Strong execution steals the show… • Thermax (TMX) :: ICICI Securities,

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Strong execution steals the show…
• Revenues of Thermax (TMX) rose ~14% YoY (above estimates of
flattish YoY growth ay | 1045 crore) on the back of strong execution
in the energy segment. Net sales in the energy segment for Q2FY15
stood at | 956 crore, up ~22% YoY while environment segment
revenues stood at | 265 crore, marginally down 2% YoY
• Reported margins at 10.3% were above our expectations of 9.1%, on
the back of raw material cost savings and strong execution
• Order inflows for Q2FY15 stood at | 1089 crore while order backlog
for Q2FY15 stood at | 5015 crore. Going ahead, in order to maintain
high double digit revenue growth rates, order inflows mainly in the
power EPC and export markets should come through
Diversified product/segment profile to provide strong operating leverage
Thermax boasts a strong product profile (heating, cooling and air
pollution segments) catering to spectrum of industries like steel, cement,
oil & gas, power, paper, etc. It also commands significant market share in
captive power plant segment. Hence, with the recovery in capex cycle
and anticipated rise in power demand in the end user of industries will
create demand for Thermax’ products and services. Hence, we expect
order inflows to witness a sharp jump from H2FY15E onwards & project
~10% order inflow CAGR over FY14-17E (sectors such as food, food
processing, chemicals, steel and cement can contribute orders), which
coupled with strong execution will also lead to ~18% revenue CAGR.
Operating subsidiaries potential value creator during economic up cycle
In the domestic markets, Babcock & Wilcox JV can be serious
contributor, going ahead, as the JV will be a 3000 MW supercritical
boiler manufacturing JV, which has the potential to inch up the average
order size and revenues of Thermax in the long run (it is eyeing 8000
MW of pipeline in FY16E). Given the current outlook of the BTG space
the JV has no confirmed orders in hand and has posted loss of | 57
crore in Q2FY15 but with commencement of ordering in FY16-17, we
believe this JV can be a money spinner for Thermax. On the other hand,
international subsidiaries like Danstoker and Chinese subsidiary did post
loss but Thermax plans for a break even by FY15E end. Its
instrumentation is another worthwhile subsidiary, which has turned into
the black in FY14 from a loss of | 17 crore in FY13. Hence, the group of
subsidiaries in terms of product and geographical diversity can be a
huge strength when the capex cycle recovers in India.
B/S key hallmark of Thermax irrespective of business conditions
Thermax generated free cash flows to the tune | 143 crore during FY14.
It reflects the strength of the balance sheet and business model given
most of the capital goods companies have resorted to leverage in the
challenging times. Even the company has over the past many years
effectively managed working capital cycle (average debtor days over
FY09-14 stood at 85 days) coupled with nil leverage.
Pick-up in order inflows critical to support growth; till then maintain Hold
The critical catalyst for Thermax’ growth would be the timing of order
inflow pick up so that it can register high double digit growth rates.
Given the recovery in the economy, we expect FY16E and FY17E to see
revenue and PAT CAGR of 18% and 17%, respectively. This would help
RoEs to improve from 15% in FY14 to 16.3% in FY17E. We value the
base business at 23x FY17E and put a target of | 973/share. Given the
sharp run up in the stock we maintain HOLD rating on the stock.

LINK
http://content.icicidirect.com/mailimages/IDirect_Thermax_Q2FY15.pdf