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TRE posted subdued 1QFY24 performance which were in line with our expectations. The company's revenue experienced a YoY decline of 2%, reaching Rs12.0bn, slightly above CentrumE's Rs11.8bn. However, the GMs outperformed our estimates, standing at 29%, a significant YoY increase of 460bps compared to our projected 24.4%. Nevertheless, the EBITDA margin came in at 10.4%, exceeding our projected 8.9% and showcasing an improvement from 1QFY23's 9.3%. TRE's reported PAT of Rs676mn, exhibiting a YoY growth of 2%,surpassing our estimated Rs573mn. FY24 poses significant challenges for TRE, as they are encountering several headwinds: 1) Western UP is grappling with yield and recovery pressures caused by red rot diseases, affecting TRE given their major presence in that region; 2) The ethanol production mix at TRE has a high dependency on grains (25% in FY23). Currently, these grains supply have been suspended by FCI, and the open market rates for damaged grains are exorbitantly high, which will likely impact their profit margins. The uncertainty surrounding rice availability would also affect visibility for their capex plans. These plans are crucial for growth prospects in FY25; 3) Moreover, as we approach the general election, there are two additional concerns that may impact its stock performance: a) an increase in SAP rates, and b) potential delays in implementing the export policy for SSY24. Considering these challenges and uncertainties, we have downgraded the stock to "Reduce" with a target price of Rs305.

Sugar segment performance declined The Sugar division of TRE reported a significant decline in revenues, reaching Rs8.9bn, marking a YoY fall of 15% (CentrumE Rs9.3bn). On volume front, TRE reported a YoY decline of 16% (CentrumE 2.02LMT) to 2.02LMT (Domestic 1.87LMT + Export 0.15LMT). This volume was achieved at blended realization of Rs37.2/kg which was in line with our estimates of Rs37.1/kg. Moving to the EBIT front, the division reported a profit of Rs495mn (CentrumE/1QFY23 Rs375mn/532mn, respectively).

Distillery segment

TRE's Distillery division delivered a below expectations performance. The division witnessed a YoY revenue growth of 21%, reaching Rs2.9bn, (CentrumE Rs3.2bn). This outstanding growth can be attributed to the expansion of capacity to 660 KLPD. The EBIT margins stood at 17.3% (CentrumE 18.0%). The EBIT for the segment amounted to Rs510mn.

PTB division higher than expected performance…

PTB division exhibited a performance that was above expectations, with a highest YoY revenue growth of 78%, amounting to Rs540mn. The EBIT margin stood at 34.0%.

…water division disappoints

TRE reported lower than expected performance in the Water division too with a YoY fall of only 1% on revenue front to Rs0.6bn and clocking modest EBIT margins of 4.6%.

Downgrade to Reduce from Add

FY2024, we anticipate TRE to focus on consolidation due to lower yields and recovery in SSY23. Looking ahead, we project a CAGR of 22% in TRE's consolidated core EPS over the period of FY23-25. This growth will be primarily attributed to improvements in EBITDA margin by FY25 and the expansion of distillery capacity which management is confident of achieving inspite of near term challenges. Revised recommendation to Reduce from ADD. Key risks to our recommendations: 1) upward revision in ethanol prices for ESY23; and 2) unlocking of value engineering business.

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