In line with other engineering stocks, the stock price of Thermax has also gained significantly in last few months. The graph below shows the returns on Rs 100 invested in Thermax as compared to Rs 100 invested in BSE-Sensex. In this article, we analyse the business of the company, its key growth areas going forward, which will give a fair idea whether the current rally in the stock price of the company is justified based on its fundamentals.
Thermax is in the business of energy and environment management products and services, catering to industrial scale clients. It provides integrated equipments and services in energy (boilers, heaters, and captive power plants) and environment friendly industrial solutions like water and waste solutions, chemicals, etc, thus it operates in a niche segment. Its joint ventures and strategic alliances with global technology leaders help the company to update its technology. Exports contribute around 20% of the company's topline. The products generally exported are boiler / heaters, VAC, chemicals, etc.
The company's performance in 1HFY04 has not been impressive as the topline dipped by around 6%, however due to higher other income (exposure in the equity markets), the bottomline showed a impressive growth. The dip in the 1HFY04 topline is due to poor performance of the company's energy division, (which contributes around 60% of the company's revenues).
Net Profit Margins
However, the company has been able to improve its performance from the international markets. It has acquired two subsidiaries, one each in UK and US in the last 2 years. These subsidiaries bring business to the company in places where it is unable to export directly due to country-specific entry barriers. The revenues from its US subsidiary were US$ 6.6 m while its UK subsidiary contributed 5.5 m pounds in FY03. The company is aiming a 25 % growth from both these subsidiaries in FY04. The company is also increasingly focusing on international markets like Russia, South East Asia, Thailand and Malaysia to enhance its export presence.
As far as the company's other business is concerned, the trend of environmental friendly solutions is still to pick up in India. However, we believe that as India Inc. goes global, awareness regarding environmental concerns will definitely rise. The awareness to use energy efficient products and practices is also increasing because it is economical. Though they require an upfront investment, the long-term benefits are immense. Thermax, with its experience in this field, is ideally placed to capitalize on this long-term trend.
At the current price of Rs 417 the stock trades at P/E multiple of 23.5x, 1HFY04 earning. Though fourth quarter is blockbuster for an engineering company, looking at the valuations it seems that future growth has been factored into the price.
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