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UBS Investment Research
Triveni Engineering & Industries
Engineering powerhouse; low on sugar
�� Initiate coverage with a Buy rating and a price target of Rs141.00
We believe Triveni Engineering & Industries (TREI), an engineering and sugar
manufacturing company in India, will extend its dominance in small turbine and
high-speed gears in India to the 30-100MW turbine segment via its joint venture
with GE. TREI has demonstrated its ability to gain market share in 20-30MW
turbines as it garnered a 35% share within two years of launch.
�� Engineering division could provide earnings stability and rapid growth
We believe TREI has competitive advantages and growth potential in all its
engineering business segments—turbines, water treatment, and high-speed gears.
We forecast a 25% revenue CAGR for the engineering business in FY11-15. We
think this segment has high ROIC and strong cash flow.
�� Sugar overhang expected to abate
Historically, the stock has traded in line with other sugar manufacturing stocks;
however, we expect this to change as the engineering division grows robustly and
the partial spin-off of the turbine segment is completed over the next two to three
quarters. The sugar division comprises 20% of our valuation for TREI. Although
we think strong growth in the engineering division and the partial spin-off of the
turbine business will unlock shareholder value, we have not included this in our
valuation.
�� Valuation: sum-of-the-parts-based methodology
We derive our price target from a sum-of-the-parts-based methodology, using a
multiple-based approach. We value the engineering division at 12.5x PE and the
sugar business at 1x P/BV.
Investment Thesis
Triveni Engineering & Industries (TREI) was established as a sugar
manufacturing company that diversified into the engineering market and is
now focused on this business. Historically, TREI has traded in line with other
sugar stocks, although we ascribe only 20% of our valuation to the sugar
division. While sugar has dominated TREI’s revenue, its contribution to EBIT
is declining as the engineering business continues to grow at a rapid clip.
Although we believe this rapid growth and partial spin-off of the turbine
business over the next two to three quarters will unlock shareholder value, we
have not included this in our valuation.
We think TREI has demonstrated its strength as a manufacturer of quality
goods through its impressive growth and strong market share in turbines and
high-speed gears. It gained a 35% market share in the 20-30MW turbine
segment within two years of launching its product. We believe the joint
venture with GE to manufacture 30-100MW turbines will increase TREI’s
addressable market six times. TREI’s superior manufacturing capability, cost
competitiveness, and GE’s brand name will be key revenue drivers, in our
view.
TREI has also built a product portfolio of industrial and municipal water and
waste water treatment and desalination projects. This segment’s revenue
CAGR was 55% over FY08-10, and given its strong order book and pipeline,
we think our 50% CAGR forecast for FY10-13 might be conservative.
We believe the company’s strategy of leveraging its high precision
manufacturing expertise and adding new products through which it can grow
its addressable market will continue to generate shareholder value.
We expect the engineering division to drive high and rapid profits and robust
cash flow. The market is valuing the engineering division at 7.2x FY12E PE
which we think is attractive given its high ROIC (we estimate incremental
ROIC will be 100% due to negative working capital in the turbine and gear
segments), and FY11-15E revenue and EBIT CAGRs of 27% and 26%
respectively. We value TREI’s engineering division at 12.5x PE and the sugar
division at 1x P/BV. Our price target of Rs141.00 is 61% above the current
share price.
Key catalysts
�� Rapid growth in the water business: TREI’s water business reported a
55% revenue CAGR from September 2008 to September 2010. The order
book in FY10 grew 213% YoY to Rs5bn (from orders valued at Rs1.5bn in
FY09. We forecast a 50% revenue CAGR for the water segment over FY10-
13, on a robust order book and project pipeline.
�� Volume and revenue growth from the JV with GE to make 30-100MW
turbines: The TREI and GE 50-50 joint venture will market 30-100MW GEbranded
turbines globally, while TREI will manufacture the turbines.
Manufacturing GE-branded 30-100MW turbines is exclusive to TREI, and
GE will not sell any turbines in this range globally other than those
manufactured by TREI. We believe the JV will be an important revenue and
margin driver and estimate it will increase TREI’s addressable turbine
market by six times.
�� Completion of turbine business spin-off: TREI is in the process of
spinning off its turbine business as a separate entity, with 78% of the shares
to be distributed to TREI’s shareholders, according to the company, with
TREI holding 22%. We believe this will allow TREI to unlock turbine
business value. TREI is waiting for the approval of the high court. We expect
the process to be completed within the next two to three quarters. While the
spun-off turbine business might result in higher multiples, we have not
included this upside potential in our valuation.
Risks
�� Illiquidity because of the time lag from the partial spinning off to listing
Triveni Turbines: Triveni Turbines, the turbine business, will have to be
listed as per Securities and Exchange Board of India (SEBI) guidelines. This
process could take several months to complete.
�� Slowing industrial capex: TREI manufactures turbines for small power
plants and a large part of its turbine business is driven by industrial
customers building captive power plants. A severe downturn in industrial
capex would have an impact on this business. However, the launch of 30-
100MW turbines should open new markets and limit the impact of a
slowdown.
�� Volatile sugar prices and unfavourable regulations: The global and
domestic sugar industry is highly cyclical, driven by supply-side variations.
Any sharp decline in sugar prices could dampen earnings. We estimate TREI
will generate 62% of its revenue and 36% of EBIT from the sugar-related
businesses in FY11. We think a downturn in the sugar market will affect
investor sentiment. Immediately following the spin-off of the turbine
business, we expect the sugar division’s earnings contribution to TREI to
increase.
�� Absence of internationally recognised auditor: TREI does not have an
internationally recognised auditor.
�� The company’s EPS declined year-on-year in FY10 due to the sugar
division’s cyclicality
Valuation and basis for our price target
We base our price target on a sum-of-the-parts (SOTP) valuation, where we
value the engineering division on a PE multiple and the sugar division on P/BV.
As the sugar business is cyclical, we use the P/BV approach for a normalised
view of the cycle. Listed sugar companies based in the state of Uttar Pradesh
trade at an average September 2010 P/BV of 1.4x and a September 2011E
EV/EBITDA of 9.5x. We value TREI’s sugar division at 1x September 2011E
P/BV, which equates to 8x EV/EBITDA on September 2011 forecasts. We value
TREI’s engineering division at 12.5x FY12E (September 12) EPS. This is in line
with its broad engineering comparable universe.
At our 12-month price target, TREI would trade at 12.2x September 2012E PE,
which we think is conservative based on our forecast EBITDA CAGR of 17%
and EPS CAGR of 26% for FY11-15E that would be driven by the engineering
division’s revenue growth, deleveraging of the balance sheet, and improving
return ratios.
For simplicity, we assume all debt is with the sugar division. Allocating Rs1-
1.5bn of debt to the engineering division would not have a material impact on
our price target.
Comparables
Comparable engineering companies are trading at an average PE of 14x and
EV/EBITDA of 8.5x on March 2012 forecasts. Given the high return parameters
of the TREI’s engineering division, we think this division could trade at 12.5x
September 2012 forecasts within next 12 months.
Uttar Pradesh-based sugar companies are trading at an average 1.4x September
2010 P/BV and September 2011E EV/EBITDA of 9.5x. We value TREI’s sugar
business at 1.0x September 2011E P/BV.
UBS versus consensus
Our financial forecasts depend on our sugar price assumptions and we have used
a normalised view of sugar prices. Additionally, not many analysts cover TREI.
Table 6: UBS vs consensus
(Rs m) UBS Consensus Difference
FY11E
Net revenue 26,063 23,417 11%
EBITDA 4,830 4,012 20%
Net profit 2,380 2,121 12%
FY12E
Net revenue 29,382 25,162 17%
EBITDA 5,544 4,154 33%
Net profit 2,994 1,881 59%
Source: Bloomberg, UBS estimates
Sensitivity analysis
Our valuation of TREI is sensitive to the PE multiple we use for the engineering
division and the P/BV multiple for the sugar division.
Our valuation of the combined entity is also sensitive to the multiples of the
standalone turbine business. For every unit change in the PE multiple of the
turbine business, our valuation would change by Rs4.60.
�� Triveni Engineering & Industries
Triveni Engineering, an engineering and sugar manufacturing company in India,
operates two divisions. The engineering division manufactures small turbines,
high-speed gearboxes and executes water treatment projects. The sugar division
operates sugar mills, cogeneration power plants and distilleries in the northern
state of Uttar Pradesh.
�� Statement of Risk
We believe TREI faces several risks, including: limited liquidity for TREI once
it spins off Triveni Turbines; a slow down in industrial capex, which could have
an adverse impact on TREI’s revenue growth rate as would volatile sugar prices.
TREI is also exposed to the cyclicality of sugar production—its FY10 EPS fell
YoY because of this.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Triveni Engineering & Industries
Engineering powerhouse; low on sugar
�� Initiate coverage with a Buy rating and a price target of Rs141.00
We believe Triveni Engineering & Industries (TREI), an engineering and sugar
manufacturing company in India, will extend its dominance in small turbine and
high-speed gears in India to the 30-100MW turbine segment via its joint venture
with GE. TREI has demonstrated its ability to gain market share in 20-30MW
turbines as it garnered a 35% share within two years of launch.
�� Engineering division could provide earnings stability and rapid growth
We believe TREI has competitive advantages and growth potential in all its
engineering business segments—turbines, water treatment, and high-speed gears.
We forecast a 25% revenue CAGR for the engineering business in FY11-15. We
think this segment has high ROIC and strong cash flow.
�� Sugar overhang expected to abate
Historically, the stock has traded in line with other sugar manufacturing stocks;
however, we expect this to change as the engineering division grows robustly and
the partial spin-off of the turbine segment is completed over the next two to three
quarters. The sugar division comprises 20% of our valuation for TREI. Although
we think strong growth in the engineering division and the partial spin-off of the
turbine business will unlock shareholder value, we have not included this in our
valuation.
�� Valuation: sum-of-the-parts-based methodology
We derive our price target from a sum-of-the-parts-based methodology, using a
multiple-based approach. We value the engineering division at 12.5x PE and the
sugar business at 1x P/BV.
Investment Thesis
Triveni Engineering & Industries (TREI) was established as a sugar
manufacturing company that diversified into the engineering market and is
now focused on this business. Historically, TREI has traded in line with other
sugar stocks, although we ascribe only 20% of our valuation to the sugar
division. While sugar has dominated TREI’s revenue, its contribution to EBIT
is declining as the engineering business continues to grow at a rapid clip.
Although we believe this rapid growth and partial spin-off of the turbine
business over the next two to three quarters will unlock shareholder value, we
have not included this in our valuation.
We think TREI has demonstrated its strength as a manufacturer of quality
goods through its impressive growth and strong market share in turbines and
high-speed gears. It gained a 35% market share in the 20-30MW turbine
segment within two years of launching its product. We believe the joint
venture with GE to manufacture 30-100MW turbines will increase TREI’s
addressable market six times. TREI’s superior manufacturing capability, cost
competitiveness, and GE’s brand name will be key revenue drivers, in our
view.
TREI has also built a product portfolio of industrial and municipal water and
waste water treatment and desalination projects. This segment’s revenue
CAGR was 55% over FY08-10, and given its strong order book and pipeline,
we think our 50% CAGR forecast for FY10-13 might be conservative.
We believe the company’s strategy of leveraging its high precision
manufacturing expertise and adding new products through which it can grow
its addressable market will continue to generate shareholder value.
We expect the engineering division to drive high and rapid profits and robust
cash flow. The market is valuing the engineering division at 7.2x FY12E PE
which we think is attractive given its high ROIC (we estimate incremental
ROIC will be 100% due to negative working capital in the turbine and gear
segments), and FY11-15E revenue and EBIT CAGRs of 27% and 26%
respectively. We value TREI’s engineering division at 12.5x PE and the sugar
division at 1x P/BV. Our price target of Rs141.00 is 61% above the current
share price.
Key catalysts
�� Rapid growth in the water business: TREI’s water business reported a
55% revenue CAGR from September 2008 to September 2010. The order
book in FY10 grew 213% YoY to Rs5bn (from orders valued at Rs1.5bn in
FY09. We forecast a 50% revenue CAGR for the water segment over FY10-
13, on a robust order book and project pipeline.
�� Volume and revenue growth from the JV with GE to make 30-100MW
turbines: The TREI and GE 50-50 joint venture will market 30-100MW GEbranded
turbines globally, while TREI will manufacture the turbines.
Manufacturing GE-branded 30-100MW turbines is exclusive to TREI, and
GE will not sell any turbines in this range globally other than those
manufactured by TREI. We believe the JV will be an important revenue and
margin driver and estimate it will increase TREI’s addressable turbine
market by six times.
�� Completion of turbine business spin-off: TREI is in the process of
spinning off its turbine business as a separate entity, with 78% of the shares
to be distributed to TREI’s shareholders, according to the company, with
TREI holding 22%. We believe this will allow TREI to unlock turbine
business value. TREI is waiting for the approval of the high court. We expect
the process to be completed within the next two to three quarters. While the
spun-off turbine business might result in higher multiples, we have not
included this upside potential in our valuation.
Risks
�� Illiquidity because of the time lag from the partial spinning off to listing
Triveni Turbines: Triveni Turbines, the turbine business, will have to be
listed as per Securities and Exchange Board of India (SEBI) guidelines. This
process could take several months to complete.
�� Slowing industrial capex: TREI manufactures turbines for small power
plants and a large part of its turbine business is driven by industrial
customers building captive power plants. A severe downturn in industrial
capex would have an impact on this business. However, the launch of 30-
100MW turbines should open new markets and limit the impact of a
slowdown.
�� Volatile sugar prices and unfavourable regulations: The global and
domestic sugar industry is highly cyclical, driven by supply-side variations.
Any sharp decline in sugar prices could dampen earnings. We estimate TREI
will generate 62% of its revenue and 36% of EBIT from the sugar-related
businesses in FY11. We think a downturn in the sugar market will affect
investor sentiment. Immediately following the spin-off of the turbine
business, we expect the sugar division’s earnings contribution to TREI to
increase.
�� Absence of internationally recognised auditor: TREI does not have an
internationally recognised auditor.
�� The company’s EPS declined year-on-year in FY10 due to the sugar
division’s cyclicality
Valuation and basis for our price target
We base our price target on a sum-of-the-parts (SOTP) valuation, where we
value the engineering division on a PE multiple and the sugar division on P/BV.
As the sugar business is cyclical, we use the P/BV approach for a normalised
view of the cycle. Listed sugar companies based in the state of Uttar Pradesh
trade at an average September 2010 P/BV of 1.4x and a September 2011E
EV/EBITDA of 9.5x. We value TREI’s sugar division at 1x September 2011E
P/BV, which equates to 8x EV/EBITDA on September 2011 forecasts. We value
TREI’s engineering division at 12.5x FY12E (September 12) EPS. This is in line
with its broad engineering comparable universe.
At our 12-month price target, TREI would trade at 12.2x September 2012E PE,
which we think is conservative based on our forecast EBITDA CAGR of 17%
and EPS CAGR of 26% for FY11-15E that would be driven by the engineering
division’s revenue growth, deleveraging of the balance sheet, and improving
return ratios.
For simplicity, we assume all debt is with the sugar division. Allocating Rs1-
1.5bn of debt to the engineering division would not have a material impact on
our price target.
Comparables
Comparable engineering companies are trading at an average PE of 14x and
EV/EBITDA of 8.5x on March 2012 forecasts. Given the high return parameters
of the TREI’s engineering division, we think this division could trade at 12.5x
September 2012 forecasts within next 12 months.
Uttar Pradesh-based sugar companies are trading at an average 1.4x September
2010 P/BV and September 2011E EV/EBITDA of 9.5x. We value TREI’s sugar
business at 1.0x September 2011E P/BV.
UBS versus consensus
Our financial forecasts depend on our sugar price assumptions and we have used
a normalised view of sugar prices. Additionally, not many analysts cover TREI.
Table 6: UBS vs consensus
(Rs m) UBS Consensus Difference
FY11E
Net revenue 26,063 23,417 11%
EBITDA 4,830 4,012 20%
Net profit 2,380 2,121 12%
FY12E
Net revenue 29,382 25,162 17%
EBITDA 5,544 4,154 33%
Net profit 2,994 1,881 59%
Source: Bloomberg, UBS estimates
Sensitivity analysis
Our valuation of TREI is sensitive to the PE multiple we use for the engineering
division and the P/BV multiple for the sugar division.
Our valuation of the combined entity is also sensitive to the multiples of the
standalone turbine business. For every unit change in the PE multiple of the
turbine business, our valuation would change by Rs4.60.
�� Triveni Engineering & Industries
Triveni Engineering, an engineering and sugar manufacturing company in India,
operates two divisions. The engineering division manufactures small turbines,
high-speed gearboxes and executes water treatment projects. The sugar division
operates sugar mills, cogeneration power plants and distilleries in the northern
state of Uttar Pradesh.
�� Statement of Risk
We believe TREI faces several risks, including: limited liquidity for TREI once
it spins off Triveni Turbines; a slow down in industrial capex, which could have
an adverse impact on TREI’s revenue growth rate as would volatile sugar prices.
TREI is also exposed to the cyclicality of sugar production—its FY10 EPS fell
YoY because of this.
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