31 October 2010
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.
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