Thermax Ltd SELL DOHA BROKERAGE. a s s o c i a t e o f D O H A B A N K. Declining Order book A cause of concern

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1 EQUITIES INDIA CAPITAL GOODS 25th FEBRUARY 2012 DOHA BROKERAGE Research Analyst: Sharon K Abraham research@dbfsindia.com Helpline: Thermax Ltd SELL Stock Data Declining Order book A cause of concern CMP Target NSE Code BSE Code Bloomberg Code Reuters Code 52 Week High 52 Week Low Market Cap (cr) Face Value DPS M Cap/Sales Stock Beta PE Multiple P/BV EV/EBITDA Downside risk THERMAX TMX:IN THMX.NS times High The company is witnessing a serious decline in the order books of the company in the past one year. Order inflows for the company were down 40% in Q3 y-o-y and 39% q-o-q. The recent trend in the capital goods space is to build smaller projects ( 1x300MW, 2x150MW) as banks are reluctant to fund large projects. At the moment, there are no large power plant orders under negotiation. There was not a single order above Rs.100 crores that got finalized. Thermax received orders worth Rs.5.9 billion in Oct Dec 2012 compared to Rs.9.9 billion a year ago. Consolidated order backlog of Thermax group is currently Rs billion rupees compared to Rs billion rupees a year ago. Due to slowdown in orders, especially in the last two quarters in the power sector and industrial capex the company s performance in the next year could be subdued. The management has also indicated that it expects the revenues to decline in the first few quarters of FY due to sluggish growth in orders. Competition intensifying in the Capital Goods space In the recent years, the capital goods space has been witnessing increasing competition predominantly from China, Korea and Japanese players. This could further increase pressure in order flows for the coming quarters. Though the company has indicated that it does not take projects with low profit margins, if the slowdown and competition in the capital goods sector intensifies, it would be forced to take orders which do not have lucrative profit margins leading to fall in profit margins and ROEs. Page 1

2 Order book tilted to projects with lower gestation period A tilted order book with a much lower gestation period is a cause of concern especially in a scenario when companies in the space are suffering from low inflows in orders. Orders with low gestation period pose the threat of drying up faster than orders with larger gestation periods. Larger players in the space are in a much better position as they have a much more diversified order book with a longer gestation period. Fall in orders with high gestation period is definitely a cause of concern. Company Description associate of DOHA BANK Thermax Ltd. is an INR 4,935 crores (USD 1.11 Billion) company, providing a range of engineering solutions to the energy and environment sectors. The company is headquartered in Pune, India and operates globally through 19 International offices, 12 Sales & Service offices and 4 Manufacturing facilities - three of which are in India and one in China. The company s presence spans 75 countries across Asia Pacific, Africa and the Middle East, CIS countries, Europe, USA and South America. The company s solutions are innovative, energy-efficient, environment-friendly and easy to operate. The company has a wide area of operations in the boilers, heaters, Absorption Cooling, Chemicals, Water treatment, power generation, and Air Pollution Control. The company currently operates through subsidiaries in Europe, America, Brazil, and China and also a few within India. Wide operating spectrum Boiler Heater Group: The boiler heater division of the company registered decent growth in the the last year. The company s joint venture with Babcock and Wilcox Power Generation Group, Inc would enable the company to manufacture parts for the 3000MW of utility boiler capacity per year. The joint venture will produce components based on B&W technology for sub critical boilers 300 MWe and larger and supercritical boilers of all sizes including 660 MWe, 800 MWe and 1,000 MWe. Cooling Division: The division witnessed a marginal growth in revenues in the last year. In the domestic market, there was pressure on the margins front due to substantial rise in copper prices. However the company has been witnessing resurgence in demand in Middle East market. The company has tie ups in the UK and US. The Chinese subsidiary Thermax Zhejiang Ltd sees sustained growth in the overseas market. The cooling division looks forward for a steady growth in the future. Solar Division: The solar division of the company is one among the most promising segments of the company s businesses. It can be used for both heating as well as cooling applications. With the cost of fossil fuels escalating from time to time, solar power would become much more affordable in the future. The prospects of the solar power division looks promising enough when looking in a long term perspective. Air Pollution Control Business: The air pollution control business bought in a healthy increase in its revenues. The growth was supported from segments like captive power steel cement and sponge iron in the domestic markets and from cement and power in the international markets. Water and Waste solution business: The water and waste water solutions division achieved a sizable increase in its revenues during the year. This is one among the most prospective segments in the infrastructure space mainly due to the acute water shortage that our country is likely to face in the coming decades. Page 2

3 Subsidiaries and Joint Ventures Domestic Subsidiaries Thermax Sustainable Energy Solutions Ltd Thermax Engineering Construction Co Ltd Thermax Instrumentation Ltd Thermax Onsite Energy Solutions Ltd Overseas Subsidiaries Thermax International Ltd (Mauritius) Thermax Europe Ltd (U.K) Thermax Inc (U.S.A) Thermax do Brasil-Energia e Equipametos Ltd (Brazil) Thermax (Zhejiang) Cooling & Heating Engineering Co Ltd (China) Joint Ventures Thermax SPX Energy Technologies Ltd Thermax Babcock & Wilcox Energy Solutions Pvt Ltd Risk and Concerns 1. Cyclical Business: The Company being a dominant player in the capital Goods space is naturally susceptible to the changes in business cycles. The company s exposure in to the cement and steel and utility power all are cyclical in nature thus making the stock a cyclical stock. 2. Customer Concentration Risk: The boiler and heater business does have large sized orders which could expose it to the risk of concentration. This is bound to happen as the company scales up its operations in the future. 3. Business Concentration Risk: Three fourth of the revenues of the company comes from the energy segment. In the recent times, the individual orders have been increasing in the boiler and heater segment. This adds concentration to the already fast growing energy segment. The company has been trying to diversify its operations into various other sectors thus reducing its exposure into the energy sector. 4. Competition Risk: The Company has been witnessing increased competition from foreign players in the recent years. China has emerged as a formidable player in the past few years. Korea and Japan are also players that pose minor threats in the capital goods space. The company in the past has taken strategic steps to tackle this problem through acquisitions and entering into joint ventures with strong players in the foreign as well as the domestic markets. 5. Project Management Risk: The Company faces risks from the projects that are long and extend for a long time. Prices tend to escalate and thus bringing pressure to the bottom-line margins. Delay in projects can also affect the finances and reputation of the company. 6. Human Resource Risk: The Company continues to witness lack of skilled workforce in the sector. Demand supply gap in the workspace could affect the operations in the sites which are situated in various areas in the domestic and international sites. 7. Interest Rate Risk: The company faces risk in the forex front, currency has witnessed high volatility in the recent times. This could likely add pressure to the margins of the company. Page 3

4 Poor Q3 FY12 numbers with a dismal future outlook The company reported a 5% decline in the December quarter profits to Rs.95 crores year-on-year due to high input cost. Sales marginally grew 2% to Rs. 1,269 crores on the back of weak order inflows. However, the company said that its year-todate profit after tax grew 8% to Rs. 277 crores and its operating revenue was also 16% higher at Rs. 3,617 crores, year-on-year. The order backlog of the group is at Rs. 5,809 crores, compared with Rs. 7,154 crores last year. Valuations- Reasonable but prospects look bleak Thermax Ltd has been going through a difficult phase in the past few quarters. The prospects of the company are good when looking in the backdrop of India s strong economic growth which is likely to keep its momentum in the coming years. The current problem in the capital goods space is the fall in industrial and capex spends in the past few quarters. With companies showing no renewed signs of increasing their spending, earnings could still witness pressure in the coming quarters. With limited chances to expect a major breakthrough in earnings numbers, we could expect the negative sentiment to persist in the sector. A possibility of the PEs witnessing contraction in the coming quarters cannot be ruled out completely. The recent developments in the Middle East leading to high oil prices could also aggravate the financial situation of the economy. These factors are likely to affect the order inflow of the company in the short term. Thus taking all these issues into consideration, we are quite certain that the company is currently overvalued. We have valued the stock on a DCF and the traditional PE multiple model. To avoid any inclination to one particular model, we have attached weights thus arriving to a target price of Rs.430. FINANCIAL DATA CASH FLOW STATEMENT CASH FLOW FROM OPERATING ACTIVITIES Net Profit before Tax Depreciation Others Net cash flow from operating activities CASH FLOW FROM INVESTING ACTIVITIES Purchase of fixed assets, net of reimbursements Increase in Investments Interest & Dividend Receipts Others Net Cash used for investing activities CASH FLOW FROM FINANCING ACTIVITIES Long Term Borrowings Dividend Paid Others Net Cash generated from financing activities NET CHANGE IN CASH & CASH EQUIVALENTS Opening Balance of Cash Cash Equivalents Closing Balance of Cash Cash Equivalents FY10A (524.73) (4.79) FY11A (492.30) (954.19) (228.28) (41.99) FY12E (263.15) (252.16) FY13E (216.85) (205.69) FY14E (325.64) (398.56) (98.69) Page 4

5 FINANCIAL DATA PROFIT & LOSS ACCOUNT Income Net Sales Other Income from Investments Other Operating Income Total Income Expenditure Consumption of Material, Erection and Engineering Expenses Employees remuneration & Benefits Other Expenses of Manufacture Total Expenses EBITDA Interest PBDT Depreciation Extra ordinary items Profit Before Tax Current Tax Deffered Tax Profit After Tax Less: Minority Interest Profit After Tax & Minority Interest Balance of Profit Brought forward from last year Transferred to General Reserve Dividend Paid Corporate Dividend Tax Paid Balance carried to Balance Sheet Per share Earning Per Share excluding Extra-ordinary items Earning Per Share Cash EPS Earnings Yield DPS Dividend Yield Valuation Ratios P/E P/BV EV/EBITDA Return on Investment ROCE ROIC ROTA Debt Equity Profitability Ratios EBITDA Margin PBT Margin PAT Margin FY10A (142.41) (0.41) % % % 28.01% 4.30% 0.74% 13.63% 8.71% 4.39% FY11A (195.32) (1.37) (4.69) % % % 29.84% 9.29% 11.25% 12.04% 10.93% 7.18% FY12E (190.60) (2.41) (5.86) % % % 26.84% 8.31% 11.58% 10.55% 9.09% 5.96% FY13E (214.18) (4.24) (7.97) % % % 26.47% 8.32% 11.39% 10.34% 8.88% 5.80% FY14E in Crores (261.78) (5.77) (9.25) % % % 27.26% 8.56% 13.59% 10.90% 9.36% 6.11% Page 5

6 FINANCIAL DATA BALANCE SHEET Sources Of Funds Equity Share Capital Reserves & Surplus Networth Secured Loans Unsecured Loans Minority Interest Deffered Tax Liability Deffered Tax Liability Deffered Tax Asset Current Liabilities & Provisions Creditors Other Current liabilities Provisions Total Liabilities Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Current Assets Loans and Advances Inventories Contracts in Progress Sundry Debtors Cash and Bank Balance Other Current Assets Loans & Advances Miscellaneous Expenditure Total Assets FY10A (29.66) FY11A (28.93) FY12E (50.64) FY13E (55.50) FY14E (62.64) Analyst Certification I Sharon K Abraham hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. Disclaimer This research report provides general information only. Recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved. The information provided herein is not, and should not be construed as an offer to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Any decision to purchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in the prospectus or other offering document issued in connection with such offering, and not on this report. Page 6

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