Thermax – 2QFY2011 Result Update- Angel Broking

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 Thermax – 2QFY2011 Result Update

Angel Broking maintains a Neutral on Thermax.

For 2QFY2011, Thermax reported above-expectation results, with revenue and

net profit growing by 61% yoy and 65% yoy, respectively. On a consolidated

basis, Thermax has an unexecuted order backlog of `7,276cr, which imparts

strong revenue visibility going forward. We maintain Neutral on the stock.

Revenue and profit report double-digit growth: Revenue for the quarter registered

61% yoy growth to `1,092cr, which was 19% above our expectations of `914cr.

The surge in revenue was attributable to a variety of factors, viz. a strong

contractually deliverable order book, increasing proportion of EPC revenue and

the commissioning of new facilities, which accelerated the company’s execution

capabilities. The energy and environment segments reported above-average

growth during the quarter. On a half-yearly basis, Thermax reported 54% yoy

growth in revenue to `1,881cr, while PAT grew by 55% to `156cr.

Outlook and valuation: Thermax’s recent JVs, viz. Thermax – Babcock & Wilcox

and Thermax SPX Energy Technologies, would enable the company to expand its

product offerings to include supercritical boilers and electrostatic precipitators

(ESPs) in addition to its traditional industrial and subcritical range of boilers.

With increasing number of new enquiries emerging from sectors such as steel,

cement and oil and gas, we believe Thermax is well positioned to exploit the

upcoming opportunities in the domestic capex cycle. At the current price, the stock

is quoting at 29.8x and 23.7x FY2011E and FY2012E EPS, respectively.

We maintain our Neutral view on the stock

Investment arguments

Power sector in India – Solid growth avenues: At present, the energy segment

accounts for ~76% of the company’s revenue. 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 is 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

into strategic alliances with global leaders, which besides plugging in technology

gaps has strengthened its product portfolio. Notable JVs include:

The Thermax – Babcock & Wilcox JV: This JV for supercritical boilers was registered

in 2QFY2011 and the formalities with regards to the transfer of technology are still

in process. Management informs that the land acquisition for the said JV has been

finalised and would be announced shortly. The JV is expected to bid for

supercritical boiler packages in the NTPC bulk tendering from 4QFY2011.

The Thermax SPX Energy Technologies JV: This JV has obtained the qualifications

to bid for ESP packages of the supercritical range associated with NTPC 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’s recent JVs, viz., Thermax – Babcock & Wilcox

and Thermax SPX Energy Technologies, would enable the company to expand its

product offerings to include supercritical boilers and electrostatic precipitators

(ESPs) in addition to its traditional industrial and subcritical range of boilers. With

increasing number of new enquiries emerging from sectors such steel, cement and

oil and gas, we believe Thermax is well positioned to exploit the upcoming

opportunities in the domestic capex cycle. At the current price, the stock is quoting

at 29.8x and 23.7x FY2011E and FY2012E EPS, respectively. We maintain our

Neutral view on the stock.