Business Analysis 4: Triveni Power Transmission
There's a huge money to be made through special situations given the entry valuation is right and the future prospects are bright
Though the business isn't listed yet, it's a promising company in the capital goods space. It will be demerged next year and listed separately. There's a huge money to be made through special situations given the entry valuation is right and the future prospects are bright.
Let's start with Triveni Power Transmission, a subsidiary of Triveni Engineering and Industries Ltd. If you are a vulture looking for your food, this might be worth studying.
The parent company which is Triveni Engineering and Industrial Ltd has 3 segments - Sugar and Alcohol, Power Transmission and Water. Around 92% of revenue comes from sugar and distillery, 5% from power segment and the rest 3% from water segment. Total Consildated revenue in FY24 including excise duty was 6151 cr. We will study the power transmission segment only. But as it isn't listed yet we have to value the parent company.
The subsidiary company, Triveni Power which is going to be demerged has 3 segments - Gears, Defence, and Built to print. Their portfolio includes gas turbines and compressor gearboxes, steam turbines, reciprocating pumps, compressor hydel turbines etc.
They serve a diverse range of industries such as power generation, oil & gas, refinery & petrochemical, chemical & fertilizer, sugar, cement, rubber & plastic, steel, marine etc.
In Q2FY25, the company delivered 102.1 cr revenue, more than 30% jump y-o-y with an EBITDA margin around 38%. The business is on its growth path with great margins as compared to its peers. As of Q2 FY25, the company has 345 crs of closing order including 105.5 crs of long duration orders. Its power transmission manufacturing facility is located at Mysuru. They are the market leader in high speed gears and gearboxes up to 70 MW capacity with a speed of 7000 rpm. As far as the capacity is concerned, the company has 12000 gearboxes under operation, 50 GW globally installed gears capacity, 1200+ replacement of >90 global brands.
There's an encouraging response from the international markets in the aftermarket service segment also. Their defence segment also is doing fantastically well with an expectation of increased order booking from gas turbine packaging, propulsion gearboxes, propulsion shafting and special application pumps. They already have 80 tonnes of equipment handling capacity, after capex, it will have another 50-80 tonnes of capacity.
As per the company estimation, Indian gear industry is valued around $500 mn of which high speed gear market is $30 mn. The whole industry is growing at 6-7% CAGR. On the other side, the global gearbox market was valued around $27.01 bn, growing at 3.90% CAGR to reach 36.69 bn by 2030. So there's a huge opportunity in the global market. They are growing their product portfolio to grow their company. Aatmanirbhar Bharat and Make in India schemes are boding well for their business as most industries are promoting indigenisation. So, gearboxes industry will benefit from those schemes. The company expects the export market will do really well in the coming years. Govts' intention of making defence sector stronger will create more opportunities for the company. Due to serving a diverse range of industries, the company dilutes the concentration risk.
Let's come to the valuation picture now.
If I compare the valuation with its peers, there are a few things one needs to keep in mind. Because the power transmission business is still attached with its parent company and not listed we need to calculate the valuation separately.
Most of the sugar companies are trading at similar or below its sales and book values, be it Dalmia Bharat, Avadh Sugar, Magadh Sugar etc except EID Parry and Balrampur Chini which are trading at nearly 1/2x sales/2x book and 2x sales/3x book respectively. As of FY24, the consolidated revenue was 5220 cr excluding excise duty and the book value was 4094 cr. Let's think the company delivers 5500 cr in FY25 growing at 5% consolidated because the sugar and water businesses are not doing well. On an avg, the parent company, Triveni Engineering should trade at around 6-7k cr market cap range. I might be too much conservative. Current market cap is around 11k cr. But they have other businesses also, we should value them separately.
Let's do the valuation of power transmission business. Its FY24 revenue was 292 cr. As of Q2, the company is growing at 30%. So at this run rate, the company will generate around 500 cr by FY26. As of H125 and FY24, they have around 200 cr and 153 cr of net worth respectively. Projected book value would be around 300-350 cr at this run rate. Also, according to the company they are incurring 180 cr capex on gears business to generate 500 cr revenue. How much multiple do you want to give such companies? Let's compare it with its peers, Elecon Engineering and Shanti Gears. After searching a lot, I found these two businesses that have similar side of operations. Elecon is trading around 6-7x sales and 8x book whereas Shanti is trading at 6-7x sales and 10x book on TTM basis. On EV/EBITDA TTM basis, Elecon and Shanti Gears are trading at 27 and 29. So, comparing these two businesses, Triveni Power should be valued around 3000 cr from sales perspective and book perspective it will be around 2700 cr pricing in the 500 crs revenue beforehand. On EV/EBITDA basis, the company should be valued around 4000 cr. All of these are calculated keeping in mind the 500 cr revenue projection by FY26. But on 12-month basis, the company should be listed around 3000 cr with 390-400 crs revenue by FY25. So, on an avg, 3k crs is a good point in a bull market scenario. Then the parent company, Triveni Engineering should trade around 9-10k cr market cap range. Current market cap is around 11k cr. So, currently the business is trading around more or less in the same range.
If you ask me, I would evaluate it in a hypothetical scenario. First, I would definitely wait for the company to list their power transmission business separately at a satisfactory valuation and trade around 1500-2000cr market cap range. Second, if the parent company trades around 6-7k cr market cap range then I may think about buying. Again, I'm saying I might be too conservative. Third, in another situation, if mutual funds sell because of their existing criteria, that might be a good buying opportunity because the business is doing well and there are tailwinds for the business. Also they made their investors rich previously by separating their turbine business long ago. So, for the parent company 6-7k cr market cap and for the power transmission company 1.5-2k would be a favourable buying opportunity given the prospects are bright of course.
All you need to do is to follow how the business is evolving after one year, how the management is executing, what their guidance is etc.
Thanks for reading
Take care
Rabi
Disclaimer: I'm not SEBI registered. This content is for educational purposes only. Do your own diligence.