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Equity Research: Triveni Turbine
With an installation base of 5,000 turbines in more than 70 countries, TRIV is the second largest industrial steam turbine player globally. Triveni turbine looks strong with increasing order book along with rising export opportunity
Triveni Turbine (TRIV), is a dominant industrial steam turbine manufacturer in 0-30MW range with over five decades of experience. It was formerly a part of Triveni Engineering and Industries and got subsequently de-merged and listed on stock exchanges in 2011 to re-brand itself as a pure-play turbine player. The company has two manufacturing plants at Bengaluru, Karnataka, at Peenya and Sompura. The older plant at Peenya has turbine manufacturing capacity of 150 units per year, while the new plant at Sompura is the latest plant with modern automation and robotics, with higher capacity of making 22-23 turbines per month, in a single shift.
Industrial steam turbine is a highly customised and engineered product, and hence globally there are limited players in the smaller MW range. In the domestic market of 0-30MW range, TRIV has a dominant market share of 50-55%, while Siemens holds market share of 30%, essentially making it a duopoly. In the global market, Siemens is the market leader while TRIV is the second largest player with ~20% market share. TRIV has 5,000 steam turbines installed across 20 industries in over 70 countries. Exports form a large chunk of sales and have accounted for 43% of total revenues over FY16-23. The key geographies of strength for TRIV are Europe and South East Asia. Margins in exports market are almost double of domestic market.
In industrial steam turbines, after-market services also forms a large share of revenue and is highly profitable. TRIV offers after-market services like (a) spare parts, (b) operation and maintenance of turbine, and (c) retrofitting and refurbishment of old turbines (made by TRIV as well as competitors). After-market services could bring 2x-2.5x revenue compared to upfront turbine sale value, over the lifetime of product, which is generally 20 years. Over FY16-23, after-market services have formed 25% of total sales and is the core reason for TRIV’s strong margin profile. In order to expand its after-market services globally and provide localised service, TRIV recently acquired 70% stake in TSE Engineering, South Africa for total consideration of Rs60mn. Along with its traditional stronghold of industrial turbines in 0-30MW range, TRIV also has additional growth levers in the form of global scale-up in 30-100MW range (after dissolving the JV of GE-TRIV) and foray in API turbines used at refineries.
Key Strength Of Triveni Turbines:
Engineered and customized product: A steam turbine is a complex product which requires high degree of customization as well as technology. The turbines are customised based on input feedstock, end user industries and output capacity, which varies from order to order. The R&D and designing of how steam flows through a turbine is a core technology differentiator, which drives the output capacity and gives better efficiency. The core mechanics of this process are done in-house by TRIV such as forged rod manufacturing, rotor base and shaft making, blades machining and casing of a turbine, while other components of a turbine, like gear boxes, generators, lube oil systems and control panels are outsourced. As turbine manufacturing is a highly engineered and customised process, it has limited players globally since it cannot give economies of scale. Consequently, it is a high margin industry with high technical expertise involved.
Input feedstock agnostic: A turbine is agnostic to the input that gets used in a boiler to generate steam/heat. Irrespective of whether the input feedstock is coal, bagasse, biomass, agricultural waste, municipal waste, industrial steam, etc., a steam turbine is needed to generate the power. This reduces the dependency and cyclicality of the feedstock being used in a particular region or industry for turbine demand.
Higher share of after-market business: After-market offerings is an essential part of an industrial steam turbine as it goes through much higher wear and tear compared to a utility turbine. Under the after-market services, TRIV offers three services namely (1) annual maintenance for its already installed base of turbines at customer location, (2) spares supply such as rotor blades, bushing, lube oil, etc. and (3) refurbishment of old turbines to improve its efficiency. While after-market services are low ticket items, it offers very high profitability and is one of the core reasons of strong margin profile of TRIV. Over FY16-23, after-market services have formed 25% of TRIV’s sales on an average, aiding TRIV to register a strong gross/EBITDA margin of 45%/21%, on an average, respectively.
Shorter gestation period: An industrial steam turbine operates at a lower gestation period as the time taken between receipt of order to manufacturing the product and delivery to customer takes only 6-9 months. This makes turbine a pure product driven business unlike EPC project businesses where gestation period extends to 3-4 years. Consequently, a lower gestation period facilitates faster conversion of order book into revenues, provides higher earnings visibility and results in faster free cash flow generation.
Strict terms of trade: With turbine being a customized product, TRIV follows strict terms of trade. As a business practise, TRIV insists on advance from customers (15-25% of order value), followed by certain milestone based payments and eventually the final product is shipped only after receipt of full payment or an LC from the buyer. This has helped TRIV to operate at low (at times negative) working capital cycle.
High market share: TRIV has a dominant market share in the domestic market of 0-30MW turbines at 50-55%, which essentially is a duopoly as Siemens has ~30% market share. Globally, the turbine industry has manufacturers from Europe, Japan, USA and Latin America, but TRIV is the second largest player with a market share of 20%, with Siemens being the global market leader.
The key sectors driving order inflow in the domestic market include process co-generation industries (pharma, pulp & paper, food processing), sugar, distilleries, cement and steel. In the international market, the key sectors driving order inflow are waste to energy (including municipal solid waste), renewable, process co-generation and IPPs. Over the years, TRIV has built higher references, with 5,000 turbine installations globally in 70 countries, and successfully gets repeat orders from customers.
Over FY16-21, TRIV’s average quarterly order inflows were Rs2bn, with average quarterly domestic inflows at Rs1.1bn and exports inflow at Rs900mn. However, since 1QFY23, the quarterly order inflows have seen a remarkable pick-up and averaged at Rs3.8bn over the past five quarters. The rise has largely been driven by the domestic market, due to the revival in industrial capex after a long time. Over the past five quarters, the average domestic quarterly inflows have doubled to Rs1.9bn while export inflows have increased to Rs1.2bn. On an annual basis, the total order inflow over FY16-22 were in the range of Rs6.5bn to Rs8.5bn, but has jumped to Rs12.8bn in FY23. Consequently, the order backlog, which was in the range of Rs6bn to Rs7.2bn over FY16-22, has jumped to Rs9.3bn as on FY22 and further to Rs10.9bn as on FY23.
We expect the order inflow traction to stay strong led by multiple drivers i.e. (1) improving corporate capex in the domestic market, where TRIV has a dominant market share of 50%, (2) rising capex in Europe in waste to energy and renewable sectors, (3) resumption of capex in South East Asia following two years of COVID impact, (4) penetration in geographies such as Latin America and Africa, (5) rising value of after-market services orders from overseas markets (driven by takeovers such as TSE Engineering in South Africa, from where it secured Rs1bn order in FY23), (6) growing opportunities in 30-100MW range from overseas markets, and (7) scale up of API turbines for refineries. On a high base of FY22, we expect 14% CAGR in order inflows over FY23-25E, from Rs11.8bn in FY22 to Rs17.7bn in FY25E.
Growth Opportunity for Triveni Turbines:
Cement: Out of India’s total cement manufacturing capacity, only 30% of the plants have a waste-heat-recovery (WHR) system installed. The sector has seen a significant consolidation, with large cement firms acquiring small and medium firms. A substantial capex is underway in the sector for improving efficiency of the older plants by putting up a WHR system. Similarly, the new green-field and brown-field capacity expansion planned by cement majors will also include WHR systems. On an average, a 1mn tonne cement plant will be able to have a WHR plant of 6-8MW. A WHR plant helps a cement firm to increase efficiency, reduce power cost and achieve sustainable development goals (SDG) for the environment set by United Nations General Assembly.
Steel: All integrated steel plants in India, with captive iron ore mines, have WHR systems installed in them. The steel sector has seen a large capacity addition over the past decade from 75MT in FY10 to 154MT in FY23. Based on the capex plans announced by key players, the capacity is expected to further rise to 175MT by FY25E. The incremental capacity expansion will bring opportunity of new WHR systems. Enquiries from steel sector, including rolling mills, sponge iron plants and pig iron plants are healthy.
Sugar: In FY2023, India is expected to produce 5,100 lakh tonnes of sugarcane, which would result in bagasse production of 1,700 lakh tonnes. Currently, India is generating 7.8GW of power through bagasse based co-generation. As per MNRE, 16GW of additional power could be generated through bagasse based co-generation in the country’s 550 sugar mills.
Biomass: Biomass materials used for power generation include bagasse, rice husk, straw, cotton stalk, coconut shells, soya husk, de-oiled cakes, coffee waste, jute wastes, groundnut shells, saw dust, etc. About 32% of the total primary energy use in the country is still derived from biomass and more than 70% of the country’s population depends upon it for its energy needs. The current installed capacity of biomass power and co-generation sector is 10.1GW formed by biomass IPPs (1.8GW), baggase based co-gen (7.8GW) and non-bagasse based co-gen (770MW). As per MNRE, the total surplus biomass availability is 230 million metric tonnes per annum, which has power generation potential of 28GW (excluding bagasse based co-gen potential of 14GW).
Distilleries: 400 distilleries have got licence to set up capacity in India, of which 40 distilleries have floated tenders to set-up captive power plants. Currently, India has distillation capacity of ~850 crore litres, of which ~450 crore litres is supplied to Oil Marketing companies (OMCs) for ethanol blending with petrol. Over the next three years, India is poised to double its distillation capacity to more than 1,600 crore litres, of which 1,016 crore litres is likely to be supplied to OMCs for ethanol blending with petrol.
With an installation base of 5,000 turbines in more than 70 countries, TRIV is the second largest industrial steam turbine player globally. For 5-30MW segment, over the five year period of 2015-19 (pre-covid), TRIV held 20% market share having supplied ~260 turbines cumulatively compared to market leader Siemens, which supplied ~320 turbines over the same period. The next three competitors were distantly smaller, having supplied 100turbines each. The reason for TRIV’s strong performance in the 0-30MW industrial turbine is attributable to (1) higher share of thermal renewable, and (2) lower cost of manufacturing in India. TRIV is the global leader in the structurally buoyant area of thermal renewable, which forms ~65% share of 0-30MW turbines whereas fossil fuel’s share stands at 28%. Hence, TRIV has an edge as the addressable market of its core strength area is much larger. Further, TRIV’s India-based turbine manufacturing cost is much lower compared to the cost of production of its global peers, which are largely based in Europe, USA and Japan. The key global peers are Siemens, MAN Energy, Shin Nippon, Mitsubishi, Baker Hughes and TGM Kanis.
Geographically, the key markets for TRIV are South East Asia (40-45% of exports sales) and Europe (30-35% of export sales). TRIV also has decent presence in LATAM region (10% of export sales), Africa and South Korea. The realizations per turbine in the international markets are much higher than domestic market, and hence the export margins are almost double of domestic margins.
The South East Asian region suffered heavily amid the COVID-19 pandemic, but is now witnessing accelerated growth in order inflows post the revival in global travel and normalization of business activities. Key sectors which drive demand are process co-gen industries such as palm oil, sugar, paper & pulp, food processing and distilleries. Europe is witnessing strong investments in renewable energy, while waste to energy (including municipal solid waste) and IPPs are also large addressable markets driving demand. TRIV has high market share in countries such as England, Finland and Turkey. Europe has been at the forefront of investment in renewable energy and municipal solid waste. The renewable energy investments are projected to grow in Europe as well as world-wide due to stringent environment regulations, improving financial viability and self-sustenance amidst rising power costs (due to gas supply challenges). Waste to energy (WTE) plants also solve a rising global issue of treating municipal solid waste, which is piling up at a rapid pace. Waste to energy plants provide sustainable waste management practices along with generating power. TRIV is a key beneficiary of rising investment in both these areas and is likely to witness a healthy growth in its international order inflows.
Exports formed 48% of total sales over FY16-23. Exports revenue increased from Rs2.6bn in FY16 to Rs3.9bn in FY20 leading to a rise in its contribution in total sales from 36% in FY16 to 48% in FY20. However, with COVID-19 pandemic affecting global travel, the exports sales declined to Rs3.2bn/Rs2.5bn/Rs3.1bn in FY21/22/23, respectively. On the low base of FY23, we expect exports revenue to grow by 34% CAGR over the next three years to Rs6.1bn in FY25E.
High Profitability from after market service:
In industrial steam turbines, after-market services form a large share of revenue and is highly profitable. TRIV offers after-market services like (a) spare parts, (b) operation and maintenance of turbine, and (c) retrofitting and refurbishment of old turbines (made by TRIV as well as competitors). After-market services could bring 2x-2.5x revenue compared to upfront turbine sale value, over the lifetime of product, which is generally 20 years. From FY16-23, after-market services have formed 25% of TRIV’s total sales and is the core reason for its strong gross/EBITDA margin profile of 46%/20%, on an average, respectively. The revenue share of after-market services in TRIV’s total sales has increased from 22% in FY16 to 28.6% in FY23, while the company aspires to increase it further to 30% of total sales over the next few years.
For supplying spare parts and offering operation and maintenance services, the existing installed base of 5,000 turbines acts as an addressable market. Compared to a utility turbine, an industrial turbine undergoes a much higher wear and tear, and hence replacement of spares such as rotor blades, bushing, lube oil, etc. becomes necessary to maintain/improve the efficiency of the turbine. Considering the low-ticket size of spares and O&M services, the spend by customers on after-market services are generally not affected by business up-cycles or down-cycles and grows at a steady pace of 10-12% CAGR.
Refurbishment of old turbines provides a much higher scalability potential for TRIV as it can also service turbines made by competitors. TRIV brings the old turbine to its manufacturing plant at Bengaluru, Karnataka and performs activities such as rotor re-balancing, blades re- balancing and turbine refurbishing. This provides a mid-life upgrade to the turbine and significantly improves its efficiency and output. To enhance its refurbishment offerings in international markets, TRIV acquired 70% stake in a South African firm named TSE Engineering Pty Ltd, which is engaged in high-precision engineering, supply of spares, repairs and overhauling of turbines in the South African Development Community (SADC) region. Through this facility, TRIV will be scouting after-market opportunities in the SADC and surrounding regions. In FY23, TRIV won a breakthrough order worth Rs1bn for servicing of large utility steam turbines in SADC region, of which Rs190mn was accounted in FY23 while the rest will be accounted in subsequent quarters. This order will aid TRIV to establish Triveni REFURB brand in the international market as it will provide reference for servicing of utility turbines up to 900MW. This could open up sizeable global opportunities in terms of spares supplies and refurbishments of large industrial as well as utility turbines for TRIV.
Joint Venture will be a game changer:
With a view to capture the global opportunities in 30-100MW space, TRIV had entered into a 50:50 JV with General Electric Oil and Gas (GE) in FY11. Scope of work for this JV involved manufacturing of turbine by TRIV at its existing Bengaluru plant through sharing of technology. Domestic marketing of the turbine was under the purview of TRIV while international marketing was the responsibility of GE. The turbines were branded as ‘GE- Triveni’. While initially the JV looked promising, but it ended up underperforming as it could not win much orders internationally. TRIV filed a petition against GE before the NCLT for misconduct in the JV. TRIV claimed that GE and its group companies have acted in a manner which is against the interest of the JV. TRIV alleged that GE failed to promote the JV’s products globally, leading to suppression in enquiries and sales. Eventually, both the parties reached an out-of-court settlement, with TRIV receiving Rs2bn from GE in damages. The JV got dissolved in September 2021, with TRIV buying out GE’s stake for Rs80mn, thus making it a wholly owned subsidiary, and eventually changing its name to Triveni Energy Solutions Limited (TESL) with effect from October 21, 2021.
Now, the global 30-100MW market has become a new large opportunity for TRIV, as it independently markets its turbines. The global market size of 30-100MW is estimated at 7GW, which is 1.5x the size of 0-30MW market. Europe and South East Asia account for 3GW market size in 30-100MW range, and are the key focus areas for TRIV as it has higher references in these two regions due to high market share and turbine installations in 0- 30MW range. In FY22, TRIV won one domestic and one international order in 30-100MW range. The international order was from the second largest steel manufacturer of South Korea for three turbines above 30MW. TRIV is receiving healthy enquiries from international markets, which should result in a consistent rise in order inflows from FY23E onwards, as business normalcy returns post COVID-19 pandemic. TRIV has also enhanced its manpower in marketing and technical fields to visit customers globally and participate in global trade fairs and exhibitions, which forms an important source of achieving connect with new customers in 30-100MW range.
30-100MW market is driven by sectors and companies, which are larger in nature and need higher capex. The key sectors driving demand in 30-100MW range are steel, cement, textiles and IPPs. The domestic market of 30-100MW had achieved a peak of 2.5GW a decade ago, but is currently only 500-600MW. With large capex planned in cement and steel, the demand is likely to remain healthy as the market size expands. However, the key scale-up opportunity for TRIV is to make inroads in 30-100MW market of Europe and South East Asia (collectively at 3GW), where GE-TRIV JV underperformed over the past decade.
As a complimentary diversification, TRIV has forayed in manufacturing of API (American Petroleum Institute) compliant drive turbines, which are used in oil & gas sector. API turbines are different from an industrial steam turbine with respect to its application as well as end-user industry. While steam turbines are used to generate power, API turbines are used in refineries to drive small applications such as pumps, compressors and generators. Foraying in API turbines has opened up a new end user industry of oil & gas as well as a new geography of Middle East for TRIV. API turbines are less customised, smaller in size (up to 5MW) and have shorter delivery timelines. While API turbines are lower in value compared to steam turbines (due to lower MW rating and absence of bought-out components such as generators), they are more profitable.
Since API turbines are supplied to refineries, globally it is a project consultant driven industry where qualification criteria are stringent and time consuming. TRIV forayed in API turbines five years ago, but has now attained the requisite approvals from global project consultants as well as domestic consultants such as Engineers India (EIL). TRIV is currently accepted as an API product supplier from over 90% of the refineries consultants and has also been recognized as an approved vendor from several OEMs. Key domestic clients are IOCL, BPCL and HPCL, but the sourcing of orders are handled by project consultants. In overseas markets, TRIV has received orders from Middle East and Central & Latin America.
In the short term, API turbine is likely to form 10% of TRIV’s total order book. However, the long term growth opportunity is extremely large as TRIV has customer approvals in place and has an enquiry pipeline of over 1,000 machines. In the domestic market, large capex is underway in Oil & Gas (upstream and downstream) and fertilizers sector that will drive demand for API turbines, which were either imported or supplied by MNCs having localised presence.
Apart from API turbines, TRIV is also working on development of carbon-dioxide based CO2 turbines. The product is still in development phase and is couple of years away from commissioning. However, TRIV is at par with global peers like Siemens and Mitsubishi, who are also developing the CO2 turbines. Over a five-year period, the market size of CO2 turbines is likely to rise materially as the size of this turbine will be of 1/5th of current turbine, and hence it needs less space. Besides, weight wise and material content wise, the CO2 turbines are much lesser, with a faster payback period of 3 to 5 years.
The commercial success of API turbines as well as the development of CO2 turbines is a proof of TRIV’s engineering and R&D capabilities. In case of both industrial steam turbine and API turbine, TRIV has been able to develop a high technology product, without the support of any international partner, while delivering a similar efficiency at lower cost.
Financials:
Valuation:
Over FY16-23, TRIV has traded at an avg. P/E of 37x. With rising industrial capex in India, strong growth expectations (FY22-25E revenue/earnings CAGR of 25%/58%), and superlative financial profile, we believe TRIV can command a 24% premium with 40xFY25E EPS.
Key Risks:
Enquiry generation for turbines highly depends on industrial capex cycle. Any slowdown in industrial capex activity, particularly in key markets of India, South East Asia and Europe, could hamper incremental order inflows.
Industrial turbine is a technology driven customized product. Inability to keep pace with new evolving technologies could affect leadership position.
Unexpected rise in competitive intensity, in both domestic and international markets, could affect market share and profitability.
Geo-political instability in key international markets may affect enquiry generation and order inflow.
Any steep rise in raw materials cost, if not passed on to customers, will impact margins.
Global certifications play a key role in API turbines. Inability to get new certifications or cancelation of existing certification can hamper business prospects.
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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