14 May 2012
4QFY12 Results Update | Sector: Capital Goods
Thermax
BSE SENSEX
S&P CNX
16,293
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
4,929
TMX IN
119.2
675/388
-2/-6/-17
50.0
0.9
CMP: INR420
TP: INR361
Neutral
Thermax: In-line performance amidst challenging environment; cutting estimates as headwinds building-up
4QFY12 operating performance in line:
TMX reported in-line 4QFY12 operational performance with standalone
revenues down 5% YoY, while PAT grew 3% YoY. Consolidated PAT grew 6% YoY in FY12 supported by positive
impact of Danstoker acquisition.
Order intake disappoints; second consecutive quarter with no large orders:
Order intake continues to be
disappointing at INR8.1b (down 40% YoY). Consolidated order-backlog declined 25% YoY to INR48b given
second consecutive quarter of no large order finalizations. Base orders from segments like cooling, heating,
chemicals, etc reported healthy growth; Power EPC was the most impacted.
Impressive EBITDA margins:
EBITDA margins improved 39bp YoY at 11%, and are impressive, in an environment
of continued increase in commodity prices / poor fixed absorption. We believe that if the macro environment
continues to remain volatile, TMX will possibly have to start compromising on margins to bag orders (as
market share / fixed costs are important priorities). TMX has taken various steps towards improving operational
excellence; while currency remains a key risk.
Cutting estimates on lowered order intake assumptions:
Management Guidance (FY13): Lower revenues YoY,
Improved order intake and maintaining margins at double digit (11% in FY12). We have cut our earnings
estimate by 13%/21% for FY13/14 driven by lower order intake assumptions. Maintain
Neutral,
revised target
price of INR361 based on 12x FY13E EPS.
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 39820 5410
Deepak Narnolia
(Deepak.Narnolia@MotilalOswal.com); +91 22 3029 5126

Thermax
Thermax: Operational performance in-line; Order inflows disappointing
Revenues impacted by slowdown in order intake (largely from Power EPC projects)
4QFY12 was the second consecutive quarter of subdued revenue growth (down
5% YoY) impacted by declining order book. Consolidated order backlog declined
25% YoY to INR48b and order intake was down 40% in 4QFY12 / 13% in FY12.
Order intake during 3Q/4QFY12 stood at just INR7.5-9.0b pa, v/s run-rate of
~INR15b/qtr; and largely reflects base level bookings (from segments like food,
chemicals, auto, hospitality, pharma, etc). Project side orders from segments like
power, oil & gas, metallurgical, cement, etc continues to get deferred given the
macro volatility; the scenario continues to be challenging.
Power EPC accounts for roughly 30% of the current order backlog. In 1QFY12, the
company had received two key orders including one worth INR4b from Grasim to
construct a 3x32 MW co-gen plant on EPC basis and an INR3.66b order for boilers
for a 120MW captive power plant (Vizag Steel Plant). Power EPC was the most
impacted in FY12 (intake at INR5b, down 75% YoY), while project heater boiler
business intake declined 10% YoY; leading to decline in aggregate order intake.
Management stated that in FY12, base orders from segments like cooling, heating,
chemicals, etc reported healthy growth. Hence, the management is reasonably
confident that FY13 order intake will be higher than FY12 levels. But given that
opening order book is down 25%, revenues in FY13 are expected to be lower on
YoY basis.
Management also highlighted the several productivity improvement measures
aimed at augmenting capacity: Pune factory has improved productivity by 15%;
line balancing at Baroda has already led to increased productivity by 10% and
there are possibilities of further improvement.
EBITDA margins sustained; various steps taken towards improving operational
excellence
EBITDA margins improved 39bp YoY at 11%, in line with our estimates. This is
impressive, in an environment of continued increase in commodity prices and
poor fixed absorption.
We believe that if the macro environment continues to remain volatile, TMX will
possibly have to start compromising on margins to bag orders (as market share /
fixed costs are important priorities). The management highlighted that ~20% of
the staff costs and ~40-50% of the other costs are variable in nature, providing
cushion to manage margins in challenging environment.
Given these initiatives, the company expects to maintain margins at double digits
in FY13 (FY12 margins at 11%).
Currency rate variation is one of the key risks to margins, as rupee depreciation
has necessitated the need for price increases across several product segments.
Raw Material costs account for 69.4% of the revenues for TMC, and large parts
comprise of various commodities sourced at import parity pricing levels. Thus,
the environment continues becoming challenging.
14 May 2012
2

Thermax
BTG JV will be a drag on profits, efforts to enhance cost competitiveness
TMX has lost out to competitors in the recent NTPC bulk tender. The BTG JV will be
commissioned in late FY13, at a capex of INR8.2b (DER 1:1).
There will be initial losses given interest, depreciation and fixed expenses (~137
employees); our earnings estimates do not factor in the negative contribution
from the JV.
The management stated that the strategy will be to enter the market with the
first order; however the bidding will not be so aggressive that will result in losses.
In the interim period, the focus is towards increasing the cost competitiveness,
through improved indigenization, vendor development, etc.
Working capital cycle intact
While the net working capital period has elongated, there are no signs of a
meaningful deterioration; the management has been very categorical that it will
not accept any orders leading to increased NWC.
A large part of the elongation is caused by other current liabilities declining from
INR115b to INR102b (impacted by lower customer advances given 25% decline in
order backlog). Increase in debtors from INR96b in March 2011 to INR125b in March
2012 (73 days to 86 days) is manageable. Net cash declined from INR5.5b to INR4.0b
YoY.
Margins expand YoY in both environment and energy business
In 4QFY12, revenues in Environment segment grew 8% YoY while Energy segment
declined 10% YoY. For FY12, Energy segment’s revenues were up 6% YoY while
Environment segment revenues grew 12% YoY. Energy business continues to
experience longer execution cycles on the back of large utility orders.
EBIT margin of Environment segment was up 122bp YoY (up 110bp QoQ), while
that of Energy segment was up 56bp YoY (down 110b QoQ). 4QFY12 EBITDA margin
stood at 11%, up 39bp YoY (up 30bp QoQ). RM/Sales ratio declined 322bp YoY
while SG&A and Staff cost/Sales was up 273bp and 9bp.
Segmental performance(INR m)
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12
Revenues (INR m)
Energy
Environment
Total
EBIT (INR m)
Energy
Environment
Total
EBIT Margin (%)
Energy
Environment
Total
6,066
2,221
8,286
680
269
949
11.2
12.1
11.5
8,910
2,482
11,392
913
308
1,221
10.2
12.4
10.7
9,904
2,943
12,847
1,073
399
1,472
10.8
13.6
11.5
14,247
3,832
18,079
1,380
491
1,871
9.7
12.8
10.3
8,025 10,348
2,647
2,968
10,672 13,317
810
313
1,123
10.1
11.8
10.5
1,102
320
1,422
10.7
10.8
10.7
9,931
3,024
12,955
1,126
389
1,515
13,206
4,211
17,417
1,353
591
1,944
YoY%
-7.3
9.9
-3.7
-1.9
20.3
3.9
11.3
10.2
56
12.9
14.0
122
11.7
11.2
81
Source: Company/MOSL
14 May 2012
3

Thermax
Revenue growth slowing down on declining order book
Consolidated order book down 25% YoY
PAT up 3% YoY; driven by margin improvement & lower tax
EBITDA margins stable; EPC revenues peaking out
Source: Company/MOSL
Valuation & view
We have cut our earnings estimate by 13%/21% for FY13/14 driven by lower order
intake assumptions. TMX trades at ~14x FY13E / 12x FY14E. Maintain
Neutral
with a
revised target price of INR361 based on 12x FY13E EPS (earlier INR 414).
13-21% cut in earnings estimates - Consolidated (INR m)
Earlier
FY13
Revenue
EBITDA
EBITDA margin (%)
PAT
EPS (INR)
55,522
5,256
9.5
3,585
30.1
FY14
56,653
5,761
10.2
4,018
33.7
FY13
59,168
6,199
10.5
4,113
34.5
Revised
FY14
63,612
6,699
10.5
4,547
38.2
Chg. (%)
FY13
FY14
-6.2
-15.2
-101bp
-12.8
-12.8
-12.7
-21.5
-31bp
-21.1
-21.2
Source: MOSL
14 May 2012
4

Thermax
Thermax : an investment profile
Company description
Thermax is India's leading engineering company
involved in pressure vessels (boilers), captive power
plants, engineering and environmental engineering
(water and air treatment). It is the largest in India among
engineering companies involved in captive power
plants, Thermax caters to various industries including
refineries, petrochemicals and chemicals, sugar, cement,
metals and textiles through its offerings in boilers and
heaters.
Higher working capital days due to the large share of
EPC projects in the revenue mix going forward is
likely to compress return ratios and cash flows.
Recent developments
Thermax signed a joint venture agreement with SPX
Netherlands BV, a wholly owned subsidiary of US-
based SPX Corporation, a global leader in providing
pollution control services to power plants.
Thermax and US-based GE Water signed deals to
share GE's ultra filtration and bioreactor (MBR)
technology. Thermax will use it to treat waste water
and reuse and process water in India's commercial
and institutional sectors. This will provide a huge
leg up for Thermax's water treatment division in
catering to large commercial and industrial clients.
Key investments arguments
EBITDA margins have shown strong resilience on
back of cost optimization and productivity
improvement measures. The company continues to
maintain a debt free status with strong operating
cash flows and robust RoE of 25-30%.
The Environment business will be a new growth
driver for the company as segments like water
treatment, air pollution control and ESPs will provide
long term clean energy solutions to governments,
municipalities, utilities, SEZs and urban townships.
TMX is a market leader in each of the segments and
should benefit from uptick in these segments.
Valuation and view
TMX trades at 14.0x FY13E / 12.5x FY14E. Maintain
Neutral
with a revised target price of INR361 based
on 12x FY13E EPS (earlier INR 414).
Upsides to our earnings estimates could be in the
form of break-through orders for the super-critical
JV in lateFY11 or early FY12 or better than expected
execution run-rate in the coming quarters.
Key investment risks
Margin compression is possible due to the entry into
the super-critical BTG and high import content.
Thermax
L&T
14.4
13.4
2.6
2.3
1.4
1.3
11.9
11.0
BHEL
8.8
11.4
1.9
1.7
1.0
1.1
5.4
7.0
Sector view
We are Neutral on the sector.
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
14.0
12.5
2.7
2.3
0.8
0.7
7.9
7.0
EPS: MOSL forecast v/s consensus (INR)
MOSL
Consensus
Forecast
Forecast
FY13
30.1
31.6
FY14
33.7
34.2
Target Price and Recommendation
Current
Target
Price (INR)
Price (INR)
420
361
Variation
(%)
-4.6
-1.4
Upside
(%)
-14.1
Reco.
Neutral
Stock performance (1 year)
Shareholding Pattern (%)
Mar-12
Promoter
Domestic Inst
Foreign
Others
14 May 2012
62.0
10.8
12.2
15.0
Dec-11
62.0
11.2
11.3
15.6
Mar-11
62.0
14.5
9.2
14.4
5

Thermax
Financials and valuation
14 May 2012
6

Thermax
N O T E S
14 May 2012
7

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Thermax
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