The stock of Uttar Pradesh-based sugar producer Triveni Engineering Industries rose by 2.3 per cent on Monday despite performing weak operationally during the 2QFY23. The rally can be attributed to three reasons.

First, the company divested its entire 21.85 per cent stake in the associate company, Triveni Turbine Limited (TTL) last quarter, and reported an exceptional income of ₹1,401.20 crore. The company’s board approved ₹800 crore buyback through tender offer at a price of ₹350 a share, implying a 26 per cent premium from Monday’s closing price of ₹277 apiece. The proposed open offer amounts to around 12 per cent of the company’s current market capitalisation.

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Secondly, the company’s operating margin dwindled to 4.2 per cent in the September 2022 quarter compared to 10.8 per cent during the same period last year, on account of higher cane costs. The State Advised Price of cane was increased by ₹25 a quintal across all varieties, about 7.5-8 per cent increase, while Triveni’s sugar realisation has risen by 1.6 per cent in 2QFY23. However, the SAP for the current year is expected to remain unchanged. Further, the company expects higher recovery from the current year’s variety, aiding margins, given the greater emphasis on soil health and nutrition. Also, the last year’s yields were impacted due to unseasonal rainfall.

Thirdly, despite the expecation of a record domestic production of 36.5 million tonnes in 2022-23 sugar season, the export market continues to remain attractive. India last week had asked sugar companies to complete export of 6 million tonnes, and Triveni expects to ship a significant quantity (~0.2 million tonnes), above 20 per cent of its total output. Higher realisation on exports should help strong performance in the December 2022 quarter. In addition, the company had contracted white sugar exports with higher realisation, aiding a strong performance outlook.

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Besides sugar, the full benefit of Triveni’s total distillery capacity of 660 KLPD will accrue in the December 2022 quarter, helping the company’s performance in the 2HFY23.

The stock has gained over 23 per cent since our buy call in August 2022, and currently trades at 17 times its trailing twelve-month earnings, compared with 11 times for the industry. Investors can continue to hold the stock., given. the growth visibility over the next few quarters.  

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