Triveni Engineering and Industries’ move to restructure its businesses into separate entities is in the right direction. While the market doesn’t seem to have taken a note of gains, given the potential shareholders should benefit in the medium term from this move.
The company, which recently got court’s approval to demerge its turbine business into Triveni Turbine (TTL) (effective May 4th), has allotted one share of TTL to its shareholders for every share held in Triveni Engineering. While its share price has corrected from Rs 104 to Rs 40 currently (market capitalisation of about Rs 1,000 crore) to reflect the demerger of the turbine business, analysts suggest Triveni Engineering’s stock is going cheap given the value in the remaining businesses. Nonetheless, TTL’s listing, expected in 4-6 weeks, should more than compensate its shareholders for the decline in the share price.
DEMERGER GAINS
After demerger, shareholders of Triveni Engineering have seen the value of their holding fall by Rs 65 a share — excluding the allotment of one share in the TTL. This means unless TTL lists at Rs 65 or more, shareholders will stand to lose. Analysts though believe it may not be the case.
| VALUE OF BUSINESSES | ||
| Rs per share | ||
| Of demerged business (TTL) | 73.9 | 12 times FY12 PAT |
| Of traded shares (A+B+C) | 79.5 | |
| A) Sugar | 28.5 | 1 time FY11 book value |
| B) Gear, water | 38.1 | 12 times FY12 PAT |
| C) 22% in TTL | 13.0 | 20% discount to TTL value |
| TTL stands for Triveni Turbine Ltd, which is yet to be listed | ||
Consider this: Turbine business’ revenue in the last six years has grown at 29 per cent annually. Even at 25 per cent growth and net margin of 18 per cent, TTL is worth about Rs 1,585 crore or Rs 74 a share estimate analysts. On the other hand, even at Rs 65, the stock will trade at 12.6 times its FY12 estimated earnings, lower than about 16 times valuation its peers enjoy.
For now, the company is strengthening its turbine business, and should sustain its high growth trajectory. TTL, which has over 70 per cent market share in 30 Mw and 85 per cent market share in 20 Mw power turbine category (which mainly caters to the captive power segment), has strengthened its product capability to 100 Mw through a technology-cum-marketing joint venture with global leader, GE of USA. In light of its enhanced capabilities, TTL which has an order book of Rs 560 crore (about 1,000 Mw or 1 times its FY10 revenue) is hoping to bag bigger orders.
VALUE IN EXISTING BUSINESSES
Meanwhile, the Triveni which is left with sugar, gear manufacturing and water businesses, saw revenues (excluding TTL) slip marginally by 6.5 per cent in the March 2011 quarter, in line with expectations. Notably, operating margins improved by about 300 basis points and helped report a 58 per cent jump in net profits.
Among the three remaining businesses, the largest namely, sugar, is being valued at one time its book value as on March 2011, which translates into a per share value of Rs 28.5. Gear and water businesses, which have grown almost three times in revenues (Rs 262 crore in 2009-10) in the last three years, are being valued at about 12 times estimated 2011-12 net profits or Rs 38 a share.
Additionally, Triveni holds 22 per cent stake TTL. At Rs 65 a share of TTL, the value of its holding works out to Rs 13 a share of Triveni Engineering. Put together, the sum of its sugar, water and gear businesses and stake in TTL works out to Rs 79, much more than its existing price of Rs 39.
