An Interesting Spin-off

An Announcement worth a second look-
Triveni Engineering & Industries Ltd. submitted this announcement to BSE on 25th April-
http://www.bseindia.com/stockinfo/anndet.aspx?newsid=6bf6e678-eec0-4678-b5dc-946e3863b700&param1=1


Now, spin-offs are considered to be a good starting point for making a good deal of money in the market. Reason- Just after the spin-off, resulting company is expected to be available at a bargain. This happens because shareholders of parent are given something which they have not asked for and hence prefer to exchange it for cash, come what may. Generally, institutions are the first one to get out of these new securities due to small size and their regulations. A view of shareholding pattern of Triveni Engineering & Industries Ltd. - http://www.bseindia.com/shareholding/shareholdingPattern_60.asp?scripcd=532356&qtrid=69.00
makes this case more interesting as about one-fourth of shares are with institutional investors who may prefer to get out of Triveni Turbine Ltd. (Resulting Company) and hence we may see some selling pressure in early days after listing and hopefully this will make TTL a bargain for value investors.

What is Triveni Turbine?
The resulting company supplies turbines to its customers. It is the largest supplier of steam turbines and commands a market share of about 60% in sub 30MW range. Its customer base includes big players from sugar, paper, textile, pharma, refinery space. Apart from making turbines, it also provides spare-parts and service to its customers.
Lets have a look at financial numbers-
 

In crs	2004	2005	2006	2007	2008	2009	2010
Sales	124	162	270	666	548	491	592
Op. Profit	16	15	42	154	128	116	130
Asset	67	86	130	236	307	295	301

A decent growth in sales and operating profit and high return on asset base. Hmm....

Valuation by Graham-
Now lets try to value this company using Graham, father of Value Investing, style. Lets find value using Debt capacity bargain and Earnings yield bargain themes.

Debt capacity bargain-
On an average, this company is earning 86 crs per year. Hence, it can safely service a debt in which it has to pay an annual interest of 29crs (Assuming Interest coverage ratio of 3). This way its earnings have to come down by 75% from average to possess any danger to annual interest payments. Assuming interest rate of 9%, it can easily get a debt of 318 crs (29/0.09) even from the most prudent banker. Hence, Enterprise Value (EV) of this company can't be less than 318 crs as per this theme. For more details on this theme, visit- http://fundooprofessor.wordpress.com/2011/04/24/vantage_point/

Earnings yield bargain-
This company is earning 86 crs per year. Now, Graham wants his yield to be atleast double of AAA bond yield. AAA bond will give you (and me) about 9% pre tax returns. That comes to be 6.3% post tax,assuming 30% tax rate. So, to get double of AAA bond yield, he would not like to pay more than 682 crs of EV for this company. (86/ 2*6.3%).


So, overall, if after listing, I (& Graham) can get this company at less than 682 crs EV, I (& Graham) would be more than happy to invest (Less than 318crs would be even better). In the next post, we will try to dig deeper into the company and try to value using Buffett style. Happy Investing!!