Thread by @siddymercury

Tata capital financial services, an arm of Tata sons bought 7.3% equity of Praj Industries from Founder-Chairman Pramod Chaudhari on September 2007 for around 338 crore rupees @ Rs. 252/share valuing the company at 4630cr. #praj #ethanol #bioenergy

Praj’s stock shortly topped out in December 2007 at Rs. 270/share. Then came the GFC where the stock bottoms at Rs. 50/share in March 2009. For over 11 years Praj has been in a tight range between Rs. 50 & 155/share.

Fundamentals and order book ramp up never followed through. Top line has been flattish for 11 years around 900-1000 crores and an average EBITDA of around 80 crores. Tata capital financial services held the stock for over 13 years with no returns.

According to the December 2020 shareholding, they have pared their stake down by a whopping 62% between Rs. 90-120/share. They currently own 2.8% of the outstanding equity. I would not be surprised to see them completely out of the stock in the March 2021 shareholding.

Not to rub salt on someone's wounds... But buying during peak euphoria in 2007 and selling majority of their holding when the company is at a serious inflection point due to the government's focus on achieving accelerated ethanol blending targets is mind-boggling.

You buy a stock for X,Y reason. Hold the stock for 13 years waiting for X,Y to happen. Nothing pans out. Due to this emotionally draining journey, I would imagine it becomes increasingly difficult to process new information & re-evaluate your thesis without any pre existing bias.

13 years of pain and patience.... for nothing.

@masterclass_si Hiren Ved in his interview highlights his reasons for buying Praj's stock around Rs. 5/6 share in 2005-06. 1) "Balrampur was looking to set up a ethanol plant to counter the cyclicality in their sugar business. They also explained us the economics of the business.

We asked them whom they would buy the equipment from, and they mentioned Praj. We realized that the rest of the industry players would follow what Balrampur was doing as they are usually two steps ahead. We got the confidence that the sugar industry leader has chosen Praj to be

the equipment supplier. We found that they had good engineering skills and good R&D."

He explains his thought process for selling the stock @ Rs. 100/share after the 2009 recovery. 1) "USA, which was the biggest market was completely frozen. We found that the funding to renewable energy had completely dried up, and new new orders were coming."

2) "When oil prices had gone up earlier, demand for ethanol was very strong. After the oil prices had crashed, post 2008 crisis, ethanol demand also went for a toss. Who would put up ethanol plants when crude prices were so low?"

"The margins and ROCE were great. We waited a while before selling, but there was just no growth momentum in the business."

“Boom-and-bust sequences are the most dramatic examples of reflexivity at work. Soros’ archetypal boom/bust sequence has seven stages: (1) The prevailing bias is present, but a trend is not yet recognized; (2) The period of acceleration, when the trend is recognized and

reinforced by the prevailing bias; (3) The period of testing. Prices suffer a setback. If the bias and the trend hold, prices emerge stronger than before and become more exaggerated; (4) The ‘moment of truth’ when reality can no longer sustain these exaggerated

price expectations; (5) The twilight period. People continue to play the game, but they no longer believe in it. They hope to be bailed out by greater fools; (6) The crossover point at which the trend turns down. Even the last fools give up hope;

(7) The rapid, catastrophic price acceleration in the opposite direction, in short, a crash.”

Praj Industries is indeed at an exciting phase it its journey with a clear run way for 1000 crore liters of ethanol capacity to be created over 3/4 years & the government's push to increase India's share of natural gas in the country's energy mix to 15% by 2030 from 6% at present

Can this be a $2 billion company over the next 5 years?

In terms of its order book, the management seems optimistic about a 10,000 crore order inflow from grain based distilleries & 4,000 crore from B-Heavy Molasses if the 2025 20% ethanol blending targets are achieved by India. The government is supporting the growth in capacity

addition in 1G by most importantly improving profitability in ethanol manufacturing with long term offtake commitments by the OMC's thereby delinking these prices from crude oil so blending continues even when crude falls. Moreover, they are providing financial assistance with

interest subvention schemes and tripartite agreements. On the biofuels front - Praj has developed capabilities in processing a diverse range of bio-based feedstocks into high-performance biofuels like isobutanol (aviation), methanol (shipping), and ethanol+bio disiel (road).

According to management, CBG could be a 1,75,000 crore opportunity (timeline uncertain). Praj inaugurated a CBG demonstration facility in 3QFY21 and expects significant traction in bio-CNG projects supported by SATAT. The government has fixed CBG gas prices at 46/kg for 5 years.

For 2G, while the distant future seems promising, over the near term due to substantially high capital costs, limited number of players will seem to invest in these projects. The capex for 2G ethanol bio-refineries are significantly higher (6x) more than a similar 1G capacity.