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CEOs running successful business operations? Plenty. But CEOs skilled at effective capital allocation? There aren't many, believes Warren Buffett. A thumb rule of his in this regard is that a company should retain earnings only when it can reinvest them in profitable avenues that create the most value for shareholders. Else, they should be returned as dividends and buybacks. Turns out a domestic player measures up to what Buffett considers an ideal capital allocation strategy. Triveni Engineering, primarily a sugar producer, has been deploying its retained earnings in ventures that promise substantial growth. The market has caught up to this, too. Despite the company's revenue and net profit growing just 4 per cent each per annum during FY20-24, the stock vaulted 6.4 times during this period, supported by the company's cash deployment strategy towards diversifying its business.
Triveni generated Rs 2,950 crore cash during FY20-24 through operations and sale of some non-core investments. Of this, it paid Rs 1,283 crore to shareholders through dividends and buybacks and retained the rest. A large chunk of the retained earnings was then deployed as capex worth Rs 1,094 crore. About 62 per cent of this capex has been poured into a number of businesses to reduce its concentration in the commoditised sugar business. Here's how the capital allocation is playing out across its different businesses:
Triveni Engineering's power transmission business
As part of this segment, the company provides high-speed gearboxes and gears used in steam turbine generators to OEMs. Although the segment made up just 5 per cent of the company's FY24 revenue, it generated an ROCE of over 45 per cent with profit before tax margins of 37 per cent for the year! The strong growth is a result of meeting strict quality checks of the products.
Triveni is working to expand the addressable market of the gears business by entering into international markets. It is currently executing a large capex of Rs 360 crore, which is expected to double the revenue potential of this segment to over Rs 500 crore. It is also exploring opportunities for these products in the defence sector. Leveraging its expertise in gear manufacturing, the company has managed to be a supplier of propulsion shafting and turbo pumps for the Indian Navy. It is also setting up a dedicated multi-modal facility for defence-focussed products.
Distillery business
As part of this business, Triveni manufactures ethanol and alcohol, which together contribute 21 per cent to its total revenue. In June 2024, the company launched two new alcohol brands—The Crafters Stamp and Matsya—marking a move towards forward integration and margin improvement. While this venture may not yield an immediate result, it holds significant long-term potential if the company succeeds.
Triveni also recently acquired a majority stake in loss-making sugar producer Sir Shadi Lal to expand its distillery business. Sir Shadi's factory, which has the largest cane stock in Uttar Pradesh, is located near Triveni's existing units, enabling strategic synergies. Triveni is thus confident of turning around Sir Shadi's operations in a short span. It spent Rs 80 crore on the acquisition, which was valued at an attractive price-to-sales ratio of just 0.3 times, demonstrating its smart capital allocation.
Investors' corner
Going by Triveni's capital allocation strategy so far, the company is on the right path. It distributed most of its cash to shareholders in the past, while still managing to invest the rest in ventures with a healthy growth potential, demonstrating high capital efficiency. The efforts are bearing fruit as the sugar business' share in the company's revenue has come down to 63 per cent in FY24 from 87 per cent in FY20. However, it's important to remember the progress can be thwarted as the company lacks experience operating the new businesses on a large scale. It is also unclear whether the new, small bets will be able to maintain their current spectacular operating metrics if they manage to achieve a larger scale. Lastly, the market is rapidly pricing in the positives as the stock's current P/E ratio of 27 is 4 times its five-year median P/E.
Also read: Defence sector rally may persist. But not for the reasons you expect
Investors should not construe this story as a Value Research recommendation. Please do your due diligence before taking an investment decision.
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