After studying law I vectored towards journalism by accident and it's the only job I've done since. It's a job that has taken me on a private jet to Jaisalmer - where I wrote India's first feature on fractional ownership of business jets - to the badlands of west UP where India's sugar economy is inextricably now tied to politics. I'm a big fan of new business models and crafty entrepreneurs. Fortunately for me, there are plenty of those in Asia at the moment.
Tarun Sawhney (left) and brother Nikhil took over from their father in 2012 and brought a new wave in their respective businesses
Image: Amit Verma
Both the Sawhney brothers went to The Doon School in Dehradun. Both went to University of Cambridge where they studied economics. Both went to Wharton School at the University of Pennsylvania, where they got their MBA in finance. So how did they decide who gets to run the family’s sugar business and who the turbine business? “The answer to that is simple,” says Tarun, 43, the older of the two siblings. “Our father decided.”
Tarun runs the Triveni Group’s sugar business—called Triveni Engineering & Industries Ltd; it also has a smaller gears and water systems business—which has seven mills in Uttar Pradesh (UP). They are not only among the country’s largest sugar producers, but also among the most efficient.
Younger brother Nikhil, 40, is in charge of Triveni Turbine, Bengaluru-headquartered makers of steam-based rotating turbines that are bought by industries for captive heat and power requirements as well as by renewable fuel-based independent power producers. On its own, Triveni makes turbines that have the capacity to produce 30 MW of power; in their joint venture with GE, where Triveni has a majority stake, it makes turbines that can produce between 30 MW and 100 MW of power.
The two brothers took over from their father, Dhruv Sawhney, now 73, in 2012 as managing directors of their respective companies. Sawhney Senior, himself a mechanical engineer from Cambridge and a management graduate from Wharton, had joined his uncle’s sugar business—set up in 1933 with one unit at Khatauli in UP—after returning to India, in 1973. It also had an engineering business in Naini, Allahabad, UP. In 2000, he merged his father’s sugar mills with his uncle’s. Eventually, the Sawhneys set up four new sugar factories in UP in 2005-06, and made Triveni among the top three sugar producers in the country in 2016-17. Although he has now stepped back, leaving the day-to-day operations to his sons—he is chairman of Triveni Engineering and Triveni Turbine—he continues to play a key role in the international expansion of the turbine business.
Tarun and Nikhil have strong projections for growth: Tarun expects the sugar business to bring in over Rs6,500 crore in revenue over the next five years, up from Rs3,000 crore in 2017, while Nikhil expects the turbine business to quadruple from the present Rs800 crore within the same time frame.
It is not hard to see why Tarun has an unmistakable spring in his step. The sugar business which had gone through an extended downcycle has seen prices improve over the last 12 to 18 months. As a result, sugar companies based in UP (those in Karnataka and Tamil Nadu have suffered on account of a drought) have swung to profits after several years of losses. “That, coupled with better support from the regulatory policy, has meant that the Triveni Group’s sugar business should see much better days ahead before the sugar business reverts to the inevitable downcycle,” says Tarun. The regulatory policies he mentions are changes that he, as president of the Indian Sugar Mills Association, lobbied for.
India’s sugar industry has always been cyclical. A typical cycle lasts between five and seven years with, roughly, two bad years, three average years and two good years. It is in the good years that efficient mills are able to make enough money to survive the bad ones.
With cane farmers constituting an important vote bank, politicians are loath to upset them. This has made cane pricing highly politicised. Across the country, states annually announce a minimum price that mills must pay to the cane farmers. The Union government also annually announces a price, but it is the state’s price that prevails.
The state-advised price in UP, however, had no relation with the price of sugar. For instance, when sugar prices were low, mills would be in a position where they would have to pay more for cane, than they would earn from selling the sugar. Consequently, they didn’t pay the farmers on time. Arrears in payments made the farmers plant less cane, thus bringing down sugar production and pushing up prices. This would allow the mills to pay off the arrears, which in turn would make farmers plant more cane, leading to a glut, which would bring down prices once again.
The Indian Sugar Mills Association has estimated that, countrywide, the mills had piled on a debt of Rs60,000 crore in 2015.
Operating in a regulated industry meant Triveni was not immune to the poor economics. But, as Tarun explains, even with these limitations, the company worked towards ensuring that their mills were the most efficient, i.e, they recover a higher percentage of sugar from a given quantity of cane. Over the last two years, the company has spent about Rs50 crore on working with local farmers towards growing cane with higher sucrose content. This does not include the cost incurred on the company’s nutrition information and farmer outreach programmes. Triveni sources cane from 1.5 lakh hectares of farms around their mills; 93 percent of this land has been planted with the newer cane varieties. These efforts have made Triveni’s recovery rate rise to 11.06 percent from 10.8 percent, compared to the UP industry average of 10.61 percent. “Operationally, Triveni’s mills are among the most efficient in the industry,” says an investor in the sugar industry on condition of anonymity.
The rise in sugar prices from
2016 onwards has dramatically affected the profitability of Triveni Engineering. The company, which had lost Rs400 crore between 2012 and 2016, swung to a Rs233 crore profit in 2017, which will allow it to pay down at least Rs200 crore of its Rs460 crore debt.
And the reason for the spring in Tarun’s step is because the industry is finally beginning to see rationality in cane pricing. “The messages coming from Lucknow about having the interests of stakeholders [farmers and the industry] more aligned are encouraging,” says Sawhney Senior. For instance, even though sugar prices rose in the last 12 months, the government has allowed the import of only 5 lakh tonnes of sugar; in the past it would have allowed a lot more.
Industry observers say there is every chance that the government could implement the recommendations of the Rangarajan Committee, which had asked for cane prices to be linked to sugar prices, which would give the industry a much more transparent pricing mechanism. Tarun expects this to lead to consolidation in the sector and suggests that Triveni would be interested in making further investments in their sugar business if the regulatory environment is more certain.
In addition, Triveni’s mills produce electricity from the steam that is generated during the processing of cane, and supply 55 MW to the grid. In FY17, it earned Rs182 crore from power generation.
Triveni Turbine is a testament to how Indian companies are capable of producing world-class engineering products. A steam turbine manufacturer, it makes turbine blades that efficiently convert the enthalpy drop in steam temperatures into kinetic energy. Triveni’s upto-30 MW turbines have a 60 percent-plus share in the Indian market. (For the joint venture with GE, Triveni consolidates the bottomline but not the topline, in accordance with new accounting rules.)
The lack of capacity expansion across the sugar, power and cement industries has resulted in the turbine business being buffeted by poor demand, both globally and locally. Nikhil illustrates this by pointing out that in 2011, overall demand for Indian turbines was worth Rs4,200 crore. That number fell to Rs750 crore in 2017. “The business has had a horrible time as the Indian market has shrunk by 60 to 70 percent,” says Akash Prakash, chief executive officer of Amansa Capital, an investor in Triveni Turbine. “Still, they have handled the Indian downturn much better than other capital goods companies.” He likes the company for its high return on equity—more than 37 percent—as well as its high margins of 22 percent.
With low domestic demand, Nikhil has worked hard at developing their products for the global market. Triveni Turbine has an installed base of its turbines in more than 72 countries with inquiries for orders from over 105 nations. It has nine service centres in India and six overseas.
This has been a significant shift from the India-centric business that his father had focussed on, and in which they then had a larger share. “Since we have a larger installed base, we have been getting a lot of new business based on reference,” says Nikhil. “The hardest part about expanding has been to find the right people overseas.” Export margins are double the 10 to 12 percent profit-before-tax margins in the Indian market. In addition, the company also earns a steady Rs110 crore a year from servicing the installed turbines.
Among the moats Triveni
Turbine has dug around itself over the years are the 200 patents that it owns. These ensure that competitors can’t replicate their blade designs that come about after hundreds of hours of engineering, testing and validation. Symbolic of the company’s confidence is the fact that it recently invested Rs160 crore in expanding capacity to manufacture 200 turbines annually. The company is also working on modernising existing turbines by retrofitting and reinstalling them.
For now, both the brothers and their father look poised to exploit the upturn in the sugar business and the expected upturn in the global investment cycle. They point to the fact that all avenues to raise funds are open. Also on the cards is a demerger of the water systems and gears business when the business environment for these two segments improves. They’ve also been approved as defence contractors and are now making parts for the indigenous submarine programme, of which they do not wish to share details.
So, how did they really decide who would run which business?
Tarun, who spent the first three years of his career at Triveni’s sugar mills, says he is temperamentally more suited to run the business. Nikhil first started at the Triveni Turbine plant in Bengaluru. “Also, Tarun’s Hindi is better,” he quips.
So, it wasn’t Sawhney Senior who took all the calls, after all.