BUY Thermax: Fine Print ::CLSA

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Fine Print
Thermax’s net working capital increased by Rs2.1bn (from -14% of
revenues in FY10 to -5% in FY11). This was on account of customer
advances falling from 33% of revenues to 20%, as order inflows declined
by 6% YoY. The decline in Ebitda margins for the consol entity (90bps)
was steeper than the standalone (50bps), as Thermax incurred Rs53m
losses in subsidiaries and JVs. We cut our FY12-13 EPS by 3% as we build
in lower margins. We prefer BHEL in generation equipment space.
Working capital rises in FY11, though continues to be negative
Thermax’s current assets fell from 52% of revenue in FY10 to 42% in FY11.
However, customer advances declined sharply from 33% of revenues to 20%,
on account of a 6% fall in order inflows, leading to the working capital
increasing by Rs2.1bn. Despite this, working capital continues to be negative
(-5% of revenues cf. -14% in FY10). As Thermax undertakes more EPC work,
we expect its working capital cycle to lengthen further.
Margin pressure more severe on consol entity
Ebitda margins for the consolidated entity fell by 90bps, to 10.8% in FY11.
Material costs increased sharply (8ppt); the impact was partly offset by a
decline in erection and fabrication charges (-2.5ppt) and other overheads
(-2.6ppt). We believe that this also reflects the change in product mix. We
note that the decline in consolidated Ebitda margins was steeper compared to
standalone margins, which slid by ~50bps. This was on account of Rs53m
losses booked on subsidiaries/ JVs, which includes Rs92m loss on B&W JV.
Progress on B&W and SPX JVs
Management highlighted that construction at manufacturing facility for supercritical
boilers (in JV with B&W) at Shirwal in Satara District (Maharashtra) is
on track; it should become operational by Sep-12. Thermax has invested
Rs492m as equity for its 51% stake so far. We note that the JV has placed
technical bids for NTPC’s 9 x 800MW bulk tender. Similarly, SPX JV has got
qualified to participate in pricing bids for supplying ESPs packages to NTPC.
Prefer BHEL over Thermax in generation equipment space
Thermax faces near term headwinds in the form of delays in finalisation of
orders. In addition, intense competition, higher proportion of EPC work and
higher commodity costs could squeeze margins. At 17.8x FY12 and 15.1x
FY13 PE, Thermax is trading at a significant premium to BHEL and Crompton.
While longer term outlook for Thermax is strong given its strategic
enhancements that allow it to tackle larger projects such as ESP supply,
heating and cooling solutions for combined-cycle gas developments and
environmental products , the valuations already reflect this. We prefer BHEL.