Triveni Engineering & Industries : EARNINGS CALL TRANSCRIPTQ4 FY 23

Triveni Engineering & Industries Limited

Q4 & FY 23 Earnings Conference Call Transcript

May 26, 2023

Operator:Ladies and gentlemen, good day, and welcome to Q4 and FY 23 Earnings Conference Call of Triveni Engineering & Industries Limited. As a reminder, all participant lines will be in listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing * then 0 on your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Gavin Desa from CDR India. Thank you, and over to you.

Gavin Desa:Thank you. Good day, everyone, and a warm welcome to all of you participating in Triveni Engineering & Industries Q4 and FY 23 Earnings Conference Call. We have with us today Mr. Tarun Sawhney, Vice Chairman and Managing Director; Mr. Suresh Taneja, Group CFO; Mr. Sameer Sinha, CEO Sugar Business Group as well as other members of the senior management team.

Before we begin, I would like to mention that some statements made in today's discussions may be forward-looking in nature, and a statement to this effect has been included in the invite, which has been shared with everyone earlier. I would also like to emphasize that while this call is open to all invitees, it may not be broadcasted or reproduced in any form or manner. We will commence the call with opening remarks from the management following an interactive Q&A session.

May I now hand it over to Mr. Tarun Sawhney. Tarun, over to you.

Tarun Sawhney: Thank you, Gavin. Good afternoon, ladies and gentlemen, and welcome to the Q4 and FY 23 results earnings call for Triveni Engineering & Industries Limited. We are extremely pleased with the performance of the Company for the year ended 31st March '23, where several milestones have been achieved. For example, the highest ever crush was in Sugar Season 2022-23, an increase of 11% year-on-year. A record, gross and net turnover of ₹6,310 crore and ₹5,617 crore respectively, with a strong performance across the board. Record alcohol production and sales, following our capacity expansion to 660 KLPD and an aggregate Engineering business revenue of over ₹500 crore and segment results of our Engineering business of over ₹100 crore is another significant milestone.

It's a matter of satisfaction to see that the diversification of our profitability; Alcohol and Engineering business contributed to 51% of the total segment results in FY 23 against 39% in the previous fiscal year. It's a healthy trend, and it's indicative of lowering the dependence on the Sugar business and more innovative management of the business risks.

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Turning towards the Sugar and Alcohol business. We had our highest sugarcane crush at 9.33 million tonnes for Sugar Season 2022-23, an increase of 11%, as I mentioned over the previous season. This was due to modernization and debottlenecking activities that were taken up in the previous off-season.

Net recovery of 10.23% with 92% of sugarcane crush with B-heavy diversion in Season 2022-23 versus 84% in the previous season. There were lower recoveries, it is important to note, across the state of Uttar Pradesh this year. Significantly enhanced refined sugar production was another important point from the year under review, increasing from approximately 40% in Sugar Season 2021-22, to 60% in Sugar Season 2022-23.

Sugar exports contributed significantly to the profitability. We've achieved exports of 190,000 tonnes during FY 23 out the total export quota just out of 205,000 tonnes for the year under review. In Q4 FY 23, just over 55,000 tonnes of physical sugar was exported. We had the highest ever alcohol production of 18.12 crore liters, which is an increase of 68% over the previous year due to additional capacities and expansions and very much in line, in fact, a little bit more than what we had forecast in previous earnings conference calls and declared earlier. The figure at that point was 18 crore liters. We estimate that for the Sugar Season 2022-23, the nation will produce 32.8 million tonnes after a diversion of 4 million tonnes for ethanol, and 18% higher diversion from the previous Sugar Season.

Turning towards the Engineering business highlights. As I mentioned, our combined business revenue of ₹500 crore plus, and the FY 23 revenues actually were ₹577 crore for both Water and the Power Transmission group growing by over 30% over the previous year. The combined profit before interest and tax crossed the ₹100 crore mark at ₹101 crore. And the overall outstanding order book stood at over ₹1,650 crore for the combined Engineering businesses.

During the year, the Company also divested its entire stake in an associated Company, Triveni Turbine Limited to enhance shareholder value. Accordingly, it was followed up by a distribution of ₹800 crore to the shareholders under the Buyback Scheme of the Company, which was completed in March 2023, just a couple of months ago. The Board of Directors in the Board meeting held yesterday has recommended a final dividend of ₹3.25 per share, 325% for the FY 23.

In addition, we have a significant development, an additional, incremental approval of ₹85 crore of capital expenditure for the Sugar business, which mainly includes the expansion in capacity of our unit in Sabitgarh by 2,000 TCD raising it from 7,000 to 9,000 TCD. And with the proposed expansion, the total crushing capacity of the Company will be augmented to 63,000 TCD.

So, looking at the financial highlights in brief. The notable changes for the quarter, of course, is a 52.5% increase in revenues compared to the previous corresponding quarter and for the fiscal year under review a 34.4% increase to ₹6,310 crore of gross revenues. The EBITDA margin also improved quite significantly in the quarter from 16.6% in the previous corresponding quarter to 18%.

The PAT for the quarter under review also increased by 74.3% from a ₹109 crore to a ₹190 crore approximately. All the businesses have contributed to the growth boosted by higher sales. The sales volumes in the Alcohol business were higher due to the new distillation capacities that were commissioned during the year and a large multi-feed distillery at Milak Narayanpur and a grain distillery at our Muzaffarnagar complex.

Profit before tax before exceptional items did decline marginally in FY 23 to ₹562.4 crore, and this is primarily because of an export subsidy that was recognized in FY

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22 of about ₹57 crore. The improved performance during FY 23 has been due to the substantial profitability of Sugar exports, which I have previously discussed. We managed to price our sugar at extremely attractive rates in December, January, and February and concluded at that time. Of course, prices went up quite substantially in February and later in March. But I think we're overall extremely happy with the realization and in comparing the realization that people have gotten across the country, I think we have fared extremely well from that particular campaign.

The total debt of the Company on a standalone basis on the 31st of March 2023 stood at ₹ 825 crore. This is a sharp reduction compared to the ₹1,504 crore on the 31st of March 2022. The overall cost of funds for FY 23 was 5.1% versus 5% in the previous year.

I'd now like to spend time on the individual businesses and discuss them in a little more detail.

Turning to the Sugar business, six of our seven sugar units recorded their highest ever sugarcane crush in Sugar Season 2022-23. We successfully produced and exported large quantities, well over 100,000 tonnes of S-grain or rather EC2 grade sugar, which fetched excellent realizations as we were able to capture the whites margin for these products. Deoband unit post conversion to a refinery has stabilized very quickly and produced excellent quality refined sugar during the Sugar Season 2022-23.

We've also produced the highest ever quantity of pharmaceutical grade sugar from our factory at Sabitgarh, which was expected. Six of the Company's units operated on B-heavy Molasses throughout Sugar Season 2022-23 and that leaves our unit in East Uttar Pradesh, which is quite far away, several 100 kilometers away in Ramkola, at Ramkola where we did not produce B-heavy molasses, and where we produce C-heavy molasses. The sugar export prices were at a considerable premium as I mentioned. And the export sale of 73,000 tonnes during the quarter was sold at a revenue of ₹29.42 crore.

Domestic sugar prices have remained broadly stagnant over the last few months. They went up a bit, they came down a bit and now have stabilized pretty much at the same level as they were just a couple of months ago. Sugar inventory on the 31st of March stood at 46.34 lakh quintals, which was valued at ₹33.7 per kilo. I would like to mention that the cogeneration operations of the business received sales of ₹63.8 crore, which was higher than the ₹62.4 crore in the previous fiscal year, an increase of about 2%.

The current Sugar prices that prevail just now, sales that happened yesterday and this morning are approximately ₹3,680 to ₹3,700 per quintal for refined sugar and ₹3,620 to ₹3,640 per quintal for sulphitation sugar. So, we've seen some amount of price increase that has happened over the last few days, few weeks or 10 days or so. Going forward, I see some further improvement certainly as we come towards the holiday season, especially when we go post monsoon, July, August, September, I would see prices increase slightly at that point in time.

The performance of this Sugar season was quite dramatic and remarkable. As I mentioned, we had our highest ever crush of 9.33 million tonnes of sugarcane at a net recovery of 10.23%, this recovery was lower. The State's recovery also was lower, the net recovery in the last season was 10.55%, but I think the more important numbers to look at is the gross recovery where you net off the B-heavy molasses etc. And previous season had a tiny little quantity of juice as well where we had experimented. The gross recovery for this season was 11.47% versus 11.70% for the previous season So that's about 0.23% reduction year-on-year. And

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I think this is broadly in line with what was experienced or what we thought we would experience certainly better than others in the state of Uttar Pradesh.

I'd like to look at the industry scenario as well. ISMA has revised its production estimates for Sugar Season 2022-23 to 32.8 million tonnes and it has lowered it from 34 million tonnes. I think this is broadly a very realistic estimate of production in the country. As of the 15th of May, the country's production stood at 32.1 million tonnes, there are still a few factories that are running in the state of Uttar Pradesh at this particular point in time and there will be a small special season that will happen in South India, which will raise the total production to about 32.8 million tonnes.

In essence, the nation has a sufficient quantity of sugar to do three things

• Meet the domestic consumption requirements
• Meet the requirements for the ethanol blending program
• To feed the export market that we as an industry have painstakingly developed over the last few years

I would like to point out that going forward, I see and we will discuss the weather in the next few minutes. But regardless of that, we will be able to accomplish these three very important things. India plays a critical role in the global sugar trade. And any absence of course, would be detrimental to India's interest and also will have a significant impact in terms of increasing global sugar prices. This is the Triveni perspective.

Looking at the balance sheet of the nation. With the opening balance on the 1st of October, of about 5.5 million tonnes, this is our estimate. We estimate the closing stock would also be just a shade above 5 million tonnes of sugar, a sufficient amount where I see the campaign for the next Sugar Season 2023-24, starting a little bit early. We also have major festivals, which would allow for an easy start in North India most certainly.

With an increased acreage and excellent rains in April and May '23, we are of the view that there are increasing chances of an El Nino impact, and this has been expressed by various metrological agencies. I think what's also important to recognize is the changes in weather patterns. This April, we had unseasonal cool weather across North India. Last March, we had unseasonal hot weather for the entire duration that continued. And we've also had inclement rain, at times that we don't have rain. This has an impact on sugarcane growth. This has an impact on recoveries. This has an impact on new forms of pests and disease that can potentially impact the sugarcane crop. And I think there has never been a more important time for us to be cognizant of all these weather events. It's not just El Nino, it's the changes in weather, changes in overall temperature, increase in the average temperature, which is something that there is really no debate about. And the impact that that it has on sugarcane as a perennial crop across the country and of course, in the State of Uttar Pradesh.

As you know, for Triveni, the majority of our sugarcane areas that are associated with our factories are located in river and well-connected canal systems, and they're supplemented by tube wells, bore wells and other irrigation methods. And therefore, there is a significantly lower likelihood for our farmers to get impacted by inclement weather or any rain impact to be precise.

Turning to the international scenario, according to the International Organization for Standardization (ISO), in view of the global supply demand situation, being global sugar balance for 2022-2023 is a substantially reduced surplus. It anticipates a global surplus of about 1 million tonnes, just under a million tonne, down from about 4 million tonnes that it is estimated in February. The changes are driven by

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increases in production in Brazil. However, the smaller increase in Thailand and lower estimates for India and Europe were the negative contributors to this.

For 2022-2023 we must say that the balance situation is quite interesting. And I think the discussion should really move to a quarterly basis, where there are certainly points in time, if we divide up quarters into hemispheres where we see pockets of deficit and strong deficit that emerge. And even going forward, I think it bodes very well for export of Indian sugar that can easily be absorbed by export markets.

International sugar prices have rallied quite substantially in calendar 2023. The New York number 11 broke $27 cents a pound, which was a multi-decade high. And actually, this is the highest since April 2012. On May 19th, 2023, the New York 11 closed at $25.77 cents/lb, although yesterday, there was a little bit of a sell-off because of higher production numbers coming out of Brazil. But by and large, we are holding at much higher prices. And I think the fact that Brazil will have a record crop of sugarcane and a record production of sugar is something to the market has completely absorbed. And I think supply side shocks will lead this market higher.

However, the correlation between international and domestic prices still eludes us, which, of course as a domestic sugar producer we would be happy with, but that doesn't really exist in this point in time.

Turning towards the Alcohol business. We achieved the highest level of production of 18.12 crore liters. The additional capacities that were established, taking the overall capacity of the Company to 660 KLPD, and to high levels of efficiency and production. We have, of course, improved our realization also quite substantially as the prices have been raised by the Government of India, and you can see that in our results. Profitability margins have been impacted because of increased transfer price for B-heavy molasses and Bagasse. It's very important as Bagasse is the fuel for the distilleries and that price has been increased as the transfer price is linked to market price.

Ethanol constituted 92% and 93% of alcohol sales in Q4 and FY 23, respectively. The sale of alcohol from sugarcane constituted 63% and 75% of total sales. And what that means really is that in Q4, 37% of sales of alcohol was from grain. And for the fiscal year, 25% of alcohol was grain. Going forward, I think we will look at about 35% from grain as a stable level, provided all things are equal. But it is important to mention that Triveni was clearly the first to set up a large multi-feed distillery. It absolutely critical, I think, in terms of our strategic positioning where our two new distilleries that will be coming up will also be multi-feed and it gives an enormous amount of flexibility and ability to be able to focus on the bottom-line, while making decisions on what feedstock to consume.

The industry scenario is also quite positive. Out of the 518 crore liters that was finalized by the OMCs against a requirement of 600 crore liters, the contracts were for 514 crore liters. Against the above, 244 crore liters have been lifted till May 7, 2023 which equates to a blending percentage of 11.65%, which is not bad. Target is 12%, and I think we will be pretty close to that 12% level. The largest contributor for this, of course has been ethanol supplies from the sugarcane industry.

Turning to our Engineering businesses, I would like to start with our Power Transmission business, and then move to Water. For the Power Transmission business, we had an increase in turnover and profitability by 22% at just under 20%, respectively. The profitability margins were sustained at 34 odd percent for the year. EBITDA margins being higher than that, it is actually higher than that.

For FY '23, the order booking grew 5% and the closing order book about was 17.7% higher than the previous year. The business has added 18 new customers

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