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High sugar prices; distillery volumes boost profits…

About the stock: Triveni Engineering (TEL) is one of the largest sugar companies in India with sugar crushing capacity of 60,000 TCD, distillery capacity of 320 KLD & co-generation power of 100 MW. It also has power transmission & waste water management business contributing 10% to revenues

The company is increasing its distillery capacity from current 11 crore litre per annum to 22 crore litre per annum by FY24 to utilise B-heavy, grain & sugarcane juice route to produce ethanol

Q3FY22 Results: TEL reported strong earnings growth led by higher sugar prices

Sales were flat YoY, due to dip sugar volumes off-set by higher sugar prices

EBITDA was at | 202.8 crore, up 26.4% YoY, with margins at 18.2%

PAT was at | 130.1 crore, up by 37.5% YoY, with high sugar & distillery realisation

What should investors do? TEL’s share price has gone up 3.8x in the last five years (from | 74 in February 2017 to | 285 in February 2022).

We expect 2.1x increase in distillery volumes to boost earnings with CAGR of 34.4% during FY21-24E

We maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 350, valuing the business at 16x FY23 PE.

Key triggers for future price performance:

With distillery capex, TEL would be able to increase its ethanol volumes 2.1x to 22 crore litre by FY24. Distillery sales to see 32.8% CAGR to | 1285.8 crore in FY21-24E, which would be 24% of total revenues

Sugar segment profitability would improve with surging domestic & global sugar prices. We estimate sugar realisation of | 34-37 /kg in FY22-24E

The company is expected to generate | 1165 crore of free cash flow in the next three years, which would be utilised for ~| 400 crore capex, debt reduction, buybacks & dividends

Alternate Stock Idea: We also like Dwarikesh Sugar in our sugar coverage

The company is one of the most efficient with highest sugar recovery and abundant sugarcane availability. It is increasing its distillery capacity to 3x in the next three years

We value the stock at | 135/share with BUY recommendation

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