What order inflows have you seen in this quarter?
We have seen a clear push in the direction of capacity creation in countries. This quarter has been very active. Just to give you a comparative number and one can say that last year was not strictly comparable, but to give you an idea of the size of the opportunity, we saw roughly 144 crore equivalent of capacity litres. Per year of capacity being contradicted for last whole year and this year in first quarter, we have seen almost 90% of it getting added to.
There is a very clear shift in favour of creation of capacity. On the green side of the equation, the green movement started little later. So, we will see in the upcoming quarters the movement of the green, although it has also started to move very positively becoming a very preferred stock. Sugar mills continue with the liberalisation of feedstock. We have seen several contracts being finalised around feedstock syrup, b molasses, etc. So, very positive for creation of capacity in the last quarter.
How do you expect the rest of FY22 to play out?
As you can see, we have posted a quarter with an order book which has built further on to the starting of the quarter. We strongly believe that we continue to build on this momentum as we move forward through the year. We have already crossed Rs 2,000 crore of order book at the end of this quarter and we believe that we can continue to build on this as we move through the quarter, even as our sales tempo will pick up as we move through the year.
Your gross margins are at their lowest in almost five years. Is majority of the raw material cost inflation absorbed in this particular quarter? Are the new orders now pricing in?
The continuous rise in the commodity prices, especially steel, has definitely been a hit on the margins; there is no question about it. We have taken several measures to counter it, but there has been an impact on the prices because as you know our contracts are not variable in nature. Once we have the contract and then suddenly the price is changed on the commodity side, it does have a negative impact.
We have taken several measures to overcome this, but what you see in this quarter is a reflection of that. Also, a lot of site activities go up in our business. If you look at the overall margin, if you look at the site activity part of it as well as the raw material, then we are still looking at about two percentage point difference. That is something which then clearly be seen as impact of commodity prices.
Do we expect growth to finally pick up significantly for the high purity business for the rest of the year?
Yes, we expect that the high purity business will start to show signs of growth. In fact, the order book is building very constructively and positively. We have seen last quarter as well, they have had their best order booking so far. We expect as that starts to get translated into sales, we will see a clear shift in momentum for that business as well.
Let us talk about the government policy about bringing forward ethanol blending target of 20%. Help our readers understand what it means for the sector and what does it mean for Praj?
One of the most exciting steps that has come into the play is the fact that we have advanced the 20% blending program for 2030. What it means is over the next five years we will see percentage of ethanol that gets blended in the petrol move up from currently at about 8% to 20%. What does this mean? This means that almost 1,000 crore litre per year capacity will have to be created in the country for production of ethanol that could then be used for blending.
Of course, this will be a gradual capacity creation as we move through the years. This year we are looking at roughly 400 crore litres of ethanol being available for the purpose of blending. From 400 we will add another 1,000 crore litres of capacity. That is a big boost. It is two and a half times capacity addition that we will have to put up over the next three to four years. Earlier, what we were talking about in terms of freeing of the feed stocks; that is where grains will have a very big role to play.
The government has just announced a big program also to focus on maize production on the agriculture side which would become a good feed stock for production of ethanol. We are seeing the overall economy moving right from the farmer all the way to the factory and beyond to the wheel. See how this greening of the fuel chain in India is actually going to create huge number of benefits from farmer because their income changes, for production people of ethanol, because that creates employment in both rural and industrial India.
We will also see a lot of foreign exchange gain for the country because now 20% fuel need not be imported. But most important of this is the fact that ethanol is a green fuel. It reduces the carbon footprint for the country and the GHG emission reduction is absolutely priority for us now as global citizens. I think this is a very positive step. We have just seen the IPCC report that came out which has predicted a scenario saying even if we continue as usual, there is no life beyond 2100. I do not think we can continue to act the way we have been. We have to change the way we use our energy and what energy we use. Biofuels have a fantastic role to play in reduction of GHG emissions.
What is the capacity that we have currently to be able to service the demand? It is a clean fuel, but are we going to see any shortage because what you are talking about is a huge jump?
You are absolutely correct. That is what all the excitement is about because from 400 when we finish, we will be at 1,400. That is the 1,000 crore delta that we will have to add. And that is precisely where all the excitement is because we have to create this capacity. Of course, we do not need this capacity tomorrow, but by the time we reach 2025, we will have to have these 1,000 crore additional capacity created. That is where we see all the movement taking place.
I was earlier mentioning that we have seen this one quarter order book equal to 90% of whole of last year. Of course, last year was very unusual, we all know that. But still, that shows the type of momentum shift that is taking place in capacity creation. A very big reason for that is also a very progressive policy environment, freeing up of the feed stocks, etc.
I think that is changing the fundamental structure of the industry itself because from a single owner industry, three states, single feed stock, we have gone to multiple feed stock pan India and multiple ownership structures. This is a fantastic time for creation of growth through ethanol and driving a story that could actually become example for the world to follow.
