Thermax NEUTRAL. Performance Highlights CMP. `673 Target Price - 3QFY2011 Results Update Capital Goods. Investment Period -

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1 3QFY2011 Results Update Capital Goods January 31, 2011 Thermax Performance Highlights (` cr) 3QFY11 3QFY10 % chg (yoy) 2QFY11 % chg qoq Revenues 1, , EBITDA EBITDA margin (%) (15.0) Reported PAT Source: Angel Research Thermax reported better-than-expected results for 3QFY2011. The company registered 66% yoy growth in top-line to `1,241cr on strong execution. Aided by robust top-line growth and stable EBIDTA margins, reported PAT was up by 77% yoy to `100cr. The quarter witnessed a 20% dip in order inflow to `1,234cr as compared to `1,584cr during the corresponding period of the previous year. Order backlog at the end of the quarter stood at `7,154cr providing revenue visibility for the next 5-6 quarters. We remain Neutral on the stock. Strong execution drives revenues and profit: Revenues for the quarter registered 66% yoy growth to `1,241cr, which was 22% above our expectations of `1,015cr. The surge in revenues can be attributable to strong order backlog, increasing proportion of EPC revenues and commissioning of new facilities, which accelerated the company s execution capabilities. The energy and environment segments reported strong growth in revenues and profitability during the quarter. For the nine months ending December 31, 2011, Thermax reported 59% yoy growth in revenue to `3,123cr, while PAT grew by 63% to `256cr. Outlook and valuation: Thermax has largely benefitted from industrial capex especially in sectors such as steel, cement and oil & gas where it has traditionally offered its products and solutions for captive power and heating solutions. However, post hardening of the interest rates due to high inflation, we expect increasing number of upcoming projects to be delayed, which may negatively impact order flows of companies like Thermax. The company s recent JVs, viz. Thermax Babcock & Wilcox and Thermax SPX Energy Technologies, would enable it to expand its product offerings to include supercritical boilers and electrostatic precipitators (ESPs) in addition to its traditional industrial and subcritical boilers. At current levels, the stock is quoting at 22.1x and 18.4x FY2011E and FY2012E EPS, respectively. We remain Neutral on the stock. NEUTRAL CMP `673 Target Price - Investment Period - Stock Info Sector Capital Goods Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume 8, / ,495 Face Value (`) BSE Sensex Nifty Reuters Code 2 18,327 5,506 THMX.BO Bloomberg Code TMX@IN Shareholding Pattern (%) Promoters 62.0 MF / Banks / Indian Fls 14.9 FII / NRIs / OCBs 9.5 Indian Public / Others 13.6 Abs. (%) 3m 1yr 3yr Sensex (7.7) Thermax (21.9) 5.3 (1.3) Key Financials Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E Net Sales 3,460 3,370 4,640 5,596 % chg Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) John Perinchery Ext: 6817 john.perinchery@angelbroking.com Hemang Thaker Ext: 6840 hemang.thaker@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 3QFY2011 performance (` cr) 3QFY11 3QFY10 % chg (yoy) 2QFY11 % chg qoq 9MFY11 9MFY10 % chg yoy Net Sales 1, , ,043 1, Other operating income (42.8) Total income 1, , ,123 1, Stock adjustments (1) 5 (3) (7) 8 Raw Material ,032 1, (%of net sales) Employee Cost (1.5) (% of Net Sales) Other Expenses (% of Net Sales) Total Expenditure 1, ,752 1, EBITDA (EBITDA %) Interest 0 1 (66.1) 0 (55.2) Depreciation Other Income (12.3) PBT (% of Net Sales) Total Tax (% of PBT) Reported PAT (% of Net Sales) Exhibit 2: Actual v/s Estimates (` cr) Actual Estimates Var (%) Revenue 1,241 1, EBITDA PAT EPS (`) January 31,

3 Exhibit 3: Segment-wise performance Y/E March (` cr) 3QFY11 3QFY10 % chg (yoy) 9MFY11 9MFY10 % chg (yoy) Revenues Energy 9,904 5, ,773 15, Environment 2,943 2, ,646 4, Total Revenues 12,847 7, ,419 19, Less: Inter Segment Revenue , Total Segment Income 12,412 7, ,119 19, EBIT Energy 1, ,666 1, Environment Total EBIT 1, ,643 2, Revenues mix (%) Energy Environment EBIT Margin (%) Energy Environment Total Balanced segmental performance: The energy and environment segments both reported strong growth rates on the back of faster project execution. Despite the rising commodity prices, Thermax was able to report stable EBDITA margins of 11.8% on account of its prudent material procurement policies. The energy division reported 77% yoy growth in revenues with stable EBIT margins of 10.8%. The environment division also reported 45% yoy growth however, EBIT margins contracted by 142bp to 13.6% possibly on account of higher proportion of EPC revenues booked during the quarter. Conference Call Highlights Thermax recently registered with Siemens AG as one of its global supporting vendor. These tie-ups provide Thermax with the opportunity to be one of Siemens supporting bidder for the HRSG portion in some of the EPC bids that Siemens would be placing across the world. The Thermax Babcock & Wilcox JV has acquired land and commenced construction at the site. The company has also placed the equipment orders and the plant is expected to commence production from September 2012 onwards. The JV is expected to bid for forthcoming supercritical boiler packages (9X800 MW) in the NTPC bulk tendering. Thermax has also been selected by the Government of Maharashtra for setting up the first-ever geothermal power plant in India. January 31,

4 Order inflows slowing, but order book healthy: Order backlog (standalone) at the end of the quarter stood at `6,353cr (energy: `5,295cr and environment: `1,059cr), while the consolidated order book totaled `7,154cr (energy: `6,092cr and environment: `1,062cr). Order inflows during 3QFY2011 was at `1,234cr (energy: `937cr and environment: `297cr) as compared to `1,548cr during the corresponding period of last year. Excluding the large EPC order (i.e the `1,001cr EPC order from Meenakshi Energy) received during 2QFY2010, we note that the order flows have been slowing down in the past two quarters. The current quarter registered a 20% yoy and 6.9% qoq dip in order accretion. Order inflows YTD have been at `4,400cr, down by 11.1% yoy. With increasing number of captive power projects likely to get delayed, the order intake guidance for FY2011 has been revised downwards from double-digit to flattish growth. Exhibit 4: Order backlog (consolidated) Exhibit 5: Order inflows (consolidated) (` cr) 8,000 6,400 4,800 3,200 1,600 6,984 7, , ,059 4,253 4,100 2,803 3,078 3,426 (` cr) 2,500 2,000 1,500 1, , , QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11-1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 Energy 2QFY10 3QFY10 Environment 4QFY10 1QFY11 2QFY11 3QFY11 January 31,

5 Investment arguments Power sector in India Solid growth avenues: At present, the energy segment accounts for ~76% of the company s revenues. Incremental capacity additions planned in the domestic power sector offer huge opportunities for power equipment manufacturing companies. Moreover, a large number of upcoming power projects are expected to be coal-fired, which has its own set of associated energy and environment challenges. With a sound product portfolio in its environment segment, environmental challenges in the power sector create an opportunity for the company to meet demand for energy-efficient power generation, a pivotal need in the context of emission reduction. JVs New directions for growth: Thermax has pursued the approach of entering strategic alliances with global leaders, which besides plugging the technology gaps has strengthened its product portfolio. Notable JVs include: Thermax Babcock & Wilcox JV: This JV for supercritical boilers was registered in 2QFY2010. Management informs that land has been acquired for the JV and construction work has commenced. The company has also placed the machinery orders and the plant is expected to commence production from September 2012 onwards. The JV is expected to bid for supercritical boiler packages (9X800 MW) in the NTPC bulk tendering. Thermax SPX Energy Technologies JV: This JV has obtained the qualifications to bid for ESP packages of the supercritical range associated with NTPCs bulk tenders. NTPC has separated ESP packages out of BTG tenders and would be inviting separate bids for the same in the near future. The JV has already bid for one of the eleven tenders of NTPC and would be participating for the remaining tenders as and when they are announced. Outlook and valuation Thermax has largely benefitted from industrial capex especially in sectors such as steel, cement and oil & gas where it has traditionally offered its products and solutions for captive power and heating solutions. However, post hardening of the interest rates due to high inflation, we expect increasing number of upcoming projects to be delayed, which may negatively impact order flows of companies like Thermax. The company s recent JVs, viz. Thermax Babcock & Wilcox and Thermax SPX Energy Technologies, would enable it to expand its product offerings to include supercritical boilers and electrostatic precipitators (ESPs) in addition to its traditional industrial and subcritical boilers. At current levels, the stock is quoting at 22.1x and 18.4x FY2011E and FY2012E EPS, respectively. We remain Neutral on the stock. January 31,

6 Exhibit 6: Key Assumption Particulars FY2011E FY2012E Order Inflow (` cr) 6,253 7,191 Order Inflow Growth (%) (2.5) 15 Closing Order Book (` cr) 7,733 9,327 Order Backlog Growth (%) Order Book Coverage Ratio Order Book/Sales Order Book/Fwd Sales Order Book to Sales (%) Exhibit 7: Change in estimates Earlier estimates FY2011 Revised estimates Var (%) Earlier estimates FY2012 Revised estimates Var (%) Revenues 4,539 4, ,720 5,596 (2.2) EBITDA (2.1) PAT (2.2) Exhibit 8: EPS forecast Angel forecast Bloomberg consensus FY2011E FY2012E Exhibit 9: One-year forward P/E band 1, Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Share Price (`) 5x 10x 15x 20x January 31,

7 Exhibit 10: Peer Valuations Company Reco CMP (`) Tgt Price Upside P/BV P/E(x) FY E RoCE RoE (`) (%) FY11E FY12E FY11E FY12E EPS CAGR FY11E FY12E FY11E FY12E ABB* Neutral Areva T&D* Sell BHEL Neutral 2, BGR Energy Buy Crompton Greaves Buy Jyoti Structures Buy KEC International Buy Thermax Neutral Source: Angel Research; Note: * December year ending January 31,

8 Profit & Loss Statement Y/E March (` cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Net Sales 2,327 3,482 3,460 3,370 4,640 5,596 Other operating income Total operating income 2,327 3,482 3,460 3,370 4,640 5,596 % chg (0.6) (2.6) Total Expenditure 2,038 3,055 3,038 2,976 4,106 4,952 Net Raw Materials 1,454 2,220 2,080 2,027 2,830 3,442 Other Mfg costs ,006 Personnel Other EBITDA % chg (1.1) (6.4) (% of Net Sales) Depreciation& Amortisation EBIT % chg (4.2) (9.4) (% of Net Sales) Interest & other Charges Other Income (% of PBT) Others Recurring PBT % chg (5.0) (5.4) Extraordinary Expense/(Inc.) 5.5 (2.1) (1.4) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso Less: Minority interest (MI) (0.4) - - Prior period items PAT after MI (reported) ADJ. PAT % chg (0.4) (9.9) (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg (0.4) (9.9) January 31,

9 Balance Sheet Y/E March (` cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus ,054 1,319 1,656 Shareholders Funds ,078 1,343 1,680 Minority Interest Total Loans Deferred Tax Liability Total Liabilities ,012 1,110 1,371 1,708 APPLICATION OF FUNDS Gross Block ,160 Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets 1,024 1,119 1,732 2,431 2,868 3,333 Cash Loans & Advances Other Current liabilities 1,178 1,259 1,372 2,239 2,603 2,857 Net Current Assets (154) (140) Mis. Exp. not written off Total Assets ,012 1,110 1,371 1,708 January 31,

10 Cash Flow Statement Y/E March (` cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Profit before tax Depreciation (Inc)/Dec in Working Capital 131 (54) (187) 469 (146) 95 Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (46) (190) (186) (74) (238) (188) (Inc.)/Dec. in Investments (177) (226) - - Other income Cash Flow from Investing (187) (132) 271 (248) (178) (120) Issue of Equity Inc./(Dec.) in loans (5) (2) 4 4 (4) - Dividend Paid (Incl. Tax) Others 7 (19) Cash Flow from Financing (87) (114) (66) (66) (101) (98) Inc./(Dec.) in Cash 42 (39) (73) 306 Opening Cash balances Closing Cash balances January 31,

11 Key Ratios Y/E March FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin (%) Tax retention ratio Asset turnover (x) ROIC (Post-tax) (%) Cost of Debt (Post Tax) (%) Leverage (x) Operating RoE (%) Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) (39.5) (20.7) (1.1) (51.9) (26.2) (27.9) Solvency ratios (x) Net debt to equity (1.1) (0.8) (0.5) (0.9) (0.7) (0.7) Net debt to EBITDA (2.3) (1.4) (1.2) (2.6) (1.8) (1.9) Interest Coverage (EBIT / Interest) January 31,

12 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Thermax 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) January 31,