Margins partially offset topline miss… • Thermax :: ICICI Securities, report

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Margins partially offset topline miss… • Thermax’ topline stood at | 1147 crore vs. our estimate of | 1205.1 crore owing to slower than anticipated execution. The other income | 7.1 crore (down ~69% YoY) was also lower than our expectations of | 20 crore • Reported margins, however, at 11.5% were above our expectations of 10%, mainly on the back of raw material cost savings • Order inflows for the quarter were at | 1228 crore (boosted by an international order inflows worth | 622 crore) while order backlog as on Q3FY15 stood at | 5097 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 Strong operating leverage led by diversified product profile Thermax boasts a strong product profile (heating, cooling & air pollution segments) catering to a spectrum of industries like steel, cement, oil & gas, power, paper, etc. The company also commands significant market share in the captive power plant segment. Hence, the recovery in capex cycle and anticipated rise in power demand in end user industries will create demand for Thermax’ products and services. Hence, we expect order inflows to see a sharp jump from H2FY15E onwards & project ~15% order inflow CAGR in FY14-17E (sectors such as food, food processing, chemicals, steel and cement can contribute orders). This coupled with strong execution will also lead to ~16.6% revenue CAGR. Operating subsidiaries potential value creator in economic up cycle In domestic markets, Babcock & Wilcox JV can be a serious contributor, going ahead, as the JV will be a 3000 MW supercritical boiler manufacturing JV that 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 a loss of | 57 crore in Q2FY15. However, with the 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 a loss but Thermax plans for a break even by FY15E end. Thermax Instrumentation is another worthwhile subsidiary that 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 challenging times. Even Thermax has over the past many years effectively managed its working capital cycle (average debtor days over FY09-14 stood at 85 days) coupled with nil leverage. Order inflow pick-up critical to support growth; till then maintain HOLD We highlight that the pick-up in order inflows would hold the key to revenue growth in FY16E and FY17E. Given the recovery in the economy, we expect FY16E and FY17E to see revenue and PAT CAGR of 16.6% and 18.5%, respectively. This would help RoEs to improve from 15% in FY14 to 17% in FY17E. We value the base business at 23x FY17E and arrive at a target price of | 1183/share. Given the sharp run up in the stock, we maintain our HOLD rating on the stock.

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