Thermax Lack of near term triggers downgrade to Neutral PhillipCapital (India) Pvt. Ltd. CAPITAL GOODS: Quarterly Update 26 July 2013

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1 Thermax Lack of near term triggers downgrade to PhillipCapital (India) Pvt. Ltd. CAPITAL GOODS: Quarterly Update 26 July 2013 Thermax Q114 results missed consensus on weaker execution, lower margins and lower other income. We revise our estimates as we factor in lower revenues and margins over FY14 and FY15; we downgrade the stock to and cut our target price to Rs 596 (earlier Rs 660). Q114 Results highlights Sales for Q114 at Rs 8.6bn ( 12% YoY) were below our estimate of Rs 10bn. This was on account of delays in execution of projects in the order book. Management specifically cited the NMDC(Rs5bn) and NEEPCO(Rs2.8bn) orders which have slowed down. However, there are no stalled projects currently present in the order book. EBITDA margins at 9.4% ( 16% YoY) vs. 9.8% in Q1FY13 were down 40bps YoY. The margin fall was primarily on account of higher other expenses which included Rs 240mn of MTM losses against Rs 130mn in Q113. EBITDA margin adjusted for the forex loss was at 12.2% (+110bps) helped by lower raw material costs on improved mix (higher O&M revenues). Energy segment revenues at Rs 6.3bn fell 17% YoY as lack of large projects wins over last few quarters continued to hurt execution. EBIT margins however, improved to 11.6% (+80bps YoY) on higher margins projects being executed. Environment segment had sales of Rs 2.4bn ( 1% YoY) and EBIT margins of 9% ( 120bps YoY). PAT at Rs 0.5bn ( 25% YoY) was below our estimates of Rs 6.6bn as lower sales and margins along with lower other income ( 56% YoY) more than offset lower interest costs. Orders at Rs 21.2bn in Q114 were up 69% YoY. However, this was largely on account of one large order worth Rs 14bn from Reliance Jamnagar for its refinery expansion. We note that Environment segment orders fell 30% during the quarter to Rs2.1bn. Order book was up 24% YoY to Rs 55.3bn from Rs43.4bn in Q413. The management indicated that there are slow moving orders in the order book amounted to 10% 15%. Out of the order book, Rs 54bn is in the energy segment and Rs 1bn is in the environment segment. Consolidated revenue for Q114 at Rs10.5bn was down 10% YoY; PAT at Rs 0.5bn remained flat YoY on account of subsidiaries making a net profit of Rs 27mn in Q114 against a loss of Rs 147mn in Q113. Consolidated order book stood at Rs 63bn and order flow for the quarter stood at Rs 26bn. Subsidiaries reported sales of Rs 1.9bn and a net profit of Rs 0.03bn. However Thermax Instrumentation, TB&W JV and Thermax Zheijang continued to make losses. By end markets, cement, steel and power are seeing weak enquiries while food processing, textiles continue to witness growth. We do not see a recovery in these segments over the next months. Estimates and target price. We cut our estimates for FY14 and FY15 by 7% and 8% respectively as we factor in lower execution and margins. We assign a target multiple of 21x FY15EPS to get a target price of Rs 596 and downgrade the stock to a (earlier BUY). TMX IN CMP RS 591 TARGET RS 596 (+1%) Company Data O/S SHARES (MN) : 119 MARKET CAP (RSBN) : 70 MARKET CAP (USDBN) : WK HI/LO (RS) : 684 / 463 LIQUIDITY 3M (USDMN) : 0.7 FACE VALUE (RS) : 2 Share Holding Pattern, % PROMOTERS : 62.0 FII / NRI : 14.6 FI / MF : 8.8 NON PROMOTER CORP. HOLDINGS : 2.5 PUBLIC & OTHERS : 12.2 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Jul 10 Apr 11 Jan 12 Oct 12 Thermax BSE Sensex Other Key Ratios Rs mn FY13 FY14E FY15E Net Sales 54,917 57,855 62,752 EBIDTA 4,902 5,471 5,908 Net Profit 3,041 3,067 3,384 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Total debt/equity (%) Est. Ankur Sharma ( ) asharma@phillipcapital.in Jishar Thoombath ( ) jthoombath@phillipcapital

2 Key takeaway from Thermax conference call Order inflow for Q114 stood at Rs 21bn of which Rs 19bn is energy and Rs 2.2bn is environment. Order book stood at Rs55bn of which Rs 53bn is energy and Rs 10bn is environment segment. Of the total order book ~10% 15% are slow moving orders. The consolidated order book stood at Rs 63bn with an order inflow of Rs 26bn for Q114. Out of the order book, Rs 11.4bn are export orders and in the order flow Rs 4.33bn are export orders. Rs 24bn of the order flow is from energy segment and Rs 2.2bn is from environment segment. Of the sales, 74% were for the domestic market with the balance being contributed from exports. Domestic sales declined 15% YoY while exports were flat. Sales for the quarter were weak ( 12% YoY) on account of delays in 2 projects, namely from NMDC and NEEPCO. Other income in the quarter was lower compared to the same period last year as other income in Q113 was boosted by maturity of mutual fund units. Forex loss of Rs0.24bn was booked in Q114 as against Rs0.13bn in Q113. On the competition front, the domestic BTG players have become more competitive on account of the fall in the rupee while competition from Chinese players will come down. However, margins will remain under pressure. Thermax instrumentation and Thermax Zheijang continued to make losses. However management sites that the losses in the Chinese subsidiary have come down and will reach close to profitability by next year. In terms of receivables, there has been an improvement in collection during the quarter while inventories were maintained at the same level. Large orders in Power, Metals, cement and refining remain elusive with no major projects currently being planned. However, management expect smaller captive power plant orders to continue. O&M revenues are expected to remain at ~Rs5bn in FY14. O&M contracts are typically for 3 years and earn a higher margin than the EPC business for the company. 2 of 7

3 Quarterly results Y/E Mar, Rs mn Q114 Q113 % Change FY13 Net Sales 8,628 9,835 12% 46,909 Raw Material 4,830 6,282 23% 30,558 % of sales 56% 64% 8% 65% Purchase of traded goods % 1,179 % of sales 2% 3% 1% 3% Employee cost (991) % 4,016 % of sales 11% 9% 21% 9% Other Expenses 1,797 1,398 28% 6,085 % of sales 21% 14% 7% 13% EBITDA % 5,071 EBITDA margins (%) 9% 10% 0% 11% Depreciation % 549 EBIT % 4,523 EBIT margins (%) 8% 8% 1% 10% Interest % 96 Other Income % 730 PBT % 730 Tax % 1,657 PAT % 3,500 PAT Margin (%) 6% 7% 1% 7% EPS % Segmental Results (Standalone) Y/E Mar, Rs mn Q114 Q113 % Change FY13 Sales Energy 6,337 7, % Environment 2,397 2, % EBIT Energy % 3797 Environment % 1188 EBIT margins(%) Energy 11.6% 10.7% 0.8% 10% Environment 9.0% 10.1% 1.2% 11% Thermax Group Results (Consolidated) Y/E Mar, Rs mn Q114 Q113 % Change FY13 Net Sales 10,517 11,702 10% 54,917 PBT % 4,814 PAT Recurring % 3,201 Change in estimates (Consolidated) Y/E Mar, Rs mn NEW estimates Old estimates % change 2013a 2014e 2015e 2014e 2015e 2014e 2015e Sales 54,917 57,855 62,752 60,756 65,936 5% 5% EBITDA 4,902 5,471 5,908 5,916 6,695 8% 12% Margins (%) 8.9% 9.5% 9.4% 9.7% 10.2% 0.3% 0.7% PAT 3,041 3,067 3,384 3,315 3,692 7% 8% EPS % 8% 3 of 7

4 FINANCIALS Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Net sales 60,912 54,917 57,855 62,752 Growth, % Total income 60,912 54,917 57,855 62,752 Raw material expenses 38,435 33,157 34,624 37,580 Employee expenses 5,578 6,122 6,449 6,995 Other Operating expenses 10,980 10,736 11,311 12,268 EBITDA (Core) 5,919 4,902 5,471 5,908 Growth, % 10.1 (17.2) Margin, % Depreciation ,022 1,053 EBIT 5,257 4,131 4,448 4,855 Growth, % 8.8 (21.4) Margin, % Interest paid Other Non Operating Income Pre tax profit 5,965 4,814 4,707 5,193 Tax provided 2,043 1,773 1,640 1,809 Net Profit 3,921 3,041 3,067 3,384 Growth, % 4.0 (22.5) Net Profit (adjusted) 3,921 3,041 3,067 3,384 Unadj. shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Cash & bank 6,983 3,211 3,686 5,548 Debtors 13,805 15,467 16,295 17,674 Inventory 3,666 3,240 3,413 3,702 Loans & advances 4,301 1,625 1,712 1,856 Other current assets 4,673 7,776 8,192 8,886 Total current assets 33,427 31,319 33,297 37,666 Investments 2,395 4,430 4,430 4,430 Gross fixed assets 11,929 12,962 13,462 13,962 Less: Depreciation 3,488 4,235 5,258 6,311 Add: Capital WIP 2,466 5,175 5,175 5,175 Net fixed assets 10,907 13,901 13,379 12,826 Total assets 46,729 49,650 51,106 54,922 Current liabilities 24,498 22,456 21,919 23,531 Provisions 1,740 2,812 2,812 2,812 Total current liabilities 26,238 25,268 24,731 26,343 Non current liabilities 3,082 4,593 4,593 4,593 Total liabilities 29,319 29,861 29,324 30,936 Paid up capital Reserves & surplus 16,055 18,449 20,442 22,646 Shareholders equity 17,410 19,790 21,783 23,987 Total equity & liabilities 46,729 49,650 51,107 54,922 Source: Company, PhillipCapital India Research Estimates Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Pre tax profit 5,965 4,814 4,707 5,193 Depreciation ,022 1,053 Chg in working capital 2,249 3,705 2, Total tax paid 1, ,640 1,809 Cash flow from operating activities 2,401 1,184 2,049 3,543 Capital expenditure 3,361 3, Chg in investments 20 2, Chg in marketable securities Cash flow from investing activities 3,342 5, Free cash flow 941 4,616 1,549 3,043 Debt raised/(repaid) 1,224 1, Dividend (incl. tax) ,073 1,181 Other financing activities Cash flow from financing activities 1, ,073 1,181 Net chg in cash 102 3, ,862 Valuation Ratios & Per Share Data FY12 FY13 FY14E FY15E Per Share data EPS (INR) Growth, % 4.0 (22.5) Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Fixed capital/sales (x) Receivable days Inventory days Payable days Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Total debt/equity (%) Net debt/equity (%) (26.3) (5.8) Valuation PER (x) PEG (x) y o y growth 4.4 (1.0) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) of 7

5 Recommendation Chart (TP 700) (TP 640) (TP 640) (TP 480) (TP 455) (TP 551) (TP 450) Sell (TP380) Sell (TP 400) (TP 660) (TP 660) 0 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 5 of 7

6 Management Vineet Bhatnagar (Managing Director) (91 22) Sajid Khalid (Head Institutional Equities) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles Deepak Jain (9122) Banking, NBFCs Manish Agarwalla (9122) Sachit Motwani, FRM (9122) Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) Ennette Fernandes (9122) Vivekanand Subbaraman (9122) Cement Vaibhav Agarwal (9122) Economics Anjali Verma (9122) Engineering, Capital Goods Ankur Sharma (9122) Jishar Thoombath (9122) Metals Dhawal Doshi (9122) Dharmesh Shah (9122) Infrastructure & IT Services Vibhor Singhal (9122) Varun Vijayan (9122) Raheel Arathodi (9122) Oil&Gas, Agri Inputs Gauri Anand (9122) Saurabh Rathi (9122) Retail, Real Estate Abhishek Ranganathan, CFA (9122) Neha Garg (9122) Mid caps Kapil Bagaria (9122) Raheel Arathodi (9122) Technicals & Quant Neppolian Pillai (9122) Shikha Khurana (9122) Sr. Manager Equities Support Rosie Ferns (9122) Sales & Distribution Kinshuk Tiwari (9122) Ashvin Patil (9122) Shubhangi Agrawal (9122) Dipesh Sohani (9122) Rajesh Ashar (Sales Trader) (9122) Mayur Shah (Execution) (9122) SINGAPORE Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel (1) Fax: (1) Contact Information (Regional Member Companies) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, C Block, 2 nd Floor, Modern Center, Jacob Circle, K. K. Marg, Mahalaxmi Mumbai Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) of 7

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