The Hindu Business Line : Triveni Engineering and Industries: Avoid

Inconsistent financial performance over the past few years and intensifying competition for cane enhance risks. A history of shareholder-unfriendly moves could also dampen valuation levels.

INVESTORS can avoid subscribing to the public offer from Triveni Engineering. The company offers scope for sharp expansion in earnings over the next year or two, as benefits from its expanded capacities add to revenues during a favourable phase in the sugar cycle. The company is comparable in size to leading players such as Balrampur Chini Mills. But an exposure to this stock carries higher risk because of inconsistent financial performance over the past few years and intensifying competition for cane in the region where the company's mills are located.

A history of shareholder-unfriendly moves by the company in the past could also weigh on valuations. At the higher end of the price band, the asking price of Rs 50 values the stock at about 10 times its trailing 12-month earnings.

Triveni Engineering controls sugarcane crushing capacities of 29,500 tcd (tonnes crushed per day) spread over three locations in western Uttar Pradesh- Khatauli, Deoband and Ramkola. The company also has power cogeneration capacities of 22 MW at Deoband and 23 MW at Khatauli. Plans are also afoot to add crushing capacities of 7000 tcd at Sabitgarh, a new location. The sugar business contributes over 80 per cent of the company's revenues, while the manufacture of steam turbines (less than 15 MW) contributes the rest; the gears business makes a marginal contribution.

Financial performance over the past five years has not been consistent, with the company registering a loss in two of the years. But both revenue and profitability have surged in 2004-05 bolstered by higher sugar prices and new revenue streams from co-generated power. For the trailing 12-month period, the company reported a net profit of Rs 122 crore on net sales of Rs 1,061 crore; profits registering a manifold jump over the preceding year. This translates into per share earnings of about Rs 4.7 on the post-offer equity base.

Healthy growth in profits could continue over this fiscal and the next. For one, the sugar cycle continues to be in the ascendant, with sugar prices holding firm on expectations of tight supply. Second, in Triveni's case, new crushing capacities of 4250 tcd and cogen capabilities of 23 MW at Khatauli have recently been commissioned and will contribute with effect from the current crushing season (beginning October). The company's order-book in the turbines business, representing over two years' revenues, also lends visibility to earnings. Third, earnings could also receive a boost in the current season (2005-06) from a longer crushing season due to improved cane availability.

However, the risks to the stock stem from four key sources:

The company has ambitious expansion plans on the drawing board, in addition to the ones that are already being implemented. If the new capacities kick in after the sugar cycle returns to a surplus, higher fixed costs could cut into earnings.

Competition for procurement of cane in the areas where the company's plants are located has been intense. Proposed expansion projects by competitors in the same region could escalate procurement prices for cane. Diversion of cane to competitors or to alternate sweeteners could prevent the company from fully utilizing expanded capacities.

In the past, the company has not been resilient to a downturn in the sugar cycle. Financials may be quite sensitive to swings in sugar prices.

The company's stock has been suspended from trading since April 2003. Prior to this, the company put through a series of mergers and restructuring measures involving group entities. In 2003, the company implemented a scheme of arrangement that offered to convert existing equity shares of public shareholders into preference shares, using a "negative consent" mechanism. This raised the promoter holding in the company to about 92 per cent and the stock has been suspended since the implementation of that scheme. The stock is proposed to be re-listed through this offer.

Background: Five crore shares with a face value of Re.1 are being offered through this prospectus. The price band for the offering is Rs 42-50. Of the offer proceeds of about Rs 191 crore, Rs 135 crore will be used to establish a new 7,000 tcd sugar plant at Sabitgarh and Rs 19 crore towards the cogeneration unit at Khatauli. The balance will go towards expansion of infrastructure at the turbine and gears businesses at Bangalore and Mysore respectively.

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