Despite a 20%+ correction in the stock price, the core business challenges remain. Given the ongoing margin headwinds, the brokerage remains cautious on Triveni Engineering and maintain Reduce rating inspite of limited downside from current levels.
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Centrum Broking Report
Triveni Engineering and Industries Ltd. reported a 22.9% YoY revenue growth to Rs 16.0 billion, beating our estimate of Rs 14.2 billion by 12.4%. However, gross margins declined to 20.1% (vs 23% in Q1 FY25) due to higher production costs stemming from lower sugar recovery in SS25.
While we had anticipated that higher average sugar realizations would cushion margin pressure, recovery remains weak. Consequently, Ebitda margin dropped to 3.3%, and PAT stood at a muted Rs 22 million compared to Rs 310 million in Q1 FY25 (our estimate: Rs 526 million). The company's continued reliance on the 0238 sugarcane variety — known to be susceptible to red rot — remains a structural issue, with exposure expected to reduce only to <40% by SSY26 (SSY25 ~55%).
This is likely to cap margin recovery at current sugar and ethanol price levels. While higher sugar prices are anticipated, a meaningful re-rating hinges on an increase in ethanol realizations.
Despite a 20%+ correction in the stock price, the core business challenges remain. Given the ongoing margin headwinds, we remain cautious and maintain our Reduce rating inspite of limited downside from current levels.
We revise our earnings and margin assumptions downward and set a new SOTP-based Target Price of Rs 342 (earlier Rs 373).
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