Thermax - Danstoker acquisition; an eye on the future; event update; Buy: Edelweiss

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Thermax - Danstoker acquisition; an eye on the future; event update; Buy

Thermax (TMX IN, INR 879, Buy)

Event: Thermax announces acquisition of Danstoker (Denmark) for EUR 29.5 mn

Attractive buyout from a strategic long-term perspective

Danstocker specializes in the manufacture of boilers using oil and gas, biomass and waste heat recovery products. The deal valuation stands at 0.7x sales and around 8x EBIDTA on YE Sept, 2010 basis, which we believe is fairly attractive, given Danstoker’s huge potential in terms of its overall product portfolio and strong client reference base across Europe, Middle-East and South East Asia. Thermax now not only  has access to a wide range of products through Danstoker, which will enable it to leverage and reap benefits of both European Union’s aim of 20% energy generation from renewable by 2020, but also to the latter’s global client base for its Indian products. Europe has a total market size of EUR 370 mn annually in the heating segment, of which a large chunk comes from Denmark, Germany and Sweden, where Danstoker has 50%, 20% & 20% market share, respectively.

Acquisition to optimise future revenue mix

The company currently derives around 11-12% of its consolidated revenue from the heating segment at INR 3.8 bn in FY10, which is expected to be INR 4.5 bn in FY11E (ex Danstoker) and around INR 5.7 bn (Including six  months of Danstoker revenues) for FY11E. Management is hopeful of posting INR 10 bn revenue in the next two years in the heating segment, which will be sufficient to keep the overall share of products business (heating) intact, despite a strong growth in the company’s EPC segment.

Outlook & valuations: Attractive long-term bet; maintain ‘BUY’

While Thermax is currently passing through a high growth phase in both profits and future revenue growth visibility, the Danstoker acquisition, we believe, augurs well for its blended business mix, which is now more skewed towards EPC orders. The company expects to balance its revenues mix between products and EPC portion in the medium to long term, which we believe is possible, especially post the recent acquisition. Thermax not only has product and market advantage in terms of the Danstoker business, it also has a huge opportunity of exploring key global markets for its existing domestic portfolio. The stock trades at a PE of 27.0x & 20.5x on FY11E & FY12E earnings, respectively. We maintain‘BUY/Sector Outperformer’ recommendation/rating on the stock.