Thermax International Installations
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Transcript of Thermax International Installations
Satyam Agarwal ([email protected]); +91 22 39820 5410
Deepak Narnolia ([email protected]); +91 22 3029 5126
CMP: INR577 TP: INR770 Upgrade to Buy
ThermaxBSE SENSEX S&P CNX
19,982 6,049
Bloomberg TMX IN
Equity Shares (m) 119.2
M.Cap. (INR b)/(USD b) 68.7/1.3
52-Week Range (INR) 640/402
1,6,12 Rel. Perf. (%) -7/-4/-2
To benefit from structural trends in the economyPeriod of exciting readjustment in Energy and Environment business
Thermax (TMX) is benefiting from few structural trends: (1) continued energy shortages
and increased energy pricing, driving demand for energy efficiency products, (2) hunt
for alternative energy, given demanding regulations and improving viability, (3) increased
environmental concerns and stringent regulatory intervention, (4) currency depreciation
leading to increased possibilities of exports (currently at 22% of revenues), etc.
There are also initial signs that the capex environment in base sectors (like Food
Processing, Pharmaceuticals, Textiles, Chemicals, Engineering, etc) is improving. Few
large Cement / Refinery projects are likely to be awarded in 1HFY14, leading to
improved trend in Gross Fixed Capital Formation (GFCF).
We expect TMX to report acceleration in revenue growth, driven by improvement in
GFCF (particularly in base industries) and interplay of several structural trends. The
company's revenues have been largely stagnant over FY11-13, impacted by
macroeconomic volatility, and we expect 15% CAGR over FY13-15. While exports would
grow at 27% CAGR, the domestic business is likely to grow at 11% CAGR.
We believe TMX is uniquely positioned to benefit from the current trends, which will
enable it to make a transition to the 'Big League' in the next economic upturn. We
expect TMX to report earnings CAGR of 22% over FY12-15. The stock quotes at 20x
FY14E and 15x FY15E EPS. We upgrade the stock to Buy, with an upgraded price target
of INR770 (upside of 33%).
Valuation summary (INR b)Y/E March 2013E 2014E 2015E
Net Sales 54.5 62.2 73.1
EBITDA 4.5 5.5 7.0
Adj PAT 3.1 3.5 4.6
EPS (INR) 26.0 29.2 38.9
EPS Gr. (%) (23.3) 12.4 33.2
BV/Sh. (INR) 157.8 176.5 200.3
RoE (%) 17.8 17.8 21.0
RoCE (%) 15.1 16.5 20.0
Payout (%) 26.9 30.8 33.4
Valuation
P/E (X) 22.2 19.8 14.8
P/BV (X) 3.7 3.3 2.9
EV/EBITDA (X) 13.5 10.2 7.4
Div Yield (%) 1.2 1.6 2.3
24 January 2013
Update | Sector: Capital Goods
Within India, TMX has a dominating market share of ~25-35% in most of the
segments it operates in (except water, where the market share is 10-15%).
Atempts being made to bridge the gap.
Possibly managing
transition to ‘Big League’
driven by:
New growth areas:
Water, Renewables,
Exports, Gas
equipments
Structural trends:
Energy pricing,
Regulations,
Environmental
concerns
TMX has emerged as a global player in various products like vapour Absorption
Chillers, Heating, Heat Recovery Steam Generators, etc. Still, apart from
absorption chillers, its market share in overseas geographies stands at just
2-3% in most product segments. We believe that the recent currency movements
provide opportunities to expand the contribution of the overseas business.
Green portfolio comprises ~30% of revenues, Exports at 22%, Standard products
at 35-40%. Many of these portfolios benefit from the structural trends in the
economy and also provide support in down-cycle.
During the current downcycle (FY10-13), it has absorbed various technologies
and acquired companies (including access to overseas markets) to enhance
the product offerings.
TMX: KEY GROWTH DRIVERS
TMX: Managing transition to the 'Big League' in the next economic upturn (Revenues - INR b)
A
B
Thermax
24 January 2013 2
Power shortages increase steadily (Base power deficit, ttm) Power prices, in recent bids, have increased meaningfully
Currency movements have increased competitiveness of Indian manufacturing
Over CY11/CY12, the INR has depreciated 20% vis-à-vis
the USD and 29% vis-à-vis the CNY. Over a five year
period, the INR has depreciated 37% vis-à-vis the USD
and a whopping 63% vis-à-vis the CNY. These currency
An important structural driver is that the energy scenario
in India has changed: availability of energy is constrained
(increasing power deficits), price of energy has increased
(tariff increases of 15-20% over the last 18 months by
Meaningfully increased demand for energy efficiency products
INR v/s USD and INR v/s CNY for five years
Structural trends
SEBs), and government regulations are becoming
demanding. We believe these changes will drive an
increasing trend towards energy efficiency products,
even for existing operations.
movements, particularly over the last two years, have
provided an opportunity to improve product exports
from India quite meaningfully.
(% YoY)
Thermax
24 January 2013 3
Government regulations have started becoming more demandingEnergy efficiency An important driver for waste heat recovery products will be 'The National Mission for Enhanced Energy
Efficiency' (NMEEE), which covers all the large energy consuming sectors. These industries are required
to lower their energy consumption levels by specific percentage points till 2015 and credible savings in
energy consumption can be traded on the power exchanges through energy efficiency certificates.
Biomass As against a biomass power capacity potential of 18,000MW, the installed capacity in India stands at
just ~1,800MW. Several states have offered various incentives. MNRE plans to shortly launch The National
Bio Energy Mission to act as a platform for achieving this potential, and envisages a capacity addition
of 9,950MW by the end of the 13th Plan (FY22).
Solar The Jawaharlal Nehru National Solar Mission (JNNSM) released its phase-2 draft policy in December
2012, which envisages addition of 9GW capacity during FY13-17. Of this, 6.3GW will be solar PV and
2.7GW will be solar thermal.
Renewable purchase Several state governments have also imposed renewable purchase obligation (RPO) mandates on
obligations for captive users, which has led to incremental costs to be offset through purchase of Renewable Energy
captive users Certificates from the power exchanges. Setting up of solar thermal applications for process applications,
also provides a cost effective mechanism to the industries for offsetting the increased costs.
Water Civic administration makes it mandatory for several industries, commercial establishments like offices,
hotels, etc, and even large residential complexes to have their own effluent / sewage treatment facilities.
TMX is a key player in this segment. Recycling of water is again an important driver, and there exist
pressures on many companies to build water recycling facilities.
Source: Company, MOSL
TMX has used the current downturn to prepare for the next upturn
TMX: Key technology tie-ups; also provide access to new geographies
Balcke-Durr GmbH Electrostatic ESPs for industries and power plants upto 300MW; overseas markets that TMX
Precipitators Precipitators would focus on include South East Asia, Middle East and Africa
Georgia-Pacific Chemicals Chemicals Performance enhancing chemicals in paper industry
GE Water, USA Water and Waste Ultra-filtration and membrane bioreactor technology for waste water
Water Treatment treatment for commercial and industrial use, and distribution of GE reverse
osmosis membranes
Wehrle Umwelt GmbH Water and Waste Hard to treat industrial biological and chemical oxygen effluents to address
Water Treatment manufacturers of pharmaceutical products, bulk drugs, dyes & pigments,
chemicals
SPX, USA Electrostatic JV, with TMX holding 51%, for ESPs for power plants >300MW
Precipitators
Babcock and Wilcox Supercritical Boilers Supercritical boilers for 300MW+ range
Lambion Energy Solutions Biomass Biomass combustion; TMX will have exclusive license to market heating systems
Combustion in India and SAARC countries, South East Asia, Middle East and Africa
Amonix Inc Concentrated TechnologyAmonix will offer solar power generation systems and TMX will be
Photovoltaic the EPC partner
Rifox (Acquisition) Steam Traps Steam traps and allied steam accessories manufacturer; will enable heating
and cooling business to extend portfolio in Europe, SE Asia and Middle East
Danstoker (Acquisition) Heating Packaged boiler business, including biomass and waste heat recovery boilers;
also enable to introduce products in Europe
Source: Company, MOSL
TMX is one of the few examples of a product-driven
engineering company from India. During the current
downturn (FY10-13), it has acquired / absorbed various
technologies. Many of its technology tie-ups also
provide opportunities to completely indigenize the
technology and access to overseas markets.
Thermax
24 January 2013 4
TMX: Track record of in-house innovationsTMX MD and CEO, MS Unnikrishnan was honored with
the 'Asia Innovator Award' at the 11th CNBC Asia
Business Leaders Awards in 2012. The citation notes that
he was awarded "for his inventive thinking in business
and his leadership in an organization that has innovation
at its core".
Spent wash fired boiler for distilleries
Municipal solid waste fired boiler for urban waste disposal
Waste heat recovery boiler for cement plants
Internal recirculation circulating fluidized bed boiler for power generation
Compact hot water fired chiller that fits into building basements and saves commercial establishments a lot in real estate
Solar based cooling solutions by integrating vapor absorption machines with Thermax solar concentrators; developed the
world's first triple effect absorption chiller - commissioned at National Solar Research Center on Solar Energy
Solar biomass hybrid distributed power generation plant capable of being operated in rural conditions
Working on range of products for the emerging market for solar energy based heat recovery systems
Source: Company, MOSL
Thermax
24 January 2013 5
Mega trends: Period of exciting re-adjustment in Energyand Environment business
Despite the constrained investment climate, TMX is benefiting from few structural
trends: (1) continued energy shortages and increased energy pricing, driving demand
for energy efficiency products, (2) hunt for alternative energy, given demanding
regulations and improving viability, (3) increased environmental concerns and
stringent regulatory intervention, (4) currency depreciation leading to increased
possibilities of exports (currently at 22% of revenues), etc. These trends have
accentuated in the last 12-18 months but given the inertia in the system, capex
finalizations took time. Now as the perception increasingly moves towards these
changes being structural, rather than cyclical, we believe that we are fast approaching
the time period when the project finalizations should start accelerating.
#1: Meaningfully increased
demand for energy
efficiency products
#2: Currency depreciation,
coupled with access to
products / markets, has
improved possibilities
to meaningfully
expand exports
#3: Hunt for alternative
energy, given regulatory
support and improving
viability
#4: Reduced water
availability and stringent
regulatory intervention
Source: MOSL
Meaningfully increased demand for energy efficiency products
An important structural driver is that the energy scenario in India has changed:
availability of energy is constrained (increasing power deficits), price of energy has
increased (tariff increases of 15-20% over the last 18 months by SEBs), and government
regulations are becoming demanding. We believe these changes will drive an
increasing trend towards energy efficiency products, even for existing operations.
Catalyst #1
TMX: Mega trends driving robust business momentum
Thermax
24 January 2013 6
Power deficits, and thus shortages, increase steadily in Southand North India (ttm) Power prices, in recent bids, have increased meaningfully
Source: Company, MOSL
TMX business drivers - led by energy shortages and increased power prices
Captive power becoming an important business model
Post the increase in industrial tariffs by 15-20% in several
key states, captive power plants based on imported coal
have become viable. In most of the industrialized states
like Maharashtra, Gujarat, Tamil Nadu, etc, the industrial
tariffs now stand at over INR6/unit, while the cost of
generating power from a captive plant is INR4.5-5/unit.
We believe that increasingly, companies will again start
setting up excess captive power capacities, as despite open
access not being permitted, states continue to be short of
electricity. Captive power is again becoming an important
business model.
Also the 5-15MW segment will start witnessing traction
given the continued power shortages.
Industrial cogeneration driven by need for energy efficiency
Cogeneration in India till date has been largely promoted
as bagasse based. Industrial cogeneration, also known
as waste heat recovery, has a potential of ~20,000MW and
it is believed that just 6-7% of this potential has been
tapped. Given the higher energy prices and also the policy
thrust towards energy efficiency, several industrial units
will have to put up waste heat recovery plants.
Also, an important driver is government regulation, under
'The National Mission for Enhanced Energy Efficiency'
(NMEEE). NMEEE covers large energy consuming sectors
like steel, aluminum, chlor alkali, textiles, pulp and
paper, fertilizers, cement, and petchem. These industries
are required to lower their energy consumption levels by
specific percentage points till 2015, from the baseline
levels of 2010. Also, under the scheme, credible savings
in energy consumption can be traded on the power
exchanges through energy efficiency certificates.
Fuel conversion projects becoming a potential opportunity
Fuel conversion projects in existing boilers could also
become an important driver, as projects designed on
domestic coal linkages will have to increasingly blend
imported coal / alternative fuels, given the continued
shortages.
The conversion is also necessary to improve the
competitive dynamics of the end user industries.
Alternative energy and efficiencies
Hunt for alternative energy is also an important trend and
TMX derives ~30% of its revenues from Green products.
Energy efficiency is also driving businesses like vapor
absorption chillers, etc for TMX.
Source: Company, MOSL
Thermax
24 January 2013 7
Waste heat recovery
Sponge Iron
Coke Oven
Non Ferrous Industry
Refinery and Petchem
Cement
Chemical Plant
Sulphur Recovery Plant
Exhaust Gas Boiler
Hydrogen Plant
Glass Furnace
Spent wash fired boilers
Boilers and heaters
Biomass fired boiler
Blast furnace gas / lean gas fired boiler
Waste gas fired boiler
Indian power sector: Reforms process tardy, consensus yet to emerge on key variables
Enter the PMO: Emerging like a Phoenix
(February 8, 2012)PMO directive on COAL FSAs
(February 21, 2012)
Pace of reforms tardy
(December 4, 2012)
The Prime Minister’s Office (PMO) intervened to
resolve the logjam in Fuel Supply Agreement (FSA) by
Coal India in January 2012. This period also marked
heightened news flow/activity on Discoms’
restructuring, proposal to alter bidding document
(CBD), possibility of coal price pooling etc. However, a
year later, there is plenty to achieve - F inancial
Restructuring Plan (FRP) yet to be adopted by states
(approved by the Cabinet though only in November,
compared to earlier expectation of July), new CBD is
not yet finalized (fuel cost pass-through), tussle still
remains on FSAs and coal price pooling. Pace of reforms
has been disappointing, in our view.
However, key positives have been regular tariff revision
by loss-making Discoms (FY12 average tariff hike of
15%), fuel adjustment surcharge being adopted by most
Discoms, improving coal supply to power sector (up 11%
YoY in 1HFY13) and revival of power demand (up 8.8% in
YTDFY13, and 8.8% in FY12 v/s mere 4% in FY11).
Government push inevitable to resolve issues
Power sector in India remains a state subject and thus
taking all states on the same footing on critical aspects
like pooling, FRP etc remain key to the sector’s revival.
Power sector’s exposure to banks/NBFC is huge (at
~INR6t, bank’s lending to sector is INR3.3t or 7.7% of
gross bank credit) and persistent delays in resolving
issues could increase the risk of distressed assets.
State governments like Odhisa and West Bengal have
publicly opposed coal price pooling and the matter has
now been referred to the Cabinet for decision, while
non-finalization of new CBD has delayed the process of
new/fresh bids. Also, from a long term perspective, the
ramp-up in domestic coal production remains crucial
and hence the need for seamless environment/forest
clearance. Concerted government action is critical to
address the contentious issues.
TMX derives ~30% of revenues from Green ProductsHunt for alternative
energy is also an
important trend and TMX
derives ~30% of its
revenues from Green
products. These include
waste heat recovery,
vapor absorption chillers,
biomass, spent wash
boilers (for distilleries),
etc.
Thermax
24 January 2013 8
Currency depreciation, coupled with access to products / markets, hasimproved possibilities to meaningfully expand exports
Over CY11/CY12, the INR has depreciated 20% vis-à-vis the USD and 29% vis-à-vis the
CNY. Over a five year period, the INR has depreciated 37% vis-à-vis the USD and a
whopping 63% vis-à-vis the CNY. TMX derives 22% of its revenues from exports
(including deemed exports), but this percentage has been fairly stable over the last
decade. The company has expanded its product range / market access quite
significantly over the last 3-4 years. In most product segments, TMX has a market
share of just 2-3% (except absorption chillers) in the overseas markets largely due to
intense competition. We believe that currency movements, particularly over the last
two years coupled with tech tie-ups, provide an opportunity to accelerate product
exports from India.
Catalyst #2
Currency movements provide an opportunity to accelerate product exports from India
Over the last few years, TMX has emerged as a global player in various products like vapor
absorption chillers, heating, heat recovery steam generators, etc, which opens up interesting
export opportunities.
Also, most of its technology tie-ups and license agreements entail access to overseas
markets, particularly in Asia, Africa and the Middle East.
The recent acquisitions of Rifox (steam traps) and Danstoker (heating business) provide
opportunities to access the European and American markets, and to expand offerings in the
heating business.
Source: MOSL
Exports as a percentage of revenues have remained largely stable over the last decade;
expect FY14 to be inflexion point
TMX derives 22% of its revenues from exports (including deemed exports), and this
percentage has been fairly stable over the last decade. Given the access to new
products and new markets, we expect the contribution of exports to improve
meaningfully to 29% of revenues in FY15.
Exports have remained stable, with Energy dominating (INR m) International installations by TMX
Source: Company, MOSL
Water Treatment Plants - 40+
Process Boilers - 50+
Power Boilers - 50+
Air Pollution Control - 200+
Chillers - 300+
Thermax
24 January 2013 9
Recent acquisitions in Europe provide opportunities to expand heating business
Rifox Steam Traps Will enable Heating and Cooling business to extend
portfolio in Europe, SE Asia and the Middle East
Danstoker Heating Mr Unnikrishnan, MD and CEO, TMX had stated in the press
release: "We want Danstoker and Omnical to be the platform
for our expansion in Europe. This means that through Danstoker
we will be able to introduce our products in Europe."
Source: Company, MOSL
Power EPC contracts an important driver, post the initial success
Company Country MW Industry
Lamson Inc Phi l l ip ines 3.5 Corn Starch
Bataan 2020 Phi l l ip ines 12.5 Paper
Under Execution
National Cement Company Yemen 28 Cement
Yemen Co Sugar Refining Yemen 13.5 Sugar
Dangote Industries Zambia 30 Cement
Source: Company, MOSL
Post the acquisitions of
Danstoker and Rifox, TMX
has increased the size of
its heating business by
~50% and has emerged as
one of the top 5 players
globally.
We believe that TMX's
successful execution
track record for EPC
projects also expands
possibilities for more
such contracts.
TMX's initial forays into
Latin America, Canada
and Saudi Arabia are
likely to generate new
orders and business
plans are under
discussion to convert
these into sustainable
markets. Also, there are
possibilities to
meaningfully expand
presence in Europe and
Africa.
Expanding geographic base: Africa and Europe emerging as important markets(# Rank in TMX portfolio)
#1 SEAsia
#2 WestAsia#3
Africa
#4 Europe
Source: Company, MOSL
Most technology tie-ups and license agreements entail access to overseas markets
Balcke-Durr Electrostatic Overseas markets that TMX would focus on include
GmbH Precipitators South East Asia, Middle East and Africa
Lambion Energy Biomass TMX will have exclusive license to market heating systems
Solutions Combustion in India and SAARC countries, South East Asia, Middle East
and Africa
Source: Company, MOSL
Many of TMX's
technology tie-ups
provide opportunities to
completely indigenize
the technology and
access overseas markets.
Thermax
24 January 2013 10
Hunt for alternative energy, given regulatory support and improving viability
Renewable energy also presents interesting possibilities, particularly for TMX, given
integration with industrial and commercial applications. The business is being
supported by government regulations, and also the need to hunt for renewable
energy. Given the increased power tariffs, several renewable energy projects
(including biomass and solar power projects) have started achieving commercial
viability. TMX has positioned itself as the pioneer in several of these products and
technologies in the country through in-house innovation, technology tie-ups and
global acquisitions. We believe that several of these products can become important
revenue contributors over the next three years.
Solar: TMX is the leading player in India
Steam for process applications: TMX's solar concentrators can generate steam, which can be utilized
directly in various process applications (100-210°C).
Steam for absorption cooling: TMX created the world's first triple effect absorption chiller,
commissioned at the National Solar Research Center based on solar energy. In this installation,
for the first time in the world, TMX has integrated a triple effect chiller and solar parabolic
concentrators (collectors), both indigenously developed by the company. This solar cooling
solution could soon find applications across shopping malls, commercial complexes, office
buildings, hospitals and industrial cooling requirements for project sizes ranging from 100KW
to 3,000KW.
Source: Company, MOSL
Biomass: TMX has expanded portfolio offerings meaningfully
Lambion grate technology has been fully indigenised to offer heating applications that use
biomass as fuel. This will also open up markets in SAARC, Indonesia, Middle East, etc for TMX
in biomass combustion.
TMX, post Danstoker acquisition, will be able to increase product offerings in biomass
combustion, as 50% of Danstoker's order booking was from renewable fuel based heating
systems.
Source: Company, MOSL
Applications that harness solar and hybrid forms of energy
TMX, along with Department of Science & Technology and Shive village, has commissioned a
technology demonstration project near Pune, which combines solar thermal with biomass to
provide 24x7 power. 24x7 power would not have been possible through solar alone. This project
has proved the concept of Hybrid Distributed Power Generation Plant capable of being operated
in rural conditions. This is a feasible solution for rural areas with agricultural waste, given that
grid penetration to remote areas will take a much longer time.
Source: Company, MOSL
Renewable energy: Strong regulatory push driving growthBiomass: As against a biomass power capacity potential of 18,000MW, the installed capacity in
India stands at just ~1,800MW. Several states offer various incentives including preferential
tariffs, renewable purchase standards, etc, while the central government offers incentives like
accelerated depreciation, fiscal incentives, etc. MNRE plans to shortly launch the National Bio
Energy Mission and envisages a capacity addition of 9,950MW by the end of the 13th Plan (FY22).
Solar: JNNSM has released its Phase-2 Draft Policy in December 2012, which envisages addition
of 9GW during FY13-17. Of this, 6.3GW will be solar PV and 2.7GW will be solar thermal.
RPO for captive users: Several state governments have also imposed RPO mandates on captive
users, which has led to incremental costs to be offset through purchase of Renewable Energy
Certificates from the power exchanges. Setting up of solar thermal applications for process
applications, also provides a cost effective mechanism to the industries for offsetting the
increased costs.
Source: Company, MOSL
Catalyst #3
TMX is accredited as a
Ministry of New and
Renewable Energy
(MNRE) channel partner
for off-grid and
decentralized solar
applications under
Jawaharlal Nehru
National Solar Mission
(JNNSM).
As against a biomass
power capacity potential
of 18,000MW, the
installed capacity in India
stands at just ~1,800MW.
Breakthrough project
delivering 24-hour
electricity integrating
solar and biomass has
been commissioned.
Due to regulatory push
and increasing energy
prices, renewable energy
is becoming viable.
Solar thermal plates
Thermax
24 January 2013 11
Catalyst #4 Reduced water availability and stringent regulatory intervention
India faces challenges in fresh water supply, sewage systems, and waste water
treatment. TMX operates in three segments: (1) water treatment (as different
industrial processes require consistent and specific quality of water), (2) effluent /
sewage treatment, and (3) water recycling.
There are constraints in terms of fresh water availability for the industry / municipal
corporations, and this is driving orders for water treatment plants. Civic administration
makes it mandatory for several industries and even commercial establishments like
offices, hotels, etc, and even large residential complexes to have their own effluent
/ sewage treatment facilities. TMX is a key player in this segment.
Recycling of water is again an important driver, and there exist pressures on many
companies to recycle water. The TMX-SPX JV has introduced air cooled condensers for
large power plants, which will help reduce water requirement by 90%, and thus,
could be an important product category.
TMX currently has a market share of 10-15% in the water segment, which is lower than
the rest of the portfolio, where it enjoys a market share of 25-35% in India. The
management believes that there exist possibilities for meaningful improvements,
given that the market is opening up and TMX has expanded its product offerings /
customer base in this segment.
Marquee orders by TMX creating a strong reference base
100% market share in 400km length of Delhi Metro [45 reverse osmosis (RO) plants - every
station has 1 RO plant; 35 sewage treatment plants; 20 softeners]
Delhi Municipal Corporation's Civic Center, which is among the largest buildings in India
80% market share in supplying water treatment, wastewater treatment plants for the
Commonwealth Games
T3, Delhi Airport
Sewage treatment cum recycle plant for Sterling's export promotions on SEZ
Source: Company, MOSL
Thermax
24 January 2013 12
Initial signs of improvement in GFCF
TMX's domestic revenues (excluding power EPC) are strongly correlated with gross
fixed capital formation (GFCF) in the economy, with a coefficient of 0.69x since 2004.
Recent trends suggest that the Capital Goods sector is seeing a fresh round of inquiries,
which will possibly take 6-8 months to fructify into actual order intake. As a large part
of the inquiries is from base sectors like Cement, Food Processing, Textiles,
Engineering, Chemicals, Automobiles, Pharmaceuticals, etc, we believe there is a
high probability of their getting converted into actual project awards. In terms of
mega projects, there are pockets of opportunities emerging in segments like
Refineries, Power Generation, etc. However, a broad investment cycle recovery is
still far away, as there are several contentious issues that remain unaddressed.
TMX: Domestic revenues strongly correlated with macro trends
0
6
12
18
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY1
3E
FY1
4E
LPA: 6.9%
TMX's domestic revenues (excluding power EPC) are strongly correlated with gross fixed capital formation, with a coefficient of 0.69x since
2004. We have excluded EPC revenues, as the project business is relatively insulated in the interim periods, given the order backlog.
Manufacturing revival: An event to watchExtract from our January 2013 INDIA STRATEGY report, Happy Times
India's manufacturing sector has virtually collapsed, as reflected in the IIP growth of
1.4% in FY13. This has been the key contributor to India's economic slowdown. The
past few months have raised hopes of a likely recovery in FY14. While the base itself
will be favorable for growth, we believe that few other catalysts that could drive
growth are emerging now:
#1 Monetary easing, lowering cost of funds.
#2 Policy engine to help kick-start several stalled projects, to start new projects.
#3 Favorable currency driving manufacturing exports.
Manufacturing sector seems poised for mean reversion
January 2013 India Strategy (manufacturing IIP % YoY)
Thermax
24 January 2013 13
Upgrading price target to INR770; Upgrade to Buy
We believe TMX is uniquely positioned to benefit from the current trends, which will
enable it to make a transition to the 'Big League' in the next economic upturn. We
expect TMX to report earnings CAGR of 22% over FY12-15. The stock quotes at 20x
FY14E and 15x FY15E EPS. We upgrade the stock to Buy, with an upgraded price target
of INR770 (upside of 33%).
Expect revenue growth to accelerate: We expect TMX to report acceleration in revenue
growth, driven by improvement in GFCF (particularly in base industries) and interplay
of several structural trends. The company's revenues have been largely stagnant over
FY11-13, impacted by macroeconomic volatility, and we expect 15% CAGR over FY13-
15. While exports would grow at 27% CAGR, the domestic business is likely to grow at
11% CAGR (given the constrained investment climate). Quarterly order intake has
bounced back to normalized levels of INR13b-14b and we expect a gradual pick-up in
the domestic market, largely driven by new product introductions.
Estimate margins at 10.7% for FY15: Margins remain the key swing factor, given the
increased competitive intensity. We estimate margins at 10.7% for FY15 (up 59bp
since FY13), supported by increased contribution of exports, lower share of project
business, and focus on productivity improvement / cost reduction initiatives.
NWC to improve meaningfully in FY15: Net working capital (NWC) has deteriorated
meaningfully from 3 days in September 2011 to 15 days in September 2012, given
increased debtors. Despite the constrained environment, TMX has been able to
maintain NWC in a tight range, which is commendable and indicates strict preference
for cash flows. We expect further deterioration to 17 days in March 2013, sustaining at
16 days in FY14. We expect meaningful improvement in FY15, with NWC declining to
3 days, given the expected improvement in investment climate, and hence, customer
advances.
Expect revenue growth at 15% till FY15, driven by exports (INR b)
While exports would
grow at 27% CAGR, the
domestic business is
likely to grow at 11%
CAGR (given the
constrained investment
climate).
Source: Company, MOSL
Thermax
24 January 2013 14
Source: Company, MOSL
Confident of maintaining double-digit margins through cost engineering
Quarterly order intake has bounced back to usual levels of INR13b-14b and we expect a gradual pick-
up in the domestic market, largely driven by new product introductions.
Order intake showing signs of stabilization (INR b)
Competition is intense, but we model 59bp margin expansion till FY15, driven by increased contribution
of exports, lower share of project business and focus on productivity improvement/cost reduction. TMX
has stayed away from projects (like EPC bids for supercritical plants), where risk profile is high or
competitive intensity is strong.
Source: Company, MOSL
Source: Company, MOSL
Trend in margins (TTM; Energy and Environment) TMX raw material cost has high co-relation with steel prices
Thermax
24 January 2013 15
Net working capital has deteriorated, but still in a tight range Trend in standalone and consolidated EPS
Source: Company, MOSL
TMX: SOTP Valuation; upgrade to Buy with an upside of 33%
SOTP INR m INR/share
Standalone 87,868 737 18x FY15E EPS (based on
average multiple across cycles
Subsidiaries 3,510 29 1 x BV of Investments
Target Price 770
Source: Company, MOSL
Source: Company, MOSL
TMX: Business model
Thermax
24 January 2013 16
TMX: Operating matrix
FY11 FY12 FY13E FY14E FY15E
Standalone Order intake (INR m) 53,180 40,300 49,500 60,675 77,498
Energy 41,736 28,830 37,500 46,875 60,938
- Power EPC 15,300 5,169 15,000 20,000 27,000
- Energy Ex Power EPC 26,436 23,661 22,500 26,875 33,938
Environment 11,444 11,470 12,000 13,800 16,560
Order intake growth (%) -8.3 -24.2 22.8 22.6 27.7
Energy (%) -10.0 -30.9 30.1 25.0 30.0
- Power EPC -28.5 -66.2 190.2 33.3 35.0
- Energy Ex Power EPC 5.8 -10.5 -4.9 19.4 26.3
Environment -1.2 0.2 4.6 15.0 20.0
Revenues 50,235 54,360 49,751 56,639 65,862
Energy 38,796 41,509 37,488 42,599 48,940
Environment 11,439 12,851 12,263 14,040 16,922
% YoY 54 8 -8 14 16
Energy (%) 61 7 -10 14 15
Environment (%) 36 12 -5 14 21
Revenue Composition 50,235 54,360 49,751 56,639 65,862
Domestic (excl Power EPC) 24,565 27,530 25,358 28,024 31,152
Domestic (Power EPC) 15,010 15,400 12,500 13,750 15,385
Exports 10,660 11,430 11,892 14,866 19,325
% YoY 54 8 -8 14 16
Domestic (excl Power EPC, %) 22 12 -8 11 11
Domestic (Power EPC, %) 157 3 -19 10 12
Exports 63 7 4 25 30
EBIT Margin (%)
Energy 10 11 10 10 11
Environment 13 12 10 11 12
Source: Company, MOSL
Thermax
24 January 2013 17
Financials and Valuation
Income Statement (INR Million)
Y/E March 2010 2011 2012 2013E 2014E 2015E
Total Revenues 32,742 52,472 60,313 54,540 62,238 73,124
Change (%) -3.8 60.3 14.9 -9.6 14.1 17.5
Raw Materials 20,271 34,803 38,435 34,908 39,459 46,055
Staff Cost 3,300 4,547 5,578 5,439 6,135 6,817
Other Expenses 6,160 8,266 10,795 10,336 11,821 14,083
EBITDA 3,947 5,669 5,919 4,516 5,548 6,966
% of Total Revenues 12.1 10.8 9.8 8.3 8.9 9.5
Depreciation 442 541 663 763 1,220 1,279
Other Income 519 652 830 956 1,028 1,226
Interest 20 45 122 220 583 590
PBT 4,004 5,736 5,964 4,489 4,773 6,322
Tax 1,432 1,965 2,043 1,650 1,928 2,345
Rate (%) 35.8 34.3 34.3 36.8 40.4 37.1
Adjusted PAT 2,568 3,818 4,034 3,096 3,478 4,633
EO Income (net) -1,149 0 0 0 0 0
Reported PAT 1,419 3,818 4,034 3,096 3,478 4,633
Change (%) -50.9 169.0 5.7 -23.3 12.4 33.2
Balance Sheet (INR Million)
Y/E March 2010 2011 2012 2013E 2014E 2015E
Share Capital 238 238 238 238 238 238
Reserves 10,544 12,911 16,055 18,181 20,413 23,246
Net Worth 10,926 13,448 16,671 18,797 21,029 23,862
Loans 80 1,480 2,704 2,704 2,704 2,704
Deferred Tax Liability 144 299 378 378 378 378
Capital Employed 11,099 15,448 20,491 22,361 23,960 26,136
Gross Fixed Assets 7,418 10,678 11,929 13,929 14,929 15,929
Less: Depreciation 2,048 2,825 3,488 4,251 5,471 6,751
Net Fixed Assets 5,369 7,853 8,441 9,678 9,457 9,178
Capital WIP 115 354 2,466 400 400 400
Investments 3,703 2,415 2,395 2,395 2,395 2,395
Curr. Assets 23,712 30,370 33,427 32,445 37,856 47,473
Inventory 2,563 3,657 3,666 3,272 3,734 4,387
Debtors 7,984 10,209 13,707 11,999 12,448 14,625
Cash & Bank Balance 6,702 6,880 6,983 8,156 12,202 17,573
Loans & Advances 3,282 4,015 3,560 3,563 3,871 4,306
Other Assets 3,181 5,610 5,512 5,454 5,601 6,581
Current Liab. & Prov.
Creditors 7,583 8,928 9,690 8,726 9,958 13,162
Other Liabilities 2,359 3,264 5,495 4,848 5,464 6,335
Provisions 1,368 2,782 2,721 2,461 2,808 3,299
Net Current Assets 1,318 4,825 7,190 9,888 11,707 14,163
Application of Funds 11,099 15,448 20,491 22,361 23,960 26,136
E: MOSL Estimates
Thermax
24 January 2013 18
Financials and Valuation
Ratios
Y/E March 2010 2011 2012 2013E 2014E 2015E
Basic (INR)
EPS 21.6 32.0 33.9 26.0 29.2 38.9
Cash EPS 25.3 36.6 39.4 32.4 39.4 49.6
Book Value 91.7 112.9 139.9 157.8 176.5 200.3
DPS 5.0 9.0 7.0 7.0 9.0 13.0
Payout (incl. Div. Tax.) 23.2 28.1 20.7 26.9 30.8 33.4
Valuation (x)
P/E 15.1 22.2 19.8 14.8
Cash P/E 13.0 17.8 14.6 11.6
EV/EBITDA 9.2 13.5 10.2 7.4
EV/Sales 0.9 1.1 0.9 0.7
Price/Book Value 3.7 3.7 3.3 2.9
Dividend Yield (%) 1.4 1.2 1.6 2.3
Profitability Ratios (%)
RoE 24.8 31.9 27.4 17.8 17.8 21.0
RoCE 24.3 29.0 22.9 15.1 16.5 20.0
Turnover Ratios
Debtors (Days) 89 71 83 80 73 73
Inventory (Days) 29 25 22 22 22 22
Creditors. (Days) 85 62 59 58 58 66
Asset Turnover (x) 2.9 3.4 2.9 2.4 2.6 2.8
Leverage Ratio
Debt/Equity (x) 0.0 0.1 0.2 0.1 0.1 0.1
Cash Flow Statement (INR Million)
Y/E March 2010 2011 2012 2013E 2014E 2015E
PBT before EO Items 4,004 5,736 5,964 4,489 4,773 6,322
Add: Depreciation 442 541 663 763 1,220 1,279
Interest 20 45 122 220 583 590
Less: Direct Taxes Paid 1,432 1,965 2,043 1,650 1,928 2,345
(Inc)/Dec in WC 5,283 (3,880) (1,985) (1,524) 2,226 2,915
CF from Operations 8,317 477 2,719 2,297 6,874 8,762
EO Income -1,149 0 0 0 0 0
CF from Oper. Incl. EO Items 7,168 477 2,719 2,297 6,874 8,762
(Inc)/Dec in FA (838) (3,265) (3,361) 66 (1,000) (1,000)
CF from Investments (3,109) (1,976) (3,342) 66 (1,000) (1,000)
(Inc)/Dec in Net Worth 218 423 (1,439) 295 633 579
(Inc)/Dec in Debt 39 1,401 1,224 0 0 0
Less: Interest Paid 20 45 122 220 583 590
Dividend Paid 697 695 1,246 969 1,246 1,800
CF from Fin. Activity (460) 1,084 (1,583) (894) (1,196) (1,812)
Inc/Dec of Cash 3,599 (416) (2,205) 1,469 4,678 5,950
Add: Beginning Balance 3,696 6,702 6,880 6,983 8,156 12,202
Closing Balance 6,726 6,880 7,021 8,452 12,835 18,152
E: MOSL Estimates
Thermax
24 January 2013 19
Capital GoodsReport Gallery
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Disclosure of Interest Statement Thermax1. Analyst ownership of the stock No2. Group/Directors ownership of the stock No3. Broking relationship with company covered No4. Investment Banking relationship with company covered No
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