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Thermax Ltd: Waste water segment dips into losses - Views on News from Equitymaster

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Thermax Ltd: Waste water segment dips into losses

Jan 28, 2014

Thermax has announced its third quarter results for 2013-2014 (3QFY14). During 3QFY14, both topline and bottomline declined by 3.2% YoY and 12.7% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales declined by 3.2% YoY during 3QFY14. The fall has come in on the back of about 4.0% YoY decline in the energy segment and 3.4% YoY decline in the environmental segment.
  • Operating profits decline by 18.8% YoY during 3QFY14 with margins registering a decline of 170 bps on a YoY basis.
  • Net profits decline 12.7% YoY due to muted performance at the operating level. However, a sharp rise in other income (+85.1% YoY) due to maturity of FMPs during the quarter curtailed the fall at the bottomline level.
  • The standalone order back log of the company stood at Rs 57 bn during 3QFY14. Order inflow during the quarter stood at Rs 13.6 bn, up 6.3% YoY. On a consolidated basis the order book stood at Rs 64.4 bn. Domestic orders constitute roughly 76% of the total order book. Sectors such as food, refinery, sugar and chemicals contributed to the order inflow during the quarter with product orders showing traction.

Standalone performance snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Income from operations  10,468 10,138 -3.2% 32,227 29,196 -9.4%
Expenditure 9,350 9,229 -1.3% 28,828 26,522 -8.0%
Operating profit (EBDITA) 1,119 908 -18.8% 3,399 2,674 -21.3%
Operating profit margin (%) 10.7% 9.0%   10.5% 9.2%  
Other income 124 229 85.1% 486 371 -23.7%
Interest 20 23 15.0% 92 50 -45.9%
Depreciation 133 147 11.0% 403 430 6.5%
Profit before tax 1,090 968 -11.2% 3,389 2,566 -24.3%
Tax 326 301 -7.8% 1,043 1,095 5.0%
Profit after tax/(loss) 764 666 -12.7% 2,346 1,471 -37.3%
Net profit margin (%) 7.3% 6.6%   7.3% 5.0%  
No. of shares         119.2  
Basic & Diluted earnings per share (Rs)          12.3  
P/E ratio (x)*         30.4  
* On a trailing 12-months basis

What has driven performance in 3QFY14?
  • Revenues declined 3.2% YoY during 3QFY14. This was mainly due to a 4% YoY decline in revenues from the energy segment. Revenues from the energy segment declined due to slowdown in large EPC projects. However, the products and service business continues to do well. Revenues from the environment segment declined 3.4% YoY due to poor performance from air pollution and waste water treatment segments. The operating margins of the environment segment fell drastically to 2.3% in 3QFY14 as waste water segment reported a loss for the quarter. Declining profitability from the air pollution segment also restrained margin growth.

    Segment-wise performance (Standalone)
      3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Revenue (Rs m) 7,993 7,671 -4.0% 24,991 21,858 -12.5%
    % share 75.3% 75.1%   76.2% 74.2%  
    PBIT margin 10.8% 10.9%   10.4% 11.4%  
    Revenue (Rs m) 2,627 2,538 -3.4% 7,810  7,620 -2.4%
    % share 24.7% 24.9%   23.8% 25.8%  
    PBIT margin 10.1% 2.3%   9.9% 6.8%  
    Revenue (Rs m)* 10,620 10,209 -3.9% 32,801 29,477 -10.1%
    PBIT margin 10.6% 8.7%   10.3% 10.2%  
    * Excluding others & inter-segment adjustments

  • Operating profits declined 18.8% YoY during the quarter with margins declining by 170 bps on a YoY basis to 9.0%. Fall in revenues led to a leverage loss and thus operating profits declined at a faster pace.

  • Net profits declined 12.7% YoY during the quarter due to muted performance at the operating level. However, 85.1% YoY increase in other income due to maturity of FMPs curtailed the fall in profitability at the bottom line level.
What to expect?
At the current price of Rs 670, the stock is trading at a multiple of 30.4x its trailing twelve month earnings. The performance of the environment segment especially on the profitability front was particularly disappointing during the quarter. The waste water segment dipped into negative and may take 1-2 quarters to revive. Also, the Babcock JV is still into losses. In another development, though not significant, the company had to suspend operations at its Mundra SEZ plant. The project mostly was an export oriented project with Rs 2-3 bn of yearly revenue potential.

Going forward, management does not expect the situation in the power sector to improve. However, strong order flows from the product & services business are likely to continue which shall help considering the dry spell in the power sector. Nonetheless, given the expensive valuations and muted outlook on the power sector, we maintain our SELL view on the stock.

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