Near term outlook muted, working on building a strong base November 11, 2016 Kunal Sheth kunalsheth@plindia.com +91 22 66322257 Samir Bendre samirbendre@plindia.com +91 22 66322256 Rating Accumulate Price Rs881 Target Price Rs900 Implied Upside 2.2% Sensex 26,819 Nifty 8,296 (Prices as on November 11, 2016) Trading data Market Cap. (Rs bn) 104.8 Shares o/s (m) 119.0 3M Avg. Daily value (Rs m) 49.8 Major shareholders Promoters 61.98% Foreign 15.99% Domestic Inst. 10.12% Public & Other 11.91% Stock Performance (%) 1M 6M 12M Absolute 0.9 17.3 2.0 Relative 5.4 12.5 (1.7) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 19.8 24.1 18.0 2018 27.6 28.7 3.7 Price Performance (RIC: THMX.BO, BB: TMX IN) (Rs) 1,200 1,000 800 600 400 200 0 Nov 15 Jan 16 Source: Bloomberg Mar 16 May 16 Jul 16 Sep 16 Nov 16 Thermax (TMX) reported PAT of Rs634m, up 6.7% YoY, driven by weak execution (down 13.5% YoY) and lower margins. Order inflow for the quarter was up 31% YoY at Rs12.4bn led by strong inflows in export market (up 90% YoY). TMX highlighted that domestic market enquiry flow for standard products has witnessed positive trend in sectors like Food processing/dairy/pharma/chemical/wood/waste paper processing/tyre industry, while enquiry from core sectors like Steel/Power continues to remain muted. However, Hydrocarbon has seen few enquiries for Euro VI related capex. In International market, the company has a pipeline of few small ticket size orders; however, competition continues to remain high. TMX s increasing market share, strong product profile, increasing traction in export market and strong management pedigree gives us confidence that the company will be able to participate in the upturn of the cycle and continue to surprise positively in terms of order flow. However, given the low order carry and weak near term outlook, we believe they can underperform over the next few quarters. We continue to recommend Accumulate at lower levels from a medium/long term perspective. Weak execution due to low order carry: Sales for the quarter was down by 13.4% YoY to Rs11bn. Sales from the Energy segment was down 17% YoY to Rs8.7bn; Sales from Environment segment was down 2% YoY to Rs2.4bn. Weak order carry impacted sales; EBITDA was down 17% YoY to Rs919m; EBITDA margin was down by 30bps YoY to 8.4%. EBIT margin for the Environmental segment was 9.2%, up 30bps YoY, while the Energy segment was up 70bps YoY to 8.7%. Adj. PAT was up 6.7% YoY to Rs634m. TMX highlighted that various cost cutting measures has helped the company offer better price and in turn, improve market share in base businesses. Contd...2 Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 53,955 55,015 50,225 57,818 Growth (%) 5.8 2.0 (8.7) 15.1 EBITDA (Rs m) 4,636 4,481 4,394 5,575 PAT (Rs m) 2,458 2,426 2,354 3,290 EPS (Rs) 20.6 20.4 19.8 27.6 Growth (%) (0.1) (1.3) (3.0) 39.7 Net DPS (Rs) 6.2 7.1 6.9 9.7 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 8.6 8.1 8.7 9.6 RoE (%) 11.5 10.6 9.4 12.2 RoCE (%) 8.2 10.4 10.3 12.9 EV / sales (x) 1.8 1.7 1.9 1.6 EV / EBITDA (x) 21.3 20.6 21.7 17.0 PE (x) 42.7 43.3 44.6 31.9 P / BV (x) 4.9 4.3 4.0 3.8 Net dividend yield (%) 0.7 0.8 0.8 1.1 Source: Company Data; PL Research Q2FY17 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Order book down 11% YoY: Order book for the quarter stood at Rs45.8bn (down 11% YoY). Inflow for the quarter was Rs12.4bn, up 31% YoY. Domestic inflow was at Rs6.1bn (up 5% YoY) and export inflow was at Rs6.4bn (up 90% YoY). In export market, TMX got orders from Thailand (sugar sector) and orders from Middle East in Oil sector. TMX highlighted that domestic market enquiry flow has witnessed positive trend in sectors like Food processing/dairy/pharma/chemical/wood/waste paper processing/tyre industry for base business orders, while enquiry from core sectors like Steel/Power continues to remain muted; however, the Oil sector is seeing few enquiries (Euro VI capex related). The company recently received one solar thermal order from NTPC for Rs780m. The total opportunity for solar thermal is ~4 5GW (~Rs16 20bn). Capex plans update: TMX is will invest US$25m in Indonesia factory and can generate US$100m sales (expecting commissioning end of Q3FY17). TMX will invest Rs1.5bn in chemical factory in Dahej which can generate sales of Rs2.7bn (expect commissioning end of Q4FY17). New land acquired in Sri city in AP will mainly be used to put up factory for absorption chillers (sales of Rs4bn possible) and expansion of small boiler capacity. Improved performance by subsidiaries: TMX highlighted that most subsidiaries, except Chinese subsidiary, have made profits in Q2FY17. TBW JV order book is at Rs3bn.TBW JV was profitable in H1 due to order under execution and cost control. Outlook and Valuation: The stock is trading at 32x FY18E earnings. We have cut our earnings by ~5% for FY17& FY18 to factor in weak execution. TMX s ability to bag base orders of ~Rs7 8bn per quarter, increasing market share, strong product profile, increasing traction in export market and strong management pedigree gives us confidence that it will be able to participate in the upturn of the cycle meaningfully and continue to surprise positively in terms of order flow. We continue to recommend Accumulate at lower levels from a medium/long term perspective. November 11, 2016 2
Exhibit 1: Q2FY17 Consolidated Result Overview (Rs m) Y/e March Q2FY17 Q2FY16 YoY gr. (%) Q1FY17 H1FY17 H1FY16 YoY gr. (%) Net Sales 10,957 12,650 (13.4) 10,021 20,978 24,957 (15.9) Expenditure Raw Material 5,387 6,134 (12.2) 4,479 9,866 12,560 (21.4) % of Net Sales 49.2 48.5 44.7 Personnel Cost 1,691 1,584 6.8 1,761 3,452 3,219 7.2 % of Net Sales 12.5 17.6 Others 2,960 3,828 (22.7) 2,978 5,938 7,054 (15.8) % of Net Sales 30.3 29.7 Total Expenditure 10,038 11,546 (13.1) 9,217 19,256 22,833 (15.7) EBITDA 919 1,105 (16.8) 804 1,723 2,124 (18.9) Margin (%) 8.4 8.7 8.0 8.2 8.5 Depreciation 199 183 8.7 194 393 367 7.2 EBIT 720 921 (21.9) 610 1,330 1,758 (24.3) Other income 361 253 42.8 231 592 498 18.8 Interest 24 38 (36.9) 32 55 66 (15.8) PBT 1,057 1,137 (7.0) 809 1,867 2,190 (14.8) Total Taxes 350 394 (11.2) 277 627 725 (13.5) ETR (%) 33.1 34.6 34.3 Share of loss from joint ventures 78 (152) (42) 36 (328) PAT 786 591 32.9 490 1,275 1,138 12.1 Other Comprehensive income (152) 3 (61) (212) 23 Total Comprehensive income 634 594 6.7 429 1,063 1,161 (8.4) Net Revenues Energy 8,665 10,410 (16.8) 8,154 16,819 20,597 (18.3) Environment 2,410 2,455 (1.8) 1,960 4,370 4,711 (7.2) Total net revenues 11,075 12,865 (13.9) 10,114 21,189 25,308 (16.3) EBIT Energy 756 834 (9.3) 649 1,405 1,748 (19.6) Environment 222 219 1.6 69 291 368 (20.7) Margins % Energy 8.7 8.0 8.0 8.4 8.5 Environment 9.2 8.9 3.5 6.7 7.8 Source: Company Data, PL Research November 11, 2016 3
Income Statement (Rs m) Net Revenue 53,955 55,015 50,225 57,818 Raw Material Expenses 31,377 29,343 29,157 33,661 Gross Profit 22,578 25,672 21,068 24,157 Employee Cost 7,057 7,076 7,602 8,169 Other Expenses 10,886 14,115 9,073 10,413 EBITDA 4,636 4,481 4,394 5,575 Depr. & Amortization 1,341 1,298 1,363 1,431 Net Interest 820 634 784 819 Other Income 1,209 1,346 1,380 1,558 Profit before Tax 3,684 3,894 3,627 4,882 Total Tax 1,708 1,468 1,273 1,593 Profit after Tax 1,976 2,426 2,354 3,290 Ex Od items / Min. Int. (1,471) Adj. PAT 2,458 2,426 2,354 3,290 Avg. Shares O/S (m) 119.2 119.2 119.2 119.2 EPS (Rs.) 20.6 20.4 19.8 27.6 Cash Flow Abstract (Rs m) C/F from Operations 3,181 6,076 (1,705) 1,735 C/F from Investing (672) (433) (620) (442) C/F from Financing (3,523) (4,393) (736) (615) Inc. / Dec. in Cash (1,014) 1,250 (3,061) 678 Opening Cash 4,508 3,494 4,744 1,683 Closing Cash 3,494 4,744 1,683 2,361 FCFF 5,662 5,940 (2,543) 2,105 FCFE 3,809 2,142 (2,543) 2,105 Key Financial Metrics Growth Revenue (%) 5.8 2.0 (8.7) 15.1 EBITDA (%) 6.0 (3.3) (1.9) 26.9 PAT (%) (0.1) (1.3) (3.0) 39.7 EPS (%) (0.1) (1.3) (3.0) 39.7 Profitability EBITDA Margin (%) 8.6 8.1 8.7 9.6 PAT Margin (%) 4.6 4.4 4.7 5.7 RoCE (%) 8.2 10.4 10.3 12.9 RoE (%) 11.5 10.6 9.4 12.2 Balance Sheet Net Debt : Equity (0.3) (0.5) (0.4) (0.4) Net Wrkng Cap. (days) 42 15 (58) (50) Valuation PER (x) 20.6 21.7 17.0 EV / Sales (x) 1.8 1.7 1.9 1.6 Earnings Quality Eff. Tax Rate 46.4 37.7 35.1 32.6 Other Inc / PBT 32.8 34.6 38.1 31.9 Eff. Depr. Rate (%) 6.5 5.8 5.6 5.4 FCFE / PAT 155.0 88.3 (108.0) 64.0 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 21,460 24,293 26,008 27,926 Total Debt 5,534 1,736 1,736 1,736 Other Liabilities 780 998 998 998 Total Liabilities 27,775 27,027 28,742 30,660 Net Fixed Assets 14,741 14,793 15,859 16,427 Goodwill Investments Net Current Assets 12,930 11,762 12,962 14,256 Cash & Equivalents 11,710 14,537 11,476 12,154 Other Current Assets 31,724 33,300 37,267 42,476 Current Liabilities 30,505 36,074 35,781 40,374 Other Assets 104 472 Total Assets 27,775 27,027 28,821 30,684 Quarterly Financials (Rs m) Y/e March Q3FY16 Q4FY16 Q1FY17 Q2FY17 Net Revenue 10,390 12,932 8,145 8,708 EBITDA 989 1,182 637 773 % of revenue 9.5 9.1 7.8 8.9 Depr. & Amortization 160 135 168 166 Net Interest 2 1 7 7 Other Income 131 478 211 289 Profit before Tax 957 1,524 673 888 Total Tax 279 413 221 292 Profit after Tax 679 1,112 452 597 Adj. PAT 679 1,112 452 597 Source: Company Data, PL Research. November 11, 2016 4
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