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UBS Investment Research
Thermax
S olid fundamentals, but priced in [EXTRACT]
Initiating coverage with an anti-consensus Sell rating
Thermax is a large and reputable engineering company in India. It has two business
divisions—energy (81% of total revenue) and environment (19%). At the current
share price, we think its risk-reward profile is unfavourable as: 1) a slowdown in
order inflow is likely in the near term due to slowing industrial activity; 2) margins
could remain subdued on increased competition; and 3) we think its valuation is
not attractive (15.1x FY12E EPS) for an EPS CAGR of 15% over FY11-14E, as
earnings may have downside. We initiate coverage with a Sell rating and a price
target of Rs500.00.
Margins could remain subdued in FY12-13E
Thermax’s EBITDA margin fell 167bp in FY08-11. We forecast a further decline
of 40-50bp over FY12-13 (it fell 111bp YoY in Q1 FY12) as higher raw material
prices, intense competition, and slower industrial capex should result in falling
demand. We also think its diversification strategy (in high mega watt capacity
boilers) could be risky.
Earnings CAGR of 15% over three years
We forecast a PAT CAGR of 15% for FY11-14 (consensus forecasts a 10% PAT
CAGR), driven by steady execution of the current order book (Rs68bn), which
provides visibility for one year; we forecast an order book CAGR of 15% over the
same period.
Valuation: DCF-based price target of Rs500.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Our price target assumes a
WACC of 12.8%. We do not expect major near-term triggers and hence view the
current valuation as stretched.
Thermax
Thermax is a major engineering company in India. It has two primary business
divisions: energy and environment. The energy segment contributes 81% to total
revenue and environment contributes the balance. Headquartered in Pune,
Thermax has five manufacturing facilities (four in India and one in China). The
company has a 51% JV with Babcock and Wilcox to manufacture supercritical
boilers.
Statement of Risk
We believe the key upside risks to our Sell rating for Thermax are: 1) robust
new orders for supercritical equipment; 2) expanding margins; 3) more
regulatory support; for example, an import duty on large-capacity power
equipment; and 4) a pick-up in industrial capex.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Thermax
S olid fundamentals, but priced in [EXTRACT]
Initiating coverage with an anti-consensus Sell rating
Thermax is a large and reputable engineering company in India. It has two business
divisions—energy (81% of total revenue) and environment (19%). At the current
share price, we think its risk-reward profile is unfavourable as: 1) a slowdown in
order inflow is likely in the near term due to slowing industrial activity; 2) margins
could remain subdued on increased competition; and 3) we think its valuation is
not attractive (15.1x FY12E EPS) for an EPS CAGR of 15% over FY11-14E, as
earnings may have downside. We initiate coverage with a Sell rating and a price
target of Rs500.00.
Margins could remain subdued in FY12-13E
Thermax’s EBITDA margin fell 167bp in FY08-11. We forecast a further decline
of 40-50bp over FY12-13 (it fell 111bp YoY in Q1 FY12) as higher raw material
prices, intense competition, and slower industrial capex should result in falling
demand. We also think its diversification strategy (in high mega watt capacity
boilers) could be risky.
Earnings CAGR of 15% over three years
We forecast a PAT CAGR of 15% for FY11-14 (consensus forecasts a 10% PAT
CAGR), driven by steady execution of the current order book (Rs68bn), which
provides visibility for one year; we forecast an order book CAGR of 15% over the
same period.
Valuation: DCF-based price target of Rs500.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Our price target assumes a
WACC of 12.8%. We do not expect major near-term triggers and hence view the
current valuation as stretched.
Thermax
Thermax is a major engineering company in India. It has two primary business
divisions: energy and environment. The energy segment contributes 81% to total
revenue and environment contributes the balance. Headquartered in Pune,
Thermax has five manufacturing facilities (four in India and one in China). The
company has a 51% JV with Babcock and Wilcox to manufacture supercritical
boilers.
Statement of Risk
We believe the key upside risks to our Sell rating for Thermax are: 1) robust
new orders for supercritical equipment; 2) expanding margins; 3) more
regulatory support; for example, an import duty on large-capacity power
equipment; and 4) a pick-up in industrial capex.
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