Triveni Engineering & Industries - A deep value Opportunity?

Investment Thesis

  • Triveni Engineering is valued at ~1800 crores.
  • It holds ~22% of Triveni Turbine valued at around ~900 crore
  • The company has an additional ~100 crores in Investments

Applying a 10% discount to it’s stake in Triveni Turbine, the engineering & sugar business is available at:
1800 - 0.9*900 - 100 = ~ 900 crores

This translates to a TTM PE multiple of ~3.8x (TTM PAT of ~240 crores) for the engineering & sugar business combined.

A quick look at Peer group Valuation

It is important to note that the two peers dont have any other business apart from Sugar while Triveni has an Engineering (gears) and water business (combined ~15% of Sales).

Background

  • Triveni Engineering & Industries Ltd (TEIL) is a well diversified and an integrated player in the sugar industry.
  • The demerger of the engineering & sugar business got called off by the management recently. The indiscriminate dumping of the stock has resulted in this deep value scenario. The margin of safety appears to be decent enough.

(I have excluded the details of company business since it’s readily available. Just focusing on the key numbers. Happy to add if you deem necessary)

Risks
Commodity/cyclical nature of industry

Please share your thoughts, questions and loopholes in the thesis.

Disclosure: Invested ~5% of Portfolio.

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I think your discounting of Triveni Turbine stake is too optimistic. In practice, holding company discount in India is around 50% or more.

Good analysis.
Views
Other business contribute only 15% however Capital Turnover ratio is not good
Sugar industries already have rally in market
Can you please specify the horizon and highlight on comprision with Shree Renuka Sugar

Nice work Ayush. Here are my two cents:

I have lost my working, but by comparing capacities, inventory, share count and applying a10% mgmt quality discount, the Triveni sugar per share value should be 40-45% of Balrampur per share value. So one can do relative valuation vis a vis Balrampur. You could do the exercise and see if you arrive at similar answer.

Gearbox business is comparable to turbine business. Margins and steady state roe are comparable. After all one can’t have turbine without gearbox. Business has a lot of promise given economics and dominant mkt share in high speed segment. Right now it is going through a rough patch due to low in capex cycle.

Water business can be compared to a small Epc company, o and m contracts notwithstanding.

Value of Triveni turbine could be unlocked in the future as part of promoters succession planning. Better to take a huge discount to mkt value, say 75%.

You could do sotp and estimate per share value.

Mgmt signalling to mkt is terrible, you know scrapping demerger and all.

Still holding on to my shares.

I believe PE will work out to be ~5 not 3.8 once you make following changes…1) PAT figures is not correct. Standalone TTM PAT for Triveni is Rs217cr… 2) 10% discount is less…usually 20% is the norm but some extremes ranges are 40% (Grasim) to 80% ( Rajpalayam mills) 3) Double counting of investments …either remove other income from investments in Standalone PAT to get Sugar PAT or don’t give any value to it separately…also half of it is accumulated profit from Tiiveni Turbines only…so post those adjustments you get 1800-0.8*900 = 1080 cr for 217cr of PAT…5X P/E for sugar business…Their are couple of sugar companies who are available at same or below multiple based on TTM P/E basis such as Oudh Sugar, Upper Ganges, Parry Sugar, DCM Shriram Industries, Dhampur Sugar Mills…

Thanks, Pavas. Agree with your calculations.

This report in the ET claims Triveni Engg & Industries is also in the water business - https://economictimes.indiatimes.com/markets/stocks/news/water-management-companies-to-gain-from-green-order/articleshow/57445969.cms
“Triveni is technologically a strong player to grab upcoming opportunities in the waste water management sector and we believe the gear and water businesses have huge value potential,“ said Forum Parekh, research analyst, Bonanza Wealth Management

What percentage of the business is water if so?

IIRC, Majority of their revenues come from sugar. Other businesses are very minor in comparison.

Triveni engineering doubling ethanol blending capacity. But the Director has also hinted that its gears business and water treatment business will be growing at a faster rate than its main sugar business.

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Triveni Engineering posted good results. Industry tailwinds have been beneficial.

Investing in Greenfield and brownfield expansion on distilleries.

Their operating efficiencies are industry best at the moment.

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Q1 FY 23 Consolidated Results

  • Revenue from Operations (Net of excise duty) at ` 1225.67 crore, a growth of 18.2% primarily driven by higher sugar and alcohol dispatches along with higher realizations
  • Profit before tax (PBT) declined by 28.4% on a year-on-year basis to ₹ 88.68 crore. This is mainly
    because the previous corresponding quarter included a net income of ₹ 45.31 crore on account of
    export subsidy pertaining to FY 21.
  • In respect of distillery operations, higher realization along with commissioning of additional capacity in Q1 FY 23 resulting in higher sales volumes, have contributed to the increase in profitability by 44.3% on a year-on-year basis.
  • Engineering business at an aggregate level reported strong revenue increase of 32.9% during the
    current quarter over the corresponding period last year.
  • Power Transmission Business order booking in Q1 FY 23 reported an impressive growth of 41.5% over the corresponding period last year. We expect this strong growth trend to sustain in the coming quarters, which would boost revenue growth for FY 23 and FY 24.
  • On a consolidated basis, the total debt is at ₹ 1617.68 crore as on June 30, 2022 as against ₹1567.96 crore as on March 31, 2022.
  • Overall average cost of funds is at 5.07% during Q1 FY 23 as against 5.27% in the corresponding period of previous year.

Sugar Businesses

  • In Sugar Season (SS) 2021-22, achieved sugarcane crush at 8.41 million tonnes with gross recovery of ~ 11.70% and sugar production of 0.89 million tonnes.
  • Distillery revenues (net of excise duty) and profitability grew substantially due to commissioning of additional capacity of 200 KLPD during the quarter resulting in increased sales volumes
  • With the commissioning of a new 60 KLPD grain-based distillery at existing distillery complex at Muzaffarnagar (U.P.) and enhancement of the capacity of two existing distilleries by 40 KLPD each, subsequent to the quarter, presently, total distillery capacity stands at 660 KLPD
  • Ethanol produced from B-heavy molasses constitutes 90% of the sales volume in the current quarter as against 81% in the corresponding period of the previous year
  • Unit-wise capacities are as follows:
    ** Milak Narayanpur distillery 200 KLPD
    ** Sabitgarh distillery 200KLPD
    ** Muzaffarnagar facility 260 KLPD
    *** 200 KLPD on molasses
    *** 60 KLPD on grain

Engineering Businesses

  • Water business has secured its second international project, in Bangladesh
  • Robust order booking in both Power Transmission and Water Business
  • Order booking in Power Transmission grew 41.5% year-on-year, this trend is
    expected to continue and support strong revenue growth in FY 23 and FY 24
  • Outstanding order book of ` 1,889 crore for combined Engineering Businesses

Expansion

  • Expansion program to set up two new dual feedstock (sugarcane derived and grain) distilleries with an aggregate capacity of 450 KLPD at Rani Nangal and Sabitgarh, U.P., subject to receipt of necessary statutory clearances, raising total distillation capacity to 1110 KLPD at an aggregate cost of about ` 460 crore. These distilleries are expected to commence commercial production in Q3 FY 24.

Disinvestment

  • Triveni Turbine stake sale(21.85%) are expected to complete by October 2022.

Feedback
All the business verticals are having robust financial performance and are promised to grow at much faster rate. Company can grow around 12-15% annually and even can improve much further once Water business starting contributing to its bottom-line. Even Power Transmission business also catching up as expected will also contribute more in coming year. Even for Distillery business, government having hard target of 12% blending is expected to be achieved for year 2022-23 which is estimated that 545 crore litres of ethanol would be required which even grow Distillery business.

Q1FY23 Concall

Disclosure: Invested in this counter from long time(around 17Rs). So, my views can be biased.

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With additional ethanol capacity and high international sugar prices (high export realisations), triveni’s profit is going to jump in coming quarters.
After removing Rs 50 per share from sales of turbines subsidiary and profit of Rs. 8 from Buy back (10% of (350 - 275) i.e. difference between current and buyback price of 350), effective price is 217 (275-58) then PE on trailing quarters will be 10 (on annual EPS of 20 without sale of turbines sub).
PE on expected FY23 EPS of 27 PE is only 8 (based only on ethanol). Due to additional sugar prices and profits from water and engineering business the EPS will be higher.
Water is going to be a big business for triveni.

All in all valuations are very attractive… I think price can easily cross buyback price of 350.

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my last analysis was actual cash basis analysis. However total debt may not be retired as loans are soft loans and lesser than FD rates. Also cash will be used for ethanol projects. I will put up a detailed analysis based on reduced shares and hence higher EPS, projected profits from ethanol, water, etc.
actual value is much more than buyback price of 350. i wont be surprised if it goes above buyback price before buyback starts !!

The company sells its stake in Triveni Turbine considering the family is looking at demerging between brothers.

The company announces buyback at 350Rs to reward the shareholders. Now, The promoter Dhruv Sawhney sells 7.03% in the open market at 280Rs.