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Key takeaways from our recent meeting with the management
(1) equipment manufacturing JV to start operations in Sept-12E; expect order inflows
next year, (2) expect duty to be imposed once domestic industry has adequate capacity,
(3) believes name plate capacities are unreliable, no overcapacity yet, (4) undecided on
upcoming bulk tender and (4) positive on water business, CFBC boilers, scaling up R&D.
Reiterate BUY on expanding opportunity set, core business traction, strong inflows.
Equipment JV to be ready by Sep-12E, inflows next year; expects import duty on capacity scale up
Thermax management expects the supercritical boiler facility to be operational by Sept-12E and
has acquired 105 acres of MIDC land near Pune. Boiler manufacturing typically starts about a year
after the order is placed and the company plans to start taking orders from next year. Thermax
believes the government is likely to impose import duty on power equipment once adequate
manufacturing capacity has been set up in the country. Thermax believes that power equipment
capacity is not in excess and the actual deliverable may be lower than name plate capacity. Actuals
are based on order inflow timeline and job scheduling, subcontractor and vendor capacity etc.
About 800 MW p.a. sales for pre-tax RoCE of 12%; still undecided about next bulk tender
We believe that for a 12% EBIT return, Thermax needs to have annual sales of about 800 MW.
Thermax believes that eventually there may be 10 to 15 large utilities in the country and Thermax
would need to have a couple of them as utilities order similar equipment repeatedly. Thermax
seemed undecided about upcoming bulk tender despite its eligibility as both partners need to take
a joint call on certain bulk tender specific contract issues.
Positive on environment segment (especially water), CFBC boilers (washery rejects) and R&D
Thermax expects strong growth in the environment segment led by water. The water business was
worth Rs2.5 bn in FY2010, having grown from Rs2 bn in FY2009. Thermax’s water business
operates across broadly three verticals, each worth (Rs1-1.5 bn) viz. (1) point of use, (2) industrial
and (3) municipal sewage treatment plant – all of which are expected to show significant growth.
We retain our earnings estimates of Rs31.5 and Rs42. for FY2011E and FY2012E. We reiterate our
BUY rating (TP: Rs965) based on (1) ) strong expansion of business opportunity across medium size
(upto 300 MW) EPC as well as large supercritical boilers and areas such as environment, (2) likely
strong order inflows and execution, (3) among the best positioned to benefit from growing capex
environment and (4) strong balance sheet, negative working capital, corporate governance among
the strongest and (5) valuations broadly in line with historical.
Equipment JV to start operations in Sept-12; to start taking orders next year
Thermax management expects the supercritical equipment manufacturing plant (JV with
Babcock and Wilcox) would be up and running by September 2012E. The company has
already completed land acquisition for the same (105 acres near Pune) and about 90 people
are working for the joint venture (temporarily on the rolls of Thermax - would be transferred
once the JV formalities such as provident fund registration etc. are in place). Machinery
ordering for the manufacturing plant is going on. Thermax will start taking in orders from
2H of next year - as the manufacturing of boilers typically start a year after an order is won.
The management also indicated that the company may have already quoted for one
proposal in the supercritical manufacturing space (did not mention the potential customer).
Undecided about bidding for 9X800 MW bulk tender for NTPC; joint decision with
the partner
Thermax is still undecided about whether it will bid for 9x800 MW bulk tender from NTPC.
Thermax says it is a joint call with international partner as several issues need to be discussed,
such as Deed of Joint Undertaking and Bank Guarantee to be furnished.
Expects duty to be imposed once domestic industry has adequate capacity
Thermax believes the government has dithered on imposing duty on imported equipment
based on the country’s need for rapid capacity addition and availability of power equipment
for the same. Once adequate manufacturing capacity has been set up in the country,
requisite imports duty would be imposed to protect domestic manufacturers from unfair
competition from Chinese power equipment manufacturers. India would not like to remain
dependant on Chinese equipment in a vital infrastructure sector.
Believes that name plate capacities are unreliable, no overcapacity as yet
Thermax believes power equipment capacity is not in excess and the actual deliverable
capacity may be lower than the name plate capacity. Deliverable capacities depend upon
order inflow timing, scheduling of jobs on the shop floor, subcontractors, vendors for critical
subcomponents and raw materials etc. Thermax believes there is a long term business
opportunity in the Indian market and there is no need to be impatient about near-term
order inflows.
We agree that nameplate capacities communicated by different manufacturers may not
necessarily be equivalent to deliverable capacity, however, we believe visibility on
incremental capacities in power equipment has increased with Bharat Forge-Alstom and JSW
Toshiba participating in the turbine tender of NTPC. Most likely, they would get respective
portions of orders which also mandates manufacturing set up as part of the orders.
About 800 MW annual sales required to generate a pre-tax RoCE of 12%
For a 12% EBIT return, we believe Thermax needs to have annual MW sales of about 800
MW p.a. Thermax believes that eventually there may be 10 to 15 large utilities in the country
and Thermax would need to have a couple of them as customers. Thermax believes
customers would typically order similar equipment repeatedly.
The boiler equipment JVs would require a potential capital investment of about Rs8 bn.
Adding a further Rs2 bn or so (about 15% of likely annual sales) would imply total capital
employment of about Rs10 bn for the equipment JV. A pre-tax return on capital employed
of about 12% would require EBIT of about Rs1 bn - implying annual sales of about Rs12 bn
(assuming 12% EBITDA margin and 10% EBIT margin). At a realization of about Rs15 mn
per MW, Rs12 bn of sales would require MW sales of about 780-800 MW per annum
implying a market share of about 4-5% in a total annual market share of about 18-20 GW.
Presence in water business across three verticals—each business being Rs1-1.5 bn
The management cited very strong traction in the environment segment both in terms of
revenue recognition as well as order inflows. All three parts of this segment (Air pollution,
water & waste treatment and Resins & chemical) are expected to record strong growth led
by the water segment. We note that Thermax’s water business was worth Rs2.5 bn in
FY2010 having grown from Rs2 bn in FY2009. Thermax’s water business operates across
broadly three verticals viz. (1) point of use, (2) industrial and (3) municipal sewage treatment
plant—all of which are expected to see significant growth.
Water and waste water treatment business also exhibited strong 24% yoy growth in FY2010
and constituted about 30% of the segment revenues (versus 25% in FY2009).
Positive on CFBC boilers as increased coal consumption would imply higher washery rejects
Thermax is looking forward to increasing utilization of its CFBC technology based boilers.
Thermax believes that as larger coal based units are set up, they would need washed coal
with higher calorific content, which would make coal washeries mandatory. Washery rejects
with calorific value of 1,800 Kcal/kg can be burnt effectively in CFBC boilers. We understand
that CFBC boilers provide higher residence time for coal in the boiler providing more time
for coal to burn in the CFBC boilers. We note that Thermax had won orders worth Rs19-20
bn from four customers for its CFBC boilers recently
Three types of innovation: product improvement, emerging opportunities and
blue sky
Thermax categorizes its R&D based on three end objectives viz.
` Product improvement – to defend position in current products from competition
` Emerging opportunities – higher scale pollution control equipment
` Blue Sky – would lead to patents in the near-term but actual business build may be 3-5
years away.
Thermax intends to scale up research and development expenditure and had spent Rs142
mn on R&D in FY2010.
Reiterate BUY (TP: Rs965) on core business traction and strong inflows
We have retained our earnings estimates of Rs31.5 and Rs42.3 for FY2011E and FY2012E
respectively. Our target price of Rs965/share is comprised of – (1) Rs890/ share for the core
business (implying 21X P/E on FY2012E EPS) and (2) Rs75 for 51% stake in a super critical JV
with B&W. Thermax has traded at an average P/E of 18X over the last five years and we have
used a 15% premium to historical average on evidence of scale up towards (1) full EPC of
larger captive/small utility plants in standalone and (2) supercritical utility plants through JV.
We reiterate our BUY rating on the company based on (1) strong performance in 2Q;
including strong order inflows and outlook raising comfort for full year FY2011E and
FY2012E estimates, (2) strong expansion of business opportunity: company reported positive
performance on scale up in supercritical JV + expansion in product portfolio to include items
such as ESP and heat transfer equipment, (3) extremely strong balance sheet, negative
working capital, among the strongest corporate governance and (4) among the best
positioned to benefit from growing capex environment.
Key risks to our estimates include — (1) slower-than-expected execution of large orders,
(2) margin and working capital pressure as execution of large-sized orders ramp up, and
(3) delays in setting up super-critical JV facility and winning large utility orders.
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