The industrial sector’s increasing demand for power spells greater opportunity for players in the steam turbines and related services space. Triveni Turbines, involved in engineering steam turbine solutions, stands to be a beneficiary here.

Despite geopolitical headwinds globally, Triveni Turbines has managed to sustain higher export order inflows in the API segment, with average export sales of around 42 per cent during FY19-FY23. Further, the aftermarket segment, being a high-margin and non-cyclical business, has been witnessing higher traction globally, with the contribution to the total sales climbing from 25 per cent in FY19 to 33 per cent in 9MFY24. In the last five years, i.e., FY19-FY24E (including consensus estimate for Q4FY24), the revenue and PAT CAGR of Triveni Turbines are around 15.3 and 22.3 per cent respectively.

The stock price has given 5x returns in the last five years and is also up by 28 per cent year-to-date. It now trades at a forward price-to-earnings ratio of around 48 times, which represents a premium of over 50 per cent compared to its five-year average P/E of 31 times.

While premium is warranted, given the better underlying structural trend now, at current levels it also appears that long-term growth prospects are factored in. Further, as per the management guidance, with the company aiming to grow manpower by 20 per cent in FY25, the EBITDA margin may remain range-bound at 19-20 per cent for the near term. Hence, given the balanced risk-reward, while existing investors can continue to hold the stock, fresh positions need not be considered at this juncture.

Business

Since its de-merger from Triveni Engineering and Industries in 2011, Triveni Turbines has established itself as a prominent player in the industrial steam turbine sector, with a domestic market share of 50-60 per cent in the sub-30MW segment and ranking second largest globally, with a share of around 20 per cent in the sub-100MW category. The company operates primarily in two segments: sales of turbines (67 per cent of revenue in 9MFY24), and aftermarket services (33 per cent). With 54 per cent of sales derived domestically and 46 per cent from exports in 9MFY24, the company’s footprint spans around 80 countries worldwide, with key export regions including South-East Asia, Africa, Europe, South America, and North America.

Triveni Turbines offers customised steam turbines catering to industries such as sugar, distilleries, steel, cement, pulp & paper, and more. It primarily operates its manufacturing facilities at two plants in Bengaluru, at Peenya and Sompura.

While the company initially ventured into producing 30-100 MW turbines through a JV agreement with General Electric (established in FY11), it dissolved the JV in September 2021, citing underperformance. Now operating independently in this space, Triveni Turbines serves end-user industries requiring captive power plants and waste heat recovery systems for electricity generation from steam. This business model, while potentially lucrative, exposes the company’s revenue streams to fluctuations in the capex cycles of these end-user industries.

However, the company has diversified into manufacturing American Petroleum Institute (API)-compliant drive turbines targeting industries such as oil & gas, petrochemical, refinery, and fertiliser sectors, which present new revenue streams. It has been recognised as an approved vendor by several OEMs. Currently, it represents a modest single-digit portion of the company’s total order book. Through its aftermarket services, it provides spare parts, turbine maintenance, and retrofitting/refurbishment services (with its Triveni REFURB brand) for both its turbines and those of competitors.

Performance

As on December 31, 2023, Triveni Turbines has achieved an all-time-high order backlog, reaching ₹1,575.4 crore. During 9MFY24, it experienced a surge in order inflows, rising by 27 per cent y-o-y to ₹1,443.2 crore, primarily driven by a 60 per cent y-o-y increase in export bookings, while domestic order inflow growth remained relatively flat at 3 per cent y-o-y. This can be attributed to subdued order bookings from major capex-driven industries in Q1, and delayed order finalisations from certain customers in Q3.

Order inflows in the aftermarket segment witnessed good traction, growing by 49 per cent y-o-y. Triveni Turbines has been strategically expanding its aftermarket segment globally, evidenced by its acquisition of a South African firm (TSE Engineering) in March 2022 and the establishment of a wholly-owned subsidiary (Triveni Turbine Americas Inc) in the US in February 2024.

The company reported a y-o-y operating revenue increase of around 36.5 per cent to ₹1,195.9 crore in 9MFY24, driven by a higher share of exports (up 50 per cent y-o-y) and robust growth in the aftermarket segment (up 49 per cent y-o-y). Further, the EBITDA increased by 36.8 per cent to ₹229 crore while the margins remained flat at 19.1 per cent. The lack of operating leverage can be attributed to ongoing workforce expansion efforts, alongside increased expenses related to subcontracting charges in the South African Development Community (SADC) region and travel costs. The company has a robust balance sheet, with a debt-free status, low (to negative) working capital, supported by advances from customers, and healthy cash reserves.

Outlook

With the recent capacity expansion at the Sompura unit, Triveni Turbines has significantly enhanced its annual manufacturing capacity to 250-300 machines, up from the previous range of 150-180 machines, eliminating the need for further capital expenditure in the near term.

Despite recent softness in the domestic sector, with a dominant position in sub-30MW turbines, the company is poised to benefit from an anticipated upswing in large-scale private capex initiatives. Post-election improvements are expected to drive order inflows from large industrial segments, potentially translating to higher domestic order inflows.

With a robust order backlog, an increasing share of exports, and a growing aftermarket segment, the revenue can grow more than 25 per cent CAGR during FY23-26E as per Bloomberg consensus estimates, while PAT can grow by around 36 per cent CAGR during the period driven by operating leverage, and strong topline growth. However, the stock price has experienced a sharp run-up in valuation following its December quarter earnings announcement. Hence, risk-reward appears balanced for now.

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