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Thermax (TMX)
Industrials
Cautious on order inflow cycle. The management was cautious about the capex cycle,
expecting flat yoy inflows versus growth earlier (9MFY11 inflows down 9% yoy). Thermax is a
cyclical stock (unlike peers)—it does not enjoy the benefit of a large backlog with long execution
cycle orders and stable infrastructure segment. Near-term margin pressure may be limited (a
large proportion is tied up) but the stock may face pressure in a weak-demand scenario.
Expansion of business across HRSG, EPC of small/medium utilities and supercritical is positive.
Reduces inflow guidance; product orders lead growth but project remains slower-than-expected
Thermax reported 9MFY11 standalone order flows of Rs40.4 bn (Rs9.9 bn in 3QFY11), down 9%
yoy. The management now expects flat order inflows in FY2011E over last year versus double-digit
growth earlier. The fall in booking activity was due to the absence of large power plant (LPP)
orders in FY2011 post the Meenakshi order. Product segment inflows grew faster than project
inflows which is positive as it (1) reflects strength of core business, (2) reduces dependence on
large orders and (3) may lead to strong near-term execution (short-cycle business).
Mgmt cautious on capex cycle, deeply cyclical stock; highlight risk of margin pressure
The management cited recovery in certain sectors (steel, cement) while remaining cautious on the
capex cycle related to increasing inflation, slowdown in government spending etc. Thermax is a
deeply cyclical stock as it does not enjoy the benefit of a large backlog with long execution cycle
orders and a stable infrastructure segment. It saw flat revenues over the past three years contrary
to other capital goods companies (L&T: 22% CAGR; large backlog with relatively long execution
cycle, CRG: 16% CAGR; diversified business across geographies and segments). Near-term margin
pressure may be limited but may face pressures in a weak-demand scenario.
Expansion of opportunities across product and project segments such as HRSG, EPC, supercritical
Thermax is expanding its opportunity set across various segments such as (1) HRSG: exploring a
potential tie-up with Siemens, (2) EPC business for small and medium sized utilities, and (3) JV with
Babcock and Wilcox supercritical boilers —the company expects to be a serious contender for
orders from Sept-11E with a view that manufacturing facility would be ready by Sept-12E, and (4)
JV with SPX to cater to large-sized ESPs (>300MW) and air pollution control systems.
Retain BUY on expansion of business opportunity, strong balance sheet
We revise our estimates to Rs.32.7 and Rs38.4 for FY2011E and FY2012E, respectively, and our
target price to Rs805/share. We reiterate our BUY rating based on (1) strong expansion of business
opportunity with HRSG, EPC of small/medium sized utilities, supercritical JV etc., and (2) strong
balance sheet. Key risks relate to (1) capex-cycle related risks, (2) potential margin pressure and (3)
delay in setting up supercritical JV facility and winning large utility orders.
Lack of large utility orders pulls down the energy segment
Total orders in 3QFY11 at consolidated level were Rs12.3bn, down 20% yoy. At a
standalone level, total orders were reported at Rs9.8bn (down 30% yoy) versus Rs13.7 bn a
year ago. The management attributed the fall to lack of any incremental large power plant
orders leading to a fall of 38% in energy orders. It highlighted that it is in discussions for
few LPP orders, which it expects to finalized in the fourth quarter. The orders for
environment segment grew 8% to Rs2.94bn this quarter.
Management reduces full year order guidance to FY2010 levels
The management reduced its full-year order flow target to the FY2010 level of Rs58 bn. The
company had earlier guided for double digit growth in FY2011 order booking. We highlight
that for 9MFY11, standalone order flows at Rs40.4 bn are down 8.9% yoy. This implies a
strong order growth requirement of 28% in 4QFY11E to achieve the new guidance.
Products inflows lead growth in this quarter suggesting that core business is kicking
Management cited confidence in product-inflow growth exceeding expectations and
growing faster than project business for the quarter. We believe this is positive as it (1)
reflects strength of the core business, (2) reduces dependence on large orders and (3) may
lead to strong near-term execution as product orders have typically short execution cycle.
Standard products lines showed growth across the board comprising of (1) heating (boilers)
(2) absorption chillers (cooling & chilling), (3) water treatment and (4) air pollution systems.
These product lines have an average execution time of 6-9 months for product versus 12-24
months for project business. We highlight that presently the product segment comprises
about 30-40% of total order backlog.
Steel and cement business drive growth; cost increase passed on protect margins
Thermax reported strong revenue growth of 66% led by strong growth in steel and cement
business. Growth was also aided by low base effect as 3QFY10 revenues had fallen 8%. .
The company also benefitted from execution of large orders nearing completion.
Near-term margin pressure may be limited; but longer-term margins may be at risk
The management highlighted its ability to pass on cost increase to customers in light of
increasing commodity prices. It stressed that the major problem in continuing doing so is not
increasing competition but lack of orders. We see margins coming under pressure if the
present lack of incremental orders continues. Thermax has a 100% fixed cost base and
inability to pass on cost increase would result in margins coming under pressure.
The management aims to ameliorate impact of price increases by going for long term
contracts for most of its raw materials. The management indicated that the rising
commodity prices would impact the margins to only a limited extent (50-100 bps) as a
significant proportion of raw materials (80-85%) for the present order backlog is already
tied up.
Mgmt. seeing strong activity in steel and cement; cautious on capex cycle
The management was very positive on growth in steel and cement business where it is
seeing phenomenal activity and but negative on the hospitality sector. It highlighted on
secondary steel manufacturers including Bhushan Steel and JSW Steel concluding orders
with Thermax and others. The management highlighted its concerns on future capacity
expansion based on (1) increasing inflation reducing disposable income and (2) lack of
liquidity making financial closure of new projects difficult. The management was positive on
business activity in Europe and the Middle East but not so on America.
Thermax is a deeply cyclical stock
We note that Thermax is a deeply cyclical stock as it does not enjoy the benefit of large
backlog with long execution cycle orders and stable infrastructure segment. Thermax
reported relatively flat revenues over the past three years versus other capital goods
companies recorded strong growth during the same period (L&T: 22% CAGR; large backlog
with relatively long execution cycle, CRG: 16% CAGR; diversified business across
geographies and segments).
Expansion in HRSG business with potential tie-up with Siemens
Thermax highlighted Salvi factory becoming fully operational with products being delivered
to Nigeria and Netherlands. Thermax has booked two medium sized orders including an
order for a power plant in Andhra Pradesh for about 120 cr. The management also hinted
for a potential JV with Siemens for HRSG but highlighted it will not be supplying for the
Torrent order which it believes would be likely supplied by Doosan. On the domestic front,
the company hinted muted activity for with GVK power order gone to Korean company and
Reliance power plant already placed on GE ( potentially may go to a US company).
Boiler business improving; ESP segment facing aggressive bidding
Thermax recaptured market share of upwards of 35% in CFBC in this quarter. ESP saw 15%
growth in bookings. Thermax has bid for one of the NTPC projects where a Korean player is
L1, but retreated from other two because of price war. It also cited BHEL is bidding
aggressively for NTPC’s orders.
Environment segment to continue on strong growth path – led by water
The management cited a 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 a strong growth led
by the water segment. The business is operated as three units – municipal, industrial and
products – all of which are expected to show significant growth
Marginal revenue growth but strong ordering required in 4Q to meet estimates
Our estimates build in full-year revenues of Rs45.6 bn in FY2011E, up 43% yoy. This would
imply a revenue growth requirement of about 18% in 4QFY11E. Our full-year EBITDA
margin of 11.9% implies relatively flat yoy margins of 11.9% in 4QFY11E. Full-year PAT
estimate of Rs3.7 bn implies a PAT requirement of Rs1.15 bn in 4QY11E implying a 16% yoy
growth. We would require Thermax to report very strong order flow of Rs17.5 bn (28%
higher than 4QFY10) to meet our full year estimate of Rs58 bn (flat on yoy basis).
Segment projections reasonable as we build moderate growth and execution
We believe our segmental assumptions are reasonable as we have built:
Large power plants. 1-2 utility or large captive orders (up to 300 MW) in FY2011E and
FY2012E each, with a gradual pick-up in execution of large orders. Thermax has already
secured a Rs6 bn captive order in FY2011E. We have assumed that EBIT margin in large
orders would be about 100-200 bps below core energy segment business.
Core energy business. Moderate 10% growth in inflows in the core energy business
(excluding utility orders) with lower execution rate than historical as orders size increases.
Environment segment. Assume 10-15% growth in order inflows in environment
segment with lower execution rate than historical as order size increases.
Revise estimates and target price to Rs805/share; reiterate BUY
We revise our revenue estimates to Rs32.7 and Rs38.4 based on stronger execution in
FY2011E and lower order inflow assumption in FY2011E (flat yoy). We have correspondingly
revised our target price to Rs805 (from Rs910) comprised of (1) Rs730/ share for the core
business (implying 19X P/E on FY2012E EPS - historical average P/E) and (2) Rs75/share for
51% stake in a supercritical JV with B&W.
We reiterate our BUY rating based on (1) likely strong near-term revenue growth, (2) strong
expansion of business opportunities in HRSG, EPC of small/medium sized utilities,
supercritical JV etc and (3) extremely strong balance sheet.
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)
delay in setting up super-critical JV facility and winning large utility orders.
3QFY11 results highlights: Strong quarter significantly ahead of estimates
Revenues: Thermax reported very strong revenues of Rs12.4 bn, up 66% yoy and
significantly ahead (18.5%) of our estimates of Rs9.2 bn.
EBITDA margin: EBITDA margin at 11.8% was broadly inline with our estimate of11.5%
and relatively flat on a yoy basis. Raw material cost as a percentage of sales increased by
about 480 bps yoy in 3QFY11. This was offset by declines in employee cost and other
expenses as percentage of sales.
PAT: Thermax reported a net PAT of Rs1002 mn, up 77% yoy from Rs565 mn in
3QFY10and 17% ahead of our estimate of Rs859 mn.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Thermax (TMX)
Industrials
Cautious on order inflow cycle. The management was cautious about the capex cycle,
expecting flat yoy inflows versus growth earlier (9MFY11 inflows down 9% yoy). Thermax is a
cyclical stock (unlike peers)—it does not enjoy the benefit of a large backlog with long execution
cycle orders and stable infrastructure segment. Near-term margin pressure may be limited (a
large proportion is tied up) but the stock may face pressure in a weak-demand scenario.
Expansion of business across HRSG, EPC of small/medium utilities and supercritical is positive.
Reduces inflow guidance; product orders lead growth but project remains slower-than-expected
Thermax reported 9MFY11 standalone order flows of Rs40.4 bn (Rs9.9 bn in 3QFY11), down 9%
yoy. The management now expects flat order inflows in FY2011E over last year versus double-digit
growth earlier. The fall in booking activity was due to the absence of large power plant (LPP)
orders in FY2011 post the Meenakshi order. Product segment inflows grew faster than project
inflows which is positive as it (1) reflects strength of core business, (2) reduces dependence on
large orders and (3) may lead to strong near-term execution (short-cycle business).
Mgmt cautious on capex cycle, deeply cyclical stock; highlight risk of margin pressure
The management cited recovery in certain sectors (steel, cement) while remaining cautious on the
capex cycle related to increasing inflation, slowdown in government spending etc. Thermax is a
deeply cyclical stock as it does not enjoy the benefit of a large backlog with long execution cycle
orders and a stable infrastructure segment. It saw flat revenues over the past three years contrary
to other capital goods companies (L&T: 22% CAGR; large backlog with relatively long execution
cycle, CRG: 16% CAGR; diversified business across geographies and segments). Near-term margin
pressure may be limited but may face pressures in a weak-demand scenario.
Expansion of opportunities across product and project segments such as HRSG, EPC, supercritical
Thermax is expanding its opportunity set across various segments such as (1) HRSG: exploring a
potential tie-up with Siemens, (2) EPC business for small and medium sized utilities, and (3) JV with
Babcock and Wilcox supercritical boilers —the company expects to be a serious contender for
orders from Sept-11E with a view that manufacturing facility would be ready by Sept-12E, and (4)
JV with SPX to cater to large-sized ESPs (>300MW) and air pollution control systems.
Retain BUY on expansion of business opportunity, strong balance sheet
We revise our estimates to Rs.32.7 and Rs38.4 for FY2011E and FY2012E, respectively, and our
target price to Rs805/share. We reiterate our BUY rating based on (1) strong expansion of business
opportunity with HRSG, EPC of small/medium sized utilities, supercritical JV etc., and (2) strong
balance sheet. Key risks relate to (1) capex-cycle related risks, (2) potential margin pressure and (3)
delay in setting up supercritical JV facility and winning large utility orders.
Lack of large utility orders pulls down the energy segment
Total orders in 3QFY11 at consolidated level were Rs12.3bn, down 20% yoy. At a
standalone level, total orders were reported at Rs9.8bn (down 30% yoy) versus Rs13.7 bn a
year ago. The management attributed the fall to lack of any incremental large power plant
orders leading to a fall of 38% in energy orders. It highlighted that it is in discussions for
few LPP orders, which it expects to finalized in the fourth quarter. The orders for
environment segment grew 8% to Rs2.94bn this quarter.
Management reduces full year order guidance to FY2010 levels
The management reduced its full-year order flow target to the FY2010 level of Rs58 bn. The
company had earlier guided for double digit growth in FY2011 order booking. We highlight
that for 9MFY11, standalone order flows at Rs40.4 bn are down 8.9% yoy. This implies a
strong order growth requirement of 28% in 4QFY11E to achieve the new guidance.
Products inflows lead growth in this quarter suggesting that core business is kicking
Management cited confidence in product-inflow growth exceeding expectations and
growing faster than project business for the quarter. We believe this is positive as it (1)
reflects strength of the core business, (2) reduces dependence on large orders and (3) may
lead to strong near-term execution as product orders have typically short execution cycle.
Standard products lines showed growth across the board comprising of (1) heating (boilers)
(2) absorption chillers (cooling & chilling), (3) water treatment and (4) air pollution systems.
These product lines have an average execution time of 6-9 months for product versus 12-24
months for project business. We highlight that presently the product segment comprises
about 30-40% of total order backlog.
Steel and cement business drive growth; cost increase passed on protect margins
Thermax reported strong revenue growth of 66% led by strong growth in steel and cement
business. Growth was also aided by low base effect as 3QFY10 revenues had fallen 8%. .
The company also benefitted from execution of large orders nearing completion.
Near-term margin pressure may be limited; but longer-term margins may be at risk
The management highlighted its ability to pass on cost increase to customers in light of
increasing commodity prices. It stressed that the major problem in continuing doing so is not
increasing competition but lack of orders. We see margins coming under pressure if the
present lack of incremental orders continues. Thermax has a 100% fixed cost base and
inability to pass on cost increase would result in margins coming under pressure.
The management aims to ameliorate impact of price increases by going for long term
contracts for most of its raw materials. The management indicated that the rising
commodity prices would impact the margins to only a limited extent (50-100 bps) as a
significant proportion of raw materials (80-85%) for the present order backlog is already
tied up.
Mgmt. seeing strong activity in steel and cement; cautious on capex cycle
The management was very positive on growth in steel and cement business where it is
seeing phenomenal activity and but negative on the hospitality sector. It highlighted on
secondary steel manufacturers including Bhushan Steel and JSW Steel concluding orders
with Thermax and others. The management highlighted its concerns on future capacity
expansion based on (1) increasing inflation reducing disposable income and (2) lack of
liquidity making financial closure of new projects difficult. The management was positive on
business activity in Europe and the Middle East but not so on America.
Thermax is a deeply cyclical stock
We note that Thermax is a deeply cyclical stock as it does not enjoy the benefit of large
backlog with long execution cycle orders and stable infrastructure segment. Thermax
reported relatively flat revenues over the past three years versus other capital goods
companies recorded strong growth during the same period (L&T: 22% CAGR; large backlog
with relatively long execution cycle, CRG: 16% CAGR; diversified business across
geographies and segments).
Expansion in HRSG business with potential tie-up with Siemens
Thermax highlighted Salvi factory becoming fully operational with products being delivered
to Nigeria and Netherlands. Thermax has booked two medium sized orders including an
order for a power plant in Andhra Pradesh for about 120 cr. The management also hinted
for a potential JV with Siemens for HRSG but highlighted it will not be supplying for the
Torrent order which it believes would be likely supplied by Doosan. On the domestic front,
the company hinted muted activity for with GVK power order gone to Korean company and
Reliance power plant already placed on GE ( potentially may go to a US company).
Boiler business improving; ESP segment facing aggressive bidding
Thermax recaptured market share of upwards of 35% in CFBC in this quarter. ESP saw 15%
growth in bookings. Thermax has bid for one of the NTPC projects where a Korean player is
L1, but retreated from other two because of price war. It also cited BHEL is bidding
aggressively for NTPC’s orders.
Environment segment to continue on strong growth path – led by water
The management cited a 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 a strong growth led
by the water segment. The business is operated as three units – municipal, industrial and
products – all of which are expected to show significant growth
Marginal revenue growth but strong ordering required in 4Q to meet estimates
Our estimates build in full-year revenues of Rs45.6 bn in FY2011E, up 43% yoy. This would
imply a revenue growth requirement of about 18% in 4QFY11E. Our full-year EBITDA
margin of 11.9% implies relatively flat yoy margins of 11.9% in 4QFY11E. Full-year PAT
estimate of Rs3.7 bn implies a PAT requirement of Rs1.15 bn in 4QY11E implying a 16% yoy
growth. We would require Thermax to report very strong order flow of Rs17.5 bn (28%
higher than 4QFY10) to meet our full year estimate of Rs58 bn (flat on yoy basis).
Segment projections reasonable as we build moderate growth and execution
We believe our segmental assumptions are reasonable as we have built:
Large power plants. 1-2 utility or large captive orders (up to 300 MW) in FY2011E and
FY2012E each, with a gradual pick-up in execution of large orders. Thermax has already
secured a Rs6 bn captive order in FY2011E. We have assumed that EBIT margin in large
orders would be about 100-200 bps below core energy segment business.
Core energy business. Moderate 10% growth in inflows in the core energy business
(excluding utility orders) with lower execution rate than historical as orders size increases.
Environment segment. Assume 10-15% growth in order inflows in environment
segment with lower execution rate than historical as order size increases.
Revise estimates and target price to Rs805/share; reiterate BUY
We revise our revenue estimates to Rs32.7 and Rs38.4 based on stronger execution in
FY2011E and lower order inflow assumption in FY2011E (flat yoy). We have correspondingly
revised our target price to Rs805 (from Rs910) comprised of (1) Rs730/ share for the core
business (implying 19X P/E on FY2012E EPS - historical average P/E) and (2) Rs75/share for
51% stake in a supercritical JV with B&W.
We reiterate our BUY rating based on (1) likely strong near-term revenue growth, (2) strong
expansion of business opportunities in HRSG, EPC of small/medium sized utilities,
supercritical JV etc and (3) extremely strong balance sheet.
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)
delay in setting up super-critical JV facility and winning large utility orders.
3QFY11 results highlights: Strong quarter significantly ahead of estimates
Revenues: Thermax reported very strong revenues of Rs12.4 bn, up 66% yoy and
significantly ahead (18.5%) of our estimates of Rs9.2 bn.
EBITDA margin: EBITDA margin at 11.8% was broadly inline with our estimate of11.5%
and relatively flat on a yoy basis. Raw material cost as a percentage of sales increased by
about 480 bps yoy in 3QFY11. This was offset by declines in employee cost and other
expenses as percentage of sales.
PAT: Thermax reported a net PAT of Rs1002 mn, up 77% yoy from Rs565 mn in
3QFY10and 17% ahead of our estimate of Rs859 mn.
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