Indian Stocks Research

Triveni Engineering: A value buy

Introduction

When the sensex is at 14,000 normally it should be very difficult to invest in the market if some one follows the conventional wisdom. But this time it is very different. It seems even now many stocks can be found in the market where there is valuation comfort and in some cases undervaluation. I guess mainly it is due to the fact that in the recent sensex rise only a handful of stocks participated and the pocket of over valuation is limited to very few stocks and sectors. For example the real estate and construction sector which is the favorite sector and where you can find most over valuation.
You can access my article on the over valuation of real estate sector here
"Real Estate Reality Check"

One such stock which is in a neglected sector and which is one of the major player in its sector is Triveni Engineering. This trades at a price of 55Rs and a Market Cap of 1400Cr.
You can read the complete analysis of this stock and the sector given below.

Key Investment Highlights

Sugar Business

•Second largest producers of Sugar in India with a crushing capacity of 40,500 TCD per year (2005-06)
•The company is undergoing a massive expansion plan where the capacity will be increased to 61,000 TCD by Feb 07.
•The company will also commission a 160 KLPD ethanol manufacturing plant by March07
•The Co-Gen capacity will be increased from the current 22MW to 68MW by 2007 which will also create 2,00,000 carbon credits

Steam Turbine Business (TBG – Turbine Business Group)

•One of the largest manufacturers of 1-12 MW steam turbines in the world with a 68% market share in India’s high and low pressure turbines up to 18 MW.
•Manufacturing capacity of 650MW in turbines which is being expanded to 1100MW in 2006-07 (Fourth Qtr)
•More than 1800 turbine installations.
•Order book of 512Cr as of Sep2006 for Turbine Business Group (TBG)
•Turbine Business Group's revenues is now close to 47% of the group's total revenues up from 22% just two Qtr ago making it a second line of business apart from sugar.
•Exponential growth seen in turbine business with industrial growth.
•The company is also getting in to higher MW turbine business (18-45MW) whose market is almost 50% bigger than the up to 18MW segment.
•TBG expects a sales of more than 500Cr in FY07 (230Cr already done by half year with a 45% QoQ growth)
•The company is now focusing on exports to Europe and Asia to drive up sales and margins.

Gear Business (GBG – Gear Business Group)
•Market leader in high speed gears and gearboxes up to 70MW capacity and 50,000 rpm
•Order book of close to 40Cr as of Sep2006 and expects revenue of 80Cr this year.
•More than 4000 high speed gear box installations in the country.
•This is the first company in India to successfully conduct full speed test on 54 MW gas turbine load gearbox.

Others
•The company has already decided to spin off the TBG and GBG to a separate company which will create shareholder value.
•This is one of very few companies that can greatly leverage their stock value for growth as the management holds close to 70% stake and public holding is just under 8%.
•Current market cap of 1400Cr does not even reflect the valuation of sugar business after enhanced capacity.
•In my calculation after the spin-off the combined value of business should be around 350 Rs ( Valuation details given later in discussion)

Overview

First of all Triveni is not just a sugar company (popular perception is that). Triveni is one of the leading companies engaged in the manufacture of sugar and engineered-to-order
mechanical equipment, such as steam turbines, high speed gears and water and waste water treatment equipment. The company is the second largest sugar manufacturer in India and the market leader in the engineering businesses comprising steam turbines, high speed gears, gearboxes, and water treatment solutions.

Besides this the company also diversified in to futuristic businesses like water and waste-water treatment and rural retail.

The business of the company is best described in the figure below.




The recent downturn in sugar prices has resulted in the downturn of Triveni’s stock price which after touching an all time high of close to 180 is hovering in the range of 55Rs. This is more or less because Triveni is more considered as a Sugar company but the reality is that only 55% of the revenues come from sugar. Also even in sugar business the company is expanding its capacity by almost 50% compared to last year.

Because of all these factors I think this is a good stock if you are willing to hold it for some time. I think Triveni is a good contrarian buy at this level.

To understand why Triveni is a good buy at these levels it is very important to know what are the business the company operates. The highlights of each of these divisions are discussed below.

The Sugar Business Group (SBG)

The SBG comprises of the sugar division and the Co-Generation division. My discussion will not cover the outlook for sugar as I am not an expert in commodity cycle. But from my understanding the sugar prices is directly proportional to crude price internationally as when crude rises more sugar cane will get converted to Ethanol. (Ok let’s leave that part).

The company currently has a capacity of 41,000TCD and is being expanded to 61,000 TCD. All these expansion will fall under the UP sugar mill policy where the company will be able to get special incentives in the form of capital subsidy, reimbursement of sugar transportation costs, refund of cane society commission from the government. (Refer UP Sugar Policy 2005-06 for more details)

Apart from the sugar business the company has a Co-Generation business which supplies power to the grid and addresses the captive power and steam requirements of the sugar factory. The Co-Gen division recorded revenue of 60Cr in 2005-06. The company is also
expanding the capacity of Co-Gen plants which will fetch additional revenues in future. Apart from a ready market like a power starved Utter Pradesh the company will also be eligible under the Clean Development Mechanism (CDM), entitling the company to carbon credits, by selling certified emission reductions (CERs). The expected number of carbon credits which is expected after full expansion is around 2, 00,000 numbers. (The company should get approval by Dec-2006)

The Ethanol story

By Feb-07 the company will also setup a 160 kilolitres per day (KLPD) distillery for the production of rectified spirit, Extra Neutral Alcohol (ENA), absolute alcohol (fuel ethanol) and industrial alcohol.

Now understanding the whole Ethanol story is very important so that you understand the full potential of Triveni going forward. Infact this is same for all sugar companies in India which has Ethanol manufacturing capacity.

Now first let us look at the global scenario. In Brazil and USA Ethanol is produced from sugar cane and maze. So when the prices of crude increases there is an increased temptation to convert more sugarcane to Ethanol thus pushing up Sugar prices (since most of the sugar cane is converted to ethanol). So for sugar companies in Brazil and US it is an alternative product from the same raw material.

But in India situation is different. In India Ethanol is produced from molasses a sugar by-product. So in India the production of ethanol will complement the fortunes of the sugar industry. Coupled with this if government makes mandatory 5% ethanol blend on an all India basis it is just another bonanza for the sugar industry. So the companies with this capacity will definitely benefit and triveni is one among that.

The Turbine Business Group (TBG)

Initially the TBG was created as a backward integration of the company’s sugar business but has exceeded all expectations and grown in to an altogether parallel business. Triveni is one of the largest manufacturers of 1-12 MW steam turbines in the world with a 68% market share in India’s high and low pressure turbines upto 18 MW.

This is one group which is growing exponentially on a YoY and a QoQ basis.



So as shown in the charts the TBG group now contributes 47% of the revenues and has the highest visibility in terms of order book. The company is almost doubling the TBG capacity to meet the growing demand.

Another lucrative area the group focuses is the after sales service. The spare business generally generates incremental revenues only after 2-3 years of turbine installation. The recent ramp up in turbine sales will generate substantial incremental spares business in the next few years. The company has 13 service centers across India offering emergency support, routine repair service and spare parts to customers. Because of their pan India presence the company will able to attend any service calls with in 24 hrs which is very important. I expect this area will contribute close to 5-6% of sales in next 2 years.

The company is also getting in to higher MW turbine business (18-45MW) whose market is almost 50% bigger than the up to 18MW segment. TBG expects a sales of more than 500Cr in FY07 (230Cr already done by half year with a 45% QoQ growth).The company is now focusing on exports to Europe and Asia to drive up sales and margins.

The Gear Business Group (GBG)

The company started to manufacture gears and gear boxes to the turbine business group. Since then this group emerged as a stand alone business supplying high speed gears and gear boxes to Triveni TBG and also to other prominent OEM’s like Siemens and BHEL.
Another interesting fact is that these OEM’s which are the customers of GBG completes with Triveni’s TBG for the manufacture of steam turbines.

This is another business which have lot of visibility going forward



Sales at this division are expected to be in the range of 80cr this year.

Recently company has successfully conducted full speed test on 54 MW gas turbine load gearbox, at its modern facility in Mysore. It is the highest power gearbox manufactured and tested successfully by any Indian engineering company. It will serve as a replacement to a European Gearbox. This marked the company’s entry in to high MW gear box market.

Other Emerging Business

Apart from these main business above the company has presence in water and waste water treatment solutions and rural retail. Both of these business are currently small in nature but has high potential going forward.

In rural retail the company has a presence with Triveni Kushali Bazaar which will have close to 90 stores by next year. This is a business which has great potential going forward. In 2005-06 the division has a top line of close to 16Cr and is growing exponentially.

De merging to create share holder value

The board of directors is already considering a proposal to de merge the Engineering business in to a separate entity to create share holder value. This will allow the investors to value each business in a separate way and in the process create wealth for shareholders.

I have created a small valuation matrix which will allow you to calculate the valuation of each of these businesses after the de merger.
NB: This is very premature valuation and can drastically change based on the management decision.


Also if the sugar cycle turns there can be more valuation to the sugar business. And the revenue from 160KLPD Ethanol division and the revenue from possible carbon credits are not considered for calculation. This can further enhance the valuation of sugar business.



That value of 350+ is a huge upside from the current levels. But this is subjected to lots of factors.

Risks

There is risk in investing at the current time. The factor is that sugar is a neglected sector now and Triveni is now perceived more as a sugar company. So any down turn in the sugar prices can adversely affect the company’s valuation.

Conclusion

Even though there are some risks in investing in the company at the current levels, I personally feel that it is worth taking a risk especially if you are a long term investor.

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Disclaimer

Author is a software technical consultant based out of Hyderabad. At the time of writing this article he and his family members do have investments in the stock mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation.

This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to
be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.

posted by Sajith @ 3:39 AM