In June, the government had advanced the target of achieving 20% ethanol in petrol (E20) by five years to 2025. At present, the average blend is around 8-9%.
Given the overall better prospects, Triveni announced a capex of Rs 350 crore to more than double it’s distillation capacity over the next 9 months.
Key points to note –
- Capex would be incurred towards increasing the capacity of existing two distilleries as well as set up of two new distilleries.
- Total capacity would increase from 320 kilolitres per day (klpd) to 660 klpd.
- Planned capacity expansion would be completed by 1st qtr of FY 22.
- Company expects it to be a very high return on capital employed project
- In FY 21, revenues from the distillery business was Rs 544 crore with operational profits (PBIT) of Rs 101 crore.
- Company estimates this to increase to 1500 crore i.e., almost 3 times as against the capacity expansion of 2x.
Projected revenue increase implies a sales to fixed assets turnover of 2.7x. This seems reasonable and achievable. Capacity expansions in general bring economies of scale and capital efficiencies. Triveni’s overall sales to fixed assets turnover ratio has been more than 3x since 2018.
- Company also expects its engineering business (comprising power transmission and water purification) to outperform the sugar business (comprising sugar and distillery). In FY21, Engineering business contributed 8% to Triveni’s revenues and 11% to the PBIT.
Overall, Triveni does seem to be ticking all the right boxes and can be an interesting stock for the long term investors. Valuations and return ratios are attractive – trailing PE of 14x and ROE of 20%. Stock price has generated a CAGR of 23% over the last 10 yrs and 65% over the last 3 years.
Anyone interested in this sector should definitely keep this stock on radar.