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Well placed to benefit from distillery volumes

Triveni Engineering (TEL) reported Q4FY21 results with 20.5% revenue degrowth. The decline was mainly due to a dip in sugar volumes impacted by lower domestic quota & delay in exports. Sugar segment revenue declined 27.6% with similar decline in sugar sales volumes. The company sold 2.74 lakh tonnes (lt) of sugar at realisation of | 32.3/kg and is holding 4.7 lt of sugar at an average price of | 30/kg. However, distillery revenue increased 57.9% led by 16.5% higher distillery volumes & 7.9% increase in realisation (due to higher proportion of B-heavy ethanol).

The distillery volumes were 2.16 crore litre at average realisation of | 57.3/litre. Gear business saw growth of 55.7% given base quarter was adversely impacted by Covid-19 lockdown. Water business continues to remain impacted by pandemic with delay in execution of projects. Operating profit saw de-growth of 11.9% mainly due to muted sugar segment sales. PAT dipped 38.2% to | 85 crore on the back of higher tax provisioning. Total debt is lower by | 576 crore to | 958 crore. TEL generated operating cash flow of | 739 crore in FY21.

Aggressive capacity addition; inventory reduction to aid profit

The company announced another distillery capacity addition of 140 KLD with the capex of | 100 crore. This capacity will be commissioned in November 2022 and takes the total distillery capacity to 22 crore litre pa. Post this expansion, the company would be able to divert more than 80% of its sugarcane towards either B-heavy or sugarcane juice ethanol. We believe TEL would be able to sacrifice 1.5 lt of sugar in FY23E, which would help it reduce the sugar inventory to the reasonable levels. We estimate distillery revenue CAGR of 37% in FY21-23E. TEL would continue to export the excess inventory in 2021-22 sugar season as well. We believe expected increase in global prices would help the company to reduce additional inventories till the distillery capacities come on stream.

Strong cash flow generation; further reduction in debt

TEL has produced 54% of ethanol from B-heavy molasses. With expected commissioning of 160 KLD distillery capacity in January 2022, it would be able to produce 80% of ethanol from B-heavy molasses or sugarcane juice. This would significantly improve distillery realisation & profitability. We estimate 27.7% earnings CAGR in FY21-23E & CFO of more than | 500 crore in FY22E, FY23E, which would be utilised for | 350 crore of capex in the next two years. Moreover, we expect debt reduction of | 300 crore by FY23E.

Valuation & Outlook

Sugar industry fundamentals have changed with the implementation of ethanol blending programme. We believe sugar companies would be able to generate ~25% of sales from distillery segment. With strong cash flow generation, we expect TEL to increase the shareholder’s payout (dividend and buybacks) to ~40%. We maintain BUY recommendation with a revised target price of | 270/share, valuing at 13x FY23 PE (earlier TP | 125).

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