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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

Q2FY22 Results: TEL reported strong earnings growth led by higher sugar prices

* Sales were flat YoY, due to lack of exports & lower domestic quota

* EBITDA was at | 107.3 crore, up 37.8% YoY, with margins at 9.3%

* PAT was at | 92.5 crore (up 3x YoY) with higher operating profit, lower interest cost & one-time higher profit from associate

What should investors do? TEL’s share price has gone up 3.2x in the last five years (from | 60 in October 2016 to | 192 in October 2021).

* We expect 2.1x increase in distillery volumes to boost earnings with CAGR of 27.7% during FY21-24E

* We maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 270, valuing the business at 13x 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 may witness 32.8% CAGR to | 1285.8 crore in FY21-24E, which would be 23% of total revenues

* Sugar segment profitability would improve with surging domestic & global sugar prices. We estimate sugar realisation of | 34-36 /kg in FY22-FY24

* The company is expected to generate | 1400 crore of operating 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 | 110/share with BUY recommendation

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