Leave the Child; lets talk to the Parent

I had discussed opportunity in Triveni Engg here. For a moment (or may be longer), lets forget the Turbines (Resulting company) and concentrate on the parent (demerged company). [Because the child is gonna command 60% of pre-demerger market cap (having revenues of only 23%) while the rest of the business are available at 40% of pre-demerger market cap] So, is the parent available at a bargain? Lets find out using Charlie Munger's saying- Invert! Always Invert!

At present, 25.8 crs shares of Triveni Engg are available at a price of Rs 40 each. Now, I would like to buy only if I find intrinsic value coming from sum of the parts valuation at a premium of atleast 50% (in other words, I would like to invest if I find intrinsic value of atleast Rs 60 in this stock). This means, Enterprise Value of about 2500 crs (assuming whole 934 crs debt belongs to the parent).

Business Segments-
Demerged company is into- Sugar, Co-generation of electricity, Distillery, Gear box and Water treatment and has 22% ownership in Triveni Turbine Ltd. (Too much diversified ??) Lets see each segment into some more detail-

Co-generation- Remains from sugar business are used to produce electricity which is used for captive use and left over is sold to UP Power Corp Ltd as a part of long term agreement. The fate of this business depends on the availability of sugarcane. The historicals are-

in crs	2007	2008	2009	2010
Turnover	152	117	94.8	146.7
PBIT	49.7	47.5	20.1	27

Since Avg PBIT of 36 crs is less than current PBIT of 27 crs, lets assume 27crs of PBIT every year. Calculating EV using earning yield bargain, we can safely assign an EV of 150 crs to this business. (PAT of 19 crs @ 30% tax, AAA bond yield of 9%).

Distilleries-Molasses, the by-product generated during the manufacture of sugar, is fermented and distilled and variants of alcohol are manufactured under this business. Again the fate is linked to the availability of cane.
Financials-

in crs	2007	2008	2009	2010
Turnover	20.7	78.7	53.9	88.9
PBIT	2.1	17.69	9.2	8.1

Taking lower of average and latest PBIT as sustainable, we can safely assign an EV of 45 crs to this business. (PBIT= 8.1 crs, Tax rate of 30%, AAA bond yield of 9%)

Gear and Gear Box- It is one of the largest manufacturers of high speed gears and gearboxes with capacity upto 70.0 MW, has 70% market share for high speed gears in India and is associated with Lufkin Industries Inc (USA) - the global leader in gears & gearboxes. Again lets try to conservatively value this business-

in crs	2007	2008	2009	2010
Turnover	109.4	88.2	73.29	101.44
PBIT	23.2	21.9	24.39	34.53
Margin	21%	25%	33%	34%

As we can see, this is a high margin business. But lets forget that for now. Avg PBIT is 26 crs which gives an EV of 145 crs for this business using same assumptions as above.

Water Treatment- It provides products and services for water treatment, waste water treatment, desalination and reuse & recycling systems.

in crs	2007	2008	2009	2010
Turnover	51.1	66.7	99.74	161
growth in turnover		31%	50%	61%
PBIT	5.8	10.5	14.83	21.94

Look at the sales growth numbers for a moment. But lets forget it now and value this using Graham's approach. Avg PBIT of 13 crs assigns an EV of 73 crs to this business.

Turbine Business- Parent is gonna have 22% stake in the child after the child gets listed. It is going to be listed at an EV of 1900 crs giving parent an EV of 414 crs. But child can be overvalued. Conservatively calculated price (from the last post) is 682 crs giving Triveni Engg an EV of 149 crs. It also has an outstanding preference shares of 2.8 crs in the child.
So total EV of all business except sugar= 150+45+145+73+149+2.8 = 564 crs.

So, if we could value sugar business at 1900-2000 crs, that would make Triveni Engg a good bargain at the current price.

Sugar Business- As a matter of fact, sugar is the main business of the company. Company is among top-5 sugar producers in the country having 7 plants having combined crushing capacity of 61000 TCD (Tonnes Crushing per Day). Since sugar is a cyclical business, it can't be valued using PE approach. Lets try to value this business relatively-
 

	Shree Renuka	bajaj hindusthan	balrampur chini	empree sugars	bannani aman	kcp sugars	Triveni Engg
Crushing capacity (TCD)	94,520	136,000	73,500	2,500	19,000	13,000	61,000
debt	6,507	6,350	972	513	238	42
mkt cap	4,651	1,619	1,884	227	652	191
EV related to sugar business	5,648	6,797	2,352	370	712	210	???
EV per crushing capacity	0.060	0.050	0.032	0.148	0.037	0.016	Median

Using Median EV per crushing capacity to calculate EV of Triveni Engg gives it an EV of 2667 crs for 61,000 TCD. Best comparable for Triveni is Balrampur Chini due to nearly identical size and presence of plants in U.P. Using EV per CC of Balrampur Chini for calculations gives Trievni's sugar business an EV of 1952 crs.

Valuation-
Hence, even after valuating all business conservatively, intrinsic value of Triveni Engg should not be less than Rs 60 { (1952 + 564- 934) / 25.8}.
Do you see anything wrong in this valuation? I see one. Using overvalued companies as comparable for sugar business will make my sugar business and hence whole company overvalued. Are other sugar companies overvalued? May be. But I don't think so. There has been a price correction of atleast 25% in almost all sugar stocks in the past 6 months. Balrampur Chini has done a buyback recently indicating that it thinks that the company is undervalued.
There might be one positive surprise for someone holding this stock for about 2-3 years period. If Turbine business lists and performs well, company could well demerge gear and water business also.

Risks Involved-

• The key risk involved in a commodity business is timing risk. Sugar comps. may not be overvalued now but to say when sugar cycle will improve needs more analysis. In fact, a lot of money can be made by correctly predicting the sugar cycle (or any other commodity cycle).
• Co generation and distillery will also perform in line with sugar business. Hence, wrong entry time will hurt a lot in this stock.
• Company operates only in UP. Any unfavourable development in the state's supply or demand situation will hurt the stock.

Am I missing something?