Thermax Channel check on the captive power market ::Prabhudas Lilladher

Interaction with ISGEC: We interacted with ISGEC (formerly John Thompson),
the key competitor to Thermax (TMX) in the captive power market. Key
highlights are: 1) Good enquiry levels in plants upto 30-50MW from domestic
markets; however, enquiries for large plants are limited 2) Demand largely
coming from small industries like Food processing, Textiles, Pharma, Healthcare
etc. 3) Market for small power plants are likely to pick up significantly, given the
power shortage scene (highlighted enquiries coming from unconventional
segments like huge housing complexes) 4) Enquiry levels in export markets are
quite healthy due to a weak rupee (especially Africa) 5) Cethar vessels bidding
for very few projects in markets (augurs well for margins once the market
improves).
! TMX expects a growth in order inflow in FY14 and maintain margins in double‐
digits: TMX has been maintaining its order inflow run-rate of ~Rs12bn per
quarter for the last 3-4 quarters in this environment. Even in the current
quarter, the company is confident of maintaining a healthy order inflow runrate.
The company is quite confident of growing order inflow in FY14 by 8-10%
even on a higher base. The key sectors which the company is looking at for
order inflow includes Steel, Cement, Oil&Gas. The optimism is largely coming
from visible pipeline of orders, good enquiry levels and expectation of recovery
in the second half of FY14. The company is also looking at improved traction in
export markets like Middle East, Africa and South East Asia. While the company
acknowledges the fact that margins are under pressure due to high competition
in the market, it believes double-digit margins could be maintained due to tight
cost controls by the management and increased contribution from export
markets.

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! Working towards being a US$2bn in sales over the next 4‐5 years: TMX aspires
to become a US$2bn company over the next 4-5 years from US$1bn currently.
The journey will largely be driven by increasing application of the current
product portfolio and increasing export foot prints (plans to add US$100m from
each of the geographies like Africa, South East Asia, Middle East and Rest of
world). The current export base is ~US$200m; it aspires to reach US$600m in
exports. Apart from growing its current portfolio, TMX is working on new
product lines in areas of Air pollution, Water, Energy and Defence which will also
add significantly to growth in the next few years. The company has set a target
for itself that one-third of the revenues should come from new business areas,
going forward.
! Outlook and Valuation: TMX’s ability to bag base orders of ~Rs7-8bn per
quarter, increasing market share and strong management pedigree gives us
confidence that it will be able to tide the slowdown and participate in the
upturn of the cycle meaningfully and continues to surprise positively in terms of
order flow. We believe TMX will continue to benefit from continued power
shortage and strong product portfolio. The stock is trading at 18x FY14E
earnings. We continue to maintain ’Accumulate’ on the stock.