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Capacity expansion in distillery for sustainable growth

Triveni Engineering (TEL) reported strong Q3FY21 results with sustained domestic sugar & distillery volumes & robust growth in operating profits. Consolidated revenue increased 5% to | 1123.1 crore led by 6.8% growth in sugar segment & 7.2% growth is distillery segment. Sugar volume increased by 6.7% to 2.71 lakh tonnes mainly on account of higher domestic sale quota. The company also exported 14244 tonnes of sugar pending from previous seasons export quota.

The company is holding 2.82 lakh tonnes of sugar valued at | 30.9 / kg. Distillery volumes increased by 3.8% to 2.24 crore litre. Distillery realisation was up 1.5% to | 47.8/litre. Engineering businesses continued to remain impacted by pandemic related execution delays. Power transmission sales were down 52.8% to | 21.3 crore mainly due to deferment of supplies from Q3 to Q4. Water business sales was down by 14.7% to | 60.2 crore. Outstanding order book for power transmission & water business was | 160 crore & | 827 crore, respectively.

Operating profit increased 82.6% to | 160.5 crore on account of lower sugar inventory valuation at the end of Q2FY21. Led by higher operating profit & lower interest cost, PAT increased to | 94.7 crore as against |45.2 crore in corresponding quarter

Capacity addition in distillery segment

The company announced capacity addition of two new distilleries of 160 KLD & 40 KLD capacity with capex of | 250 crore. The 160 KLD capacity would fungible for sugarcane juice, B-heavy molasses, C-Heavy molasses & grain whereas 40 KLD capacity would be dedicated for grain based ethanol. With this, TEL’s total distillery capacity would increase to 520 KLD (~16 crore litres pa). It would be able to commission these plants by January 2022. We believe new capacities would create a sustainable business model where company would be able to switch its production between sugar & ethanol according to demand supply situation. Moreover, this would also eliminate the possibility of building up sugar inventory & in turn working capital debt.

Low sugar recovery to increase cost of production

In the current sugar season, sugar recoveries are expected to be lower by 20-30 bps due to adverse weather conditions at the time of ratoon sugarcane crushing. This would increase the cost of production by |0.6 - | 1.0/kg. However, we believe sugar mills in western UP would fare better compared to mills in central & eastern UP. We believe sugar production for TEL would be down by only ~5% & it would be able to take advantage of expected higher domestic sugar prices in FY22E

Valuation & Outlook

The company has been able to reduce its overall debt by ~| 1000 crore in last one year. Further, we believe increase in distillery capacities would result in sustainable growth without building up any working capital debt. We value the stock at 1.3x FY22 book value with a revised target price of | 100/share (earlier target price was | 95/share) and maintain BUY rating.

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