agility in commercialization helped in making sharper business decisions. Purpose driven innovation – was the new mantra which has been well implemented - any innovation has to be around customer need and must solve their problem.
4) Strong focus on execution: Realizing the importance of execution, a centralized planning function was set up under the newly appointed Head of Operations to ensure execution in a timely and efficient manner keeping customer at the top of the mind.
5) High degree of customer centricity: While on one side Praj has made significant progress on technology, it was equally important to enhance their mindset towards customer centricity to accelerate commercialization of technologies. Customer has now become the focal point for everything; all innovations now revolve around customer needs - anything Praj wishes to do must start keeping customer in mind. One notable example is a South East Asian client who required a membrane change which historically happened only through multiple site visits over time - during the lockdown, the execution team innovated ways to assist the client change the membrane themselves without any disruption of business activity or visit to client location, exemplifying how beautifully the team came together and delivered a great customer experience!
6) Employee engagement: To encourage entrepreneurship and innovation within the company an organization wide program was implemented which encouraged sharing of ideas, best practices, new ways of doing things and several other initiatives on a weekly basis. All good ideas and best practices are rewarded. This brought many new ideas and solutions from every part of the organization.
In our opinion such practices are a great motivational force and encourages employees to go beyond their call of duty. In one such incident, an employee who was bed ridden for 2 months with physical movement constraints, had an immense urge to add value - he found an innovative idea and developed intervention in the software which helped the team to improve efficiency in the process. To his credit, he is not a qualified software engineer but a combination of a motivated mind and the thriving culture prevalent at Praj.
Even through the covid period, the senior management team continued to be engaged with all the employees on weekly basis.
7) Risks Management culture: There are no businesses without risk; what matters is what kind of focus one brings to manage it appropriately. Each business unit at Praj is exposed to different types of risks such as performance risk, mechanical risk, process risk, legal & financial risk etc…in the last 3-4 years the Company has extensively worked towards embedding the right risk matrices to each business unit, and has clearly defined the risk mitigation processes to bring “predictability” in its business and iron out any potential risk which can jeopardize its business. Individual incidences were used as an opportunity to learn and strengthen the overall risk management functions - fix permanently when the problem arises and remove any negative surprises from business operation.
Early signs of change already visible
Impact on order book and profitability
Recent improvement in the order book and profitability is just the tip of the ice-berg. We believe it is the beginning of a golden decade for Praj. Combination of capability, leadership and industry tailwinds will result in Praj emerging as one the leading global players and thought leader/opinion maker. Accelerated order book, improved margins are just some of the early indicators and labelling it as sugar related company or just one of the capital goods suppliers is an incorrect and understatement in our view. Praj is a technology company with focus on futuristic & NextGen applications which will benefit several industries in the time to come and play its role in environment sustainability...…this is just the beginning. Picture abhi baki hai….
Disclaimer
Investments in the securities markets, and especially in options, are speculative and involve substantial risk. All investments under the portfolios are subject to market and other related risks and there is no assurance or guarantee that the value of or return on investments will always be accretive, it could depreciate to an unpredictable extent. For more information about various types of risk factors, please click here.
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Disclosure of Performance Figures: Performance related information provided in the newsletter or email is not verified by SEBI. Past Performance are not indicative of future performance. Reader should not assume or expect that future performance of any investment or strategy will be profitable or equal to historical or anticipated performance levels. Further note that w.e.f. April 2020 onwards,
1. Firm Level Performance figures given herein above calculated on Time Weighted Rate of Return (TWRR) basis is combined performance of all the portfolios of all Investment approaches managed by Portfolio Manager as required by SEBI (PM) Regulations 2020.
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