Thermax. Institutional Equities. 3QFY18 Result Update. Healthy Execution, But Margins Disappoint SELL

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1 3QFY18 Result Update Institutional Equities Thermax 8 February 2018 Reuters: THMX.BO; Bloomberg: TMX IN Healthy Execution, But Margins Disappoint Thermax posted healthy execution in 3QFY18 with standalone revenues rising 25% YoY to Rs9.8bn, while consolidated sales grew 18% YoY to Rs11.2bn. However, margins were under pressure as gross margin was down 270bps YoY at 45.1% while EBITDA margin fell 90bps YoY to 9.4% on a standalone basis, below our/consensus estimate of 9.7%/9.9%, respectively. On a consolidated basis, gross margin declined 590bps YoY to 47.4% while EBITDA margin fell 80bps YoY to 8.5%. Consequently, PAT grew by a moderate 7% YoY to Rs586mn. The consolidated order inflow in 3QFY18 was healthy at Rs14.1bn, up 19% YoY. Consequently, the consolidated order backlog is up 6% sequentially at Rs55.6bn. Thermax is focusing on ramping up its presence in overseas markets as well as scaling up new manufacturing plants of chillers, chemicals and at Indonesia. We have marginally tweaked our earnings estimates for FY19/FY20 and rolled forward our valuation to FY20E financials. We have retained Sell rating on Thermax with a revised target price of Rs985 (Rs870 earlier) based on 26x FY20E earnings. Future growth outlook: In the next upcycle, Thermax expects healthy order inflow from sectors such as refinery and petrochemicals (30% of 9MFY18 inflow), cement, non-ferrous metals, fertilisers, chemicals and consumption-driven sectors such as food processing and alcohol. Unlike in the previous upcycle, coal-based thermal and captive power plants are unlikely to be main growth drivers. Thermax also expects healthy orders from new avenues such as BS6-related capex (Thermax won Rs1.35bn orders in phase 1, phase 2 market opportunity is likely at Rs5bn) and pollution control equipment like SOx. For Thermax, incremental growth in FY19 is expected to come from three greenfield manufacturing plants in Indonesia (for heating boilers and standard package equipment), Dahej (for resin chemicals) and Sri City (for absorption chillers) where production commenced in FY18. Thermax is planning to scale up its presence in international markets and has started to receive enquiries from South East Asia for its new manufacturing plant in Indonesia. Unlike in the previous upcycle, Thermax now has a much bigger international presence and will be able to benefit from global capex outlay. Order inflow position: Thermax posted healthy order inflow in 3QFY18 of Rs14.1bn, up 19% YoY, aided by Rs3.3bn EPC order for a 2x65MW captive power plant from a chemical plant. Energy segment posted order inflow of Rs10.8bn, environment segment posted Rs2.5bn inflow while chemical segment registered Rs810mn inflow. The 9MFY18 order inflow of Thermax is strong, up 45% YoY at Rs47.3bn (49% is overseas), primarily driven by a large ~Rs10bn order won in 1QFY18 from Dangote group, Nigeria, to supply multiple boilers for an upcoming refinery. Consolidated order book was up 6% QoQ at Rs55.6bn, a three-year high. Segment-wise performance: Segment-wise, on a consolidated basis, energy segment s revenues rose 18% YoY to Rs8.7bn with EBIT margin of 8.3% (up 100bps YoY). Environment segment s revenues grew 3% YoY to Rs1.7bn with EBIT margin of 2.8% (down 530bps YoY). Chemical segment s revenues grew 7% YoY to Rs906mn with EBIT margin of 14.4%, down 290bps YoY. Outlook: We have retained our Sell rating on Thermax owing to likely challenges for margin expansion as most of the large orders won by Thermax are fixed-price contracts in an inflationary commodity-cost environment. The current valuation at 31x FY20E earnings is stretched considering a low RoE of 15% in FY20E. SELL Sector: Capital Goods CMP: Rs1,167 Target Price: Rs985 Downside: 16% Chirag Muchhala Research Analyst chirag.muchhala@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$bn) 139.1/ Wk H / L (Rs) 1,375/834 Daily Vol. (3M NSE Avg.) 84,528 Price Performance (%) 1 M 6 M 1 Yr Thermax (5.6) Nifty Index (0.8) Source: Bloomberg Y/E March (Rsmn) (standalone) 3QFY18 2QFY18 3QFY18 YoY (%) QoQ (%) 9MFY17 9MFY18 YoY (%) Net revenues 7,847 8,639 9, ,215 25, Raw material costs 4,098 4,862 5, ,675 13, Staff costs 1,096 1,139 1, ,285 3, Other expenses 1,847 1,777 2, ,038 6,031 (0.1) Total expenditure 7,041 7,778 8, ,998 23, EBITDA ,217 2,214 (0.1) EBITDAM (%) Depreciation (5.0) Interest costs (55.6) Other income (6.5) PBT ,411 2,347 (2.7) Tax Net profit ,615 1,525 (5.6) NPM (%) EPS (Rs) (5.6)

2 Exhibit 1: Financial summary (consolidated) Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Net sales 51,450 44,831 45,895 54,262 63,691 EBITDA 4,291 4,330 4,085 5,155 6,305 Net profit 2,823 2,230 2,636 3,625 4,510 EPS (Rs) EPS growth (%) 34.6 (21.0) EBITDA margin (%) P/E (x) P/BV (x) EV/EBITDA (x) Dividend yield (%) RoCE (%) RoE (%) Exhibit 2: Consolidated quarterly financials Y/E March (Rsmn) 3QFY17 2QFY18 3QFY18 YoY (%) QoQ (%) 9MFY17 9MFY18 YoY (%) Net revenues 9,440 10,331 11, ,926 30, Raw material costs 4,409 5,474 5, ,275 15, Staff costs 1,635 1,721 1, (0.1) 5,087 5, Other expenses 2,521 2,185 2, ,967 6,835 (14.2) Total expenditure 8,565 9,379 10, ,329 27, EBITDA ,598 2, EBITDAM (%) Depreciation (0.7) Interest costs (51.3) Other income (5.3) (15.3) PBT ,780 2,665 (4.1) Tax , Share of profit from associates (42) (10) (9) (80) Minority interest (12) (4) (15) (10) - Net profit ,823 1,564 (14.2) NPM (%) EPS (Rs) (14.2) Exhibit 3: Consolidated segment-wise snapshot Y/E March 3QFY17 2QFY18 3QFY18 YoY (%) QoQ (%) 9MFY17 9MFY18 YoY (%) Revenues (Rsmn) Energy 7,363 7,857 8, ,234 23,813 (1.7) Environment 1,686 1,520 1, ,455 4,217 (5.3) Chemical 850 1, (16.4) 2,478 2, Revenue mix (%) Energy Environment Chemical EBIT (Rsmn) Energy ,816 1,715 (5.6) Environment (63.6) (44.1) Chemical (11.4) (56.3) EBIT margin (%) Energy Environment Chemical Thermax

3 1QFY11 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 3QFY11 1QFY12 3QFY12 1QFY13 3QFY13 1QFY14 3QFY14 1QFY15 Institutional Equities 3QFY15 1QFY16 3QFY16 1QFY17 3QFY17 1QFY18 3QFY18 Exhibit 4: Actual performance versus our estimate, Bloomberg consensus (standalone) 3QFY18 (Rsmn) Actual Our estimate Deviation (%) Bloomberg consensus Deviation (%) Revenues 9,805 8, ,831 (0.3) EBITDA (4.6) PAT (4.0) Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research Exhibit 5: Change in our earnings estimates (Rsmn) Old New Deviation (%) Y/E March FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Revenues 45,719 52,410 61,618 45,895 54,262 63, EBITDA 4,343 5,293 6,532 4,085 5,155 6,305 (6.0) (2.6) (3.5) PAT 2,895 3,702 4,569 2,636 3,625 4,510 (8.9) (2.1) (1.3) Source: Nirmal Bang Institutional Equities Research Exhibit 6: Consolidated order backlog, earnings visibility (Rsbn) (x) Order backlog (LHS) Order backlog to sales ratio (RHS) Exhibit 7: Consolidated order inflow trend (Rsbn) (includes Rs17bn RIL order) Thermax

4 Apr-06 Jan-07 Oct-07 Aug-08 May-09 Mar-10 Dec-10 Oct-11 Jul-12 May-13 Feb-14 Dec-14 Sep-15 Jul-16 Apr-17 Jan-18 Institutional Equities Exhibit 8: P/E chart (x) Median P/E = 26.1x 10 0 Source: Nirmal Bang Institutional Equities Research 4 Thermax

5 Financial statements (consolidated) Exhibit 9: Income statement Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Net sales 51,450 44,831 45,895 54,262 63,691 % growth (3.0) (12.9) Raw material costs 27,398 22,642 23,774 28,379 33,438 Staff costs 6,597 6,864 7,022 7,868 9,108 Other overheads 13,163 10,995 11,015 12,860 14,840 Total expenditure 47,158 40,501 41,811 49,107 57,386 EBITDA 4,291 4,330 4,085 5,155 6,305 % growth (7.0) 0.9 (5.7) EBITDA margin (%) Other income 1,224 1,141 1,050 1,220 1,410 Interest costs Depreciation ,001 Profit before tax 4,671 4,554 4,176 5,331 6,633 Tax 1,439 1,560 1,420 1,706 2,122 Net profit 3,232 2,994 2,756 3,625 4,510 Profit from associates & JVs (409) (586) (120) - - Extra-ordinary items - (178) Reported PAT 2,823 2,230 2,636 3,625 4,510 % growth 34.6 (21.0) PAT margin (%) EPS (Rs) % growth 34.6 (21.0) Exhibit 11: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Share capital Reserves 23,936 25,151 26,643 28,695 31,204 Net worth 24,162 25,376 26,881 28,934 31,442 Minority interest Short-term loans 1, Long-term loans Total loans 1,722 1,313 1, Deferred tax liability (net) (1,049) (993) (993) (993) (993) Total liabilities 24,834 25,710 27,015 28,867 31,176 Gross block 14,555 15,300 18,213 19,413 20,613 Depreciation 7,431 8,250 9,088 10,029 11,029 Net block 7,124 7,050 9,125 9,384 9,584 Capital work-in-progress 600 1, Goodwill 1,149 1,057 1,057 1,057 1,057 Investments 10,498 10,830 10,830 10,830 10,830 Inventories 2,903 2,833 3,144 3,568 4,013 Debtors 13,870 11,178 11,442 13,380 15,356 Cash 2,976 2,210 2,172 2,523 3,648 Other current assets 11,486 12,880 12,804 14,394 16,896 Total current assets 31,235 29,101 29,561 33,865 39,913 Creditors 9,964 10,516 10,096 11,663 13,284 Other current liabilities & provisions 15,808 13,225 13,563 14,708 17,025 Total current liabilities 25,772 23,742 23,659 26,371 30,309 Net current assets 5,463 5,359 5,902 7,495 9,604 Total assets 24,834 25,710 27,015 28,867 31,176 Exhibit 4: Exhibit 10: Cash flow Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E EBIT 3,569 3,511 3,247 4,214 5,305 (Inc.)/dec. in working capital (934) (663) (581) (1,241) (984) Cash flow from operations 2,635 2,848 2,666 2,973 4,321 Other income 1,224 1,141 1,050 1,220 1,410 Depreciation ,001 Tax paid (-) (2,385) (1,504) (1,420) (1,706) (2,122) Minority interest / profit from JVs (409) (586) (120) - - Net cash from operations 1,788 2,718 3,014 3,428 4,609 Capital expenditure (-) 6,297 (1,558) (1,600) (1,200) (1,200) Net cash after capex 8,085 1,160 1,414 2,228 3,409 Interest paid (-) (122) (97) (121) (103) (82) Dividends paid (-) (860) (858) (1,144) (1,573) (2,002) Inc./(dec.) in short-term borrowing 105 (527) (200) (200) (200) Inc./(dec.) in long-term borrowing (4,600) Inc./(dec.) in total borrowings (4,495) (409) (200) (200) (200) (Inc.)/dec. in investments (2,280) (332) Minority interest (780) Cash from financial activities (8,551) (1,682) (1,452) (1,876) (2,284) Others (401) (244) Opening cash balance 3,844 2,976 2,210 2,172 2,523 Closing cash balance 2,976 2,210 2,172 2,523 3,648 Change in cash balance (867) (767) (38) 352 1,125 Exhibit 5: Exhibit 6: Exhibit 12: Key ratios Y/E March FY16 FY17 FY18E FY19E FY20E Per share (Rs) EPS Book value Valuation (x) P/E P/BV EV/EBITDA EV/sales Return ratios (%) RoCE RoE RoIC Profitability ratios (%) EBITDA margin EBIT margin PAT margin Turnover ratios Total asset turnover ratio (x) Debtor days Inventory days Creditors days Thermax

6 Rating track Date Rating Market price (Rs) Target price (Rs) 27 January 2012 Sell February 2012 Sell April 2012 Sell May 2012 Sell July 2012 Sell October 2012 Sell October 2012 Sell December 2012 Sell January 2013 Sell February 2013 Sell April 2013 Sell May 2013 Sell July 2013 Sell July 2013 Sell July 2013 Sell October 2013 Sell November 2013 Sell December 2013 Sell January 2014 Sell January 2014 Sell April 2014 Sell May 2014 Sell July 2014 Sell July 2014 Sell October 2014 Sell November 2014 Sell January 2015 Sell 1, February 2015 Sell 1, April 2015 Sell 1, May 2015 Sell July 2015 Sell 1, July 2015 Sell 1, October 2015 Sell October 2015 Sell January 2016 Sell February 2016 Sell April 2016 Sell May 2016 Sell July 2016 Sell August 2016 Sell October 2016 Sell November 2016 Sell January 2017 Sell February 2017 Sell February 2017 Sell April 2017 Sell June 2017 Sell 1, July 2017 Sell August 2017 Sell October 2017 Sell November 2017 Sell 1, January 2018 Sell 1, February 2018 Sell 1, Thermax

7 Apr-11 Jun-11 Sep-11 Dec-11 Feb-12 May-12 Aug-12 Nov-12 Jan-13 Apr-13 Jul-13 Sep-13 Dec-13 Mar-14 Jun-14 Aug-14 Nov-14 Feb-15 May-15 Jul-15 Oct-15 Jan-16 Mar-16 Jun-16 Sep-16 Dec-16 Feb-17 May-17 Aug-17 Nov-17 Jan-18 Institutional Equities Rating track graph Not Covered Covered 7 Thermax

8 DISCLOSURES This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I/We, Mr. Chirag Muchhala the research analysts, are the authors of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 8 Thermax

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