Triveni Engineering and Industries Ltd’s proposed
demerger of its steam turbine business gives it the usual benefits of a demerger: better focus, induction of a strategic partner and higher valuation. While Triveni has nurtured its sugar and engineering businesses equally well, its valuation is closer to that of a sugar company. A demerger will see the engineering business trade at a higher valuation. But the structure of the demerger is a bit of a dampener, with the demerged company’s equity capital 39% higher than Triveni’s.
In fiscal 2009 (year ending in September) sugar contributed to 68% of Triveni’s sales and engineering the rest. The latter is further split into steam turbines (23%), water treatment (5%) and gears (4%). Triveni is spinning off the steam turbines business, but not the others. It sells steam turbines to industries, with a 75% share in the up to 15MW range and a 30% share of the relatively new 15-30MW range. Post-demerger, it will likely induct a strategic partner with an equity stake. The idea is to get the capability to make 100-150MW turbines and also sell in global markets. The gears business is being retained to avoid any conflict of interest because it supplies to Triveni’s competitors in the turbines business, too. It has separate plans for tie-ups for the fast-growing water treatment and gears divisions.
Graphic: Yogesh Kumar/Mint
The steam turbines business, with revenue of Rs475 crore and a segment profit margin of 24% in fiscal 2009, will be demerged into an existing 100% subsidiary, called Triveni Turbines Ltd (TTL). Triveni’s current price-earnings multiple is around 14 times, based on its trailing 12-month earnings per share. In contrast, the BSE Capital Goods Index trades at a multiple of 29 times. TTL should thus get better valuations, especially since it is the most profitable division.
But the structure of the demerger is dilutive. TTL’s existing equity capital is Rs10 crore, and will increase to Rs38.5 crore after issuing shares to Triveni’s shareholders in the ratio of 1:1. That will see its earnings being spread over a larger number of shares. A clean demerger would have seen both companies left with identical equity capital and shareholder structures. The market value of Triveni’s post-demerger stake of 28% in TTL may, of course, reflect in its own share valuation and provide a buffer when the sugar business enters a down cycle. But TTL would have benefited more if its equity capital had remained constant.
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