Tuesday, May 15, 2012


Higher sugarcane price hurts profits

Triveni Engineering & Industries’ (TEIL) Q2SY12 result was significantly below our estimates with EBITDA at Rs28mn against our estimates of Rs511mn and operating margin at 0.6% (vs. est. 10.7%). EBITDA was adversely impacted due to inventory valuation write-down and losses in the sugar business. The company reported loss of Rs311mn against adjusted profit of Rs208mn in Q2SY11. Sugar business during the quarter was impacted because of higher sugarcane price and reported EBIT level loss of Rs563mn against profit of Rs8mn in Q2SY11. In the Engineering segment, Gear business reported EBIT decline of 14.8% YoY and EBIT margin declined 8.3pp YoY to 33.7%. Water business’ EBIT improved 18.5% YoY to Rs67mn. 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 from higher production expected in SY12E. However, we maintain Buy rating on the stock on account of attractive valuations with target price of Rs23. We have assigned Rs5.5/share value for its 21.8% stake in Triveni Turbine Ltd. 

􀂁 Disappointing performance of sugar segment: Sugar division reported EBIT level loss of Rs563mn against a profit of Rs8mn in Q2SY11 primarily due to inventory valuation write-down and higher sugarcane price paid to farmers after the increase in SAP by the Uttar Pradesh government. Sugar sales volume was up 10.1% YoY to 0.11mn tonnes and blended realization up 10.4% YoY to Rs28.6/kg. 

􀂁 Improvement in realization leads to better performance of distillery segment: EBIT from the distillery segment increased 26.4% YoY to Rs90mn primarily due to 7.5% YoY increase in realization to Rs30.4/litre. EBIT margin of the segment improved 6pp YoY to 26.9%. Improvement in realization was due to focus on ENA, which is being sold to United Spirits Ltd. 

􀂁 Margin decline seen in the Gear business; Order intake improves: Though the revenue of the Gear business increased 6.3% YoY to Rs362mn, EBIT of the segment declined 14.8% YoY to Rs122mn. We believe that increase in revenue share of servicing and other aftermarket services impacted the EBIT of this segment. Revenue share of servicing and aftermarket services increased to 35% of sales in H1SY12 against 26% in H1SY11. Order intake during the quarter increased 48% YoY to Rs269mn in Q2SY12. 

􀂁 Higher interest cost leads to losses: Interest cost of the company increased 35% during the quarter and 30% during H1SY12 driven by higher utilization of working capital. Debt in the books of the company is higher by Rs5.04bn to Rs13.3bn compared to end-SY11. 􀂁 Increase in cane crushing and sugar production in H1SY12: Sugarcane crushing by the company increased 12% YoY to 5.12mn tonnes during H1SY12 and sugar production increased 11% YoY to 0.47mt. Recovery rate was 12bps lower at 9.09% during H1SY12. 

􀂁 Maintain Buy on attractive valuations: The stock is trading at 0.4x SY12E P/BV and 0.49x SY13E P/BV. We maintain Buy rating on the stock with a price target of Rs23, an upside of 66% from the CMP.