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Best play in sugar industry…

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 660 KLD & co-generation power of 104.5 MW. It also has power transmission & waste water management business contributing 10% to revenues.

* The company is increasing its distillery capacity from current 21 crore litre per annum to 31 crore litre per annum by FY25 to utilise B-heavy, grain & sugarcane juice route to produce ethanol

Q2FY23 Results: TEL posted 26% revenue growth led by higher sugar volumes.

* Sales were up 26% YoY with 45.2% growth in distillery sales

* EBITDA was muted at | 45.4 crore, down 57.7% YoY, with margins at 3.4%

* Adjusted PAT was at | 24 crore, down 74.0% YoY, due to higher cost of production, one-time wage arrears & higher levy molasses obligation

What should investors do? TEL’s share price has gone up 3x in the last five years (from | 93 in November 2017 to | 277 in November 2022).

* We expect 55.5% CAGR in distillery sales to boost earnings CAGR of 20.3% during FY22-24E

* We maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 380, valuing the business at 14x FY24 PE

Key triggers for future price performance:

* With distillery capex, TEL would increase its ethanol volumes from 11.8 crore litre in FY22 to 25 crore litre by FY24 & 31 crore litre in FY25. Distillery sales would contribute 34% to total revenues in the next three years

* TEL can produce 60% of its total sugar volume as refined white sugar, which could be exported at premium given global white sugar prices are prevailing at | 38-40 /kg. It received export quota of 2 lakh tonnes for 2022-23 season

* The company is expected to generate | 1588 crore of operating cash flow in the next two years, which would be utilised for ~| 900 crore capex (including some currently concluded), 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. Its distillery volumes to increase to 11 crore litres by FY24 from 5.5 crore litres in FY22

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

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