1
May 22, 2018
Thermax Ltd
India Research - Stock Broking
HOLD
Recommendation (Rs.)
CMP (as on May 21, 2018) 1147
Target Price 1217
Previous Target Price 1263
Upside (%) 7
Stock Information
Mkt Cap (Rs.mn/US$ mn) 136.7 / 2.0
52-wk High/Low (Rs.) 1375 / 834
3M Avg. daily value (Rs. mn)
71.2
Beta (x) 0.7
Sensex/Nifty 34616 / 10517
O/S Shares(mn) 119.2
Face Value (Rs.) 2.0
Shareholding Pattern (%)
Promoters 62.0
FIIs 14.8
DIIs 11.5
Others 11.7
Stock Performance (%)
1M 3M 6M 12M
Absolute 2 (0) 11 16
Relative to Sensex 1 (2) 7 2
Source: Bloomberg
Relative Performance*
Source: Bloomberg; *Index 100
Analyst Contact
De Arul Kaarthick | Ankit Soni
040 - 3321 6280 / 74
arul.kaarthick@karvy.com
soni.ankit@karvy.com
For private circulation only. For important information about Karvy’s rating system and other disclosures
refer to the end of this material. Karvy Stock Broking Research is available on Thomson Reuters &
Bloomberg (Code: KRVY<GO>)
Exhibit 1: Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 51450 44831 44649 53759 65581
EBITDA 4291 4330 4009 5259 6874
EBITDA Margin (%) 8.3 9.7 9.0 9.8 10.5
Net Prot 2834 2161 2311 3207 4261
EPS (Rs.) 25.1 19.8 20.6 26.9 35.8
RoE (%) 11.7 8.5 8.5 10.9 13.7
PE (x)* 31.6 53.3 58.5 42.6 32.1
Source: Company, Karvy Research; *Represents multiples for FY16 - FY18 are based on historic market price
On a Stable Recovery Path
Thermax (TMX) revenue was down by 3% in Q4FY18 mainly on account of issues
related to e-way bill which was quantied at around Rs. 2 bn by the management.
However, this is normalising in Q1FY19. Operating margins were lower by
200 bps for the quarter on account of slower execution, higher material prices,
costs associated with few facilities and provisions related to Chinese litigation.
Going forward, we expect execution to pick-up as order backlog visibility and
EBITDA margins to reach 10.5% in FY20E expanding EPS to Rs. 35.8 by FY20E.
Nevertheless, concerns on lack of large order ows, commodity ination and lower
utilization at the new facilities necessitates caution. Hence, we maintain our ‘HOLD’
rating on the stock valuing it at 34x FY20E earnings for a target price of Rs. 1217.
Order backlog to remain strong: Base orders witnessed strong growth in FY18
and management commentary indicates reasonable visibility for large orders
from steel, sponge iron, renery and cement. However, it is also cautious on lack
of enquires similar to Dangote order, selective recovery in the CapEx cycle and
continued demand from B2C sectors. We expect TMX to maintain order visibility
well over 1x of revenues between FY19E-20E.
Moderate expansion in margins: We expect pick-up in execution and take into
account already peaked commodity ination and margin prole of order backlogs.
This would aid TMX to reach double digit EBITDA margin by FY20. We estimate
earnings to improve to Rs. 35.8 by FY20.
Retaining entities for capabilities: TMX is willing to hold on to loss making
assets like TBWES, China subsidiary and First Energy (FE) more from a capability
perspective. TBWES for manufacturing base and NOx technology, China subsidiary
for manufacturing base, FE for product range and market access.
Valuation and Risks
Business prole of TMX has changed signicantly from the previous cycle with
higher service mix, higher international revenues and double digit margin prole.
However, in the near term, lack of large order ows, commodity ination and lower
utilization necessitates caution. Hence, we maintain our ‘HOLD’ rating on the stock
valuing it at 34x FY20E earnings (8 yr avg. 1 yr forward earnings) for a target price
of Rs. 1217.
Earnings Revision (%)
YE Mar FY19E FY20E
Sales (%) (4.6) 2.9
EBITDA (%) (12.4) (0.7)
PAT (%) (14.8) (1.4)
Source: Karvy Research
L
L
L
L
L
L
Result Review
Industrials - Electrical Equipment
Thermax Ltd
Bloomberg Code: TMX IN
75
90
105
120
135
May
-
17
Jun-17
Jul-17
Aug -17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar -18
Apr-18
May-18
Thermax Ltd
Sensex
2
May 22, 2018
Thermax Ltd
Key takeaways from quarterly earnings
Margins were lower primarily due to lower revenue, losses in the Danstoker,
provision related to litigation charges in China.
Orders backlog covers 1.3x of ttm revenues which includes 1 boiler order from
Nigeria, 2 orders from fertilizer sector, 1 BTG order for 120MW. Most of the orders
are xed price contracts except for SEGs/PSUs orders. To maintain margins, TMX
locks special commodity prices once it receives order and also enters into rate
contract annually for pumps, values and other important items.
Energy segment: In terms of opportunity in the SOx & NOx control, TMX could go
with Marsulex technology to address SOx and B&W technology to address NOx
opportunity. JSW and TATA steel have large orders in place which could trickle
down to sponge iron manufactures, renery orders are struck at Engineers India
level which could happen in FY18 and some greeneld CapEx is expected in the
Cement sector. Management believes sector sequence for ordering starts with
steel then copper and nally aluminum.
Management termed First Energy (FE) investment as mistimed since customers
switched from wooden pallets to LPG. Customer base eroded from 3000 to 1000
as price of oil went below $60-70/bbl. At present FE is selling 1100 tn which could
go upto 3 times if oil price continues to remain at current levels.
Environment segment: Air Pollution (AP) and Chillers (CH) order backlog carry
medium margin prole and not much of price erosion is expected. Indonesian’ AP
facility phase I CapEx of US$16 mn is complete and rest US$8 mn shall be spent in
coming year. Indonesian facility could clock US$100 mn in 5 years. Sri City facility
for CH is ready for commissioning as a replacement to Pune facility. Sri City facility
is mostly automated and could fetch revenue upwards of Rs. 3.5-4 bn in next 7
years. As far as China facility is concerned, it shall be used as a manufacturing base
and TMX shall not be selling in Chinese market.
Chemical segment: Pune has 10k m3 capacity and Dahej has 12k m3 capacity.
Dahej facility is expected to reach peak utilization by H1FY19 which currently is at
500m3/month. Phase II for additional 8k m3 shall be completed by Q1FY20 at a
cost of Rs. 600 mn which could free up Pune facility. TMX follows ‘me too’ pricing
reecting international environment as volumes are locked annually. Management
earlier quantied that Dahej facility could clock Rs. 2.5-3 bn annual sales with high
teen margins in 5 years.
Acquiring residual stake from JV partner Babcock & Wilcox (B&W) in Thermax
Babcock & Wilcox Energy Solutions Pvt. Ltd (TBWES). TMX shall own the facility
to address sub/super/captive requirements and have access to technology from
B&W to address NOx requirement. Management believes the buyout price could
be much lesser than the 1st order for NOx solution. NOx opportunity could be upto
95GW in India.
Chinese litigation: TMX is ghting 4 cases in China for prior supplies towards
which it has made provision of Rs. 177 mn. Chinese legal system works in a peculiar
way with 1st order being passed without defendant’s representation, which had
happened and TMX has contested the same at 2nd level court. Outcomes could be
dependent on country of origin of defendant which puts TMX in a disadvantageous
position.
Moderate margin prole of
backlogs oers comfort
CapEx cycle recovery
expected in core sector
except Power
Retaining loss making
entities for capabilities
3
May 22, 2018
Thermax Ltd
Chemical segment witness
worst magrin drop
Impairment provided for
investments in JVs
Exhibit 2: Q4FY18
YE Mar - Consolidated (Rs. Mn) Q4FY18 Q3FY18 QoQ % Q4FY17 YoY %
Turnover 14430 11170 29.2 14905 (3.2)
Expenditure 13048 10215 27.7 13172 (0.9)
EBITDA 1382 955 44.7 1732 (20.2)
Depreciation 239 208 15.3 229 4.3
EBIT 1143 747 52.9 1503 (24.0)
Interest 37 25 48.8 25 48.8
PBT 1106 722 53.1 1478 (25.2)
Other Income 450 238 88.5 297 51.5
Exceptional items 0 0 NA (178) NA
Ta x 626 378 65.8 598 4.7
PAT 929 583 59.3 998 (7.0)
Adjusted PAT 1101 580 89.8 1822 (39.6)
EBITDA Margin (%) 9.6 8.5 103 bps 11.6 (205) bps
EBIT Margin (%) 7.9 6.7 123 bps 10.1 (217) bps
Net Prot Margin (%) 7.6 5.2 244 bps 12.2 (460) bps
Source: Company, Karvy Research
Exhibit 4: Q4FY18
YE Mar - Standalone (Rs. Mn) Q4FY18 Q3FY18 QoQ % Q4FY17 YoY %
Turnover 13101 9805 33.6 13428 (2.4)
Expenditure 11602 8881 30.6 11908 (2.6)
EBITDA 1499 924 62.2 1521 (1.4)
Depreciation 175 168 3.9 163 7.5
EBIT 1325 756 75.2 1358 (2.5)
Interest 21 17 20.6 17 23.5
PBT 1304 739 76.5 1342 (2.8)
Other Income 380 219 73.8 321 18.4
Exceptional items (250) 0 NA (1328) NA
Ta x 577 326 77.0 502 15.0
PAT 858 632 35.7 (167) NA
Adjusted PAT 1108 632 75.3 1161 (4.6)
EBITDA Margin (%) 11.4 9.4 202 bps 11.3 12 bps
EBIT Margin (%) 10.1 7.7 240 bps 10.1 (0) bps
Net Prot Margin (%) 8.5 6.4 201 bps 8.6 (19) bps
Source: Company, Karvy Research
Exhibit 3: Segmental Financials
YE Mar - Consolidated (Rs. Mn) Q4FY18 Q3FY18 QoQ % Q4FY17 YoY %
Segment-wise revenues
Energy 11158 8716 28.0 12073 (7.6)
Environment 2720 1737 56.6 2542 7.0
Chemical 801 906 (11.6) 841 (4.8)
Segment-wise EBIT
Energy 1119 720 55.4 1413 (20.8)
Environment 216 49 337.0 249 (13.2)
Chemical 26 130 (80.1) 188 (86.2)
Segment-wise EBIT Margin (%)
Energy 10.0 8.3 177 bps 11.7 (167) bps
Environment 7.9 2.8 509 bps 9.8 (185) bps
Chemical 3.2 14.4 (1113) bps 22.4 (1913) bps
Source: Company, Karvy Research
Slower execution,
commodity ination,
costs associated with
new facilities and one-os
impacted margins
4
May 22, 2018
Thermax Ltd
TMX has traded at 34x
1 yr forward earnings in the
past eight years
Exhibit 5: Segment wise Revenue (Rs. Bn)
Source: Company, Karvy Research
Exhibit 6: Segment wise EBIT Margin (%)
Source: Company, Karvy Research
Exhibit 8: Thermax - 8 yr PE Valuation
Source: Bloomberg, Karvy Research
Exhibit 7: Change in Earnings Estimates
YE Mar - Consolidated (Rs. Mn)
FY19E FY20E
Old New % Change Old New % Change
Net Sales 56323 53759 (4.6) 63725 65581 2.9
EBITDA 6000 5259 (12.4) 6925 6874 (0.7)
EBITDA Margin (%) 10.7 9.8 (87) bps 10.9 10.5 (39) bps
Adj. PAT 3763 3207 (14.8) 4323 4261 (1.4)
EPS (Rs.) 31.6 26.9 (14.8) 36.3 35.8 (1.4)
Source: Karvy Research
8.3
6.9
7.3
11.7
7.3
6.0
8.3
10.0
1.7
8.1
9.8
2.0
2.8
7.9
13.9
17.4
17.3
22.4
10.8
27.4
14.4
3.2
-5
0
5
10
15
20
25
30
Q1'17
Q2'17
Q3'17
Q4'17
Q1'18
Q2'18
Q3'18
Q4'18
Energy
Environment
Chemical
81.5
87.2
73.6
120.7
72.4
78.6
87.2
111.6
11.8
15.9
16.9
25.4
9.6
15.2
17.4
27.2
7.8
8.5
8.5
8.4
8.2
10.8
9.1
8.0
0
50
100
150
Q1'17
Q2'17
Q3'17
Q4'17
Q1'18
Q2'18
Q3'18
Q4'18
Energy
Environment
Chemical
10
20
30
40
50
60
2011
2012
2013
2014
2015
2016
2017
2018
1 YE Fwd P/E
Average
+1SD
-1SD
Exhibit 9: S&P BSE Capital Goods Index - 10 yr PE Valuation
Source: Bloomberg, Karvy Research
19
24
29
34
39
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
S&P BSE Capital Goods Index
Average
+1SD
-1SD
5
May 22, 2018
Thermax Ltd
Financials
Exhibit 10: Income Statement
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Revenues 51450 44831 44649 53759 65581
Growth (%) (4.6) (12.9) (0.4) 20.4 22.0
Operating Expenses 47158 40501 40639 48500 58708
EBITDA 4291 4330 4009 5259 6874
Growth (%) (7.4) 0.9 (7.4) 31.2 30.7
Depreciation & Amortization 722 819 824 1094 1244
EBIT 3569 3511 3185 4164 5629
Interest Expenses 122 97 129 107 109
Other Income 1224 1141 1164 1131 1211
PBT 4671 4376 4220 5188 6731
Tax 1428 1560 1658 1779 2309
Adjusted PAT 2834 2161 2311 3207 4261
Growth (%) 35.1 (23.7) 6.9 38.8 32.9
Source: Company, Karvy Research
Exhibit 11: Balance Sheet
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Cash & Equivalents 1494 1730 2464 2403 3374
Sundry Debtors 13341 10342 12432 12532 12907
Inventory 2903 2833 3666 2889 2918
Loans & Advances 2408 265 226 226 226
Investments 10498 8669 12828 12828 12828
Gross Block 21462 22212 23812 25212 26812
Net Block 8595 7050 8505 10070 10826
CWIP 278 1385 1034 1034 1034
Miscellaneous 11089 4530 5610 6948 6948
Total Assets 50606 50605 59450 61139 63270
Current Liabilities & Provisions 26103 24754 31773 31129 30041
Debt 342 460 530 468 473
Total Liabilities 26445 25215 32303 31597 30514
Shareholders Equity 225 225 225 225 225
Reserves & Surplus 23936 25151 26922 29317 32531
Total Networth 24162 25376 27147 29542 32756
Minority Interest 0 14 0 0 0
Total Networth & Liabilities 50606 50605 59450 61139 63270
Source: Company, Karvy Research
6
May 22, 2018
Thermax Ltd
Exhibit 12: Cash Flow Statement
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
PBT 4671 4376 4220 5188 6731
Depreciation 722 819 824 1094 1244
Interest 81 97 129 107 109
Tax Paid (1708) (1578) (1577) (1779) (2309)
Inc/dec in Net WC 2256 3635 (2579) 728 (1444)
Other Income (621) (1141) (1164) (1131) (1211)
Other non cash items (2876) (3969) 5815 (1338) 0
Cash ow from operating activities 2526 2240 5668 2869 3120
Inc/dec in capital expenditure (1324) (1188) (1793) (2660) (2000)
Inc/dec in investments (2425) 0 0 0 0
Others 2292 993 (3016) 1131 1211
Cash ow from investing activities (1458) (195) (4809) (1529) (789)
Inc/dec in borrowings (83) (409) 860 (757) (43)
Dividend paid (958) (823) (860) (1014) (1208)
Interest paid (81) (97) (129) (107) (109)
Cash ow from nancing activities (1123) (1329) (129) (1878) (1360)
Net change in cash (55) 716 730 (537) 971
Source: Company, Karvy Research
Exhibit 13: Key Ratios
YE Mar FY16 FY17 FY18 FY19E FY20E
EBITDA Margin (%) 8.3 9.7 9.0 9.8 10.5
EBIT Margin (%) 6.9 7.8 7.1 7.7 8.6
Net Prot Margin (%) 5.5 4.8 5.2 6.0 6.5
Dividend Payout Ratio (%) 23.9 30.3 29.1 26.0 23.3
Net Debt/Equity (x) 0.01 (0.01) (0.01) (0.03) (0.06)
RoE (%) 12.3 8.7 8.8 11.3 13.7
RoCE (%) 11.4 8.2 8.3 10.6 13.1
Source: Company, Karvy Research
Exhibit 14: Valuation Parameters
YE Mar FY16 FY17 FY18 FY19E FY20E
EPS (Rs.) 25.1 19.8 20.6 26.9 35.8
DPS (Rs.) 6.0 6.0 6.0 7.0 8.4
BVPS (Rs.) 194.0 207.9 220.4 237.9 261.4
PE (x)* 31.6 53.3 58.5 42.6 32.1
P/BV (x)* 3.9 4.6 5.1 4.8 4.4
EV/EBITDA (x)* 21.0 26.5 33.7 25.8 19.6
EV/Sales (x)* 1.7 2.6 3.0 2.5 2.1
Source: Company, Karvy Research; *Represents multiples for FY16 - FY18 are based on historic market price
7
May 22, 2018
Thermax Ltd
Stock Ratings Absolute Returns
Buy : > 15%
Hold : 5-15%
Sell : < 5%
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Analyst certication: The following analyst(s), De Arul Kaarthick & Ankit Soni, who is (are) primarily responsible for this report and whose name(s)
is/are mentioned therein, certify (ies) that the views expressed herein accurately reect his (their) personal view(s) about the subject security (ies) and
issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specic recommendation(s) or views contained in
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