Sweet offer

IPO REVIEW

Triveni Engineering is attractively priced considering upturn in sugar cycle.

The Rs 1000 crore Triveni Engineering & Industries Ltd (TEIL), one of the largest sugar manufacturers in India, has come out with a public offer. TEIL plans to raise Rs 210-250 crore, through the issue of 5 crore equity shares in the price band of Rs 42-50. At the given price band, the stock trades at trailing 12 month P/E of 6.6-7.9 times.

Analysts feel that the issue is attractively priced taking into consideration the expected firmness in sugar prices due to the prevailing demand-supply imbalance and company's scale of operations.

According to Vikram Suryavanshi of Karvy Stock Broking, sugar prices are expected to remain firm at Rs 18-19 levels or may even move up further as demand is expected to outpace supply for third consecutive year. TEIL's valuation is at a significant discount to its peers like Bajaj Hindustan (15x), Balrampur Chini Mills (11.7x), Dhampur Sugar Mills (11.9x).

TEIL plans to utilise the proceeds of the issue for expanding its current businesses and also to relist its shares by bringing down promoter's stake from 90 per cent to about 72 per cent post issue. The company's shares were suspended from April 28, 2003 as the non-promoter shareholding was below the 25 per cent prescribed by BSE on account of the buyback by the promoters.

A sugary deal
TEIL has its sugar plants at Khatauli (16000 TCD) and Deoband (14000 TCD) in western Uttar Pradesh (UP) and at Ramkola (3500 TCD) in Eastern UP.

It plans to enhance its capacity further by about 20 per cent in FY06 through a greenfield plant in Sabitgarh-Western UP, which is expected to be commissioned by December 2005. The company also plans to set up two more mills with a capacity of 5000-7000 TCD each by the next crushing season (October-September).

Geographical location of the plants is set to benefit the company as western UP has a comparatively long crushing season due to sufficient quantities of sugarcane. The area is also less reliant on monsoons due to canal based irrigation facilities and is close to sugar deficient markets like Rajasthan, Gujarat, Delhi, Punjab, Haryana, West Bengal etc.

However, according to an analyst of a leading brokerage firm, the company is expected to face raw material (sugarcane) shortage as big players like Bajaj Hindustan, Mawana sugar etc. would be vying for buying cane to service their proposed expansion plans next year.

However, S P Tulsian, an investment advisor, is unperturbed given the fact that every player is given a minimum area of 15 km of the cane area around the mill.

Dhruv Sawhney, chairman and managing director of TEIL, says, "The company is likely to avail the benefits of UP Government's incentives in terms of capital subsidy, reimbursement of transportation costs of sugar etc." The company's total investments in the sugar and co-generation business is set to cross Rs 350 crore by FY06 and Rs 500 crore by FY07. 
 

FINANCIALS
(In Rs crores)	Q2FY06	Q2FY05	% change
Net sales	304.01	275.48	10.36
Other income	2.15	0.56	283.93
Operating profit	46.42	50.99	-8.96
OPM(%)	15.27	18.51	-
Net profit	43.15	33.57	28.54
NPM(%)	14.19	12.19	-

Well geared
Beside sugar, TEIL has presence in cogeneration, steam-based turbines, gears, gear boxes and water treatment businesses which contributed about 31 per cent and 20 per cent to the topline and bottomline respectively. Turbines have been the company's main focus and it grew by robust 30 per cent (y-o-y) in FY05.

The company's turbine and gear box business is expected to do well in the coming years as there are a slew of expansion plans proposed by the power intensive industries like steel, cement, paper, sugar etc., which are the main users of turbines and gearboxes for captive power and co-generation requirements.

TEIL is a leading manufacturer of small steam-based turbines, (upto 20.0 MW) with a market share of about 60 per cent (including imports).

Though the company is into low end of the turbine business, it is backward integrated in the gearbox business through alliance with Lufkin for producing higher range and also supplies to its competitors in the turbine business.

TEIL plans to increase manufacturing capacity of turbines and gearboxes in the existing range of upto 20MW and 35MW respectively. The company had witnessed pressure on margins in turbines and gear business due to a sharp rise in steel prices.

However, analyst Pritesh Vinay of Edelweiss Capital believes that steel prices are expected to remain stable after seeing a drop of about 30 per cent in last seven months.

Says Suresh Taneja, chief financial officer of TEIL, "Margins in turbines and gears are expected to improve as steel prices are unlikely to move up any further."

Best of both worlds?
The company's sales have grown at a CAGR of 18.8 per cent in FY01-FY05. However its profits have been fluctuating in the same period due to the cyclical nature of the sugar industry. After posting losses of Rs 1.8 crore in FY01, it posted a hefty profit of Rs 85.66 crore in FY05 thanks to the sharp uptrend in the sugar cycle and resultant firm sugar prices.

For Q2FY06, net sales increased by 10 per cent at Rs 304.01 crore. However operating profits declined by about 9 per cent to Rs 46.42 due to rising prices of key inputs -- sugarcane and steel. Thus operating margins declined by 324 bps to 15.2 per cent. Net profits registered a growth of 28.5 per cent to Rs 43.15 crore while margins improved by 200 bps to 14.2 per cent.

Overall analysts are quite optimistic about the issue as the company is expected to benefit largely from the upturn of the sugar cycle and the engineering business is only going to be an added advantage.

Issue closes: November 25, 2005