Triveni Engineering and Industries Ltd: Fundamental Analysis

The current section of the “Analysis” series covers Triveni Engineering and Industries Ltd, a leading Indian sugar manufacturer with diversified operations in alcohol i.e. ethanol, Indian Made Foreign Liquor (IMFL), and Indian Made Indian Liquor (IMIL), power transmission i.e. high-speed gearboxes, gas & steam turbines and water treatment businesses.

To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

Triveni Engineering and Industries Ltd: Detailed Fundamental Analysis

In most of its operating history, Triveni Engineering and Industries Ltd has had multiple child entities i.e. subsidiaries and joint ventures. As a result, the company reports both standalone as well as consolidated financials.

On June 30, 2024, the company had 11 subsidiaries and one joint venture (Q1-FY2025 results, pages 7-8).

We believe that while analyzing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of a company present such a picture. Therefore, if a company reports both standalone as well as consolidated financials, then in such a case, it is advised that the investor should prefer the analysis of the consolidated financials of the company, whenever they are present.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Therefore, in our analysis of Triveni Engineering and Industries Ltd, we have analysed consolidated financials for the last 10 years (FY20115-FY2024).

Financial and Business Analysis of Triveni Engineering and Industries Ltd:

In the last 10 years, Triveni Engineering and Industries Ltd has increased its sales at an annual growth rate of 11% from ₹2,061 cr in FY2015 to ₹5,220 cr in FY2024. During the last twelve months i.e. July 2023-June 2024, the company increased its sales to ₹5,323 cr.

Over the last 10 years (FY2015-2024), the operating profit margin (OPM) of Triveni Engineering and Industries Ltd has witnessed wild fluctuations from 0% in FY2015 to 18% in FY2017 and then declining to 8% in FY2018. In the last 12 months, the company had an OPM of 11%.

The net profit margin (NPM) of the company has been equally volatile and the company reported losses in FY2015 and FY2016. Thereafter, its NPM increased to 10% in FY2022. In FY2023, the company reported an NPM of 32% as it had a large one-time income of about ₹1,500 cr from the sale of its stake in a group company, Triveni Turbine Ltd. In the last 12 months (July 2023-June 2024), the company reported an NPM of 7%.

The financial picture of the company’s historical performance presents more insights if an investor extends her analysis to the earliest available financial information from 1996 onwards present in its historical annual reports available on the website of BSE Ltd.

In the below table, we have presented the data of sales, net profits and net profit margin (NPM) for the last 29 years (1996-2024) for Triveni Engineering and Industries Ltd.

A look at the last 29 years shows that the financial performance of Triveni Engineering and Industries Ltd has been very volatile. The company has frequently had periods of declining sales and profitability. Once, it had a continuous stretch of net losses from 2012 to 2016. Even otherwise, the profit margins have been very volatile and after a few years of good margins, suddenly, the margins see sharp declines.

To understand the reasons for such fluctuations in the business performance of Triveni Engineering and Industries Ltd over the years, an investor needs to read the publicly available documents of the company like annual reports from 1997 onwards, conference calls, credit rating reports, management interactions as well as its corporate announcements.

In addition, an investor should also read the following article in which we have highlighted key factors influencing the business of sugar-producing companies: How to do Business Analysis of Sugar Companies

After going through the above-mentioned documents and article, an investor notices the following key factors, which influence the business of Triveni Engineering and Industries Ltd. An investor needs to keep these factors in her mind while she makes any predictions about the performance of the company.

1) Highly volatile and uncertain nature of sugar production due to cyclical industry and agro-climatic risks:

The sugar industry is highly cyclical where periods of good production are almost always followed by poor production. Whenever there is a surplus production of sugar, then it creates high inventories in the market leading to a decline in sugar prices. As a result, sugar mills pay a lower price to farmers for sugarcane due to which in the next year, farmers sow less sugarcane. A shortage of sugarcane in the next year reduces sugar production and the excess inventory levels of the previous year get consumed, which leads to high sugar prices, high sugarcane prices and high cultivation. It is a cycle that repeats indefinitely.

For example, during 2005-2007, the sugar industry saw an upcycle and the surplus production led to very high inventories. As a result, in 2008, sugar prices crashed below the price of sugarcane and the sugar industry made huge losses.

FY2008 annual report, page 22:

sugar production rose from 12.7 million tonnes in SY 05, to 28.3 million tonnes in SY 07. This has resulted into high inventory levels, which in turn led to mellowing of sugar prices. Ex-factory sugar prices, after peaking from Rs. 20000 per tonne in February /March 06, declined to Rs. 12800 in May 07 – which was even lower than the cane cost itself, resulting in huge losses for the sugar industry

Due to low prices of sugar and losses in the industry, mills could not pay remunerative prices of sugarcane to farmers. As a result, the next year, sugarcane cultivation was less and sugar production declined sharply by almost 50% from 2007.

FY2009 annual report, page 17:

Sugar production in India came down to 14.6 million tonnes in 2008-09, dropping by near 50% from the 28.3 million tonnes produced in 2006-07

After a few years, the sugar production revived and then again resulted in huge oversupply by 2015 leading to another crash of sugar prices in 2016.

FY2016 annual report, page 16:

Due to global and domestic oversupply, the sugar prices were on a declining trend during the first half of the year. In July-August’15, the sugar prices hit six-year lows with massive dumping by many mills in order to generate cash flows to meet the operating expenses and to pay farmer dues.

Due to huge sugar oversupply and crashing sugar prices, mills were not able to pay the farmers who in turn reduced sugarcane cultivation leading to a sharp decline in sugar production in the next year and rising sugar prices.

FY2017 annual report, page 18:

sugar production for Sugar Season (SS) 2016-2017 declined significantly, even below the consumption levels, which led to correction of sugar stocks in the country. The resulting strong sugar prices helped the sugar industry witness a remarkable turnaround

Thereafter, sugar production again increased and reached a significant surplus by 2019 and declining sugar prices.

FY2019 annual report, page 21:

Sugar business remains saddled with issues mainly emanating from surplus production for the last three consecutive years and record domestic sugar inventories which resulted in lower realisation of sugar

After the last few years of surplus sugar production, the cycle turned and by 2024, the industry was facing a shortage of sugarcane.

FY2024 annual report, pages 10-11:

decline in revenue of the Sugar business by 11.6% to ₹ 3,857.9 crore…season also witnessed a higher diversion of sugarcane to kolhus/ crushers…This reduced sugarcane availability and thus its crush.

From the above discussion, an investor would appreciate that the sugar industry is highly cyclical where sharp reduction and increases in sugar production in any two consecutive years is seen frequently. Therefore, it becomes difficult to anticipate a smooth year-on-year growth and financial performance from sugar-producing companies.

Within this cyclical nature of the sugar industry, the susceptibility of sugarcane crops to various agro-climatic risks adds further risk to sugar production. Sugarcane production is affected by lower rainfall (draught), excess rainfall (flooding/water logging), El Nino and pest attacks.

For example, in 2024, the sugarcane crop in UP was affected by poor climate and pest attacks.

FY2024 annual report, page 8:

Adverse climatic conditions and the spread of red rot disease impacted sugarcane yields in the state of Uttar Pradesh

In 2006 as well as in 2000 (Pyrilla attack), sugarcane yield was impacted by pest attacks. (FY2006 annual report, page 23 and FY2000 annual report, page 16).

In 2016 (El Nino), 2017 and 2006, the sugarcane crop was impacted by drought.

FY2016 annual report, page 21:

El nino has affected the sugarcane production in major sugarcane producing countries. El nino led to excessive rains in Brazil and drought in India and Thailand.

However, on other occasions, heavy rainfall leading to floods and waterlogging affected the sugarcane crop e.g. in 1999 and 2001.

FY2001 annual report, page 9:

Performance of all sugar units in Eastern U.P. was seriously affected owing to the early commencement of rains in April 2000, and their continuance till end September. Substantial cane acreage remained submerged in water for more than 3 months

Therefore, an investor can appreciate the volatility inherent in the sugar industry. In light of this, it comes as no surprise to the investor when she reads that in FY2017 when Triveni Engineering and Industries Ltd had a record sugar crush, then it was after 10 years, that it had crushed so much sugarcane. In the intervening 10 years, it was continuously impacted by one or the other factor and it could not improve upon its performance of FY2007.

FY2017 annual report, page 25:

Company has achieved record sugar cane crush and sugar production during the Sugar Season 2016-17. The previous highest crush achieved by all seven units was exactly a decade ago at 610 lakh quintals.

Therefore, any investor in sugar companies should keep in her mind that if any company currently has its highest-ever production, then the cyclicity and uncertainty of the industry may suppress its performance even for the next whole decade.

To solve agro-climatic challenges, the company has continuously tried to take steps like changing the varieties of sugarcane to improve yield and productivity.

FY2019 annual report, page 25:

turnaround in the UP sugar industry, owing to rapid propagation of a new variety of sugarcane Co-0238, which has resulted in unprecedented increase in recovery, along with rising yields.

However, this is a continuous struggle because new crop varieties work well for a few years and thereafter, they become susceptible to pests. Co-0238 variety of sugarcane, which once was appreciated a lot due to its high yield, soon became a trouble as it was susceptible to red rot disease.

FY2022 annual report, page 42:

Co 0238, the most widely cultivated variety across our units (as well as the State) has started becoming susceptible to red rot under certain climatic conditions at some of our units. There is, thus, need to gradually replace it with newer promising varieties.

Therefore, the company had to drastically cut down on the cultivation of Co-0238 in its catchment area.

Conference call transcript, Q1-FY2025 results, August 2024, page 7:

Tarun Sawhney:…last year, we had 77% of Co0238 variety across the seven sugar units. This year…our target was to bring this around 50%. And I’m happy to report that that reduction has been achieved.

Therefore, sugar companies are continuously struggling to maintain their business and profitability against numerous challenges of cyclicity and agro-climatic issues.

Moreover, its other business divisions like water treatment as well as gears business also face cyclicity as they are dependent on the stage of economic growth in the market. For example, in FY2014, the water division of the company made losses as the projects got delayed due to economic slowdown.

FY2014 annual report, page 29:

The losses reported by Water Business are reflection of economic slow-down in the country and policy conundrum and as a direct consequence, some of the ongoing projects have been delayed due to financial, viability and/or regulatory issues. It has led to cost overruns and necessitated provisioning.

Also read: How to do Business Analysis of a Company

2) Intense competition and no pricing power in the hands of the fragmented sugar industry:

The sugar industry is highly fragmented and numerous small mills compete with each other to gain access to farmers’ sugar cane as well as the share of business of major customers, which are businesses like confectioneries, beverage manufacturers etc. The industry has always been fragmented leading to intense competition among them.

FY2005 annual report, page 12:

sugar industry in India is highly fragmented, with 566 sugar units spread over 16 states.

Apart from the intense competition among sugar mills, the industry faces more competition from the jaggery (gur) and khandsari industries, which also use sugarcane as raw material. As a result, it is a strong contest to attract a higher share of farmers’ sugarcane crops among different players like sugar mills and kolhus/crushers producing jaggery etc.

For example, in FY2024, sugar mills suffered when a lot of sugarcane was sold by farmers to kolhus instead of sugar mills.

FY2024 annual report, page 11

season also witnessed a higher diversion of sugarcane to kolhus/ crushers, which is the unorganised jaggery sector. This reduced sugarcane availability and thus its crush.

Most of the time, prices of raw jaggery are lower than refined sugar. As a result, kolhus are not able to offer farmers a higher sugarcane price than sugar mills. However, whenever prices of sugar decline or prices of jaggery increase, then kolhus/crushers are able to match or give a better price of sugarcane. During such times, farmers sell sugarcane to kolhus and sugar mills face cane shortages.

FY2009 annual report, page 20:

percentage of cane crushed by sugar mills out of the total cane production in the state of UP came down to around 42% during SS 2008-09, from over 60% in SS 2007- 08 and over 67% in 2006-07…price realisation for jaggary was higher than the sugar prices. This enabled the producers of these products to pay a higher price for sugar cane which resulted in higher diversion.

Moreover, it is not only the competition within the domestic sugar mills or kolhus/crushers, sugar mills face competition from global sugar players as well. This is primarily because sugar is a globally traded commodity and as a result, excess production in any major producing country like Brazil, Thailand, Australia etc. impacts the sugar industry across the world.

For example, in the early 2000s, Europe was dumping cheap sugar abroad at a price one-fourth the price in its domestic market, which added to the competition within India as well.

FY2005 annual report, page 12

export of white sugar, especially from European Union, is heavily subsidised at prices less than 25 per cent of the prices prevailing in the European domestic markets.

Due to the intense competition among sugar mills within the country as well as the global trade of sugar, the mills have lost their pricing power. As a result, sugar mills are mostly price takers and are not in a position to pass on the increase in the cost of their raw materials (primarily sugarcane).

Moreover, due to govt. determined pricing of sugarcane, sugar mills face a double whammy when in the downcycle, sugar prices are down whereas sugarcane price (minimum support price, MSP) continues to increase.

No wonder that frequently, sugar mills end up reporting losses and at times, go out of business as well because the price of sugar is not able to cover its cost of production.

For example, in FY2018, when India witnessed a surplus of sugar production, then the price of sugar in Uttar Pradesh (UP) fell to  ₹28/- per kg whereas its cost of production was ₹34/- per kg.

FY2018 annual report, pages 25-26:

country’s sugar production for SS 2017-18 is estimated at ~ 32.4 million tonnes, higher by more than 60% over the previous sugar season…sugar prices were hovering around ₹ 2,800/quintal, which is significantly lower than the cost of production, that stands, on an average, at ₹ 34/kg for UP mills.

In the past decade, from FY2010 onwards, Triveni Engineering and Industries Ltd continuously faced challenges in its sugar business and reported frequent losses in the division.

FY2010 annual report, page 19:

the cost of production was significantly higher for the sugar manufactured. This coupled with the steep fall in free sale sugar realisation from January 2010 onwards caused a net loss before interest of 222 million to our Sugar Business.

FY2011 annual report, page 17:

While the gross cost of production(COP) was over 3000 per quintal, the average realization for the year remained at 2661 per quintal. The higher COP resulted in losses for all the sugar players operating in Uttar Pradesh.

The stress in the sugar division was so great that during FY2012-FY2016, for four consecutive years, Triveni Engineering and Industries Ltd reported overall company-level losses. This was primarily due to a lack of pricing power, as it could not increase the price of sugar to its customers even when its production costs were higher than the sugar itself.

FY2015 annual report, page 5:

With continuous oversupply of sugar both in the global and domestic market, sugar prices during the year have witnessed a steep fall. With the State Advised Price (SAP) for sugarcane remaining high, the viability gap has increased, leading to increased losses for the sugar mills in Uttar Pradesh

Even in the past, in years like 2007, when India produced surplus sugar, then the sugar operations of the company reported losses due to a lack of pricing power.

FY2007 annual report, page 4:

India has recorded a bumper sugar production of 28.5 million tonnes in the year ended 30m September 2007…With high State Advised Cane prices, and the steep decline in sugar realisations, our company incurred substantial losses in its sugar operations.

Even in recent years, Triveni Engineering and Industries Ltd does not have pricing power over its customers. For example, in its distillery business where it produces ethanol to sell to oil marking companies (OMCs) for blending with petrol, even when govt. allowed a higher price of ethanol produced from maize, the company could not benefit as all the benefit was taken away by farmers and middlemen.

Conference call transcript, Q1-FY2025 results, August 2024, pages 8-9:

Tarun Sawhney: Despite prices for the output, for the ethanol made from maize increasing, because you have unfettered increases in the input cost of maize, the entire advantage has been taken up by either the trade and some portion to the farmers…for industry, I think maize at this point poses a huge problem

At times, the situation of the sugar industry becomes so tough that mills have to shut their shop and leave the market. For example, in FY2002 and FY2005.

FY2002 annual report, page 9:

There are 508 installed sugar mills of which only 436 worked in the last season. It is expected that in the next year, another 20/25 units would close down.

FY2005 annual report, page 13:

Despite the large recent profits shown by the Indian sugar industry, 112 mills – old and inefficient remained closed during the year.

In such a stressful industry situation, an investor needs to be extra cautious while analysing Triveni Engineering and Industries Ltd because its mills are located in the state of UP, which has one of the lowest sugarcane yields in the country.

FY2014 annual report, page 37:

cane yields in UP are one of the lowest in the country, one half of the yields in Maharashtra and one third of the yields in Tamil Nadu

Also read: How to analyse New Companies in Unknown Industries?

3) High regulatory intervention/risk in the sugar industry:

Govt. keeps tight control on all aspects of the entire value chain of sugar and related products. This is because the key raw material, sugarcane influences the life of a large section of the farmers’ population, which forms a significant political force. In addition, sugar is an essential commodity where govt. wishes to ensure that the price and availability are under control.

Govt. directly controls the price of sugarcane by stipulating numerous mechanisms like minimum support price (MSP), fair & remunerative price (FRP), state-advised price (SAP) etc. These price indicators for sugarcane are ensured to give a good return to the farmer on his/her cost price of the crop.

Most of the time, these prices are unlinked to the prevalent sugar prices/market dynamics. As a result, on numerous occasions, state-advised prices for sugarcane became uneconomically expensive for the sugar mills leading to losses in their operations and even bankruptcy.

At times, when the price of sugarcane is announced by the govt. was unreasonably high, then the sugar industry even filed cases against the govt.

FY2007 annual report, page 4:

in the light of the current low sugar prices, mills in UP have approached the Allahabad High Court seeking relief against the recently announced State Advised Cane Price

However, most of the time, the courts have ruled in favour of the government’s right to stipulate prices for sugarcane.

FY2008 annual report, page 118:

State Advised Price (SAP)…has been challenged before the Lucknow bench of the Allahabad High Court on the ground of it being arbitrary but the court has upheld the SAP.

Moreover, once the govt. stipulates a high sugarcane price, then all the mills have to follow it because most of the sugar mills in India are either owned by govts. or co-operative societies, which agree to pay higher sugarcane prices as they get subsidies from the govt. for it. However, private sugar mills that do not get any such subsidy, also have to pay high sugarcane prices because otherwise, farmers refuse to sell sugarcane to them and instead sell it to other mills.

FY2002 annual report, page 10:

Around 60% of sugar production in India is controlled by the Cooperative & State Government sugar factories. These factories are subsidized by the State Exchequer which enables them to pay high cane prices and thereby push the private sector to do the same

At times, sugarcane prices become very expensive as compared to sugar and the mills make losses and go out of business as well. During such times, govt. attempts to control the entire value chain by way of influencing the price of sugar by announcing a minimum selling price for sugar to support the mills primarily to enable them to make payments for sugarcane purchased from farmers.

FY2019 annual report, page 21:

Government introduced a Minimum Selling Price of sugar (MSP) at a time when sugar prices were collapsing due to burgeoning inventories.

Govt. also provides subsidies and cheaper loans to sugar mills so that they can clear their payments of sugarcane to farmers.

FY2016 annual report, page 20:

The UP Government and Central Government also extended soft loans to the industry for payment of cane dues.

Govt. attempts to control the price as well as the availability of sugar in the market. At times, govt. purchases a fixed portion of sugar produced by sugar mills at a discounted price (levy sugar) so that it can provide this sugar at a cheap price to poor people via a public distribution system (PDS).

Over time, the govt. has kept on changing the policy of the proportion of levy sugar. In the 1990s, sugar mills had to offer 30% of their production to govt. at discounted price i.e. levy sugar, which in 2001 was reduced to 15% (FY2001 annual report, page 8). Over time, it reduced levy sugar to 10%; however, then increased it to 20% for FY2010 (FY2009 annual report, page 22).

Finally, in FY2014, on the recommendation of Dr Rangarajan Committee, the govt. removed the levy sugar mechanism. Nevertheless, an investor should always be aware that if circumstances demand, then govt. can any time mandate sugar mills to sell sugar to them at a discounted price affecting their profitability.

Apart from the price of sugarcane and sugar, the govt. also controls the availability of sugar in the market via imposing monthly quotas on sugar mills on how much sugar they can sell in the market called the monthly release mechanism.

Conference call transcript, Q2-FY2024 results, Oct. 2023, page 2:

Tarun Sawhney:…sugar sales volumes were lower during the half year due to lower quotas given by the Government of India

In addition, as per available sugar stock and expected sugar production, govt. tries to influence sugar availability and price via multiple mechanisms. During a sugar surplus, govt. forces mandatory timebound export of sugar by the mills. If sugar prices are lower in the overseas market meaning that mills would incur losses on exports, then govt. also provides subsidies on such exports to the mills to get rid of excess sugar from the market.

FY2020 annual report, page 41:

An Export Quota of 6.0 million tonnes was allocated to all sugar mills on September 12, 2019, with export date till September 30, 2020. The Government notified a scheme for providing Export subsidy of ₹10,448 per tonne for export of sugar

Govt. also imposes high duties on the import of sugar during such periods.

During times of surplus sugar production, govt. also forces the mills to keep surplus sugar in their warehouses as buffer stock to avoid this sugar from entering the market and depressing the prices. Govt. even offers subsidies against the carrying cost of the buffer stock of sugar.

FY2019 annual report, page 49:

GoI introduced buffer stock of 3 million tonnes with reimbursement of inventory carrying cost (finance cost and insurance cost).

Whereas during the periods of shortage of sugar, govt. implements measures like stock limits to prevent hoarding of sugar by mills and traders, removing duties on the import of sugar etc.

FY2010 annual report, page 28:

As the sugar prices continued its rise, the Government initiated various measures such as fixing stock limits for market intermediaries, allowing direct import by bulk consumers of sugar and allowing duty-free import of raws and whites to ease the domestic supplies.

Apart from controlling sugarcane and sugar, govt. also influences market dynamics of related products ethanol, its pricing, its feedstock/raw material etc., which has a significant influence on the overall market.

Govt. of India is implementing a large program for blending ethanol with petrol to reduce crude oil import bills. Ethanol can be produced by distilleries using multiple raw materials like sugarcane juice, molasses, grains like rice, maize etc.

Every year, govt. announces multiple purchase prices of ethanol depending on different raw materials used to make it. Such differential pricing influences distilleries’ choices for using different raw materials for making ethanol. In addition, govt. also puts direct limits on how much any raw material can be used to make ethanol especially sugarcane and molasses as using these for ethanol production directly affects sugar production.

Conference call transcript, Q3-FY2024 results, January 2024, page 3:

Tarun Sawhney:…on the December 15, 2023, the Department of Food and Public Distribution (DFPD) issued directions in view of the expected lower sugar production of the country to limit the sugar sacrifice through B-heavy and Sugarcane Juice route to 1.7 million metric tonnes of sugar, and this was compared to 3.8 million metric tonnes in the previous season. And I think it came as a bit of a surprise to the industry. And of course, it has impacted distillery operations…not just with Triveni, but for the nation as a whole.

Similarly, the distillery operations of Triveni Engineering and Industries Ltd are affected whenever govt. changes its policies of allowing the Food Corporation of India (FCI) to sell rice to distilleries for making ethanol.

In FY2024, govt. restricted FCI from selling rice to distilleries and as a result, the company had to use maize for producing ethanol, which increased its cost of production significantly.

FY2024 annual report, page 8:

This along with the stoppage of Surplus rice by FCI, impacted feedstock availability for our Alcohol business. While we swiftly shifted to maize feedstock, it led to lower operating capacities and margins.

One of the main reasons for an increase in the cost of ethanol was that the ethanol production capacity of the distillery declines by 25% when maize is used to make ethanol.

Conference call transcript, Q2-FY2024 results, Oct. 2023, page 5:

Tarun Sawhney:…when you transfer from the ‘B’ heavy molasses and start producing Ethanol from maize, the capacity, even running at full capacity is the output of Ethanol reduces by approximately 25%.

Other than the price of ethanol and its raw material, govt. also imposes license and denaturation fees on ethanol (FY2024 annual report, page 121).

Additionally, govt. of UP mandates that sugar mills must sell a specified quantity of molasses to manufacturers of country liquor at discounted prices.

Credit rating report by ICRA, March 2020, page 1:

the increase in the molasses reserved quota from 12.5% in SY2019 to 18% in SY2020 for state manufacturers of country-made liquor in UP is likely to result in a decline in the availability of the molasses for ethanol manufacture

Apart from sugar mill and distillery operations, govt. also directly influences the profitability of the power co-generation business of Triveni Engineering and Industries Ltd by controlling the price at which it will buy the power.

FY2020 annual report, page 61:

profitability in the Co-generation business is lower than previous year as UPERC has reduced power tariff by approx. 40% effective April 1, 2019.

An investor should keep in her mind that whenever there is a large intervention by govt. in any industry whether positive or negative i.e. to support or to restrict the industry, then it carries a lot of risk and uncertainty because the policies of govt. are not constant and keep on changing as per govts.’ priorities. At times, such priorities are not in the best interests of the shareholders of private companies.

For example, in the past UP govt. has announced UP Sugar Promotion Policy 2004 under which Triveni Engineering and Industries Ltd invested about ₹1,000 cr and the company was to receive incentives of an equal amount.

FY2006 annual report, page 18:

We would have invested around Rs. 10 billion since April 2004, and by March 31, 2007, in projects which are eligible for incentives under the UP Sugar Promotion Policy 2004. We are entitled to incentives for ten years commencing from FY 07 subject to a ceiling of Rs. 10 billion.

However, soon thereafter, the govt. in the UP changed and the new govt. scrapped this policy and refused to provide on the investments made by the company. As a result, the company had to go to court and after more than a decade, in FY2019, the company got a decision in its favour from the Allahabad High Court. However, the UP govt. then appealed against the HC order in the Supreme Court.

FY2019 annual report, page 213:

the Hon’ble Allahabad High Court has recently decided the matter in favour of the Company and directed the State Government to quantify and pay all the incentives that were promised under the said Policy. The State Government has however filed a Special Leave Petition before the Hon’ble Supreme Court challenging the decision of the Hon’ble High Court against it.

In the past, due to changing regulations related to export-import policies, the company had to exit its business of small steam turbines as the govt. abolished import duties on their import and its products became unviable against imported turbines.

FY1997 annual report, page 8:

we sold our 49% stake in GEC Alsthom Triveni Ltd, to GEC Alsthom (Holdings) India Ltd…where imports already have a zero import duty. As against imports, our turbines have to incur various duties and costs associated with government policies, totalling almost 15% of our sale price. This large negative protection was responsible

On multiple occasions, the company has clearly stated that excessive regulation of the sugar industry by the govt. is one of the main reasons for its tough business circumstances.

FY2011 annual report, page 9:

Regulation of the sugar industry, both at the State and Central Government level, is the main cause for the downward spiral in the fortunes of this industry.

Moreover, the water treatment business of the company is also highly dependent on govt. by both, orders from state-owned enterprises as well as policies of govt. towards controlling water pollution and improving the penetration of water supply in the country.

Therefore, an investor should always very closely monitor regulatory developments related to sugar, distillery, water treatment etc. as these have the potential to seriously impact the business of Triveni Engineering and Industries Ltd.

Recommended reading: How to study Annual Report of a Company

4) Steps taken by Triveni Engineering and Industries Ltd to improve its competitive advantage:

Despite operating in a commodity industry where any customer can easily replace the product of one supplier from another, and operating in a highly regulated environment, Triveni Engineering and Industries Ltd has taken multiple steps to improve the strength of its business model and increase its competitive advantages.

Let us see some of such steps.

4.1) Diversification, integration (both forward and backwards) and premiumization of operations:

To tackle the significant volatility and cyclicity in sugar production, the company expanded its operations by entering into various related business segments.

First, it started the turbine division as a backward integration to the sugar business.

FY2006 annual report, page 35:

turbine business unit was commissioned as a backward integration of the company’s sugar business.

Later on, it started its gears division as a backward integration to its turbine division, which also turned out to be a high-margin business reducing the impact of volatile margins of the sugar business.

FY2005 annual report, pages 6 and 31:

In 1976, the gear division was started as a backward integration of the turbine division.

High speed gears: compared with the other businesses within the company, it is a high margin business High speed gears: compared with the other businesses within the company, it is a high margin business High speed gears: compared with the other businesses within the company, it is a high margin business

Thereafter, the company started co-generation power plants in its sugar division to capture the waste heat and become more efficient in its operations and earn extra revenue.

FY2007 annual report, page 4:

Your company has de-risked sugar manufacturing by augmenting its co-generation capacity with a new 23 MW co-generation plant at Khatauli…Our co-generation capacity now accounts for 68 MW, out of which around 42 MW is surplus and exported to the UP state grid

Subsequently, the company also made its co-generation plants compatible with burning coal to produce electricity so that they can work even in the off-sugar season.

FY2010 annual report, page 32:

In order to enhance the utilisation of the power generation capacity during off-season, provision to fire coal in one of the co-generation boilers at Khatauli has been implemented

However, the experiment was not very successful, as the very next year, the coal prices increased sharply and the cost of electricity produced by its plants was economically unviable.

FY2011 annual report, page 34:

During the previous year, one of the plants was operated with coal during the off season. However, in view of unviable coal price, the operation of the plant on coal was not feasible in the current year.

Over time, it also entered the water treatment business and has become one of the major players in the water treatment plants in India.

Later on, Triveni Engineering and Industries Ltd started the distillery division as a forward integration to the sugar business where it could use sugarcane juice, molasses and if needed, sugar itself for the production of alcohol including ethanol and earn higher profitability.

FY2007 annual report, page 4:

Your company has de-risked sugar manufacturing by…the 160,000 litre per day distillery at Muzaffarnagar.

The company made its distilleries flexible production with multi-feed i.e. capable of making different kinds of alcohol using diverse raw materials so that these can work in different market situations.

FY2014 annual report, page 19:

distillery has a flexible manufacturing process allowing it to produce high quality Extra Neutral Alcohol (ENA), Rectified Spirit (RS), Special Denatured Spirit (SDS) and Ethanol, based on the requirements.

FY2024 annual report, page 35:

total distillery capacity to 860 KLPD, which includes two multi-feed units, two molasses-based units and one grain-based unit, giving significant operational flexibility in feedstock usage

Moreover, the company also started forward integration in Indian Made Indian Liquor (IMIL) operations as it wanted to benefit from UP govt. policy that otherwise forced it to sell molasses cheaply to other country liquor producers.

FY2021 annual report, page 18:

…forayed into the Potable Liquor market – Indian Made Indian Liquor (IMIL)…In addition to the benefit of value addition to our ENA production, this forward integration will help reduce our obligation to supply the Molasses (termed as Levy Molasses) to various other IMIL manufacturing units, at a price much lower than the market rate.

In 2024, the company expanded its alcohol product range to include Indian Made Foreign Liquor (IMFL) as a further step of premiumization in the forward integration of its distillery operations.

FY2024 annual report, page 111:

new business of manufacturing, marketing and selling own brands in the premium segment of Indian Made Foreign Liquor (IMFL) as a forward integration of its distillery operations.

On the sidelines, Triveni Engineering and Industries Ltd also started large retail stores named Triveni Khushali Bazaar, spread across 3 acres, where it could sell its own products along with products of other companies and earn more money.

FY2005 annual report, page 39:

Triveni Khushali Bazaar is a One-Stop Shop for farmers and rural customers where they can buy agri-inputs, cattle feed, cycle, plastic furniture, FMCG, automobiles, building material and petroleum products…on a three acre plot

The company also launched its own brand of sugar named “Shagun Sugar” (FY2004 annual report, page 8). Over time, it increased its capacity to make refined sugar and also started making pharmaceutical-grade sugar and by FY2024, it used about 70% of its production capacity to make these premium varieties of sugar, which offered higher prices.

FY2024 annual report, page 11:

continued our efforts to increase production of refined and pharmaceutical-grade sugar which attracts a premium over sulphitation sugar…enhance the proportion of this premium portfolio from ~60% to ~70%,

The company also started production of export quality S-grain sugar (FY2023 annual report, page 54) and also contract manufacturing of private label sugar (FY2024 annual report, page 104).

In 2023-24, Triveni Engineering and Industries Ltd also ventured into the defence field via a multi-modal defence facility (FY2023 annual report, page 71).

In FY2024, to enhance its corporate brand image, it ventured into the sports arena and formed Triveni Sports Private Limited as a joint venture, which formed a chess team “Triveni Continental Kings” and won the chess tournament, Global Chess League, organized by Tech Mahindra and FIDE in Dubai.

Therefore, over the years, Triveni Engineering and Industries Ltd has taken numerous steps to strengthen its business model and overcome the cyclicity and volatility of its core sugar business by going for forward and backward integration, diversification, premiumization of products etc.

As a result, the company has been able to sustain its business and face the deep downcycles in the sugar industry better and has survived and grown over the years.

Also read: Margin of Safety in Stock Investing: A Complete Guide

4.2) Expanding its business size to benefit from economies of scale:

Over the years, the company has increased the size of its business operations significantly. It increased the crushing capacity of its sugar mills from 10,000 tonnes of cane crushed per day (TCD) in 1999 to 63,000 in 2024 (FY2024 annual report, page 5).

Similarly, it has expanded its distillery operations to 860 kiloliters per day and has enhanced its capability of executing water treatment plants significantly.

Even in other businesses like high-speed gears, the company has captured a significant share of the market.

FY2020 annual report, page 13:

Gears business has a leadership position in High Speed Gears segment in India and enjoys a market share of more than 80% across all major OEMs

Over the years, the company has benefited from economies of scale and strengthened its business model.

FY2024 annual report, page 133:

The increase in the profitability is due to scale of operations as well as due to better pricing.

5) Tie-ups formed by Triveni Engineering and Industries Ltd with industry and technology leaders to improve its products:

Over the years, the company has formed numerous associations with Indian and overseas companies and institutions to better its business proposition and gain competitive advantages.

For example, in FY2022, the company formed an alliance with GEAE Technology, USA to make parts of LM2500 gas turbine for the Indian Navy.

FY2022 annual report, page 23:

Signed a 10-year business agreement with GEAE Technology USA to locally manufacture the LM2500 gas turbine base and enclosure…M2500 is the chosen propulsion gas turbine by the Indian Navy for many of its surface combatant vessels

Previously, in FY2010, when the turbine division of the group was a part of Triveni Engineering and Industries Ltd, then it had formed a joint venture (JV) with General Electric (GE) called GE Triveni Ltd to make steam turbines in 30-100 MW range.

FY2010 annual report, page 5:

formed a Joint Venture with GE Oil & Gas to design, manufacture, supply, sell and service advanced technology steam turbines in the above 30 to 100 MW range for power generation applications.

For the power transmission (gears) business, the company had a contract with Lufkin Industries, USA for a very long time.

FY2003 annual report, page 16:

reason for this excellent performance came from the sale of gears produced under license from Lufkin Industries of the USA.

In 2006, the company extended the contract with Lufkin for 7 years (FY2006 annual report, page 39), which, in 2011, it renewed further for the next 12 years (FY2011 annual report, page 10). In FY2023, after a long association of multiple decades, the companies decided not to renew the agreement and thereafter, Triveni Engineering and Industries Ltd has been developing high-speed gears on its own.

FY2023 annual report, page 42:

Company’s high speed licence agreement with Lufkin Gears LLC expired in January 2023 and the business is now pursuing the high-speed high- power segment independently

In the past, for the turbine business, the company tied up with many foreign players to gain access to products and technology. It used to get technology for making turbines from Peter Brotherhood, UK (FY2002 annual report, page 60), Sokda Energo of Czech Republic (FY2004 annual report, page 3), and Beijing Beizhong Steam Turbine Generator Co, Ltd. (BZD), China (FY2007 annual report, page 3).

It tied up with GE for high-speed reciprocating compressors for the Oil & Gas industry (FY2007 annual report, page 3), for manufacturing of precision components for Schlumberger, USA and France (FY2007 annual report, page 31) and for gas engines with Waukesha Engines, a business unit of Dresser Inc., USA (FY2006 annual report, page 35).

It entered into a development program for developing new turbine blades with the Indian Institute of Science, Bangalore (FY2002 annual report, page 12).

For the water treatment business, it entered into a technology agreement with Aqwise Wise Water Technology Limited, Israel to get access to Moving Bed Bio Reactor (MBBR) technology (FY2012 annual report, page 3). In addition, it tied up with the Confederation of Indian Industry (CII) to establish the CII-Triveni Water Institute (FY2011 annual report, page 24).

In the past, it had tied up with US Filter (a Siemens group company) to gain access to products and technology.

FY2004 annual report, page

Water and Waste Water Treatment: Triveni has recently concluded an agreement with U.S. Filter, Palm Desert, California, U.S.A. for the Indian market. This will expand our range beyond our existing license with the Envirex division of U.S. Filter.

Therefore, Triveni Engineering and Industries Ltd has over the years tied up with various companies and institutes to improve its product range for its customers, which has helped it grow its business.

While analysing the company, an investor should always keep in mind the seasonality, volatility and uncertainty of its business due to the inherent cyclicity of the sugar industry and its agro-climatic risks.

In the last 10 years (FY2015-2024), the tax payout ratio of Triveni Engineering and Industries Ltd has been very different from the standard corporate tax rate in India.

It is mainly due to previously accumulated losses, which it adjusted when it made profits. At times, it had also received tax incentives from govt.

FY2019 annual report, page 242:

It also had credits for minimum alternate tax (MAT) as well as other exemptions and deductions, which it exhausted until FY2021 and thereafter opted for the new tax regime in FY2021 onwards.

FY2021 annual report, page 75:

As the Company has exhausted all MAT credit and certain exemptions/deductions, it may be subject to lower tax rates under new tax regime for the subsequent periods.

In FY2022, the company had a lower tax payout ratio of about 9% because most of its pretax income was a capital gain tax on the sale of its stake in Triveni Turbine Ltd.

FY2023 annual report, page 342:

Recommended reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of Triveni Engineering and Industries Ltd:

a) Net fixed asset turnover (NFAT) of Triveni Engineering and Industries Ltd:

Over the years, the net fixed asset turnover (NFAT) of Triveni Engineering and Industries Ltd has improved from 2.2 in FY2016 to 3.5 in FY2024. The NFAT reached a high of 4.6 in FY2020; however, since then it has declined a bit because the company has been doing significant capital expenditures in its distillery, sugar as well as gears manufacturing capacity.

FY2021 annual report, page 45:

Board has approved expansion of distillation capacity of the existing and upcoming distilleries…at an aggregate cost of ₹ 100 crore (approx.)

Whenever any company undertakes a capacity expansion program, then for some time, its NFAT declines until the company ramps up its production and reaches optimal utilization of the new manufacturing capacity.

Going ahead, an investor should keep a close watch on the fixed asset turnover levels of the company to assess whether it is able to optimally utilize its production capacity.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of Triveni Engineering and Industries Ltd:

Over the years (FY2015-2024), the inventory turnover ratio (ITR) of the company has increased from 1.4 in FY2016 to 2.4 in FY2024.

An increase in ITR indicates an improvement in the inventory utilization by the company. However, the ITR of the company is low because its business of sugar production is seasonal where it has to make sugar during the season and then store it in warehouses for sale during the off-season.

In addition, at times, govt. directives of maintaining buffer stock of sugar also puts pressure on the company as holding sugar stock has costs like financing cost of working capital as well as insurance costs against the risk of damage of stored inventory. Therefore, as discussed earlier, most of the time, govt. provides subsidies to back its directives of buffer stock.

Nevertheless, due to the cyclical nature of the sugar industry, prices of sugar are very volatile and as a result, Triveni Engineering and Industries Ltd has to face very sharp fluctuations in the valuation of its stored inventory. At times, during periods of surplus production, when sugar prices decline sharply, then it had to take large write-downs of inventory value leading to a significant impact on profitability.

In the last 10 years, on multiple occasions, Triveni Engineering and Industries Ltd took large inventory write-downs. In FY2018, it suffered a loss of ₹219 cr.

FY2018 annual report, page 48:

Company had to write-down sugar inventory by ₹ 219.7 crore, including estimated losses on exports pursuant to MIEQ Scheme

In FY2019, it suffered a loss of about ₹70 cr due to inventory write-down (FY2019 annual report, page 224).

In FY2015, it faced an inventory write-down of ₹111 cr (FY2015 annual report, page 151) and in FY2014, it suffered a loss of ₹55 cr due to an inventory write-down (FY2014 annual report, page 31).

In FY2024, the inventory of the company witnessed a sharp increase of about 20%. The primary reason for the same, as per earlier discussion, was the reduced selling quota given by the govt. to Triveni Engineering and Industries Ltd in the year (Conference call, Oct. 2023, page 2).

FY2024 annual report, page 124:

Inventories were higher by 21% at ₹ 2,419.93 crore as on March 31, 2024, as against ₹ 1,996.49 crore in the previous year, mainly due to 27% higher sugar inventories (at 5,89,383 MT) and 5% higher sugar inventory valuation rate at ₹35.3/kg, mainly due to increase in cane price by ₹200/MT for SS 2023-24.

Going ahead, an investor should keep a close watch on the inventory position of the company to understand whether it is able to maintain the efficiency of its inventory utilization or suffers additional large inventory write-downs.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Triveni Engineering and Industries Ltd:

Over the years, receivables days of Triveni Engineering and Industries Ltd have improved from 46 days in FY2016 to 26 days in FY2024. An improvement in receivables days over the years indicates that Triveni Engineering and Industries Ltd has collected its money from its customers on time.

Going ahead, an investor should continue to monitor the receivables position of the company to check if it continues to collect its money on time from its customers.

Further advised reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Triveni Engineering and Industries Ltd for FY2015-2024, then she notices that over the last 10 years (FY2015-FY2024), the company could not convert its profit into cash flow from operations.

Over FY2015-2024, Triveni Engineering and Industries Ltd reported a total net profit after tax (cPAT) of ₹3,670 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹1,988 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

The major reason for cCFO being lower than cPAT is the non-operating income of ₹1,496 cr in FY2023 due to the sale of a stake in Triveni Turbine Ltd, which is included in P&L but not in CFO as it is an inflow under cash flow from investing. However, even after adjusting for the after-tax-non-operating income, the company is not able to convert its cPAT over the last 10 years into cCFO.

Going ahead, an investor should keep a close watch on the cash flow performance of the company to monitor if it is able to convert its profits into cash flows.

The Margin of Safety in the Business of Triveni Engineering and Industries Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

From FY2018-FY2024, Triveni Engineering and Industries Ltd had a very fluctuating SSGR ranging from 6% to 53%. In recent most years, its SSGR has been very high primarily due to high one-time non-operating income from the sale of a stake in Triveni Turbine Ltd. Nevertheless, an investor needs to understand that due to the highly cyclical nature of the sugar business, the company undergoes periods of losses when its SSGR becomes negative.

Nevertheless, in the comparatively stable period of FY2019-FY2022, the SSGR of the company was about 16%-22%, which is higher than the sales growth rate achieved by the company of about 11%. Therefore, it has funded its growth from internal sources and did not require funds from additional sources like debt or equity dilution.

On March 31, 2024, it had a debt of ₹1,416 cr against debt of ₹1,472 cr. in FY2015 indicating that it has kept its debt under control.

An investor arrives at the same conclusion when she analyses the free cash flow position of the company.

b) Free Cash Flow (FCF) Analysis of Triveni Engineering and Industries Ltd:

While looking at the cash flow performance of Triveni Engineering and Industries Ltd for the last 10 years (FY2015-FY2024), an investor notices that it generated cash flow from operations of ₹1,988 cr. During the same period, it made a capital expenditure of about ₹1,509 cr.

Therefore, during this period (FY2015-FY2024), Triveni Engineering and Industries Ltd had a free cash flow (FCF) of ₹479 cr (=1,988 – 1,509).

In addition, during this period, the company had a non-operating income of ₹1,867 cr and an interest expense of ₹815 cr. As a result, the company had a total free cash flow of ₹1,531 cr (= 479 + 1,867 – 815). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.

Triveni Engineering and Industries Ltd used its free cash flow for:

• paying dividends of about ₹370 cr (excluding dividend distribution tax of about 20%)
• buybacks of about ₹965 cr in 2020, 2021 and 2023 (excluding incidental expenses and taxes of about 20%) and
• has increased its cash & investment balance by about ₹46 cr from ₹87 cr in FY2015 to ₹133 cr in FY2024.

Going ahead, an investor should keep a close watch on the free cash flow generation by Triveni Engineering and Industries Ltd to understand whether the company continues to generate surplus cash from its business and how it utilizes it.

Further recommended reading: Free Cash Flow: A Complete Guide to Understanding FCF

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Triveni Engineering and Industries Ltd:

On analysing Triveni Engineering and Industries Ltd and after reading annual reports, its credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management succession planning of Triveni Engineering and Industries Ltd:

The company is promoted by the Sawhney family. Currently, Mr Dhruv Sawhney (aged 80 years) is the chairman of the company. His two sons, Tarun Sawhney and Nikhil Sawhney are present on the board of directors of the company.

It seems that, as a part of the succession planning, the Sawhney family has decided to hand over the leadership of Triveni Engineering and Industries Ltd to Mr Tarun Sawhney (aged 51 years) who is currently, the managing director of the company. The leadership of another group company, Triveni Turbine Ltd is handed over to his brother, Mr Nikhil Sawhney (aged 47 years) who is the managing director of the company.

The presence of the next generation of the promoter family in the executive leadership positions in the company when the elder generation of promoters is still on the board indicates good succession planning as the younger ones can get hands-on experience and guidance.

The presence of a well-thought-out management succession plan is essential in the case of promoter-run businesses as it provides for a smooth transition of leadership over the generations and provides continuity in the business operations of any company.

Further advised reading: How to do Management Analysis of Companies?

2) Related party transactions of Triveni Engineering and Industries Ltd with promoters:

An investor should analyse the transitions that the company has done with its promoters.

Every year, the company pays rent of about ₹2 cr to its promoters i.e. Mr Dhruv Sawhney (Chairman), his wife: Ms Rati Sawhney and a company controlled by Ms Rati Sawhney: Kameni Upaskar Limited.

FY2024 annual report, page 345:

In FY2023, when the company sold about 7.06 cr shares of Triveni Turbine Ltd (TTL), it sold about 45% of these shares (3.23 cr, 10% stake in TTL) to Ms Rati Sawhney, wife of Mr Dhruv Sawhney (Chairman). The price of this transaction was ₹229/- per share based on the closing price of Triveni Turbine Ltd on NSE of ₹228.95 per share on the previous day).

FY2023 annual report, pages 125-126:

Sale of 3,23,30,548 equity shares (representing 10% of the total paid-up capital of TTL) to Mrs. Rati Sawhney, one of the existing promoters by way of inter-se transfer between promoters at a price of ₹229 per share (based on the previous day closing price of ₹ 228.95 per share on NSE) through block trading window on stock exchange

An investor would note that this block deal was a method by promoters to increase their direct shareholding in Triveni Turbine Ltd by 10%. If the promoters had tried to increase their direct shareholding in TTL, then looking at promoter-buying, the market would have increased the share price of the company and it would have been difficult for the promoters to buy 3.23 cr shares at nearly the previous day’s closing price.

As per the Screener website, on Sept 5, 2024, the average daily trading volume for the last 1 year for TTL is about 14 lac shares per day. Therefore, it would have taken multiple days for the promoters to acquire 3.23 cr shares.

It seems that by buying these shares directly from Triveni Engineering and Industries Ltd, the promoters could avoid the market impact cost in their acquisition.

Moreover, in the past, the company has paid excess remuneration to the promoters when its profits were not adequate to pay that much amount.

FY2011 annual report, page 95:

The profits for the current year are inadequate and the remuneration paid to the managerial personnel are in excess of remuneration prescribed under Section 309 (3) read with Schedule XIII of the Companies Act, 1956. The excess remuneration paid in the case of the Managing Director is 17.29 Million; continuing Whole Tme Director is 8.69 Million and in the case of the Whole Time Director who has resigned from the services of the Company during the year is 6.34 Million.

Going ahead, an investor should keep a close watch on the transactions between the company and its promoters because such related party transactions carry the risk of transferring economic benefits from minority shareholders to promoters.

Also read: How Promoters benefit from Related Party Transactions

3) Numerous disputes of Triveni Engineering and Industries Ltd:

The company is engaged in multiple disputes with various counterparties including govt. entities. Many of these disputes include monetary aspects that may impact the financial position of the company.

As per the details of litigations disclosed by the company on August 14, 2023, to stock exchanges (click here), it is involved in a dispute with the Punjab Water & Supply and Sewerage Board (PWSSB) related to a water supply and sewage treatment plant awarded to the company in Bathinda, which got delayed. As part of the dispute, PWSSB has filed claims of ₹117 cr on the company whereas the company has filed a claim of ₹129 cr on PWSSB.

In the same document, the company disclosed that under the disputed Sugar Industry Promotion Policy, 2004 of UP state, it had availed incentives of about ₹41.58 cr, which are disputed by the Trade Tax Department, Uttar Pradesh. The matter about this policy is currently under hearing in the Supreme Court. If the case is decided against the company, then it might have to pay ₹41.58 cr to the govt.

Under the same disputed policy, the Income Tax Department has disallowed the incentives taken by the company as tax-free. Therefore, the income tax department has raised further demands of ₹58.83 cr including interest and penalties, which the company might have to pay if the Supreme Court decides the case against the company.

In the past, there have been instances where the company had to pay a substantial amount of money to the govt. when the case was decided by the court against the company. For example, in FY2012, Triveni Engineering and Industries Ltd had to pay about ₹79 cr when the court upheld the higher cane price for the sugar season of 2007-08.

FY2012 annual report, page 14:

Pursuant to the Supreme Court judgment, relating to cane price for 2007-08, payment of ₹ 7,896 lacs was made causing a further financial burden and the resultant loss in the annual accounts.

Many times, such disputes keep on going for a very long time and are then settled against the company and it had to pay the money. For example, in FY2007, a dispute towards the pricing of levy sugar pending since FY1973-74 was settled against the company and it had to make the payment.

FY2007 annual report, page 52:

Exceptional Items: The total amount is Rs. 21.4 million which comprises amount of Rs. 11.2 million paid towards levy claim of 1973-74 under the final directions of the Court

Moreover, due to the highly regulated nature of the sugar industry, on multiple occasions, there are disputes related to the cane pricing declared by the govt. In addition, due to the project execution-related work of some of the divisions; there are numerous instances of disagreement between the company and the customers about the quality and timely completion of work resulting in disputes related to the invocation of bank guarantees.

FY1997 annual report, page 32:

Encashment of Bank Guarantees against which the Company has filed appeals before the Court Rs.248.31 lacs (Rs.191.31 lacs).

company has filed a civil suit challenging the invocation as well as payment of three advance bank guarantees aggregating to Rs.354 lacs issued in favour of Picaddily Sugars

An investor needs to keep a close watch on the disputes and litigations currently ongoing for the company and monitor their outcomes to assess whether these can have a significant impact on the financial position of the company.

For example, currently, the company is carrying a contingent liability of about ₹60 cr as interest payment on the delays it did in payment for the purchase of sugarcane from farmers for the sugar seasons of 2013, 2014 and 2024.

FY2023 annual report, page 372:

Amount of contingent liability on account of interest on delayed payment of cane price for the sugar seasons 2012-13, 2013-14 and 2014-15

Also read: Why Management Assessment is the Most Critical Factor in Stock Investing?

4) Instances of weak internal controls and processes at Triveni Engineering and Industries Ltd:

As per the disclose done by the company to stock exchanges on Nov. 30, 2023 (click here), UP Pollution Control Board (UPPCB) imposed a fine on the company’s distillery at Muzaffarnagar as the company was discharging a higher level of spent wash in the environment, which was damaging the lagoons.

In FY2011, the company suffered losses from two instances of cheque fraud due to weakness in internal controls and processes.

FY2011 annual report, page 67:

two cases of fraudulent encashment of cheques involving a sum of 0.60 Million were detected by the management during the year for which appropriate steps were taken to strengthen internal controls as informed to us.

On multiple other occasions, the company did not keep proper records and did not provide the same to the auditors. On one occasion, it did not have records in its sugar and oil & gas division.

FY2000 annual report, page 24:

company is maintaining proper records…except for some old records (other than Plant & Machinery) for Sugar Unit Khatauli and some updation required for Oil & Gas Divison.

On another occasion, it did not give details of assets to the auditor.

FY1999 annual report, page 17:

In respect of Oil & Gas Division broad particulars of assets including quantitative details and situation have been given upto 30th September, 1996 only and in respect of assets of Head office location has not been given in some cases.

At times, the company used some accounting assumptions, which led to the inflation of its profits, which was highlighted by the auditor of the company. In FY2002, it did not include the interest cost on the working capital borrowings as a cost and it directly adjusted it against the reserves in the balance sheet leading to a higher reported profit.

FY2002 annual report, page 41:

interest on working capital finance has not been considered as a component of cost for the purpose of valuation of sugar…An amount of Rs.2438.01 lacs has been withdrawn from the general reserve and credited to Profit & Loss Account to set off the effect of interest included in the opening inventories of sugar

Similarly, in FY1999, the company did not charge some of its costs to the P&L resulting in inflation of profits, which was pointed out by the auditor.

FY1999 annual report, page 14:

in respect of Rig Idle time expenses deferred during the period which in our opinion are period costs and should have been charged to Profit and Loss Account. Consequently, the profit for the period is higher by Rs. 110.90 lacs.

Therefore, it is essential that an investor does an in-depth study of the public disclosures of the company to identify any such issues related to presentation of financial data.

Also read: How Companies Inflate their Profits

5) Capital allocation decisions by Triveni Engineering and Industries Ltd:

In the past, Triveni Engineering and Industries Ltd made capital allocation to the sugar division, distilleries, gears business etc. where the company has made profits. It purchased other sugar mills to expand its operations like Sir Shadi Lal Enterprises Ltd in 2024 as it noticed that its catchment area of Shamli is the best farm area in the state of UP.

Conference call transcript, Q1-FY2025 results, August 2024, pages 12-13:

Tarun Sawhney:…Shamli has possibly the best farm area and acreage in the State of Uttar Pradesh…The farmers are the most loyal and have been for decades…Shamli is the factory that has had the longest season in terms of operating days…the yield in Shamli is one of the highest.

However, in the past, there have been many instances where it decided to stop capacity expansion as well as shut down divisions and take out capital when these units became economically viable.

In FY2024, it decided to defer a proposed expansion of its distillery as the recent policy changes related to raw materials impacted the profitability of its distillery operations.

Conference call transcript, Q3-FY2024, January 2024, page 1:

considering present government policy and challenges in availability of permitted grains at viable procurement costs for distillery operations, it has been decided to keep the implementation of the new proposed 250 KLPD distillery expansion project at Sabitgarh, U.P. in abeyance.

On another occasion, during the Covid pandemic, when the operations of its joint venture Aqwise Wise Water Technologies Ltd were severely impacted, then it decided to sell it off. In the transaction, it wrote off about ₹33 cr including an exceptional item of ₹9.99 cr in FY2022 and ₹23.20 cr in FY2021.

FY2022 annual report, page 65:

Exceptional items comprise an impairment provision in respect of consideration receivable towards divestment of investments in…Aqwise Wise Water Technologies Ltd. This is in addition to the impairment provision of ₹ 23.20 crore made in the previous year.

Similarly, in the past, it had closed down its oil rigs division and one of its turbine units at Naini, UP when they started making losses (FY1997 annual report, pages 8-9).

On other occasions, the company decided to make a strategic shift and restructure its operations to derive better value. For example, in FY2005, it decided to restructure its water treatment division from a turnkey operator to an equipment supplier to avoid competing with its customers.

FY2005 annual report, pages 35-36:

Water treatment: The company restructured…evolved from a turnkey operator to a mechanical equipment supplier during 2004-05 and, in doing so, increased its turnover

The company provides equipment (as opposed to turnkey solutions), which enables it to avoid competing with its clients

On other occasions, to improve profitability, it decided to reduce its workforce in the sugar business by giving them voluntary retirement (VRS) in FY2010 and FY2011.

At times, the company has taken the help of renowned consultants to form its business strategy e.g. KPMG in the water treatment business in FY2004, Accenture in the turbine business in FY2001, Andersen Consulting in the turbine business in FY2000 etc.

At times, the company has made donations to political parties as well (FY2022 annual report, page 184: ₹5 cr).

Going ahead, an investor should monitor the capital allocation decisions of the company to assess whether it is able to earn a good return on its investments.

Also read: How to Identify if Management is Misallocating Capital

The Margin of Safety in the market price of Triveni Engineering and Industries Ltd:

Currently (Sept 7, 2024), Triveni Engineering and Industries Ltd is available at a price-to-earnings (PE) ratio of about 28.4 based on consolidated earnings of the last 12 months (July 2023-June 2024). An investor would appreciate that a PE ratio of 28.4 does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.

Moreover, we recommend that an investor read the following articles to assess the PE ratio to be paid for any stock, which takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be sign of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

Analysis Summary

Overall, Triveni Engineering and Industries Ltd has grown its sales at a rate of about 11% over the last 10 years. However, the company operates in a very cyclical industry where due to agro-climatic risks, its earnings and profit margins are very fluctuating. In the past, on multiple occasions, it reported losses including during a continuous stretch of 4 years (FY2012+-FY2016).

The company faces intense competition from other sugar mills, local crushers/kolhus and international sugar producers. As a result, the company hardly has any pricing power over its customers. During the periods of surplus sugar production when prices of sugar fall and at times, when prices of jaggery are high, local crushers/kolhus pay a higher price for sugarcane to the farmers and in turn, create a shortage of cane available to mills.

As a large population of farmers depend on sugarcane crops for their livelihood, therefore, govt. keeps a tight control on sugarcane prices as well as the supply and availability of sugar in the market. During surplus sugar production, govt. incentivizes exports by giving subsidies, forces sugar mills to hold sugar stocks in warehouses and puts high import duties to avoid a glut of sugar in the market. On the other hand, during periods of sugar shortfall, govt. imposes stock limits, bans sugar exports and removes import duties.

Due to a high intervention by govt., sugar mills are not able to adopt strategies to maximize their profit margins.

To handle the cyclicity and uncertainty of the sugar business, Triveni Engineering and Industries Ltd has diversified and gone for forward and backward integration to improve profitability and reduce cyclicity. It entered into turbine manufacturing, gear-box manufacturing, distilleries, ethanol, IMIL, IMFL as well as water treatment businesses.

Along with these business expansions, the company has increased its manufacturing capacity in all its divisions like sugar, distillery, gears etc., which have also helped the company benefit from economies of scale.

On its way, the company tied up with many reputed institutions and organizations to gain access to superior products and technology that helped Triveni Engineering and Industries Ltd provide a better value to its customers.

Over the years, the company has managed its financial position well and despite large inventory write-downs on multiple occasions, it has kept its debt under check. It generated surplus cash from its operations and used it to pay dividends and buy back shares.

The company has a management succession plan in place as the promoters of Triveni group (Mr Dhruv Sawhney) seem to have handed over the two major companies of the group to each of his sons (Mr Tarun Sawhney and Mr Nikhil Sawhney).

Over the years, the company has faced numerous disputes, which might significantly impact its financial position. On certain occasions, the company has faced weakness in internal controls and processes leading to losses. However, at other times, the company has closed down units, and taken out investments when it realized that the business divisions have become economically unviable.

Going ahead, investors should closely watch the trends of sugar production in the industry to assess whether the industry is entering a surplus or deficit phase. She should closely watch all the regulatory developments related to its business divisions like sugar, distilleries, gears (capital equipment) and water treatment.

The investor should monitor the inventory levels of the industry as well as of Triveni Engineering and Industries Ltd to understand if it might face large inventory write-downs. She should keep a watch on the related party transactions of the company with its promoters as these carry the risk of transferring economic benefits from public shareholders to promoters.

She should carefully go through all the public disclosures of the company to check any signs of weaknesses in internal controls, processes and accounting quality as well as the status of its numerous disputes.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Triveni Engineering and Industries Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.