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Triveni Engineering and Industries Ltd>
  • CMP : 223.4 Chg : -3.25 (-1.43%)
  • Target : 350.0 (48.31%)
  • Target Period : 12 Month

05 Aug 2022

Distillery capex to make TEL biggest ethanol supplier

About The Stock

Triveni Engineering (TEL) is one of the largest sugar companies in India with sugar crushing capacity of 60,000 TCD, distillery capacity of 660 KLD & co-generation power of 104 MW. It also has power transmission & waste water management business contributing 10% to revenues.

  • The company announced distillery capacity expansion of 450 KLD (14 crore litre) with the capex of Rs 460 crore. This would take its total distillery capacity from 21 crore litres now to ~35 crore litres by FY25.
Q1FY23 Results

TEL saw 18.2% sales jump led by strong sugar, ethanol volumes.

  • Sales was up 18.2% YoY with 66.7% growth in distillery sales
  • EBITDA was at Rs 113.9 crore, down 23.9% YoY, with margins at 9.3%
  • PAT was at Rs 66.5 crore, down 28.0% YoY, due to Rs 45.3 crore export subsidy in base quarter, higher cost of production & high interest cost
What should Investors do?

TEL’s share price has gone up 176% in the last five years (from Rs 85 in August 2017 to Rs 236 in August 2022).

  • We expect 47.4% volume CAGR in distillery volumes to boost distillery revenue by 56.8% CAGR during FY22-24E
  • We maintain our BUY rating on the stock
Target Price Valuation

We value the stock at Rs 350, valuing the business at 14x FY24 PE

Key triggers for future price performance
  • With distillery capex, TEL would be able to increase its ethanol volumes 3x to 35 crore litre by FY25. Distillery sales to see 56.8% CAGR to Rs 1632.7 crore in FY22-24E, which would be 28% of total revenues
  • The company has announced further capacity addition of 450 KLD (14 crore litre) with the capex of Rs 460 crore. TEL would be utilising sugarcane juice as well as grain route to produce ethanol from these distilleries
  • The company is expected to generate Rs 1588 crore of operating cash flow in the next two years, which would be utilised for ~Rs 900 crore capex (including some currently concluded), debt reduction, buybacks & dividends
Alternate Stock Idea

We also like Dwarikesh Sugar in our sugar coverage.

  • The company is one of the most efficient with highest sugar recovery and abundant sugarcane availability. It is increasing its distillery capacity to 3x in the next three years
  • We value the stock at Rs 150/share with BUY recommendation

Key Financial Summary

Key Financials FY20 FY21 FY22 5 Year CAGR % (FY17-FY22) FY23E FY24E (Blank) CAGR % (FY22-24E)
Total Operating Income 4,436.6 4,674.2 4,291.0 8.7 5,136.3 5,417.8 - 12.4
EBITDA 543.2 558.2 634.4 4.0 766.6 928.4 - 21.0
EBITDA Margin % 12.2 11.9 14.8 - 14.9 17.1 - -
Net Profit 335.1 294.6 424.1 10.9 496.6 604.9 - 19.4
EPS (Rs) 13.5 12.2 17.5 12.3 20.5 25.0 - 19.4
P/E 17.5 19.4 13.5 - 11.5 9.4 - -
RoNW % 19.9 18.9 22.4 - 21.9 22.4 - -
RoCE (%) 17.6 19.4 15.8 - 18.3 20.5 - -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter

Q1FY23 Results: Post capex, distillery volume to reach 3x to 35 crore litre

  • Consolidated sales witnessed growth of 18.2% to Rs 1225.7 crore led by 17.2% growth in sugar sales, 66.7% growth in distillery sales, 49.2% growth in water segment & 7% growth in gears business
  • Sugar volumes increased 11.9% to 2.39 lakh tonnes, which is entirely domestic sales given the company has not exported any quantities of sugar in 2021-22 sugar season. Sugar realisation was up 5.7% to Rs 35.3 /kg. The base quarter included Rs 45.31 crore of export subsidy pertaining to FY21. Co-generation sales witnessed growth of 19% to Rs 16.9 crore
  • Distillery sales witnessed growth of 66.7% to Rs 379.2 crore led by 42.4% increase in distillery volumes driven by commissioning of new 200 KLD capacity in March 2022. The distillery realisation was up 7% on account of higher proportion of B-heavy ethanol. B-Heavy ethanol constitutes 90% of the total sales volumes. OMCs increased ethanol prices by Rs 1.0-2.5/litre for different feedstock in June-2022
  • The company is looking to clock ~18 crore distillery volumes in FY23E & ~25 crore in FY24E. With the new capacity addition available for full year in FY25, total distillery volumes to touch ~35 crore litre in FY25
  • IMIL sales volume increase 112.3% to 6.56 lakh cases on a low base as company started its IMIL operations last year. The segment is currently posting small loss. However, with the increase in volumes, it is likely to be profitable from FY24
  • The company is holding sugar inventory to the tune of 4.68 lakh tonnes (lt) valued at Rs 32.2/kg. Operating profit declined 23.9% to Rs 113.9 crore given base quarter includes export subsidy of Rs 45.31 crore. However, cost of production also increased by Rs 2.5/kg due to increase in sugarcane prices & 16 bps lower sugar recovery in 2021-22 season
  • The engineering business saw growth of 32.9% in Q1. Power transmission (gears) business witnessed sales growth of 7.6% to Rs 30.4 crore & PBIT margin of 28.8% (down 34 bps). Order book was at Rs 243.4 crore including long duration orders of Rs 110 crore. Water business saw 49.2% revenue growth of Rs 65.2 crore (low Covid-19 base). During the quarter, the company secured its second international project, in Bangladesh. This project is an EPC order and under a joint-venture arrangement with a Bangladeshi company. Order book for water business is at Rs 1645.5 crore, which includes Rs 950 crore O&M contracts
  • Interest cost increased 38.4% to Rs 21.7 crore due to higher working capital debt given company accelerate farmer payment in current season. Net profit de-grew 28% to Rs 66.5 crore
  • Triveni’s distillery capacity has reached 660 KLD (21 crore litre) after completion of capex in the current quarter. This includes 60 KLD grain based distillery. The company has announced further capacity addition of 450 KLD, which would take its total capacity to 1110 KLD (35 crore litre). This would require investment of Rs 460 crore and it would get commissioned in December 2023
  • The new distillery would be fungible for sugarcane juice, B-heavy & grain based ethanol. The company would decide the product mix according to working economics at the time of commencement
  • Total debt for the company increased marginally to Rs 1541.5 crore as of June-2022 against Rs 1503.7 crore in corresponding quarter last year. The higher debt level is mainly due to increased sugar inventory for the company given it has chosen not to export during 2021-22 season. Moreover, farmer’s payment has been much faster in the season. Overall cost of debt is 5.07%

Triveni Engineering is one of the most efficient sugar company in the country with sizable crushing capacity. With the current announcement of distillery capex, the company would be utilising sugarcane juice route to produce ethanol supplemented by grain based ethanol production. It’s sugar realisation is also better compared to other sugar millers given 45% of its sugar production is refined sugar. With the increasing sugarcane diversion towards ethanol & aggressive exports of 11 million tonnes, sugar inventory in the country would reach to 5.5 million tonnes by September 2022, which would keep sugar prices firm above Rs 35 / kg. However, we believe sugarcane production by farmers is also increasing at a faster pace. We believe sugar industry in India is required to further increase distillery capacities to utilise excess sugarcane to produce ethanol. We believe Triveni’s capex announcement is the step in right direction. We maintain our BUY recommendation and target price of Rs 350 / share, valuing it at 14x FY24E PE.

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