Tuesday, February 14, 2012

>TRIVENI ENGINEERING & INDUSTRIES: Higher sugarcane price hurts profits

Triveni Engineering & Industries’ (TEIL) Q1SY12 result was below our estimates with EBITDA at Rs215mn against our estimates of Rs449mn and operating margin at 5.1% vs. est. 10.1%. EBITDA was adversely impacted due to inventory (of previous year) valuation write-down of Rs250mn. The company reported adjusted loss (adjusted for Rs790mn paid for sugarcane in crushing season 2007-08 after the recent Supreme Court judgment) of Rs108mn against profit of Rs16m in Q1SY11. Sugar business during the quarter was impacted because of higher sugarcane price coupled with lower sales volume (down 19.5% YoY) and reported EBIT level loss of Rs229mn against profit of Rs59mn in Q1SY11. In the Engineering segment, Gear business was adversely impacted due to general economic slowdown and reported revenue decline of 24.4% YoY and EBIT decline of 39.8% YoY to Rs42mn. However, the management expects the performance of this division to improve in Q2 as it believes that off-take by OEMs should improve going forward. We believe that the profitability of the company would be under pressure given the higher State Advised Price (SAP) (Rs240/quintal vs. Rs205/quintal in SY11) fixed by the Uttar Pradesh State government and pressure on sugar prices as higher production is expected in SY12E. However, we maintain Buy rating on the stock on account of attractive valuations with target price of Rs23 (upside of 20.6% from CMP).

 Disappointing performance of sugar segment: Sugar division reported EBIT level loss of Rs229mn against profit of Rs59mn in Q1SY11 (and Rs157mn in Q4SY11) driven by 19.5% YoY decline in sales volume to 0.10mt and higher sugarcane price paid to farmers after the increase in SAP (State Advised Price) by the Uttar Pradesh government. The profit was impacted adversely due to inventory (of previous year) valuation write-down of Rs250mn. Realization of sugar improved 6.5% YoY to Rs28.5/kg.

 Improvement in realization leads to better performance of distillery segment: Led by 2x YoY sales volume increase and 20.6% YoY in realization, revenue from the distillery segment went up 141.9% YoY to Rs310mn. EBIT of this segment increased 4.8x YoY to Rs55mn and EBIT margin improved 878bps YoY to 17.7%.

 Increase in cane crushing and sugar production during the quarter: Sugarcane cane crushing increased 25% YoY to 1.8mn tonnes during the quarter and sugar production increased 20% YoY to 0.15mt. Recovery rate was 37bps lower at 8.6% during the quarter, however, recovery rate is expected to improve going forward as the crushing of new plant crop starts in February.

 Maintain Buy on attractive valuations: The stock is trading at 0.56x SY12E P/BV and 0.69x SY13E P/BV. We maintain Buy rating on the stock with a price target of Rs23, an upside of 20.6% from the CMP. The key triggers for the stock would be a) sustainability of sugar price at higher levels b) more allowance for export and c) court ruling in favour of sugar mills in the ongoing case for higher sugarcane price fixed by the Uttar Pradesh state government for SY12E (as per the management the high court of Uttar Pradesh has reserved its judgment).