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THERMAX LTD
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.773
FY12E P/E: 18.2X
q Order intake has continued to remain weak in Q4 FY11 with management
signaling at a significant moderation in order backlog as the company
enters FY12. In view of this, we are revising our FY12 earnings
downwards.
q The company has indicated that order enquiries continue to be healthy,
but a decelerating economic growth amidst higher borrowing costs is
making project investors cautious, thereby resulting longer order finalization.
q Stock has rallied 22% from its low. In view of the earnings downgrade
and limited upside to our target price, we revise rating from BUY to Accumulate
with a target price of Rs 773 (Rs 784 earlier). Premium valuation
is justified on account of strong balance sheet, clean corporate governance
track record and robust cash generation.
Sluggish order intake prompts earnings review
At the beginning of the year, the company had indicated target order intake in
double digits. However, order intake during 9M FY11 declined by 9% to Rs 40.4 bn,
partly due to absence of big ticket orders. During FY11, the company won a single
large order for captive power unit of IOC of Rs 5.8 bn. As against this, there were
three large orders totaling Rs 17.2 bn in FY10 consisting of 1) 270 MW EPC order
worth Rs 10 bn 2) EPC order for 2x60 MW CPP worth Rs 4.8 bn 3) CFBC Boilers for
2x90 MW worth Rs 2.4 bn.
Management has maintained that order enquiries have continued to remain healthy
though order conversion is taking longer partly due to evidence of a slowing down of
industrial activity and higher borrowing costs. The company has indicated that it has
received decent orders from the Cement and Steel industry. The company expects
order intake to gain momentumin FY12 as orders for packaged boilers required in
food processing, hospitality and textiles have continued to remain resilient.
Management has indicated that order intake has been weak in Q3 and Q4 of FY11
but expects a sequential growth in Q4 over Q3. However, the company may end the
year with a modest increase in order backlog. As a result, a significant deceleration
in earnings growth is inevitable in FY12.
Status of supercritical boilers mfg facility
Thermax has been allotted 104 acres of land by the Government of Maharashtra
near Pune. The construction activities has commenced it is expected that the plant
should be up by September 2012. The company plans to start bidding for orders
from the second, third quarter of the current year. The company's equity commitment
for its 51% stake is around Rs 1.8 bn. This along with its other ongoing expansion
projects in environmental engineering should envisage an overall capex of Rs
2.2-2.5 bn in FY12.
The company intends to get itself technically prequalified for 9x800 MW bulk tender
for boilers. However, it is undecided on whether it will participate in the bidding
process.
Material price scenario is manageable - management opines
The management is confident of maintaining margins even in the face of rising
material prices despite most of its orders are fixed priced. This is because it has frozen
the prices for specialized tubes for upto three months delivery. These tubes form
a critical component of boilers. It is well-covered for bulk of the material and component
supply except structural steel which typically forms roughly 15-20% of the order
book. The company is more concerned about any signs of demand shrinkage which
may then result severe price competition and may hurt margins.
Future Initiatives - Nuclear and Solar Power
n The company is positioning itself for emerging opportunity in the nuclear power
arena and intends to partner with the world leaders (Areva, GE and Toshiba) to
co-produce equipments. It also targets the water-treatment business in the
nuclear power sector. However, meaningful traction in the nuclear power business
will be visible only from FY13 onwards.
n The company has also initiated moves in the solar power sector. Thermax is designing
a plant to operate with solar energy, with biomass as support energy
source to meet round-the clock energy requirements. This power plant will be
designed using air condensers to economise on the water requirements for
power generation. Thermax will also manage the operation & maintenance of
the solar thermal power plant at Shive village for a period of five years
n The company has also initiated work on geothermal power and has identified a
site in Maharashtra to utilize geothermal energy to produce power.
Lower order intake prompts earnings revision
The company's order intake has been much lower than anticipated. This will have
negative ramifications for the revenue outlook for FY12. We have accordingly revised
our revenue growth for FY12.
Valuation - Downgrade to Accumulate on recent rally
We downgrade the stock to ACCUMULATE on the back of recent stock upmove
and earnings downgrade.
The strong cash flow from operations supports our DCF based target price of Rs 773
(Rs 784 earlier). At our target price, the stock would trade at 20.2x FY12 earnings.
DCF model Summary (Rs mn)
WACC (%) 13.5
NPV of cash flows 2011-24 56365
TV 24646
Profit growth between FY11-19 (%) 16
One year forward target price 773
Source: Kotak Securities - Private Client Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
THERMAX LTD
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.773
FY12E P/E: 18.2X
q Order intake has continued to remain weak in Q4 FY11 with management
signaling at a significant moderation in order backlog as the company
enters FY12. In view of this, we are revising our FY12 earnings
downwards.
q The company has indicated that order enquiries continue to be healthy,
but a decelerating economic growth amidst higher borrowing costs is
making project investors cautious, thereby resulting longer order finalization.
q Stock has rallied 22% from its low. In view of the earnings downgrade
and limited upside to our target price, we revise rating from BUY to Accumulate
with a target price of Rs 773 (Rs 784 earlier). Premium valuation
is justified on account of strong balance sheet, clean corporate governance
track record and robust cash generation.
Sluggish order intake prompts earnings review
At the beginning of the year, the company had indicated target order intake in
double digits. However, order intake during 9M FY11 declined by 9% to Rs 40.4 bn,
partly due to absence of big ticket orders. During FY11, the company won a single
large order for captive power unit of IOC of Rs 5.8 bn. As against this, there were
three large orders totaling Rs 17.2 bn in FY10 consisting of 1) 270 MW EPC order
worth Rs 10 bn 2) EPC order for 2x60 MW CPP worth Rs 4.8 bn 3) CFBC Boilers for
2x90 MW worth Rs 2.4 bn.
Management has maintained that order enquiries have continued to remain healthy
though order conversion is taking longer partly due to evidence of a slowing down of
industrial activity and higher borrowing costs. The company has indicated that it has
received decent orders from the Cement and Steel industry. The company expects
order intake to gain momentumin FY12 as orders for packaged boilers required in
food processing, hospitality and textiles have continued to remain resilient.
Management has indicated that order intake has been weak in Q3 and Q4 of FY11
but expects a sequential growth in Q4 over Q3. However, the company may end the
year with a modest increase in order backlog. As a result, a significant deceleration
in earnings growth is inevitable in FY12.
Status of supercritical boilers mfg facility
Thermax has been allotted 104 acres of land by the Government of Maharashtra
near Pune. The construction activities has commenced it is expected that the plant
should be up by September 2012. The company plans to start bidding for orders
from the second, third quarter of the current year. The company's equity commitment
for its 51% stake is around Rs 1.8 bn. This along with its other ongoing expansion
projects in environmental engineering should envisage an overall capex of Rs
2.2-2.5 bn in FY12.
The company intends to get itself technically prequalified for 9x800 MW bulk tender
for boilers. However, it is undecided on whether it will participate in the bidding
process.
Material price scenario is manageable - management opines
The management is confident of maintaining margins even in the face of rising
material prices despite most of its orders are fixed priced. This is because it has frozen
the prices for specialized tubes for upto three months delivery. These tubes form
a critical component of boilers. It is well-covered for bulk of the material and component
supply except structural steel which typically forms roughly 15-20% of the order
book. The company is more concerned about any signs of demand shrinkage which
may then result severe price competition and may hurt margins.
Future Initiatives - Nuclear and Solar Power
n The company is positioning itself for emerging opportunity in the nuclear power
arena and intends to partner with the world leaders (Areva, GE and Toshiba) to
co-produce equipments. It also targets the water-treatment business in the
nuclear power sector. However, meaningful traction in the nuclear power business
will be visible only from FY13 onwards.
n The company has also initiated moves in the solar power sector. Thermax is designing
a plant to operate with solar energy, with biomass as support energy
source to meet round-the clock energy requirements. This power plant will be
designed using air condensers to economise on the water requirements for
power generation. Thermax will also manage the operation & maintenance of
the solar thermal power plant at Shive village for a period of five years
n The company has also initiated work on geothermal power and has identified a
site in Maharashtra to utilize geothermal energy to produce power.
Lower order intake prompts earnings revision
The company's order intake has been much lower than anticipated. This will have
negative ramifications for the revenue outlook for FY12. We have accordingly revised
our revenue growth for FY12.
Valuation - Downgrade to Accumulate on recent rally
We downgrade the stock to ACCUMULATE on the back of recent stock upmove
and earnings downgrade.
The strong cash flow from operations supports our DCF based target price of Rs 773
(Rs 784 earlier). At our target price, the stock would trade at 20.2x FY12 earnings.
DCF model Summary (Rs mn)
WACC (%) 13.5
NPV of cash flows 2011-24 56365
TV 24646
Profit growth between FY11-19 (%) 16
One year forward target price 773
Source: Kotak Securities - Private Client Research
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