Thermax  S E L L   Target Price (INR)  893 

India Equity Research Engineering November 6, 2014
Thermax SELL Target Price (INR) 893 Company Update  Last Price (INR)
945.6
TMX IN
Bloomberg code
THMX.BO
Reuters code
49,151
Avg. Vol. (3m)
43.0
Avg. Val.(3m)(INRmn)
997 / 607
52‐wk H/L (INR)
27,916
Sensex
MCAP (INRbn/USDbn)
112.67 / 1.83
Shareholding (%)
06/14
09/14
62.0
62.0
7.6
7.9
FIIs
15.4
15.1
Public
Others
11.5
3.6
11.4
3.5
Promoters
MFs, FIs, Banks
Stock Chart (Relative to Sensex)
1,000
Base orders improvement on a low base is insignificant Revenue and margins in Sep14 were ahead of expectations but may have been aided by a large order crossing revenue and margin booking threshold. Accordingly, we increase our FY15 EPS forecast by 10% but leave FY16f‐17f EPS unchanged. The pick‐up in base orders was not very meaningful q‐o‐q. Management does not expect large project orders to revive in H2, implying that the risk of a slower‐than‐expected order recovery remains – especially with coal availability posing a significant bottleneck. We rollover out TP to Sep15 and raise it to 893 based on P/E of 25.0x the Sep16f EPS. We maintain the SELL rating. Q2 results impresses as execution of large orders gains traction Revenue growth, at 14% y‐o‐y, turned positive in Q2 after 10 consecutive quarters of de‐growth. Execution on the large INR17bn order received in Jun13 picked up after lagging in the past two quarters. Other income included INR80mn of income tax refunds and INR55mn of MTM gains. It booked an INR360mn of EO loss in the consolidated books against investments in Danstoker’s German subsidiary, Omnical Kessel. Base orders at INR7.7bn see a slow recovery from a low base 900
The standalone Sep14 order inflows of INR11bn include INR3.2bn of CPP export order (3x25MW) received from Africa. Excluding this, the base orders run rate at INR7.7bn was up 16% from INR6.6bn in Jun14 and flat y‐o‐y. The q‐o‐q improvement is on a very low base and hence not very meaningful. Its subsidiary TBW also received an INR3.4bn order from B&W for supply of boiler parts (2*360MW). This will further support TBW’s manufacturing operations; other overseas orders in the pipeline for TBW are much smaller. 800
700
600
500
Nov13
Mar14
Jul14
Thermax
Nov14
Sensex Rebased
Stock Perfm. (%)
1m 3m 1yr Absolute
4.6
10.4
51.5
Rel. to Sensex
‐0.5
1.9
20.0
Financials (INRmn)
03/14
03/15f
03/16f
Sales
43,022
47,226
52,723
‐8
10
12
YoY (%)
EBITDA (%)
A.PAT
10.5
8.9
10.1
3,230
2,939
3,678
Sh o/s (diluted)
119
119
119
A.EPS (INR)
27.1
24.7
30.9
YoY (%)
‐8
‐9
25
D/E (x)
‐0.4
‐0.4
‐0.4
P/E (x)
34.9
38.3
30.6
EV/E (x)
23.4
24.8
19.2
16
17
13
14
15
16
RoCE (%)
RoE (%)
Quarterly Trends 12/13
03/14
06/14
09/14
Sales (INRmn)
10,138
13,825
8,394
11,908
666
1,059
414
860
PAT (INRmn)
Please refer to the disclaimer towards the end of the document. Increase FY15f EPS by 10% on better margins in Q2, outlook unchanged We increase our FY15f EPS by 10% mainly on better margins in Sep14 while our FY16 and FY17 forecast are largely unchanged. We assume Q2 margins may not be sustainable and accordingly factor lower margins in H2. Management in its commentary indicated expectations of further pick‐up in orders for standard products while large/project orders may not pick‐up in H2. Hence, the management outlook on domestic order pipeline remains largely unchanged. Maintain SELL with TP of INR893 based on 25x Sep16f We retain our 25x target P/E for the stock which is in‐line with upper end of the range over Aug09‐Aug10. It implies a significant premium for the stock on a P/E‐ROE matrix within the sector. We rollover our TP to Sep15f and based on the revised forecast, raise it to 893 (from 825 earlier). With a 6% downside, we maintain the SELL rating on the stock. Higher margins and higher export orders are the key risks. The company can deliver 50%‐60% higher revenues on its current capacities but the operating benefit may largely accrue beyond FY17f. Our FY17f EBITDA margin forecast is 11.3% versus peak margins of 15.4% booked in FY09. However, the revenue mix of the company has changed significantly since FY09 as the contribution of lower margin EPC revenues has increased significantly. Devang Patel, +91 022 66842861 [email protected] Thermax
Exhibit 1: Order booking trend Exhibit 2: Order backlog trend 23
Order backlog INRmn)
21.2
Order inflow (INRbn)
17
14.4
13.3
11
12.7
2.1
65,000
1.7
55,000
1.3
45,000
0.9
13.7
12.8
12.6
11.6
11.6
11.8
BTB (x, RHS)
75,000
11.4
10.9
9.9
8.1
7.7
6.6
5.9
0.5
35,000
5
Sep10 Mar11 Sep11 Mar12 Sep12 Mar13 Sep13 Mar14 Sep14
Sep10 Mar11 Sep11 Mar12 Sep12 Mar13 Sep13 Mar14 Sep14
Source: Company, IL&FS Institutional Equities Source: Company, IL&FS Institutional Equities Exhibit 3: Quarterly growth and margin (%) Exhibit 4: Quarterly segment margin trend (%) EBITDA margin (LHS)
Revenue y‐o‐y
PAT y‐o‐y
14
90
12
60
10
30
Energy
EBIT margins Environment
Total
15
12
9
6
0
8
3
‐30
6
‐
Sep10 Mar11 Sep11 Mar12 Sep12 Mar13 Sep13 Mar14 Sep14
Sep10 Mar11 Sep11 Mar12 Sep12 Mar13 Sep13 Mar14 Sep14
Source: Company, IL&FS Institutional Equities Source: Company, IL&FS Institutional Equities Exhibit 5: Aggregate subsidiary performance (INRmn) Exhibit 6: Consensus EPS trend (standalone, INR) Revenue
Consensus EPS
PAT (RHS)
100
2,000
0
1,750
Mar14e
Mar15e
Mar16e
50
45
‐100
40
‐200
1,500
35
‐300
‐400
1,250
1,000
Sep11
Mar12
Sep12
Mar13
Sep13
Source: Company, IL&FS Institutional Equities Mar14
Sep14
30
‐500
25
‐600
20
Apr12
Sep12
Mar13
Aug13
Feb14
Jul14
Source: Bloomberg, IL&FS Institutional Equities Engineering 2 Thermax
We raise our FY15f EPS by 10%, FY16f‐17f largely unchanged Exhibit 7: Earnings revision summary (standalone) (INRmn) ‐‐‐‐‐‐‐‐‐‐ FY15f ‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐ FY16f ‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐ FY17f ‐‐‐‐‐‐‐‐‐‐ Old New Var (%) Old New Var (%) Old New Revenue 46,368
47,226
2
51,917
52,723
2 61,409 61,839
1
EBITDA 3,737
4,208
13
5,182
5,335
3 6,857 6,981
2
PAT 0
Var (%) 2,666
2,939
10
3,641
3,678
1 4,814 4,830
EPS (INR) 22.4
24.7
10
30.6
30.9
1 40.4 40.5
0
Orders 49.3
49.3
‐
60.2
60.2
‐ 76.4 76.4
‐
Order y‐o‐y ‐8.7
‐8.7 22.1
22.1 27.1 27.1 8.1
8.9
10.0
10.1
11.2 11.3
EBITDA margin 85bp
14bp 12bp
Source: Company, IL&FS Institutional Equities Target P/E of 25x in‐line with upper end of the range over Aug09‐Aug10 Exhibit 8: FY16f P/E (x) vs RoE (%) LT
BHEL
TMX
AIAE
VOLT
Exhibit 9: 1‐year forward P/E and target P/E (x) CRG
KKC
HAVL
35
FY16 P/E (x)
TMX
Target P/E
5‐yr Avg
35
30
30
25
25
20
20
15
15
10
10
5
5
10
15
20
25
FY16 ROE (%)
30
Source: Bloomberg, IL&FS Institutional Equities 35
5
Nov09
Jan11
Mar12
May13
Jul14
Oct15
Source: Company, IL&FS Institutional Equities TMX already trades at a significant premium on a P/E‐ROE matrix within the sector. Our target P/E is based on the higher end of its range over the Aug09‐Aug10 period. TMX’s target P/E is supported by 25% order inflow CAGR over FY16f‐17f even as the FY17f ROE is lower at 19%. We believe, a target P/E higher than the underlying ROE is justified given a higher cyclicality in TMX’s earnings and operating leverage gains accruing beyond FY17. However, fuel related bottlenecks for the sector and our assumption of weak pricing power may constrain the earnings growth and pull down the P/E premium going forward. Key risk factors  Sharp capex recovery may lead to a higher than forecast demand pick‐up.  Improved coal availability may revive demand in the captive power segment.  Currency depreciation may improve export margins. Engineering 3 Thermax
Exhibit 10: Result snapshot for the quarter (INRmn) Total operating income Total operating expenses EBITDA Other income Depreciation EBIT Interest Recurring PBT Net extra ordinary items PBT (reported) Tax PAT (reported) Prior period items Adj. net income Adj. EPS (INR) Ratios (%) EBITDA margin EBIT margin Effective Tax rate Net profit margin Sep13 Dec13
Mar14
Jun14
Sep14 Y‐o‐y (%)
Q‐o‐q (%)
10,433 9,398 1,035 75 140 970 17 953 ‐100 853 261 302 ‐ 662 5.6 9.9 9.3 30.6 5.7 10,138
9,229
908
229
147
990
23
968
‐
968
301
666
‐
666
5.6
13,825
12,486
1,339
351
148
1,542
39
1,503
‐
1,503
444
1,059
‐
1,059
8.9
8,394
7,817
577
191
150
619
30
589
‐
589
175
414
‐
414
3.5
14
14
18
208
30
31
42
31
42
37
112
21
22
106
‐19
112
46
48
185
112
122
108
30
30
108
108
9.0
9.8
31.1
6.6
9.7
11.2
29.5
7.7
6.9
7.4
29.7
4.9
11,908 10,685 1,222 232 182 1,272 24 1,248 ‐ 1,248 388 860 ‐ 860 7.2 10.3 10.7 31.1 7.2 Dec13
Mar14
Jun14
Sep14 Y‐o‐y (%)
Q‐o‐q (%)
22
‐1
193
14
48
23
50
42
102
16
‐14
11
65
11
‐16
4
Source: Company, IL&FS Institutional Equities Exhibit 11: Segment result snapshot for the quarter (INRmn) Sep13 Segment revenue Energy Environment Unallocated Total revenue Segment margins (%) Energy Environment EBIT / Sales Capital Employed Energy Environment Unallocated Total Capital employed 7,851 2,684 ‐103 10,433 11.7 9.0 8.4 3,389 2,954 13,086 19,429 7,671
2,538
‐71
10,138
10,968
2,978
‐121
13,825
6,446
2,148
‐200
8,394
10.9
2.3
9.8
11.2
2.6
11.2
6.5
4.6
7.4
1,780
3,403
14,766
19,949
2,927
3,434
13,888
20,250
4,130
3,104
13,447
20,681
9,562 2,646 ‐301 11,908 12.2 7.5 10.7 6,833 3,441 11,237 21,511 Source: Company, IL&FS Institutional Equities Engineering 4 Thermax
Financials and valuations (standalone) Engineering 5 Thermax
Analyst Certification The following analyst(s) is(are) primarily responsible for this report and, certifies(y) that the opinion(s) on the subject company(ies) and its security(ies) and any other views or forecasts expressed herein accurately reflect their personal view(s): Devang Patel Disclosures Meaning of IL&FS Broking Services Private Limited’s equity research ratings The rating represents the expected change in the price of the stock over a horizon of 12 months. Buy: more than +15% Add: +5% to +15% Reduce: ‐5% to +5% Sell: less than ‐5% Analyst disclosures None of the analysts involved in the preparation of this research report or a member of his/her household is an officer, director or supervisory board member of any of the company(ies) that is/are the subject of this research report. 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Engineering 6 
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