3QFY2011 Results Update Capital Goods January 31, 2011 Thermax Performance Highlights (` cr) 3QFY11 3QFY10 % chg (yoy) 2QFY11 % chg qoq Revenues 1,241 748 65.9 1,092 13.7 EBITDA 146 89 63.8 129 13.9 EBITDA margin (%) 11.8 11.9 (15.0) 11.8 1.8 Reported PAT 100 57 77.3 90 11.9 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 8,018 0.6 926 / 560 85,495 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) 12.8 1.3 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 -0.6-2.6 37.7 20.6 Net Profit 288 259 362 435 % chg -0.4-9.9 39.8 20.0 EBITDA (%) 12.2 11.7 11.5 11.5 EPS (`) 24.1 21.8 30.4 36.5 P/E (x) 27.9 30.9 22.1 18.4 P/BV (x) 8.1 7.4 6.0 4.8 RoE (%) 32.9 25.0 29.9 28.8 RoCE (%) 34.6 21.9 31.5 30.2 EV/Sales (x) 2.2 2.1 1.5 1.2 EV/EBITDA (x) 17.8 17.7 13.2 10.5 John Perinchery +91 22 3935 7800 Ext: 6817 john.perinchery@angelbroking.com Hemang Thaker +91 22 3935 7800 Ext: 6840 hemang.thaker@angelbroking.com Please refer to important disclosures at the end of this report 1
Exhibit 1: 3QFY2011 performance (` cr) 3QFY11 3QFY10 % chg (yoy) 2QFY11 % chg qoq 9MFY11 9MFY10 % chg yoy Net Sales 1,216 726 67.4 1,048 16.1 3,043 1,917 58.7 Other operating income 25 22 13.9 44 (42.8) 79.89 52.42 52.4 Total income 1,241 748 65.9 1,092 13.7 3,123 1,969 58.6 Stock adjustments (1) 5 (3) (7) 8 Raw Material 819 441 85.8 719 14.0 2,032 1,160 75.2 (%of net sales) 67.3 60.7 68.6 66.8 60.5 Employee Cost 97 72 35.4 99 (1.5) 272 203 33.9 (% of Net Sales) 8.0 9.9 9.4 8.9 10.6 Other Expenses 133 101 31.5 121 9.8 347 282 22.9 (% of Net Sales) 10.9 13.9 11.5 11.4 14.7 Total Expenditure 1,095 659 66.2 963 13.7 2,752 1,732 58.9 EBITDA 146 89 63.8 129 13.9 371 238 56.2 (EBITDA %) 11.8 11.9 11.8 11.9 12.1 Interest 0 1 (66.1) 0 (55.2) 1 1 1.1 Depreciation 11 10 1.6 10 0.5 32 30 4.4 Other Income 12 7 58.8 13 (12.3) 39 32 22.4 PBT 147 86 71.8 131 12.5 377 238 58.5 (% of Net Sales) 11.9 11.5 12.0 12.4 12.4 Total Tax 47 29 61.1 41 13.8 121 81 50.0 (% of PBT) 32.0 34.1 31.6 32.1 34.0 Reported PAT 100 57 77.3 90 11.9 256 157 62.9 (% of Net Sales) 8.2 7.6 8.2 8.4 8.2 Exhibit 2: Actual v/s Estimates (` cr) Actual Estimates Var (%) Revenue 1,241 1,015 22.2 EBITDA 146 122 20.2 PAT 100 82 21.6 EPS (`) 8.4 6.9 21.6 January 31, 2011 2
Exhibit 3: Segment-wise performance Y/E March (` cr) 3QFY11 3QFY10 % chg (yoy) 9MFY11 9MFY10 % chg (yoy) Revenues Energy 9,904 5,603 76.8 24,773 15,034 64.8 Environment 2,943 2,031 44.9 7,646 4,939 54.8 Total Revenues 12,847 7,634 68.3 32,419 19,973 62.3 Less: Inter Segment Revenue 436 151 1,300 280 Total Segment Income 12,412 7,483 65.9 31,119 19,693 58.0 EBIT Energy 1,073 606 77.2 2,666 1,697 57.1 Environment 399 304 31.2 976 663 47.3 Total EBIT 1,472 910 61.8 3,643 2,360 54.4 Revenues mix (%) Energy 77.1 73.4 76.4 75.3 Environment 22.9 26.6 23.6 24.7 EBIT Margin (%) Energy 10.8 10.8 10.8 11.3 Environment 13.6 15.0 12.8 13.4 Total 11.5 11.9 11.2 11.8 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, 2011 3
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 7,276 7154 5,966 5613 5,059 4,253 4,100 2,803 3,078 3,426 (` cr) 2,500 2,000 1,500 1,000 500 2,034 2026 1,541 1273 1100 1051 937 791 811 717 377 319 174 210 146 203 246 275 364 299 275 297-1QFY09 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, 2011 4
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, 2011 5
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 (%) 26.3 20.6 Order Book Coverage Ratio Order Book/Sales 1.7 1.7 Order Book/Fwd Sales 1.4 1.6 Order Book to Sales (%) 38 38 Exhibit 7: Change in estimates Earlier estimates FY2011 Revised estimates Var (%) Earlier estimates FY2012 Revised estimates Var (%) Revenues 4,539 4,640 2.2 5,720 5,596 (2.2) EBITDA 522 534 2.3 659 645 (2.1) PAT 354 362 2.3 445 435 (2.2) Exhibit 8: EPS forecast Angel forecast Bloomberg consensus FY2011E 30.4 30.9 FY2012E 36.5 38.9 Exhibit 9: One-year forward P/E band 1,000 900 800 700 600 500 400 300 200 100 0 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, 2011 6
Exhibit 10: Peer Valuations Company Reco CMP (`) Tgt Price Upside P/BV P/E(x) FY2010-12E RoCE RoE (`) (%) FY11E FY12E FY11E FY12E EPS CAGR FY11E FY12E FY11E FY12E ABB* Neutral 732 - - 6.0 5.0 31.7 23.9 31.1 20.3 22.3 18.6 20.8 Areva T&D* Sell 313 260-7.7 6.5 42.9 29.8 14.6 13.9 18.0 18.6 22.7 BHEL Neutral 2,219 - - 5.5 4.4 19.3 15.7 26.8 33.1 32.1 31.3 30.4 BGR Energy Buy 550 720 30.8 4.4 3.4 14.2 11.4 31.1 18.2 17.7 34.7 33.6 Crompton Greaves Buy 279 375 34.6 5.5 4.4 19.9 17.2 10.0 38.5 36.9 31.4 28.4 Jyoti Structures Buy 110 215 94.7 1.5 1.2 8.1 6.4 29.6 18.8 19.3 20.2 20.6 KEC International Buy 89 130 46.3 2.4 1.9 9.8 7.7 22.2 18.5 18.9 27.6 26.2 Thermax Neutral 673 - - 6.0 4.8 22.1 18.4 29.4 31.5 30.2 29.9 28.8 Source: Angel Research; Note: * December year ending January 31, 2011 7
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 43.1 49.6 (0.6) (2.6) 37.7 20.6 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 370 567 670 619 849 1,006 Personnel 214 267 288 330 427 504 Other - - - - - - EBITDA 289 427 422 395 534 645 % chg 63.5 47.7 (1.1) (6.4) 35.2 20.9 (% of Net Sales) 12.4 12.3 12.2 11.7 11.5 11.5 Depreciation& Amortisation 19.5 23.2 35.1 44.2 51.2 61.2 EBIT 269 403 387 351 482 584 % chg 67.6 49.8 (4.2) (9.4) 37.6 21.0 (% of Net Sales) 11.6 11.6 11.2 10.4 10.4 10.4 Interest & other Charges 2 2 4 2 2 2 Other Income 36 44 40 52 60 67 (% of PBT) 11.8 9.8 9.5 13.0 11.2 10.3 Others - - - - - - Recurring PBT 304 446 423 400 541 649 % chg 75.8 46.7 (5.0) (5.4) 35.1 20.0 Extraordinary Expense/(Inc.) 5.5 (2.1) (1.4) 114.9 - - PBT (reported) 298 448 425 286 541 649 Tax 104.6 157.1 135.7 141.6 178.5 214.1 (% of PBT) 35.1 35.1 32.0 49.6 33.0 33.0 PAT (reported) 194 291 289 144 362 435 Add: Share of earnings of asso. - - - - - - Less: Minority interest (MI) - - - (0.4) - - Prior period items - - - - - - PAT after MI (reported) 194 291 289 144 362 435 ADJ. PAT 199 289 288 259 362 435 % chg 94.3 44.9 (0.4) (9.9) 39.8 20.0 (% of Net Sales) 8.6 8.3 8.3 7.7 7.8 7.8 Basic EPS (`) 16.7 24.2 24.1 21.8 30.4 36.5 Fully Diluted EPS (`) 16.7 24.2 24.1 21.8 30.4 36.5 % chg 94.3 44.9 (0.4) (9.9) 39.8 20.0 January 31, 2011 8
Balance Sheet Y/E March (` cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E SOURCES OF FUNDS Equity Share Capital 24 24 24 24 24 24 Preference Capital - - - - - - Reserves& Surplus 566 736 969 1,054 1,319 1,656 Shareholders Funds 590 760 992 1,078 1,343 1,680 Minority Interest - - - 9 9 9 Total Loans 2-4 8 4 4 Deferred Tax Liability 7 13 16 14 14 14 Total Liabilities 599 773 1,012 1,110 1,371 1,708 APPLICATION OF FUNDS Gross Block 292 433 661 742 879 1,160 Less: Acc. Depreciation 125 145 170 205 256 317 Net Block 167 288 491 537 623 843 Capital Work-in-Progress 12 61 18 11 113 19 Goodwill - - - - - - Investments 574 560 144 370 370 370 Current Assets 1,024 1,119 1,732 2,431 2,868 3,333 Cash 97 58 370 670 598 903 Loans & Advances 202 219 222 328 302 364 Other 22 32 41 59 58 70 Current liabilities 1,178 1,259 1,372 2,239 2,603 2,857 Net Current Assets (154) (140) 359 191 265 476 Mis. Exp. not written off - 4 - - - - Total Assets 599 773 1,012 1,110 1,371 1,708 January 31, 2011 9
Cash Flow Statement Y/E March (` cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Profit before tax 298 448 425 286 541 649 Depreciation 20 23 35 44 51 61 (Inc)/Dec in Working Capital 131 (54) (187) 469 (146) 95 Less: Other income 36 44 40 52 60 67 Direct taxes paid 103 148 133 142 178 214 Cash Flow from Operations 310 225 99 604 207 524 (Inc.)/Dec.in Fixed Assets (46) (190) (186) (74) (238) (188) (Inc.)/Dec. in Investments (177) 14 416 (226) - - Other income 36 44 40 52 60 67 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) 83 112 70 70 98 98 Others 7 (19) 8 10 - - Cash Flow from Financing (87) (114) (66) (66) (101) (98) Inc./(Dec.) in Cash 42 (39) 312 300 (73) 306 Opening Cash balances 55 97 58 370 670 598 Closing Cash balances 97 58 370 670 598 903 January 31, 2011 10
Key Ratios Y/E March FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Valuation Ratio (x) P/E (on FDEPS) 40.3 27.8 27.9 30.9 22.1 18.4 P/CEPS 36.7 25.7 24.8 26.4 19.4 16.2 P/BV 13.6 10.6 8.1 7.4 6.0 4.8 Dividend yield (%) 0.9 1.2 0.7 0.7 1.0 1.0 EV/Sales 3.2 2.1 2.2 2.1 1.5 1.2 EV/EBITDA 25.5 17.4 17.8 17.7 13.2 10.5 EV/Total Assets 12.3 9.6 7.4 6.3 5.2 4.0 Per Share Data (`) EPS (Basic) 16.7 24.2 24.1 21.8 30.4 36.5 EPS (fully diluted) 16.7 24.2 24.1 21.8 30.4 36.5 Cash EPS 18.4 26.2 27.1 25.5 34.7 41.6 DPS 6.0 8.0 5.0 5.0 7.0 7.0 Book Value 49.5 63.4 83.3 90.5 112.7 141.0 Dupont Analysis EBIT margin (%) 11.6 11.6 11.2 10.4 10.4 10.4 Tax retention ratio 0.6 0.6 0.7 0.5 0.7 0.7 Asset turnover (x) 4.3 5.1 3.9 3.2 3.7 3.6 ROIC (Post-tax) (%) 32.6 38.2 29.5 16.6 26.1 25.4 Cost of Debt (Post Tax) (%) 33.6 152.1 186.8 33.7 33.2 49.0 Leverage (x) - - - - - - Operating RoE (%) 32.6 38.2 29.5 16.6 26.1 25.4 Returns (%) RoCE (Pre-tax) 50.1 58.8 43.3 33.5 38.7 39.4 Angel RoIC (Pre-tax) - - - - - - RoE 38.0 42.9 32.9 25.0 29.9 28.8 Turnover ratios (x) Asset Turnover (Gross Block) 8.5 9.6 6.3 4.8 5.7 5.5 Inventory / Sales (days) 26.6 22.1 25.9 34.0 32.0 32.0 Receivables (days) 50.3 48.8 58.1 66.0 64.0 62.0 Payables (days) 37.4 40.2 46.2 44.0 42.0 40.0 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) 174.9 244.5 101.5 172.7 241.2 291.9 January 31, 2011 11
Research Team Tel: 022-39357800 E-mail: research@angelbroking.com Website: www.angelbroking.com 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, 2011 12