Thermax -preferred midcap pick in India engineering :: Citi

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Thermax (THMX.BO)
Firing On All Cylinders – Increasing TP to Rs981
 Strong 2Q FY11 – PAT up 65% YoY, 31% ahead of estimate — Profit growth was
driven by strong revenue growth (up 61% YoY, 31% ahead of our estimate).
Margins remained largely flat. Energy revenues grew by 72%YoY and Environment
revenues by +51%. Margins declined by 118bps in the energy segment. Thermax
orderbook was at Rs73bn, up 44% YoY and 5% sequentially.
 Business momentum accelerating and becoming broad-based — 1) Steel (sponge
iron), ferrous, non-ferrous, oil and gas industries are showing increasing
investments. 2) Thermax is also seeing a revival in the cement sector, expecting
orders from this segment in 1Q FY12. 3) Gas-based power plants are an emerging
opportunity; Thermax received 4 major inquires for medium-sized gas-based
power plants. 4) Industrial water-treatment projects and municipal sewage
treatment are showing good momentum. 5) Its JV with SPX (air pollution control)
has prequalified and will bid for NTPC tenders to supply 11 ESPs.
 Supercritical JV with B&W is now registered as a company — The Board will have
4 nominees from Thermax. The JV has bought land, and ~50 people have been
hired so far. The technology transfer has started and it will bid for supercritical
boilers from 4QFY11. The JV is critical to Thermax as it will be a key driver of
business scale and growth. Our estimates do not factor in the supercritical JV.

 Revising estimates and risk rating, TP Rs981 (from Rs787) — We increase
revenue by 3%-9% in FY11E-12E but trim margins 30-50bps given higher % of
EPC revs in the future. Our Rs981 TP is based on a P/E of 23x Mar12E (from 22x
Sept11E). We believe 1) the structural change in the business, 2) the broader
economic revival, and 3) the strong outlook should support a rerating. Our target
multiple is 1) at a premium to Thermax’s historical avg PE (16x), given the strong
outlook 2) on par with BHEL (23x) given Thermax’s superior earnings outlook and
RoE (EPS CAGR of 32% vs 19% for BHEL, RoEs of 30-32% vs BHEL RoE’s of 29-
31%). It is a preferred midcap pick in the India engineering sector.