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Praj Industries Ltd
Earnings Call Analysis
Q2-2024 Analysis
Praj Industries Ltd
The company projects that the second half of the year (H2) is likely to outperform the first half (H1), creating a sense of optimism for the near future. There's a discussion on the potential for margin expansion, although no specific targets such as 11%, 12%, or 15% are committed to; improvement is anticipated based on the types of export orders executed over time.
Raw material prices, if they continue to hover in the current range, constitute a stable input cost scenario, boding well for keeping operational expenses in check. Moreover, there's an undercurrent of opportunity in the CBG (Compressed Biogas) sector, with multiple players, including sugar mills, showing interest in setting up related projects. This indicates a growing market and potential demand for the company's services in the domain.
The capital expenditure (CapEx) for the current fiscal year is pegged at around INR 120 crores, with allocations for various strategic investments, including the GenX project. The discussions further suggest that an uptick in execution volumes and efficiencies could drive an improvement in gross margins, highlighting the company's operational prowess.
The inquiry basket appears quite promising, suggesting robust business interest, which could potentially translate into future orders. A vision is laid out to increase the international order ratio from the current 20:80 (exports to domestic) to at least 30-plus in the international sector, with the U.S. market expected to play a pivotal role in this expansion.
There's a strong emphasis on the company's unique, patent-protected technology solutions, which are said to be sustainable and proven. It positions the company well against competition, which, while present, doesn't seem to offer equivalent alternatives. This technology advantage could help gain a competitive edge in tenders and client acquisitions, especially in the US market, where the company aims to showcase best-in-class technologies over low-cost solutions.
The company's financial robustness is exemplified by their record of retention, with no forfeitures witnessed to date. This suggests strong project completion and service delivery, which underpins financial stability and client trust.
Internationally, the company is exploring shifts towards alternative feedstocks for ethanol production, indicating an evolving market landscape. This presents opportunities but also introduces complexity regarding competition, technological choices, and logistical considerations. However, the company is confident in its ability to navigate these challenges based on its proprietary technology offerings and sector expertise.
The management concluded the call with an openness to further inquiries and a commitment to transparent communications. They sign off with a focus on technology leadership, underscoring a conscious decision to not compete on cost alone but rather on the superior quality of their technological solutions.
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Ladies and gentlemen, good day, and welcome to the Praj Industries Limited Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, sir.
Thank you. Good morning, everyone, and a very warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent the Investor Relations of Praj Industries Limited. On behalf of the company, I'd like to thank you all for participating in the company's earnings call for the second quarter and first half of financial year 2024.
Before we begin, let me mention a short cautionary statement. Some of the statements made in today's earnings call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review.
Now let me introduce you to the management participating with us in today's earnings call and hand it over to them for opening remarks. We firstly have with us Mr. Shishir Joshipura, CEO and Managing Director; and Mr. Sachin Raole, CFO and Director of Resources. Without any further delay, I request Mr. Joshipura to start with his opening remarks. Thank you, and over to you, sir.
[Technical Difficulty]
Sorry to interrupt, but the lines for the management has got disconnected. Please stay connected while I reconnect the management. [Operator Instructions] Over to you, sir.
Good day, everyone. I welcome to Praj Industries earnings call for quarter 2 and H1 of FY '24. First, all of you had all go through our results for the quarter ended 30th September 2023. The launch of Global Biofuel Alliance at G20 Summit in September '23 is a very significant event for sustainable global development of biofuels.
The alliance is anchored by India, United States and Brazil. 19 countries and 12 international organizations have agreed to be part of it. This alliance is committed to facilitate access to technology, fostering an ecosystem to support biofuel production and consumption and initiating policy interventions and alterations in the Global South.
India's leadership across [indiscernible] ecosystem development benefits the larger world and help include Global South in this important journey. We applaud leadership of G20 for this landmark development.
Coming to business performance in the second quarter. Business activity continued its buildup along the momentum established over the last couple of quarters. This quarter, international order booking was 29% of the total order book. The share of international order booking is -- in overall H1 is 32% as compared to 13% in H1 of FY '22.
Our domestic Bio-Energy business, Food Corporation of India's ban on issue of rice to ethanol distilleries led to a brief period of reduced activity. However, with upward revision of rates for grain-based ethanol from OMCs restored the competence for the ongoing and [indiscernible] projects.
The GST Council's decision to reduce GST on molasses from 28% to 5% will have positive impact on project viability. Overall, we see continued in order book for both starch and sugar-based ethanol plants.
On the international front, low-carbon ethanol opportunity in the United States, though significant, is moving at a slow pace, owing to an awaited clarifications on certain provisions in the Inflation Reduction Act.
We are pleased to announce receipt of our first order for low-carbon ethanol even as discussions are moving positively with several other potential cases. Our services business is receiving good traction in both domestic and international markets, especially Brazil. We are in the process of establishing a strong distributor network in chosen markets to offer entire suite of solutions comprising of enzyme, yeast and performance enhancers.
On the 2G front, biofuels plant recommissioning has begun last week as the feedstock availability has commenced. In an agreed 2-stage program with IOCL, we will establish the performance for the plant over the next 6-month period.
In the CBG business, positive developments in addressing the ecosystem challenge, strong focus from larger players in establishing capacities augur well for growth momentum in this business.
We are moving forward with the execution of the first project even as the modus operandi for the balance project of the 5 that we announced last quarter is moving forward. We are witnessing positive developments on overall inquiry pipeline in this segment.
Energy transition is taking routes and our solutions basket is finding favor in the market. Demand emergence in the ETCA segment, coupled with repeat orders from our key customers in other served segments is building a strong order book for execution.
ETCA segment has a significant share of 52% in the overall order book for the quarter of our CPES business. We have commenced the work on setting up integrated manufacturing facility at Mangalore for Praj GenX, and execution plans are underway to start manufacturing in the fourth quarter of FY '24.
Our PHS business witnessed development of strong order book and has crossed INR 100 crore order book for the quarter. Continued development in fermentation-based drug production is a positive business driver for growth of high purity business.
Potential on semiconductor application is yet to materialize, and we are keeping a close watch on this development. Zero liquid discharge in brewery business segments are expecting -- are experiencing healthy inquiry inflow and we expect positive business development in near future across both these segments as well.
Overall, the business outlook continues to be positive for all our businesses. Before closing, it gives me immense pleasure to inform you that Dr. Pramod Chaudhari is elected as a fellow of the prestigious Indian National Academy of Engineering by the Government Council in recognition for its distinguished contribution to [indiscernible] engineering and technology.
Further, Dr. Chaudhari is conferred with a lifetime achievement award by the Indian Institute of Chemical Engineers. This award is testament of Dr. Chaudhari's contribution to the field of chemical engineering.
With this, I will now hand over to Sachin for his comments on the financial performance.
Thank you, Shishir. Good day, everyone. Let me take you through the financial highlights for the quarter and half year ended September 30, 2023. The consolidated income from operations stood at INR 8.8 billion in Q2 of FY '24. PBT is increased by 29% and stood at INR 848.121 million in Q2 FY '24 as compared to [ INR 657.327 million ] in Q4 of last year.
Similarly, profit after tax stood at INR 623.67 million in Q2 FY '24 as compared to INR 481.28 million in Q2 FY '23. For H1 FY '24, income from operations was INR 16.19 billion. PBT stood at INR 1.62 billion in H1 FY '24 as against INR 1.2 billion in H1 FY '23.
PAT of INR 1.21 billion in H1 FY '24 as against INR 893.91 million in H1 FY '23. Export revenues accounted for 16% of Q2 FY '24. Of the total revenue, 79% is from Bio-Energy, 15% from Engineering and 6% is from PHS business.
The order intake during the quarter was INR 10.63 billion, with 71% from domestic market. Of the total order intake, 68% came from Bio-Energy, 22% from Engineering and 10% from PHS business.
The order backlog as of September 2023 is at INR 39.6 billion, comprising of 74% of domestic orders. Cash in hand as on September 30, 2023, is INR 6.87 billion.
I now conclude my remarks, and I would like to thank you all for joining us on this call. We will now be happy to discuss any questions, comments or suggestions you may have.
[Operator Instructions] The first question is from the line from Amit Anwani from Prabhudas Lilladher Pvt. Limited.
My first question on, sir, for the domestic versus exports, now we are seeing that export is gaining traction and contributing 25% for this quarter and last quarter also, there was an improvement -- and I think this is -- if we would like to highlight going forward, any target on this front? And -- any breakup of domestic versus exports in Engineering, HiPurity and Bio-Energy, which you would like to highlight?
What we have said 2 or 3 drivers, and I think that's important to understand what's going to drive the business in the export market. And let me start, a, on the Bio-Energy side, we talked of low-carbon ethanol moment out of the United States at the back of the IRA provisions and ethanol production capacity creation.
As I mentioned, there are some clarifications required still on the treatment side, but they are expected soon. But in absence of that as well, we have now received the order book actually includes for the quarter, the first order we have received on the low-carbon ethanol front. It will be a project to have worked in an existing corn ethanol for 1G ethanol producer and help them reduce the carbon score, so that becomes "feedstock" for that production.
We have also talked about the energy transition and climate action as a big segment under which we also announced the entire GenX formation and setting up of manual facilities, the INR 100 crore CapEx, all of that is coming from the side.
There is a clear push globally for setting under [indiscernible] for green hydrogen, green ammonia, waste-to-energy projects being set up very exclusively. And that's a segment that GenX business will serve. So that's the second one.
So -- and we believe that these 2 are big drivers. We are also started to push in Brazil, as I had mentioned in my opening remarks as well, both for our service business as well as equipment business. So there are several markets in which -- the drivers are there. We are positioning our solutions, which will lead to an improved position for us as far as order booking is concerned, and that's what you see reflected in the last 2 quarters as well.
Sure, sir. My next question again, sir, on the other intake prospects. So if you would like to highlight on 1G, you did mention that we are seeing a healthy pipeline for starchy and cell, which is ongoing. So if you would like to highlight 1G, what is the pending opportunity and as well as for CBG last time you then highlighted that at least 5 projects are under progress of either awarding or you're executing from a large corporate? And maybe opportunities in CBG. So I just wanted to understand other prospects for CBG over the next 12, 18 months and also for 1G, which you might have worked out?
Yes. So let me start with the second, first. So CBG, as we had mentioned, we had a -- we have been awarded a contract for 5 projects. In the order booking that we reported [Technical Difficulty] there are other issues like [indiscernible] project-type finalization [indiscernible] which are happening from our customer's end, as soon as they are released, we will be in a position to move forward with execution.
So those contracts are not included in the order booking numbers that we have given. We also see some other movements from some other corporates. We've seen OMCs announcing projects. So we are working with Indian Oil as you are aware, and other OMCs as well.
Overall, I think there is a momentum building up in the CBG market for establishing capacities across the country. And that should hold well for the development of this business in a very, very positive way. And therefore, I think it's very important that we stay the near to ground on this opportunity as it develops. We are very -- we're reasonably positive that this will go into a very positive direction from here onwards.
At what speed, et cetera? Some other factors like land availability, feedstock tie up, et cetera, are required, but I'm sure that, that will happen as well because the people who are putting up the projects are obviously very, very large professional organizations, so they know how to go about these issues to be solved.
In terms of opportunity for 1G, we -- as I said, that we remain confident that with this small blip that happened in the second quarter because of the change in the feedstock policy, it did have an impact, both for order book as well as for execution during the quarter because the period was too short. But obviously, very quick actions were also taken by government to correct the price portion at least so that sort of goes back to enable a different supply chain establishment for these projects.
So we will see -- we believe that these quick actions from the government also indicates a strong unwavering commitment to the EBP20 program and furthering the cause of biofuels. So both this and the gas are in good space right now for development.
Sure, sir. My last question on the...
Sorry to interrupt, Mr. Anwani, maybe request that you return to the question queue for a follow-up question.
Sure. Yes.
[Operator Instructions] The next question is from the line of Lokesh Maru from Nippon India Mutual Fund.
Congratulations, sir, on excellent set of numbers and our first order received from U.S. Sir, 2 questions from my side.
Sorry to interrupt Mr. Maru, may we request that you use the handset mode while speaking and not the speaker phone?
One second. Am I audible now?
Yes.
A little better. Please proceed.
Yes. So sir, 2 questions. One is on the order received from U.S. What the quantum would be of this order during the -- in this quarter, right? 29% is the order intake from exports, so how much would this be?
And another question is on if we are able to deliver 43%-plus gross margin and we had challenges on execution during the quarter, as we enter Q3, Q4, if you maintain these gross levels, isn't it, given our cost structure, isn't it safe to believe that we will be able to do 14%, 15% or at least 13%-plus EBITDA margins going forward?
So in the order book, we are giving the bifurcation between Bio-Energy and the Engineering and PHS. We are not right now giving the bifurcations within the individual segments of Bio-Energy. So during this quarter, you have seen the order intake of INR 10.63 billion, and 68% from that is from the Bio-Energy. On the margin side, can you please repeat your question because you are not audible, Lokesh. Can you just be a little louder?
So my question was if we are able to do 43.5% gross margin that we did this quarter just because our top line was some bit -- execution was some bit short during Q2. Isn't it safe to believe that as we get on track with better execution, improved execution from Q3 onwards, our EBITDA levels should improve much higher from here, like 13%, 14% from here?
I will not be able to talk about exact numbers, but your observation is right. You have already seen that even though the half yearly top line is more or less flattish, but there is a margin expansion, which has already been weakness of almost 2.2%.
Yes, if the execution is on a higher side, there is a possibility of some kind of expansion of the margin. I will not be able to comment whether it is going to be 13%, 14% or 15%. But yes, there is a scope on the basis of higher execution which is going to happen in the next H2.
Sir, 1 related question, if I may ask. So could you please help understand the challenges on execution that we faced in Q2?
Sorry, sorry, again, your...
Sorry, Lokesh, you need to repeat yourself, sorry for that.
Sir, I was just checking, could you please explain the challenges we have faced during Q2 on execution side?
Yes, yes. So the execution challenge was not on the capacity that at all. We have all the capacities that we need from a supply chain, from a production basis, engineering basis. So those were not the challenges.
The bigger challenge came from the fact that because of the announcement on the policy from the FCI that they will no longer issue rice for production of ethanol during the quarter, that led to a very quick situation of, a, -- 2 things, actually, a, customers that were in the process of ordering their projects had to halt and say, "Hey, what's going to happen?"
B, projects that were already under execution also put to a halt because the banks also -- those who are -- the banks that are funding these projects and as you know, all these projects are largely funded by banks, the banks also took a halt and say, "We need to understand the impact of this actions on the liability of the project, whether we should go ahead and commit further funds, et cetera," that was second thing.
And then when the price correction happened, which was very quickly announced by the government. But in all this process, start, stop, negotiations, clarifications and restart, almost 8 to 10 weeks, now in a 12 weeks quarter, you lose 8 weeks on to the more significant section, and as you are aware that over the previous period, a large section of the order booking on ethanol was coming through the [indiscernible]. So a lot of projects were impacted, both even the new ones that are being built as well as the ones that are in the execution so that was the biggest challenge. But that seems to have sorted itself out, and now we are returning back to normalcy.
The next question is from the line of Shailesh Kanani from Centrum Broking.
Sir, I'm aware that we faced some challenges in the Bio-Energy sector during the last quarter. However, I'm seeing a decline in the Engineering revenues for the quarter and the first half as well, whereas our order inflow has been very robust to this segment. So can you explain what is happening on the Engineering side, revenue booking front?
So Engineering order book is definitely picking up, but it has its own implications cycle, Shailesh. So there is no reason to believe that there is a decline in the Engineering revenue, but Engineering revenue will have its own cycle because the execution cycles are very, very different for that business.
Because major business is naturally going to come up from the ETCA segment, where the cycle is going to be anywhere between 12 months to 15 months. So it is going to be of a very different nature. And that's the reason why you are seeing a different execution which has happened during this quarter. Otherwise, there is nothing else which has happened in the Engineering business.
So after order booking, there is no delay as such in execution or the pick of the order. Is that a fair assessment?
There is nothing. There is nothing. The orders which we have received in the recent past has a little larger scope on the Engineering side, which has taken more time because naturally, that was the time which was required for completing the engineering activity. The manufacturing activity will follow now. And that's the reason you are seeing a little lower on the Engineering revenues at this time.
Okay, sir. Fair enough. Sir, second, my second question is a 2-part question. Yesterday evening, ISMA has revised their sugar production estimates downward due to declining yields and a similar situation is observed in the rice industry as well. So given this development, I'm interested in understanding how EBP program is expected to perform in the near term, especially as we approach in a new year, next year? So while I recognize that EBP program in general long term is promising, but from -- I appreciate if you spend -- throw some light on strategies in the near term to maintain our growth strategy?
So I think from the EBP20 program perspective, this sugar season is important because this will -- we know already there were customers that their projects are now getting commissioned on the syrup route which produces much larger quantities of ethanol. So a lot of projects are under commissioning right now. So we will see a very different kind of push in terms of availability of ethanol.
I think already OMCs have come up with a tender for INR 850 crore liters. And we will see that a lot of new capacities will come into the marketplace where our commissioning speed of the plant has really gone up in the last quarter and it's really picking a speed now as we go to start with the sugar season in this quarter.
So on EBP20 perspective, I think we are correct -- we are on the right track. In terms of sugar production coming on [Technical Difficulty] production, we still have sugar surplus. So from the perspective of feedstock, I think we don't have a problem there because even if -- we still -- even after we divert all the current -- all the capacity has been put up right now on a sugar-based ethanol, we will still have surplus sugar and we consume all the sugar that we need with all the safety stock, et cetera.
As a country, we will still have positive surplus. So I'm not worried about the feedstock side on the side of sugar. On the rice side, I think the things have -- the dynamics have changed a little bit. And there, what's going to happen is, and we also see already happening in the fields, if there's a shift taking place from rice-based plants to maze-based plants, and that is likely to lead to a -- and maze is abundant availability right now.
It does have some other challenges in terms of stabilizing the plant, et cetera, but that's not a -- we do that for living internationally every year and for many years now. So we are very well aware of what needs to be done. That's where we are. So there may be a shift in supply chain. But other than that, I don't see a problem.
Okay, sir. Sir, just 1 clarification, if you can give. On CBG front, Mr. Sachin said that only 1 order received. So INR 100 crores is booked in this order inflow of CBG and INR 400 crores is still eligible as on 1st November, today. Is that understand right?
That is correct.
The next question is from the line of Vikram Suryavanshi from PhillipCapital.
Just on the employee cost, is there any one-off during which you added into on employee cost, sir?
So, Vikram, our increment cycle starts from the July and not from the April month. So the yearly increments and all that stuff takes into account in the quarter of July, July to September. So that's 1 action. Second thing, we have started working on picking up our employees strength for GenX now, where the new employees for the new facility are getting rolled in right now. So that's another reason which has come up into the future.
So there is no onetime kind of a scenario, but because of the increase in the employee count for GenX and the increments which have been announced in the month of July for the next year are the 2 main reasons because of which you have seeing the increase in the employee cost.
Got it. And in case of HiPurity, we have seen really good traction. And I think sir was mentioning about that we're still yet to see the impact of opportunity in semiconductor side. but I guess there will be opportunity even for green hydrogen, where which we will require pure water. So what kind of opportunity landscape we can look for, say, 2 to 3 years down the line for HiPurity?
So Vikram, the HiPurity segment, so the water treatment is one, industrial water treatment maybe if there if a sea-based plant and sea water RO, those are normal industrial water treatment. The PHS segment is slightly different. This is ultra-high purity water. And as that -- if the applications call for ultra-high purity water, for sure, PHS will benefit because they have been in the field for quite some time.
I had also mentioned that for PHS, 1 big driver in the market that is changing for them is that a lot of large fermentation-based capacities are supposed to be set up in India over a period of time as we go forward.
And that's all done very well for them because fermentation is key strength of the parent company Praj, but hygienic manufacturing around those is the key strength of PHS -- combine the both gives us the unique proposition for these companies that are setting up their facilities. We're already seeing some traction build on that. So that will become the second driver for PHS' business.
Okay. Got it. Yes. So just I missed that cash balance, I think, 6 points something you said, which I was not able to hear.
Sorry. Could you please repeat your question, Vikram?
I just was not able to listen that cash balance, which...
INR 6.87 billion.
The next question is from the line of Levin Shah from Motilal Oswal AMC.
So firstly, on the execution front. So like we have -- even in the previous calls also, we have highlighted that we'll have H2 heavy execution. But if you look at now with this some impact we had because of this whole green-based plants. So how do you see execution in H2? Will there be even more bunch up now that some of Q2 would also spill over to Q3 and anyways, we have H2 heavy execution cycle.
Sorry. So we stand by our comment that we made earlier that H2 execution is likely to be larger in size compared to H1. I also said that we are seeing the return to normalcy for the grain disturbance that happened in the market. We are not seeing any reason right now to change or revise what we've already committed to you. So we stand by the fact that H2 is likely to be better than H1.
Sure. And sir, in terms of our supply side readiness because it will be very heavy as compared to H1, we are ready with it, right? So that supply side, we won't face any issues?
Yes. On the execution side, in terms of our preparedness with our supply chain, our manufacturing facilities, our vendor base, our capabilities, we do not have a constraint.
Sure. Sir, another question was on the U.S. market. So like firstly, congratulations that we have got the first set of orders, and we have been awaiting this opportunity since some time now. So this whole clarification that the players over there are awaiting from the U.S. government, where is that -- how long will it take? And where exactly is this -- how long do you expect before orders -- a few more orders start flowing in?
Well, so the way this is happening now is that we are -- to customers have engaged with us. They are continuing to engage with us to say, okay, let's keep ourselves prepared. So the detailed feasibility study that we need to do for each plant, that is now underway.
We had -- there's almost 8 projects now where we have either completed or are doing that right now, as we speak. The part on the clarification is the U.S. government action. I'm not an expert to predict when exactly they will do it, but from whatever we know, it is expected that by end of the quarter, that clarification will come. And as and when that comes, that will start to show the right direction for these projects.
Okay. Sir, and my last question is to Sachin sir, on the margin. So obviously, earlier, you explained this, but if you'll see our gross margins for this half versus the previous year, there has been a significant uptick that we have seen. And now with exports becoming a larger portion of our order backlog and incrementally also order inflows from exports will be higher. Do we see that there would be a significant change in the margin trajectory what we have seen last couple of years where exports were small, and we had this impact of raw materials also significant impact? So...
Yes. So Levin, I think in the earlier question also I've mentioned the same thing that there is a definite of improvement based on what kind of export orders will get executed over a period of time. Naturally raw material prices, the which they are right now, if they remain in a similar kind of a zone, I think there is definitely a scope for margin expansion. I cannot only tell you whether it is going to be 11%, 12% or 15%, someone was asking about 15%, so I can't comment on that, but yes, there is a scope for improvement.
Got it. And sir, just a follow-up on that. If you look at our other expenses also for this half despite -- specifically for this quarter, despite the weak execution, the other expenses have gone up by 25%. So is there any one-off element because generally, they are linked over execution cycle, right?
So -- no, so the other expenses -- I will not say there is a one-off kind of a thing. But if there are certain, what I can say, the execution related only, but site-related expenses, if they are coming up there, then naturally, that increase will be there. I will get back to you if there is some specific reason. I don't think there is any specific reason or one-off kind of a scenario.
Sure. Or is it that some of the projects we would have incurred some site-related expenses, but the execution will pick up in H2, and hence, that will balance out for full?
No, not necessarily. So let me specifically give you an answer. We can discuss this separately also. But right now, I don't see anything which is kind of extraordinary thing which is sitting there.
The next question is from the line of Dhananjai from ASK.
This is Dhananjai Bagrodia from ASK. Just a couple of questions. One is in your annual report you mentioned...
Sorry, I can't hear you.
Sorry, we aren't able to hear you, sir, at all.
Can you hear me now?
Yes.
Yes.
This is Dhananjai Bagrodia from ASK. Just a couple of questions. A, in the annual report, you mentioned about bioplastics. Any update regarding what's happening on that front? Because I believe that is also a big opportunity with the amount of single-use plastic there is?
So Dhavan (sic) [ Dhananjai ], as we had mentioned, that we are setting up a pilot project now to demonstrate our technology and that project is currently being set up, and it's -- we expect to commission this in the last quarter of this financial year. And once that is set up and we demonstrate, then we will be able to in a position to speak about the business that emanates out of that.
Okay, sure. And sir, secondly, the CBG opportunity, what are the IRA that customers are looking at? And are they using this a like how sugar, ethanol people because anyway they're manufacturing sugar. And then the -- what is the profile of the customer who's looking at setting up CBG plants? Any color on that?
Well, there are different segments, so different kind of customer profiles. There are ESG funds, that are the customers for the project. There are large -- actually, every large oil marketing companies, both private and public sector, they are looking at this as an opportunity. The sugar mills are looking at an opportunity.
There are a few independent players as well who are thinking of setting up the projects. So it's a very varied cross section of people, number one, green funds.
On the other hand, the IRA question is tough to answer for the simple fact that everybody has a different cost of funds, everybody has a different expectation of ownership structures, what is [indiscernible] to the projects. So many dimensions. So there is not a plain vanilla answer.
But every one of them, what's happening is with the development that are taking place, the CBG projects are now in the realm of reality in terms of meeting those IRA those as for many people. And as the technology development, we put a few projects on the ground.
I'm sure there'll be further positive developments on the IRA improvement side. But now as things stand, I think it's moving in the right direction from different perspective, different stakeholders. And a few of them because there are other considerations like cost of carbon reduction per -- tonne of carbon reduction, what's the cost per tonne. So there are many dimensions to which these projects are being put through, and we are seeing a very constructive development on that side.
Okay. But sir, let me -- a follow-up question. Is there a raw material -- like is there a raw material in terms of abundance and how would that look like? Actually, sugar, ethanol worked well because there was a lot of abundance in sugar. Is that something similar in CBG?
So it's a sugar mill based, which -- sugar mills have got the way, they have molasses, they also have ethanol. So for them, that's very easy and very simple logistics for feedstock. For the agri based feedstock, I think, yes, there is a need to -- and I think a lot of that is happening in terms of establishing of sustainable supply chains on that dimension as well. As you probably can surmise, this is -- this has to be a year in advance of the project. So we can see a lot of activity that is happening in that space as well.
Okay. And lastly, what would be your CapEx for this year?
The CapEx spend for this year?
Yes, total amount.
So totally, we are looking at -- because of the GenX coming into the picture, of INR 100 crores, but entire INR 100 crores will not get spend in this year, maybe INR 50 crores will be this year and [ INR 50 crores ] in the next year on account of GenX. And there will be some routine CapEx, which will be happening for other facilities and for IT, that should be in the range of another INR 15 crores to INR 20 crores.
Yes, and I need to mention that 2 pilot plants, which we are putting up, 1 is for the [indiscernible] and another one is for the PLA, that should be another -- in this year, the CapEx will take to the tune of around INR 40 crores. So all put together INR 120 crores for this year.
60 plus 80 -- okay.
60, 20 and 40, INR 120 crores.
The next question is from the line of Sagar Dhawan from Valuequest Investment Advisors.
So just a further on the gross margin, sir. What led to the improvement in the gross margin? Just to understand the drivers of this because in the last 2 quarters, we can see significant improvement in the gross margin. So if you can just talk about -- give some color on the drivers -- gross margins?
See, for gross margin, there are 2, 3 drivers: one, definitely, what is the raw material costs, but also the composition of my revenue. If my composition of revenue as 1 element, definitely, which is on the export side. And second is, if there are only engineering orders, so we are not supposed to supply equipment or take care of any execution that builds up the margin on a very positive side. So the gross margin is defined in these 3 ways: one, what is the composition of sales? Second one is the element of international sales. And third one is the pure engineering services. So it's not -- I'm not talking about engineering business, but I'm seeing services, which is like soft services, which we provide to our customers.
For example, the audit, which we are conducting in the U.S. will not have any supply and installation activity, but that can give a higher margin because that is only the services which we are providing. So these 3 elements are the major contributor to define what kind of gross margin which we can have.
Okay. Got it. So just a follow-up on this. What would be the services portion for sales as a percentage right now?
Sorry, your voice, I'm not able to hear it properly.
Sir, is it better now?
It is better.
No, it's not clear.
Yes, it's not clear. It's loud, but not clear.
Okay. Sir, just on the services piece, I wanted to understand what percentage of our sales are currently coming from services?
Sales are coming from?
Services segment, sir.
Services should be out of today's INR 880 crores around -- the services, which I mentioned, should be in the range of INR 10 crores to INR 15 crores.
Okay. Got it. And on the GenX facility that we are setting up, sir, by when do we expect the commissioning to be completed of this new facility for GenX?
So GenX, we are expecting the commercial production will start in the last quarter of this financial year. So by February, March, we should be having commercial production happening in GenX.
Okay. Sir, last question from my side. What is the kind of pipeline that we are seeing, inquiry pipeline on GenX side, especially for the new plant, if you could just quantify that, please?
So inquiry basket is definitely pretty big. We generally don't talk about inquiry basket number for any of our businesses. But it is good enough and gives us the confidence that we can start our production in the last quarter of this financial year.
The next question is from the line of Sagar Kapadia from Anvil Share.
Sir, congratulations for getting the big order from the U.S. What is the size of this order which you all have got?
We specifically don't talk about order by order -- but it is good enough...
Approximate size, you can just tell us...
There are other people also listening to this call. So we don't...
Yes, we don't want to talk about by order by order number.
[indiscernible] to talk about it, that's it.
Okay, sir. Sir, 2 to 3 years from now, so what will be your expectation from the order size from the U.S. market and from the Brazil market?
Sorry, could you repeat the question?
Yes, I'll tell you, 2 to 3 years from now -- see, what will be your internal order expectations from the U.S. market and Brazil market where you are deploying resources?
Three years from now, maybe we can look at -- yes.
Anyway, we are looking for changing the trajectory between exports that is international orders and domestic for the current ratio of 20:80 to at least 30-plus for international orders. And out of that 30% -- will come from U.S., some portion will come from Brazil, but maximum contribution -- because the U.S. is going to contribute for Bio-Energy business and the GenX business, both.
So U.S. is going to be a major contributor in that sense. I cannot give you an exact number. But from the -- what I can say from the visibility point of view, the change in the dimension for international is going to be definitely on a higher side and the maximum number is going to be contributed by U.S. and then by Brazil.
The next question is from the line of Kunal Sheth from B&K Securities.
Sir, my first question is around the international business. We've seen share of international business growing meaningfully over the last 2, 3 quarters. So which are the end markets which are contributing meaningfully to the order inflow from the international? And we just got our first order for the low-carbon fuel. So that has just started to contribute. But which are other steady state products or end markets that have contributing to this order flow, international order flow?
So as Sachin was mentioning earlier, for both Bio-Energy business as well as for the business of GenX that we have talked about, energy transition and climate actions, markets are United States and Europe, for both of them. Depending on -- customers are pretty common, of course, U.S. low-carbon ethanol is entirely in United States right now, but we expect that will also start to move in Europe within a very short period of time and other markets of the world as well. Because as production starts to take priority, low-carbon ethanol will be a key requirement. So that's 1 clear directive.
As of today, it's more United States oriented, but we expect that as we move forward, Brazil, Europe, et cetera, will get added into a significant portion. And when the GBS kicks in over 3-, 5-year kind of horizon, as I was mentioning, we expect a lot more business to flow in from many other nations of the world, especially Global South, Island nations, which are all looking for solutions to decarbonize their economy. And I think that will further change the complexion of the exports business.
But sir, currently, in the Bio-Energy, is it largely 1G driven orders what we are getting?
Yes. For export, it is 1G. We are not -- we have not got any orders on 2G yet or CBG, we are not taking it outside India. But when that happens, you will see that as well.
Okay. Sir, and my second question is around GenX. So what exactly will be our offering in terms of scope in this? I mean like in our Bio-Energy business, we also supply equipment, right? So in GenX, what exactly will be our scope of offering?
So for the GenX business, they will serve the segment of energy transition and climate action, which is more around green hydrogen projects, green ammonia projects, waste-to-energy projects, but within that broad segmentation of the industry, what they will be offering is, a, equipments that are required for those projects, plus -- more important than anything else, they will be offering modularized plant solutions to these projects. So they will have a look at the process that is being deployed by different process licensers and convert that to a modularized plant and then offer the plant itself.
The next question is from the line for Abhijeet Singh from YES SECURITIES.
Sir, my first question is on the export side, similar to the previous participant. So how do we look at the export opportunity going forward? Like, we have started penetrating into the U.S. market. We have done a few FEL studies and have received an order in this quarter. But let me talk about the overall market size in U.S. and similarly in other geographies. How do we quantify it? Is there a way to quantify it in the next 2, 3 years? What will be the overall market size there in terms of the opportunity that rises from SAF or other low-carbon opportunity in ethanol?
So let me put it like this. So for -- under the IRA program, there's a goal to achieve 3 million gallons per year of SAF production by 2030. And that based on the feedstock, et cetera, it looks like it almost of this 3 billion, the first 1.5 billion to 2 billion will come from a different route, which is the [ REFA ] route.
But after that, since there's no feedstock on the [ REFA ] side. Further, the last 1 billion plus all the future capacities will come from what is call alcohol-to-jet routes. And that is where -- so almost 1 billion gallons of SAF will come through -- SAF route by 2030. That would mean 2 billion gallons of ethanol will have to be low-carbon ethanol in the United States.
So that's the size. And 2 billion gallon of ethanol has to be decarbonized over a period of -- between now and 2030. Typically, U.S. plants have a size of either 55 million gallons per year or 100 million gallons per year, there's 2 capacities in the United States for different plants. So we can run the math to see that in order to reach 1 billion, how many of them will have to actually convert and go through the solution stages. We had also experienced in the past, I'm not going to pick up too much time on this call, but it's a 3-step process.
And each of the step involves -- one after another. And each plant eventually will have to take all the 3 steps. The contract that we're talking about right now is only for the step 1. So that's on the U.S. side.
In general, the drivers for ETCA, the green hydrogen, green ammonia movement, the low-carbon ethanol movement, but the third one very critical is what happens on a middle to long-term basis on the GBA platform because that is a very, very important platform that's being developed. And that will include many nations which today do not have -- they have a capability in terms -- they have the possibility, not even capability, they have a possibility to be a biofuel producer, but they're not looking at it from that perspective.
But I think many countries are now beginning to get aware of very differentiated benefits to their economies from biofuel. So we are seeing a lot more new countries walk into this dialogue of establishing biofuels capability. We'll talk about it as we go through year and the future period as well. But we clearly see a very positive development there as well.
The next question is from the line of Ash Shah from Elara Capital.
So can you just provide the status of the IOC JV that you are going to proceeds? So what are the expectations? What are the opportunities on the JV front if you could....
We lost you there again, Ash, we couldn't follow what you're asking.
Can you hear me now?
Yes.
Can you just provide some opportunity on the -- what is the current status of the IOC JV that we had signed recently? What is the status? And what are the opportunities? Have you decided -- have we locked on it or something like that? If you could provide some color on it? That's all from my side.
See, as we mentioned in the last quarter also that IOC JV formation is indeed still work in progress. The JV is basically for entire Biofuels segment. And within that Biofuels segment, decisions are right now related to and CBG. We have not at, what I can say, finalized any specific project of something because first, the JV has to come into the picture. But parallelly, we are discussing on these 2 fronts in a very active way. And we will see some action happening once the JV is strong that what kind of projects can come up under this 2 umbrella.
But this is -- the JV is basically meant for covering the entire basket of biofuels and it is not restricted only to 1 biofuel. So we will see some action that JV will play.
And follow-up to that, when will the JV come up, by Q4?
Yes. The plans are actually to get this JV fund up by Q4.
So we seek approval from [indiscernible] which is the process that is undergoing now at IOC. Once those approvals are in place, then we can go forward.
The next question is from the line of [ Manan Mundra ], a private analyst.
Yes. So sir, my first question is regarding the retention ratio of our projects. So during the last 2, 3 years, the projects that we have executed, have we seen any percent of our retention ratio being forfeited by our clients?
You're talking about the retention?
Yes.
No. So we have not seen any of any forfeiter of our retention until date. There can be delays in the release of retention for various reasons, but there is no question of our retention money maybe because of we are not providing services or we have not completed the project. No, we have not seen any of those instances.
Okay. And if you can share who are our major competitors in the market?
So there are many players and maintain different segments for that matter. For biofuel, there are different set of people who are working in ethanol segment, different people who are working in CBG segment. For high purity, different competition; for brewery business, there is a different competition. So yes, there are many -- depending on the [Technical Difficulty] competitors in the market for us.
Okay. Okay. Okay. Understood. And last question, sir, we have seen an expansion in our margins. So is it majorly due to a reduction in the commodity prices or is it also an improvement in the execution efficiency also?
According to me, around 75% to 80% is on account of raw material because our execution is doing fine. But we have seen some upside because of the large volume execution, which we are doing, but major contribution according to me is on account of raw material prices.
Okay. So going ahead, we can expect the execution volumes increase, we can expect more efficiencies to come in?
That's possible. That's what I was earlier also saying that there is a scope for that kind of an improvement.
[Operator Instructions] The next question is from the line of Naushad Chaudhary from Aditya Birla Sun Life AMC.
Few clarifications.
Sorry, Naushad, we are not -- please be a little louder.
Yes. Hope I am audible now?
Yes.
Some clarification firstly, on the U.S. opportunity. So -- can you talk about the competition here? Can you give us some specific name, which compete with you on this opportunity? And are these are tender-based opportunity or how -- what exactly do we pitch to the client to get these orders?
So Naushad, what happens is that there are about 200 grain-based ethanol plants in the United States that are -- and about 150 of them are operating right now, 150, 160, some number. And they are not all of them, but the people were wanting to produce SAF under the new program that I mentioned, they are looking -- obviously looking for the feedstock, which is low-carbon ethanol.
So there are, what I call, dialogue that is taking place between the SAF producers and the ethanol producers to see if there's a possibility for them to come together and work together. That's 1 dimension.
The second is, we also have a presence in the U.S. that people know that we have solutions. We've been talking in seminars. We have been talking -- making our presentations in industry forums. We have customers who talk about us. We have been meeting customers to tell them what -- how they can reduce the carbon intensity from where they are today to where the desired level of the carbon intensity reduction is.
Three, we have a unique solution that is patent-protected right now and also covered through an exclusivity agreement so that we are able to offer a very unique way of reducing this in an existing project. There are alternatives. It's not that we are the only game in town. There are alternatives. But we believe that ours is a very sustainable, proven kind of a solution. So that is not something that is experimental at all in this nature.
There's the second part. Third is we are also participating in different forums, even with USDOE, USDA to educate customers on their platforms as well to see how this could be developed further because very clearly, this is a requirement as a feedstock. This is already existing for them.
And the third thing is that in the United States, the projection is that because of the electrification of the fleet, the overall ethanol demand may go down. And the only way for it to be bolstered up and even build more capacity if by positioning it as a feedstock for SAF, and that is where whole effort of low-carbon ethanol is heading right now.
Can you name a few competitors here?
Can I name a few? So it depends on what technology pathway is chosen. So for example, if customers say we will go down the carbon capture and sequestration with ECS through a pipeline route, then that also achieved a similar objective. However, pipeline routes are long term because you need to get permissions, which are not easy to come by. You need a wellhead locator, which is not easy to get today. So that's a very long-term prospect. And there are lots and lots of what I would call a logistical challenges to be overcome on that too, but that's definitely route.
There are -- on the side of low-carbon ethanol. As I said, it is a step process on 1 step. I want to believe that we do not have an equivalent competition. People are trying to find different routes to solve the problem.
On second and third stage, there are -- so companies like [indiscernible], ICM, these are other ethanol equipment manufacturers in the United States also would like to offer solutions.
Understood. And in terms of the efficiency, ROI point of view, from the client point of view, do you think our solution is better than the peers here? Or where do we stand?
Yes. The stage 1 of solution that we are offering is very, very attractive for them.
Okay. Second clarification on the similar or some other opportunity we were talking about in Brazil and -- at some point of the call, we had mentioned that the INR 14,000 crores, INR 15,000 crores of opportunity we see...
We are losing you here, Naushad, we can't follow. After Brazil, we couldn't follow a word.
On the Brazil opportunity also earlier, we used to talk about it's a INR 14,000 crores, INR 15,000 crores kind of opportunity we see here in Brazil because they are shifting to -- they're targeting for corn-based capacities by '27-'28. Is there any development there? What exactly we are doing here and where we can see the orders from the Brazil for these opportunities?
Yes. So first of all, I don't recall having said the number that you mentioned, not -- definitely not by us, we think that's too large. But yes, Brazil is moving in direction of creating capacities from alternative feedstocks apart from sugary feedstocks. And as that development takes place, there's elections there, all these things are now -- are settled down.
There is a much longer time than many other economies to overcome the impact of the COVID on their economy. So now we see constructive developments that are taking place in that market, and we'll keep you posted as the developments move to a definitive stage.
The next question is from the line of [indiscernible] Securities Limited.
Sir, 2 questions from my end. Sir, just more clarity and I know the earlier participant mentioned, but is there any one-off item in the operational cost with respect to setting up the new GenX facility or it is just in [indiscernible].
So [indiscernible] there will be some costs which will be sitting in the employee cost and on other expenses also related to the employee because these new facilities, which is coming up, naturally, the cost has started getting built up and can be seen now.
But it is not onetime because Praj GenX is going to be there. Only the revenue right now is not reflected from Praj GenX, which will start happening hopefully from the quarter 4 of this financial year.
Okay. Okay. And secondly, sir, on -- as you were talking about competitors in the U.S. market. So I just wanted to understand, are these local players over there or even those players are someone who are exporting to U.S.? In the U.S. ethanol and...
They are local guys. They are local guys.
Okay, okay. So we'll have certain margin advantages given our low cost to them?
More than a margin, it's a technology advantage. And of course, there will be a number which will be attached to that...
We -- our position in the United States market is not -- it's actually not in any market for that matter of a low-cost solution provider. We are very clearly saying we have best-in-class technology and therefore, buy from me.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.
So thank you, everyone, for your time today. In case you have any more questions, feel free to write us at info@praj.net. Again, thanks for your time today and wish you a great day, and Happy Diwali. Thank you.
Thank you, members of the management team. Ladies and gentlemen, on behalf of Praj Industries Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.