Triveni Engineering & Industries : EARNINGS CALL TRANSCRIPTQ3 FY 23

The increase in net distillery turnover by 61% in the nine months has been driven by additional capacities that were commissioned during the course of the year, and this leads to sales volume increase of just under 40% coupled with 8% approximate improvement in realizations. There has been a robust increase in the turnover of both the Power transmission and Water business growing by 29% and 41% approximately year-on-year for the nine months. The outstanding order book for our engineering businesses stood at ₹ 1,766 crore.

Yesterday, the Board of Directors at our Board Meeting approved a CapEx of ₹ 90 crore for the Sugar business and ₹ 100 crore for the Power Transmission business. The proposed CapEx of ₹ 90 crore towards our Sugar business is for a process change at Milak Narayanpur towards refined sugar and modernization, debottlenecking, and most importantly, efficiency improvements at various sugar units which will lead to substantial cost optimization and the reduction in our cost of production.

The proposed CapEx of ₹ 100 crore in our Power Transmission business is towards a brand new bay that will be set up with complete equipment for a new gear shaft. This will be at our existing facility at Metagalli in Mysore and it will also include machinery towards our Defence business project and plant, which is a separate facility that will be set up over the next 12 months as well. For the Power Transmission business, this will lead to an enhancement in terms of total capacity from a base of approximately ₹ 250 crore to ₹ 400 crore. (Note: corrected to 250 as it was mentioned erroneously on the call as 450).

I would like to also spend a few minutes discussing the financial highlights for the nine months of FY 23. Profit before tax before exceptional items increased by 7.4% in the quarter. The profitability in the Sugar business is lower as the cost of sugar sold pertaining to the previous season includes the impact of sugarcane price, which was increased for Sugar Season 2021-2022 and led to a higher cost of production, when compared to the previous corresponding quarter. Further, for the nine months FY 22, these numbers also include an export subsidy of ₹ 57 crore related to the previous period.

The higher profitability of the engineering business is due to strong revenue growth of 45.8% and 35.8% during the current quarter and nine-month period compared to the previous corresponding period.

The total debt of the Company stood at ₹ 389 crore on a standalone basis versus ₹ 525 crore on the 31st of December 2021. The standalone debt comprises of term loans of ₹ 335 odd crore, almost all these loans are with interest subvention or at subsidized rates of interest. On a consolidated basis, the total debt is ₹ 480 crore compared to ₹ 592 crore for the previous period. The average cost of funds on the 31st of December stood at 4.75% versus 4.15% in the corresponding period of the previous year. The Company at this point in time is holding surplus funds through short-term fixed deposits of ₹ 1,278 crore. Our proposed buyback of ₹ 800 crore is presently under approvals. The stake sale in Triveni Turbine Limited has infused substantial funds in the Company, which, even after the proposed buyback, will meet the expansion requirements of the businesses and reduce finance costs on working capital requirements.

I would like to give a brief update on the buyback, the Company has obtained approvals from shareholders, the draft letter of offer has been filed with SEBI and final observation letter is awaited.

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Turning towards the financial highlights, again, I would like to point out that for the quarter, the revenues from operations for the Company grew by 34% to ₹ 1,659 crore, and the EBITDA margin stood at 16% at ₹ 230 crore and the PAT was a shade above ₹ 147 crore.

I would like to now spend a few minutes discussing the various businesses in a little more detail. Starting with the Sugar business, our realisations during the quarter were ₹ 3,611 per quintal for domestic sales and our export realisation was a considerable premium at ₹ 4,041 per quintal for the same period. The current sugar prices as of the 24th of January at our factories, for refined sugar, it's approximately ₹ 3,560 per quintal; and for sulphitation, it's about ₹ 3,450 per quintal.

Sugar inventory on the 31st of December was just under 24 lakh quintals valued at ₹ 34.4 per kilo (kg). Co-generation operations have achieved external sales of ₹ 36.5 crore for the nine months against ₹ 33 crore, an increase of 10%.

I would like to mention that our domestic realisation price for this quarter is, as I mentioned, ₹ 3,611, which is a 1% reduction versus the corresponding period of the previous year. Now, this to me, frankly speaking seems a little bit of an anomaly, because if we look at the stock position, especially on a month-on-month basis, to have prices at the same level, marginally lower than the previous corresponding period is a little bit of an anomaly. The expectation for the remainder of this year is that prices will gradually increase to a more healthier level.

From an industry perspective, the country as of the 15th of January has produced

15.68 million tonnes, which is an increase of 4% when compared to the previous year. 515 mills are crushing versus 507 mills at the same point last year. And Uttar Pradesh has produced 1% more sugar, at 4.07 million tonnes at this particular point in time, which is in line with our projections.

According to our estimates (Triveni), we are anticipating net sugar production into the season 2022-2023 of 35 million metric tonnes, and this is lower than we previously announced estimates as well as street estimates, which were approximately 36 odd million tonnes.

We still believe that this is a very healthy amount of production, and with 6 million tonnes of exports that have been announced, there is a possibility of a second tranche of a maximum of probably about 1 million tonnes that can be considered by the Government and our hope is that the Government does consider an additional tranche very soon of 1 million tonnes of sugar, as the window to truly export sugar from India will end with the sugar season and that is approximately the point in time when Brazilian sugar, etc. will also be in global markets.

Turning to the international markets based on reports, the forecast is that sugar season 2022-2023 is a surplus of 3 million tonnes of sugar and this is primarily due to substantially larger crop in Centre South Brazil as well as an increase in Thailand.

The global sugar prices have also softened very recently, but it has been fluctuating for quite some time and very substantial and improved pricing in global market. So, today, after touching highs of over 21.18 cents in December 2022, New York #11 futures are now trading at about 19.82 cents. London White #5 contract was trading at $551 per tonne, down from the recent highs of about $580 per tonne in December 2022.

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So we are sort of hovering around recent highs, which is quite encouraging, and which leads me to the point that if India were to export another 1 million tonnes of sugar, the timing is very appropriate right now. The world market will certainly absorb that sugar and Indian mills will receive remunerative pricing.

Turning towards our alcohol business, we have had an 87% increase in production for the quarter under review. The same quarter has had an increase in average realisation of ₹ 2.5, which stood at ₹ 56.6 per litre. Additional capacities have been commissioned in the nine months, which has resulted in the increased sales volume and the aggregate distillation capacity now stands at 660 kilo litres per day (KLPD).

The profitability margins have been somewhat impacted by increased transfer price of B-heavy molasses. And, as you will note, we adjust the transfer price to be more relevant with the market prices from time to time. The sale of ethanol produced from grain accounted for 33% and 20% of total sales volume in the current quarter and nine month period correspondingly.

The ethanol produced from B-heavy molasses constitutes 57% and 72% of sales volume in the current quarter and nine month period against 88% and 80% in the corresponding periods of the previous year.

From a domestic industry perspective, of the 470.5 crore litres that's been finalized by OMCs against the total requirement of 600 crore litres, contracts for just under 460 crore litres have been executed till January 1, 2023. Against the above, 38 crore litres have been lifted by OMCs by January 1 to the average blending is 10.43%. The target of course as we all know for the nation for this year is 12% blending.

The total contracted quantity from sugarcane juice and B-heavy molasses is 133 crore litres and 204 crore litres respectively till January 1, 2023. 5.8 crore litres in the contracted quantity towards C-heavy molasses, 18.7 crore litres from damaged food grains and 97 crore litres from surplus rice. Therefore, the sugarcane-based feedstock continues to be the dominant contributor towards the ethanol blending programme.

And my view on this is fairly clear, that as we go forward and approach levels of EBP20, the sugarcane sector should continue to play a disproportionately high role in terms of the Government EBP programme. And we definitely need that to be accounted for in Government policy. And I am alluding directly towards the pricing of ethanol that is made from juice, because I think it is the most reliable source for ethanol and for the EBP programme, as we move towards the 1,000-crore mark and beyond.

Turning quickly to the Engineering Businesses, I'd like to start with our Power Transmission business, which has seen revenue increases in the quarter of 71% to

• 60.5 crore, and a PBIT improvement of 91.5% to shade above ₹ 21 crore.

The closing order book is 23% higher at ₹ 262.75 crore. For the nine months, the order booking grew at 10% for the same period. And I will, of course, be happy to discuss the changes in the CapEx of the Power transmission business during the remainder of this call.

Turning quickly to the Water business. There's been a 34.4% improvement in revenues in the quarter to ₹ 104 approximate crore and the closing order book is a

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shade above ₹ 1,500 crore, broadly in line with what it was in the previous corresponding period. The above results are based on the consolidated perspective including our wholly-owned SPVs.

The orders that have been achieved in the Water business for the nine month period stands at just above ₹ 190 crore, excluding O&M orders. The Company is expecting robust order booking in the coming quarters And we are anticipating several important orders to be concluded within Q4 FY 23.

I would like to spend just a few minutes talking about the outlook of the various businesses. As far as the Sugar business is concerned, as a result of the debottlenecking and modernization carried out top three factories are crushed is expected to be significantly higher this year. We are still maintaining as we did on our last call before the sugar season or just about when the sugar season had started that we will have a higher crush of between 9% and 10% this year. Of course, with the CapEx that have been planned, we propose that we will have a higher crush in the next season and even higher crush compared to this year as well.

The current ongoing season, there is a declining trend of recoveries across the State of Uttar Pradesh for the ratoon crop, and this is due mainly to the rains during the grand growth periods and thereafter, in late October. However, we have had fantastic conducive weather and it is expected that there will be a catch up for the balance part of the season with the plant crop coming to the factories. Our test data from our labs indicates very positive results for the plant crop, which we anticipate coming to our plant, with the start expected in the next week or 10 days up to 2 weeks, depending on each plant.

Considering the crush and recovery expectations, we expect higher production for the year. And with 60% of our total sugar being refined sugar and the doubling of the pharmaceutical grade production plant. This would all boost realizations and profitability in the coming quarters. The plant at Deoband, which was converted into a refinery is operating brilliantly, and the sales of that refined sugar will be reflected in Q4 and beyond, a very small quantum was reflected in Q3.

On the policy front, we believe this is the most appropriate time for the Government before the budget to consider during the budget, an increase in the MSP of sugar plant to offset the impact of costs and cane prices, etc. As I mentioned, the Board is also approved ₹ 90 crore CapEx to further modernize, debottleneck the plants and for efficiency improvements across the various facilities.

I would like to also mention that the recoveries for this year and last year are not directly comparable because last year, our largest factory at Khatauli, ran on C- heavy molasses. And therefore there was a higher recovery, versus this year in our factories, six out of the seven plants have run on B-heavy molasses, the quantums are different as I mentioned earlier.

Turning to the outlook of our alcohol business, we have a capacity of 660 KLPD and a planned increase up to 1,110 KLPD with two more distilleries both of the new ones being dual feed. We believe that that is the modus operandi for sugar mills, but that should be adopted giving you ultimate flexibility in terms of looking at the bottom line, and the availability of different feed stocks for the distilleries.

We are encouraged by the recent increase in ethanol prices. However, there is an urgent need for the Government to improve the pricing of ethanol produced from

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