Pick of the week
Thermax Ltd
BSE Code: 500411
CMP: Rs.157
P/E: Rs.6.84
Face Value: Rs.2
Dividend:400%
EPS: Rs.22.95
52-Week High/Low: Rs.622/Rs.150.5
Resistance zone: Rs.160—Rs.166.
Introduction: Thermax Ltd is a global solution provider in energy and environmental engineering. Itoffers products and services in energy sector (boilers, heaters & coolers, waste heat recovery, captive power production) and industrial environment friendly solutions (water treatment and recycling, waste management and performance chemicals).
Thermax Ltd is a market leader in providing small and medium sized industrial boilers; while its biggest rival BHEL focuses on large utility boilers.
It is well positioned to capture the market share of industrial and smaller utility boilers using its innovative technology. Capacity expansion will enable the company to fulfill the growing demand of boilers.Thermax brings its rich experience gained from customer engagements around the world. Through technology partnerships and strategic alliances, it provides superior value to help industry perform efficiently and profitably. With a dedicated sales & service network spread over South East Asia, Middle East, Africa, Russia, India, UK and the US, Thermax ensures innovative solutions and reliable support for client's business improvement. Strong capex announcement made by its user industries would continue to drive the order book of Thermax Ltd.
Shareholding Pattern: The promoters hold 61.98% while the general public holds 38.02 %. Among the general public, Arisaig Partners (Asia) PTE Ltd A/c Arisaig India holds 1.02% while Saif III Mauritius Company Ltd holds 1.74% shares of the company.
Financials: For Q3FY09, the company came out with flat top and bottomlines consider Q-o-Q. This is significant considering the overall economic downturn. The total income of the company for Q3FY09 came out to be Rs.803.83 Cr as against Rs.854 Cr. The net profit of the company for Q3FY09 came outto be Rs.72.3 Cr as against Rs.75.03 Cr in the same period previous year. This is on a very small equity capital of Rs.23.83 Cr. The year to date income of the company was Rs.2, 343 Cr (Rs.2, 311.3 Cr in the same period, last year), while profit after tax for the period stood at Rs.193 Cr (Rs.200.3 Cr in the same period previous year).
On a consolidated basis, year to date, Thermax group’s total income stood at Rs.2, 447.1 Cr (Rs.2, 464.2Cr) and profit after tax was Rs.183.5 Cr (Rs.207.8 Cr).The EPS of the company for Q3FY09 is almost flat at Rs.6.07, as against Rs.6.30 in the same period previous year. Even the operating profit margin is flat at 13.28% in Q3FY09 as against 13.43% in the same period previous year. The net profit margin of the company is also flat at 9.09% as against 8.87%in the same period previous year.
Industry Outlook:Thermax Ltd is power utilities manufacturer and a sophisticated player in the environment friendly solutions. Intense capital and technological requirements makes this sector of the market less fragmented. Total market share by sales of 4 (four) firms (Ecoboard Industries Ltd, Ion Exchange Ltd,Thermax Ltd & Western Paques) of pollution control equipment manufacturing industry is 98.8% in which the Thermax Ltd alone owns the 82.5% of share.
Thermax is second largest Power Equipment manufacturer, renowned supplier of industrial and utilitiesboilers, with a market share of around 21%, just next to the BHEL which stands at 69%.The ambitious target of 78,000 MW for additional power generation capacity taken up as part of the Eleventh Plan is slated to be on the fast track with the government already approving several megapower projects. It is widely expected that the intensive capital investment in mega power generation facilities will drive the demand of power utilities.
Steel, Cement and Petrochemicals are the sectors, which contribute 60% of the total order book forThermax Ltd. Thus, High capital expenditure in these sectors will be the main driving factor. Till some months back, the high interest rates regime have lead to the postponement of capital expenditure,which is going to change in the near future. It is expected that these sectors will be witnessing the increased investment in the near future
Investment Rationale:
(a) Good order book position: The Thermax group has an order book of around Rs.4,103 Cr as ofDecember 31, 2008 which is substantially up considering Q-o-Q. Last year Thermax bagged Rs.820 Crorder from an oil company under expansion in the Western India to build utility segment boilers which are currently only supplied by BHEL. In October, 2008, the company won a Rs.450 Cr order for setting up a captive power plant. The 60 MW power plant will be built and commissioned on a turnkey basis for a green field integrated steel complex in Andhra Pradesh. The plant will use process gases and blended coal as fuel. The Company is currently bidding for multiple projects with an average order size of Rs.500Cr.
b) Increased carry forward order book: Thermax Ltd has good carry forward order book, i.e.unexecuted orders. It is widely expected that a large pile of these orders are sufficient enough to takecare of revenue growth for few quarters incase of unexpected drop in the new orders.
c) Efficient Working Capital Management: The Company has been effective in managing the Debt Equity position at lowest possible over the past few years. This type of structure makes the earnings(EPS) less volatile, to have linear variability with its operating earnings (EBIT). This type of structure is unusual for a capital-intensive company. The main reason for this is the effective working capital management.Company has been able to maintain its cash conversion cycle by effectively increasing its creditor’s velocity in line with the debtor’s velocity. At the same time the company has been able to bring down thedays of inventory. The company’s advances from customers have gone up substantially in line with the increasing size of order book. Advances make the net working capital to be negative. We can expect thetrend to continue and this will allow the company to fund its capital expenditure with the internal accruals.
d) National Action plan on climate change: On 30th June ‘08, Prime minister of India, unveiled climate change action plan which seeks to promote sustainable development through use of clean technologies.The focus of this action plan is on implementation of energy efficiency measures, effective water resource management, and enhancement of eco-system services. Further, the clean environment is themain focus of this century. This in a way augments well for the environmental engineering division ofThermax Ltd.
e) Tie up with Balcke-Dürr GmbH and Babcock & Wilcox: In February, 2008, Thermax Limited and Balcke-Dürr GmbH, Germany signed a Technical Know How Transfer and License Agreement for dry and wet Electrostatic Precipitators (ESPs) — air pollution control equipment for power, industrial and utility segments upto 300 MW. The agreement will help Thermax to gain a rightful share of the air pollution control business emerging from this sector. Thermax Ltd has also signed a license agreement with Babcock & Wilcox (B&W) for utility boilers that grants the former, the right to engineer, manufactureand sell sub-critical B&W Radiant utility boilers in India. This should enable it to gain a strong hold in themarket for power utilities.
(f) New Manufacturing Facility: The Company has decided to set up a new manufacturing facility inIndia, which would manufacturer large boilers having a capacity ranging from 100 Mw to 800 Mw. Thecompany has signed a technical agreement with US--based Babcock & Wilcox Co for making sub--critical boilers in India, as mentioned earlier. The company plans to invest Rs.300 Cr in the Phase I of the project, which would have an annual boiler manufacturing capacity of 1,500 Mw.
(g) Cutting edge technologies: Thermax has sourced cutting-edge technologies for its business operations through alliances with world technology majors, like Babcock & Wilcox USA, Kawasaki Thermal Engineering Company, Japan; Eco Tech, Canada; Honeywell, USA; Bloom Engineering, Germany;Struthers Wells and Ozone Systems, USA. Through technology partnerships and strategic alliances, the company is expected to perform well going forward. With a dedicated sales & service Network spread over South East Asia, Middle East, Africa, Russia, India, UK and the US, Thermax ensures innovative solutions and reliable support for client's business improvement.
(h) Production on China plant to drive growth: Very recently the production at China unit of the company has started which will usher in a new beginning for the company. This plant has cost around $10million with a capacity to manufacture 200 chillers. It expects to reach full capacity utilization in a three-year time frame. China accounts for 50% of the $600 million global market for absorption chillers.In FY09, the company is carrying out a capex of around Rs.3 bn towards setting up a independent utility investment.
Concerns:
• Thermax Ltd may see selling pressure as institutional investors may churn portfolio in favour of companies with less dependence on private sector for orders.
• Most of the company's projects business and large boiler orders are at fixed price. Unless, the company builds cushion or hedges against steel price, the profitability on these orders are at arisk; given the probability of increase in steel prices in next few months.
• Given the prevailing economic conditions coupled with the credit squeeze, many industries are reviewing their capital expenditure plans.
• Since some of Thermax's revenue (packaged boilers and enviro chemicals) come from fast-moving products with very low invoice cycle hence revenue growth could taper off to around 12%-15% inFY09.
Conclusion and Chart-Check: The recommendation of Thermax Ltd is backed by three reasons, its strong financial performance, strong order book and most importantly company’s execution capability.The fact that the government has lifted the ban on coal linkage for Captive power projects, has spurred interest into such power projects. Thermax is aiming for a 10% market share out of the planned capacity in power generation by the private sector. With the significant private sector interest in power generation, Thermax Ltd is expected to generate sizeable revenue from utility boilers in the coming years.
What I feel is that India’s long-term story is intact and capital goods have a larger part to play in that.Hence, it is imperative at this stage to invest in fundamentally strong scrip like Thermax with a long term perspective. The scrip is available near its 52-week low price and most importantly the valuations also looking very attractive. Hence, considering the points mentioned above it is found that the scrip ofThermax Ltd could be purchased with a short term target of Rs.165—Rs.180. The scrip has a strong resistance around Rs.160—Rs.166 range.
On the charts it appears that the scrip has bottomed out in the short term and is poised to move up.The MACD, Stochastic (slow and fast), Williams % R, Bollinger Bands, and RSI are all in buy mode. Also good point is that the stock has not broken down the envelop pattern formed on daily charts. Moreover,it has given a minor breakout at Rs.155 and is looking to cross the stiff resistance zone of Rs.160—Rs.165, provided the market conditions remain buoyant. However, these days, the stock markets arehighly unpredictable and hence please keep a SL of Rs.148, (exit) for any short term trade. The stock atthe CMP of Rs.157 is available at throw-away price, considering the potential of the company. Last yearKotak Securities Ltd came out with a price target of Rs.526.
Note: The stock was recommended to Paid Groups in the Sunday Report (15-03-09) at the CMP of Rs.157.