December 11, 2012

Triveni turbines limited - Waiting for growth

Triveni turbine is a Bangalore based company in the business of manufacturing and servicing steam turbines upto 30 Mw. In addition the company has a JV with GE (general electric) for turbines in the range of 30-100 Mw.

The company has around 2500 turbine installations globally and is a market leader in India in the sub 30 Mw range with a market share of around 55%.

Steam turbines have multiple applications such as co-generation, captive power plants, and Industrial drives and in ships. The company supplies industry specific turbines to multiple industry segments such as sugar, cement, steel, chemicals, municipal solid waste and textiles.

The company was spun off from triveni engineering in 2011, which also has a sugar, water management and gears business. The turbines business has grown from around 280 crs in 2006 to around 670 Crs in the current year at a CAGR of around 13%. PBT has risen from around 37 Crs to 140 crs in the current year at a CAGR of 20%+.

The company has been able to maintain an operating margin of roughly 25% during this period and a return on capital in excess of 100%. The company is able to earn such a high return on capital due to negative working capital and high operating margins.

The company earns a very high return on capital which points to the presence of a sustainable competitive advantage. It enjoys a very high market share in India and is now expanding into export markets too

The company also has the following four growth engines working for it
-      Industrial demand for power via captive power plants. Additional demand from co-gen opportunities
-      Service demand from the install base and for turbines of other manufacturers.
-      Demand from the JV with GE in India and abroad for the 30-100 Mw range
-      Export demand for sub 30 Mw product range

In addition to the above growth opportunities, the company is currently running at around 40-50% of capacity and can expand sales with minimal capex.

The key risk for the company is a delay in the revival of the capex cycle. The investment cycle has slowed down in India and in the export markets. As a result the company has struggled to grow the topline and profits in the last 2 years. If the capex does not revive, the company could face stagnant profits for some more time.

Competitive analysis
The key competitor for the company in India is Siemens. However companies like Siemens and BHEL have a very wide range of products and are not as focused on a single product in a narrow range (below 30 Mw). Most companies in this sector enjoy a decent return on capital and hence triveni turbine should continue to earn a high return in the foreseeable future.

Management quality checklist
-          Management compensation : reasonable at around 1-2% of profit
-          Capital allocation record : In the short operating period as an independent company, management has used the free cash to pay down the debt and the company should be debt free by the end of the year
-          Shareholder communication – fairly good. The company shares adequate details via the annual report and quarterly investor updates and conference calls.
-          Accounting practice – appear conservative
-          Conflict of interest – none

The company is currently selling at around 20 times earnings. On the face of it, this does not appear to be cheap. At the same time one has to look beyond the raw numbers. The topline and profits for the company have stagnated in the last 2 years with a complete collapse of investment demand.

During this period, several capital goods companies have made losses and have seen their working capitals blow up. During one of the worst downturns in the sector, the company has remained solidly profitable and continues to operate with a negative working capital.

In addition the company expanding its export business has a thriving and growing turbine services business and should see additional revenue from the JV with GE. We may not see a PE expansion as the company is already operating very efficiently, however as the topline and profits start expanding, we should get a return commensurate with the growth.

The company operates in a niche and has a sustainable competitive advantage due to its customer relationships and service network. In addition the company has formed a JV for the 30-100 Mw range which should enable it to expand the target market for its products.

The company’s performance has stagnated in the last 2years due to the macro economic conditions. However the long term prospects remain intact and the company and its stock should do well in the long run.

Disclosure: No position in the stock as of writing this post
Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please read disclaimer towards the end of blog. 


Anonymous said...

Hi Rohit,

This company has just started doing something since 2011 (probably spun off from the parent). But its too early to take an opinion. We are seeing a year of spectacular ROCE and margins/eps. Looks like a cyclical...Not very cheaply valued either. Rather looks like its over valued. Is the market for turbines growing and poised to grow year on year?

Best, Vidyanshu.

Rohit Chauhan said...

Hi vidyanshu
the last two years have actually been a drag..if you look at the performance when the company was still a division of triveni engg, the company had good growth

after the demerger, the debt was partially shifted to this biz and also some accumulated losses. the company cleaned the debt and losses in a year and should have lots of cash from next year

In addition the capex needs are quite low wcap and little fixed asset as the capacity utilisation is around 50%. long term also the return on incremental capital is likely to be high

if you look at recent profits, yes valuations are not cheap, but that is the case with capex type cyclical companies during a downturn


Dhwanil said...

Hi Rohit,

Completely agree with you on the business side. Triveni has a rock solid business and is in enviable position for other capital goods company. What I like most is a combination of asset light business (due to combination of inherent business characteristics and negative WC due to its standing in the market) and excellent profit margins. What is remarkable is that inspite of degrowth in revenue, company is able to maintain its bottom line by increasing its margin. Looks like pricing power/moving up value chain at play.

Its partnership with GE can be a game changer once (and If!) it picks up (eventually it should..). So only moot point here is valuation. Personally, I do not like to pay for growth, so waiting (and may be hoping) for price to come down around 40 to load up.

Best Regards
Dhwanil Desai

Ankur Jain said...

Hi Rohit,

Triveni promoters had come out with a questionable scheme in 2003 which had converted the equity shares of small shareholders into preference shares; the scheme came along with a negative consent.

Though the promoters agreed to "not do any such thing again" and the presence of GE now might prohibit the promoters from doing anything which is questionable but still it is a risk which requires more thinking if you are considering this investment as a long term compounding machine.


Ankur Jain

Jigs said...

Promoters came out with IPO in 1992-1993 and then used re-structuring for increasing their holding and again did IPO recently. Though exports potential for sector is huge I would stay away from such promoters.
Check AIA Engineering which seems similar in business and has reputed promoter.

Rohit Chauhan said...

Hi dhwanil
agree the prospects for the business are quite good, but the comments from ankur and jigs has made pause. i am always wary of promoters pulling a fast one on the minority shareholder


Rohit Chauhan said...

Hi ankur
once you get caught , a lot of people agree never to do the same thing again :) we said the same to our parents as a kid and did some other naughty thing
my search did not turn up any such negative and the management's actions in the last few years seem to be fine , but from what they have done in the past makes me apprehensive.

it may not change the overall thesis (as most promoters in india have some shady stuff or other), but i think one needs to be cautious


Rohit Chauhan said...

Hi jigs
can you share some more details ? is it conversion of equity to preference capital which ankur mentioned ?

the power of the net is that if any promoter has done any shady thing in the past, it cannot remain hidden. thanks for highlighting it...i had not found any such thing in my search, but good to realise it now


Ankur Jain said...

That's true Rohit that one will always find something shady or something at odd with Indian promoters or even Indian arms of MNCs. I believe it is something to do with the hawa-pani (climate and food) of India. That's why I restrained myself from commenting that one should avoid Triveni. I think one should duly evaluate the risk.

At the same time, it does happen that companies as they grow in size; or because the promoters understand the power of market cap or because of generational change in the management, some managements do realize that the shady practices don't reward in the long term and they moderate themselves to incline towards the more righteous way of conducting business.

Rayhaan said...

i believe this idea contains the appropriate pessimism that is necessary to keep a fellow like me consistently(or at any rate,much of the time) rational,especially with's mood set to the tune of gangnam-style.

i'm hopeful that the members of safal niveshak representing a pretty vast cross section of professionals should be able to add insights and give this idea the proper attention it deserves.i have taken the liberty of copy and pasting your thesis with (a link to this blog,of course)
Trust it should not be an issue.

thanking you in advance