Goldman Sachs: Thermax: Expansion into utility boilers

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Thermax (THMX.BO, Neutral): Expansion into utility boilers – opportunity to build scale
Source of opportunity
 We initiate coverage on Thermax with a Neutral rating and P/E based TP of Rs 903 implying 8% potential
upside.
 Thermax has a strong execution track record across the energy (equipment for generating power and steam,
chillers, heaters) and environment (water, air pollution control, and chemicals) segments.

 Key growth drivers
– Recovery in industrial capex: We expect capex recovery across the cement, steel, and refinery
segments driving demand for captive power plants, especially renewable fuel and waste heat recoverybased
plants.
– Upcoming orders in the supercritical power equipment space: Thermax’s joint venture with Babcock
& Wilcox positions the company well to benefit from this important large-sized order pipeline – however,
we believe these orders could be at lower margin and return levels than the company’s existing
business.
– Environment segment: Various technical collaborations have enabled Thermax to build a portfolio of
capabilities in water treatment and air pollution control that could be a key advantage as the market for
such products expands in India.
 The strong traction in order inflows over the last five quarters, driven by industrial capex, has improved
revenue visibility, and we expect an EPS CAGR of 35% over FY10-12, higher than the 31% for FY05-10.
 However, the stock has risen sharply ytd – up 37% vs. the BSE Sensex (up 10%) – and now factors in
improving revenue visibility and strong growth prospects, in our view. Hence, we initiate with a Neutral
rating on the stock.

Valuation
 Thermax currently trades at a 12-m fwd P/E of 22.9X – at a 13% premium to its 5-yr average 12-m fwd P/E of
20.8X. This premium valuation adequately builds in the strong growth outlook for the company, in our view.
 Our 12-m TP of Rs903 is based on 22.9X FY12E. This is a 10% premium to its 5-year average P/E as we expect
a 35% EPS CAGR over FY10-12, higher than the FY05-10 EPS CAGR of 31%.

Key risks
Upside:1) Better-than-expected order inflows in the energy segment; 2) Stronger traction in the environment
segment leading to better-than-expected margins.
Negative: 1) Delay in capacity expansion plans/capex from companies 2) Volatile commodity prices, 3) Surplus
grid power situation in India earlier than anticipated.



Energy segment to continue to be the key driver of growth
Our GS Equity Utilities analyst expects the supply demand mismatch that currently exists in the Indian power segment will continue
to persist till FY2013E. With industrial users accounting for about 45% of the overall power consumption in the country, we expect
these users to continue to invest in captive power. Thus, in our view, the sub-300 MW captive EPC projects will be the key medium
term growth driver for Thermax.



Traction in order booking over the last five quarters has improved business visibility
The faster execution cycle on a majority of Thermax’s order book implies that a strong order inflow is critical to sustain growth.
Order inflows have moved up to a higher trajectory over the last 5 quarters. We expect strong sales growth in the seasonally
stronger 2HFY11E, on the back of this strong order backlog. 44% of our FY11 order inflow estimate has already been achieved.


Company background
Thermax Ltd provides a range of engineering solutions to the energy and environment sectors – with a special focus on cleanenergy
based solutions. The Energy segment’s products include boilers and heaters, absorption chillers/heat pumps, power plants
and solar concentrators. Products covered under the Environment segment include air pollution control equipments/systems, water
and waste recycle plants, ion exchange resins and performance chemicals. During fiscal 2010, Thermax signed two joint venture
agreements, one with SPX Netherlands BV for air pollution control equipment, and with Babcock & Wilcox Power Generation Group,
Inc. to manufacture supercritical boilers for the Indian power sector. The supercritical power equipment manufacturing facility is
expected to be commissioned in March 2012, enabling Thermax to benefit from the huge order inflows expected in the super critical
power equipment space in India. The SPX JV and other technical collaborations in the environment segment have helped the
company build up a strong portfolio of products and services in the segment and could potentially be a key advantage in winning
orders in this segment in the longer term.
Thermax recently acquired Danstoker – a manufacturer of industrial boilers and waste heat recovery systems in Europe. Danstoker’s
focus on renewable energy sources is expected to provide Thermax with new technologies