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UBS Investment Research
Triveni Engineering & Industries
Sugar at cyclical trough, deregulation a
p otential catalyst
Management meeting takeaways—Sugar at cyclical low in FY11
We met the Triveni Engineering management team. We think the sugar division is
at a cyclical trough and expect it to post 41% improvement in EBITDA in FY12.
We believe the drivers are higher free market sugar prices, lower mix of levy
sugar, and higher sugar recovery rates for Triveni Engineering.
Revised estimates to factor in lower revenue growth rate for Water
As a result of slower capex by the power sector as well as by government bodies,
we are lowering our estimate of growth rate for the Water division.
Gear to continue to be strong due to expansion in addressable market
Triveni Engineering has entered into a technology tie-up with Lufkin to launch
low-speed high-precision gear. These products will focus on the rubber, steel,
metals and cement, power and marine industries. As per the company, the
opportunity for high-precision low-speed gear is 2-3x that for high-speed gear, and
import substitution should propel growth of the low-speed gear division.
Valuation: Buy rating, Rs80 price target
We derive our price target from our sum-of-the-parts-based methodology, using a
multiple-based approach. We value the engineering division at 14x PE and the
sugar business at 1x P/BV. We lower our price target to Rs80 to reflect the lower
growth rate for the Water division.
Takeaways from management meeting
Sugar division
Triveni Engineering has weak profitability in the sugar division in Q1-Q3 FY11
due to three Triveni Engineering-specific factors:
Lower sugar recovery rates—Triveni Engineering recorded a sugar recovery
rate of 9.15% in FY11, compared to the five-year average of 9.9%. We
expect the sugar recovery rate to improve to 9.5% FY12 onwards. We expect
this to lead to 0.8 Rs/kg higher EBITDA for sugar.
Lower levy sugar sales—we expect the levy sugar sales to be 10% compared
to 15.5% during FY11. We expect this to help realisations be 0.5 Rs/kg
higher than FY11.
Higher sugarcane procurement—we expect Triveni to improve its sugarcane
procurement to increase 10% YoY in FY12 and FY13 each to 5.1 mio tonnes
and 5.6 mio tonnes, respectively. This would also allow for more uniform
cane availability through the crushing season, subsequently higher steam
efficiency, and higher cogen power production. Subsequently, we expect
power sales to grow at 12% / 10% YoY in FY12 / FY13.
While the State Advised Price (SAP) for sugarcane procurement can be higher,
we expect higher sugar prices to compensate for higher sugarcane SAP. Many
sugar mills in Uttar Pradesh are recording losses and subsequently, the SAP
increase is likely to be limited.
Potential sugar decontrol
Triveni Engineering and other sugar companies are lobbying for sugar decontrol.
The government has shown willingness to decontrol key commodities:
Over the past three years, the government has slowly deregulated fertilizers.
The government has allowed export of non-Basmati grade rice in July 2011
and export of onions in September 2011.
We think that the potential decontrol may include multiple factors:
Allow sugar companies to sell sugar as and when they would like to—this
would allow sugar companies to improve their cash flow.
Do away with levy quota; the government may bear part of the subsidy
burden for levy sugar.
Introduce a policy for sugar exports as there is no firm policy yet.
Potentially remove sugar from the essential commodities act.
We believe the recent policy direction and weak financial state of sugar
companies in Uttar Pradesh bode well for decontrol.
It is difficult to predict the timing of decontrol. However, sugar decontrol could
be a key event for Triveni Engineering.
Triveni’s efforts focused on development of catchment
area
Triveni Engineering has been working with ICRISAT and AgSri (Hyderabad) to
help farmers in Uttar Pradesh adopt practices to improve sugarcane yield and
sugarcane quality. This will help Triveni Engineering improve sugar recovery
rates further as well as increase its crushing season. Improvement in recovery
would drive higher EBITDA margins, while lengthening of the crushing season
would drive higher asset turn. These efforts—termed Sustainable Sugarcane
Initiative (SSI)—are aimed at:
Sugarcane yield improvement—farmers who planted using SSI methodology
were able to improve sugarcane yield by 50-100%. However, during wider
plantation efforts, the yield improvement may be lower.
Improving the quality of sugarcane so that the recovery rates are higher.
Increasing the efficiency of irrigation water.
In the second year of the effort, Triveni has been able to achieve trial SSI
plantation in 1650 hectares and expects to grow this exponentially over the next
two to three years.
Gear division—expansion into low-speed gears
Triveni Engineering entered into a technology tie-up with Lufkin in August
2011 to launch high-precision low-speed gear products in its gear product
portfolio. The low-speed gear products will focus on the rubber, metal, steel,
cement, power and marine engineering industries. As per the company, the highprecision
low-speed gear market is 2-3x the market for high-speed gear; an
increase in addressable market and potential for import substitution can be key
drivers for growth in the gear division.
Incremental capital deployment
The company plans to explore opportunities in Build-Operate-Transfer (BOT) in
water treatment. Triveni is already providing water treatment solutions to power
plants as well as to municipalities. It intends to pursue opportunities in BOT
projects in water treatment—both in providing water treatment plants to power
plants as well as to municipalities on BOT basis. This would provide an
attractive opportunity for Triveni Engineering to deploy its capital and also grow
the attractive water treatment business.
Triveni Engineering & Industries
Triveni Engineering & Industries, 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
Sugar at cyclical trough, deregulation a
p otential catalyst
Management meeting takeaways—Sugar at cyclical low in FY11
We met the Triveni Engineering management team. We think the sugar division is
at a cyclical trough and expect it to post 41% improvement in EBITDA in FY12.
We believe the drivers are higher free market sugar prices, lower mix of levy
sugar, and higher sugar recovery rates for Triveni Engineering.
Revised estimates to factor in lower revenue growth rate for Water
As a result of slower capex by the power sector as well as by government bodies,
we are lowering our estimate of growth rate for the Water division.
Gear to continue to be strong due to expansion in addressable market
Triveni Engineering has entered into a technology tie-up with Lufkin to launch
low-speed high-precision gear. These products will focus on the rubber, steel,
metals and cement, power and marine industries. As per the company, the
opportunity for high-precision low-speed gear is 2-3x that for high-speed gear, and
import substitution should propel growth of the low-speed gear division.
Valuation: Buy rating, Rs80 price target
We derive our price target from our sum-of-the-parts-based methodology, using a
multiple-based approach. We value the engineering division at 14x PE and the
sugar business at 1x P/BV. We lower our price target to Rs80 to reflect the lower
growth rate for the Water division.
Takeaways from management meeting
Sugar division
Triveni Engineering has weak profitability in the sugar division in Q1-Q3 FY11
due to three Triveni Engineering-specific factors:
Lower sugar recovery rates—Triveni Engineering recorded a sugar recovery
rate of 9.15% in FY11, compared to the five-year average of 9.9%. We
expect the sugar recovery rate to improve to 9.5% FY12 onwards. We expect
this to lead to 0.8 Rs/kg higher EBITDA for sugar.
Lower levy sugar sales—we expect the levy sugar sales to be 10% compared
to 15.5% during FY11. We expect this to help realisations be 0.5 Rs/kg
higher than FY11.
Higher sugarcane procurement—we expect Triveni to improve its sugarcane
procurement to increase 10% YoY in FY12 and FY13 each to 5.1 mio tonnes
and 5.6 mio tonnes, respectively. This would also allow for more uniform
cane availability through the crushing season, subsequently higher steam
efficiency, and higher cogen power production. Subsequently, we expect
power sales to grow at 12% / 10% YoY in FY12 / FY13.
While the State Advised Price (SAP) for sugarcane procurement can be higher,
we expect higher sugar prices to compensate for higher sugarcane SAP. Many
sugar mills in Uttar Pradesh are recording losses and subsequently, the SAP
increase is likely to be limited.
Potential sugar decontrol
Triveni Engineering and other sugar companies are lobbying for sugar decontrol.
The government has shown willingness to decontrol key commodities:
Over the past three years, the government has slowly deregulated fertilizers.
The government has allowed export of non-Basmati grade rice in July 2011
and export of onions in September 2011.
We think that the potential decontrol may include multiple factors:
Allow sugar companies to sell sugar as and when they would like to—this
would allow sugar companies to improve their cash flow.
Do away with levy quota; the government may bear part of the subsidy
burden for levy sugar.
Introduce a policy for sugar exports as there is no firm policy yet.
Potentially remove sugar from the essential commodities act.
We believe the recent policy direction and weak financial state of sugar
companies in Uttar Pradesh bode well for decontrol.
It is difficult to predict the timing of decontrol. However, sugar decontrol could
be a key event for Triveni Engineering.
Triveni’s efforts focused on development of catchment
area
Triveni Engineering has been working with ICRISAT and AgSri (Hyderabad) to
help farmers in Uttar Pradesh adopt practices to improve sugarcane yield and
sugarcane quality. This will help Triveni Engineering improve sugar recovery
rates further as well as increase its crushing season. Improvement in recovery
would drive higher EBITDA margins, while lengthening of the crushing season
would drive higher asset turn. These efforts—termed Sustainable Sugarcane
Initiative (SSI)—are aimed at:
Sugarcane yield improvement—farmers who planted using SSI methodology
were able to improve sugarcane yield by 50-100%. However, during wider
plantation efforts, the yield improvement may be lower.
Improving the quality of sugarcane so that the recovery rates are higher.
Increasing the efficiency of irrigation water.
In the second year of the effort, Triveni has been able to achieve trial SSI
plantation in 1650 hectares and expects to grow this exponentially over the next
two to three years.
Gear division—expansion into low-speed gears
Triveni Engineering entered into a technology tie-up with Lufkin in August
2011 to launch high-precision low-speed gear products in its gear product
portfolio. The low-speed gear products will focus on the rubber, metal, steel,
cement, power and marine engineering industries. As per the company, the highprecision
low-speed gear market is 2-3x the market for high-speed gear; an
increase in addressable market and potential for import substitution can be key
drivers for growth in the gear division.
Incremental capital deployment
The company plans to explore opportunities in Build-Operate-Transfer (BOT) in
water treatment. Triveni is already providing water treatment solutions to power
plants as well as to municipalities. It intends to pursue opportunities in BOT
projects in water treatment—both in providing water treatment plants to power
plants as well as to municipalities on BOT basis. This would provide an
attractive opportunity for Triveni Engineering to deploy its capital and also grow
the attractive water treatment business.
Triveni Engineering & Industries
Triveni Engineering & Industries, 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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