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Triveni Turbines Ltd - Buy or Sell - A Tech Perspective

Ahead of the pack: Triveni Turbines Ltd (TRITURBINE), the market leader (with over 65% market share domestically) in the up to 30MW steam turbine segment, is at an inflexion point with a strong ramp-up in the after-market (spares and refurbishment of the existing plants; contributes 26% of revenues) and export (contributes 32% of the revenues) businesses while the domestic market is showing distinct signs of a pick-up. Unlike most of its peers, TTL is already showing a distinct improvement in order booking and reported a 47% growth in its order inflows in the first half of this fiscal (it has an order backlog of Rs770 crore).

JV with GE-an added boost to export business: TTL has established itself in the overseas markets with installations across 50 countries and export orders account for 60% of its current order book. A joint venture (JV) with global power equipment major General Electric (GE) to manufacture turbines (30MW to 100MW) is further boosting its export business with the revenues from the JV scheduled to grow multi-fold in the current and the next year (over a relatively small base of Rs20 crore in FY2014). The venture is also expected to turn profitable in FY2015.

Industry beating margins sustainable: The shifting of the revenue mix towards a higher contribution from the fast growing and highly profitable businesses of exports and after-market is aiding margins. We expect the company to sustain its OPM at 22-24%, which is among the best in the industry and way ahead of competition.

Healthy balance sheet and operating cash flows: TTL is virtually a debt-free company and has an efficient working capital cycle resulting in very healthy return ratios (both RoE and RoCE in the upwards of 50%). It has consistently been able to maintain a low working capital cycle by virtue of the advances received (up to 15-20% of the order value) from its customers and a short execution cycle (of less than one year). With a minimal investment of Rs40 crore to substantially increase its manufacturing capacities and healthy growth rates, we see the cash generated from operations increasing manifold to Rs147 crore in FY2017 from Rs37.5 crore in FY2014.

Quality business at discounted valuations; Buy with price target of Rs128: Given its relatively better competitive positioning in the domestic as well as overseas markets, strong order backlog and a healthy balance sheet (it is debt-free and enjoys superior return ratios), TTL is set to report a 39% compounded annual growth in its earnings over the three-year period FY2014-2017. It is our preferred pick in the power equipment space and among the few Indian capital goods companies to have established a global footprint. However, in spite of a superior quality of business and return ratios, it trades at a close to 40% discount to its comparable peer like Thermax. Thus, we see significant scope for re-rating (narrowing of the valuation gap) and set our price target at Rs128 (23x FY2017 estimates which is a discount of 15% to the current multiple of Thermax and lower than TTL's average PE multiple of 25x over the past five years). We initiate coverage on TTL with a Buy rating.

Key risks: (1) A less than expected pick-up in the capex cycle in both the domestic and overseas markets; (2) a delay in order execution; and (3) any unfavorable currency movement.

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