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Thermax: Growth slows but margins intact - Views on News from Equitymaster
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Thermax: Growth slows but margins intact
Feb 7, 2013

Thermax has announced its third quarter results for 2012-2013 (3QFY13). During 3QFY13, both topline and bottomline declined by 17.5% YoY and 20% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales declined by 17.5% YoY during quarter ended December 2012. The fall has come in on the back of about 19.5% YoY decline in the energy segment and 13.1% YoY decline in the environmental segment.
  • Operating profits decline by 18% YoY during 3QFY13. However, margins remain relatively flat at 10.7% during the quarter compared to 10.8% in 3QFY12.
  • Net profits decline 20% YoY due to muted performance at the operating level, fall in other income and rise in interest expenses.
  • The consolidated order back log of the company stood at Rs 51.9 bn during 3QFY13. The breakdown is as follows: Rs 40.7 bn worth of orders belong to the Energy segment while Rs 11.1 bn to the environment segment. The consolidated order intake stood at Rs 14.5 bn for the current quarter.

Standalone performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Income from operations 12,693 10,468 -17.5% 36,172 32,227 -10.9%
Expenditure 11,328 9,350 -17.5% 32,265 28,828 -10.7%
Operating profit (EBDITA) 1,365 1,119 -18.0% 3,907 3,399 -13.0%
Operating profit margin (%) 10.8% 10.7%   10.8% 10.5%  
Other income 157 124 -21.0% 512 486 -5.1%
Interest 17 20 17.7% 32 92 189.9%
Depreciation 121 133 9.8% 349 403 15.6%
Profit before tax 1,384 1,090 -21.2% 4,038 3,389 -16.1%
Tax 429 326 -24.0% 1,268 1,043 -17.7%
Profit after tax/(loss) 955 764 -20.0% 2,771 2,346 -15.3%
Net profit margin (%) 7.5% 7.3%   7.7% 7.3%  
No. of shares         119.2  
Basic & Diluted earnings per share (Rs)*         19.7  
P/E ratio (x)*         19.1  
* On a trailing 12-months basis

What has driven the performance in 3QFY13?
  • Revenues declined 17.5% YoY during 3QFY13. This was mainly due to a 19.5% YoY decline in revenues from the energy segment. Revenues from the energy segment declined due to execution issues in the project business. However, the product business did well. The company won an EPC order worth Rs 5 bn for a captive power plant from a leading public sector undertaking during the quarter. Management stated that the carry forward order book is expected to remain flat for the year. However, the order finalization in non-power industries, namely food, oil & gas and cement is expected to drive order inflows from next year.

    Segment-wise performance (Standalone)
      3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Revenue (Rs m) 9,931 7,993 -19.5% 28,303 24,991 -11.7%
    % share 76.7% 75.3%   76.6% 76.2%  
    PBIT margin 11.3% 10.8%   11.0% 10.4%  
    Revenue (Rs m) 3,024 2,627 -13.1% 8,640 7,810 -9.6%
    % share 23.3% 24.7%   23.4% 23.8%  
    PBIT margin 12.9% 10.1%   11.7% 9.9%  
    Revenue (Rs m)* 12,955 10,620 -18.0% 36,943 32,801 -11.2%
    PBIT margin 11.7% 10.6%   11.2% 10.3%  
    * Excluding others & inter-segment adjustments

  • Operating profits declined 18% YoY during the quarter. However, operating margins were relatively flat at 10.7% in 3QFY13 compared to 10.8% in 3QFY12. On the segmental basis, margins from the energy segment declined by 50 bps YoY to 10.8%. However, in the environmental segment margins registered a sharp fall of 280 bps YoY. This was predominantly due to dip in margins from the air pollution sector as prices of coded steel increased.

  • Net profits declined 20% YoY during the quarter due to muted performance at the operating level and fall in other income.

What to expect?
At the current price of Rs 584, the stock is trading at a multiple of 19.1 times its trailing twelve month earnings. While the overall ordering environment is muted, one large order worth Rs 5 bn from the power sector helped the company to register order inflows of Rs 14.5 bn during the quarter. Going forward, management does not expect the situation in the power sector to improve though it clearly stated that the pricing levels prevailing in the industry are unsustainable.

However, there are signs of revival from the cement sector. The industry is operating at 75-80% capacity and thus enquiries are coming in. Also, mid size steel companies are likely to witness brownfield expansion. As far as the performance of the subsidiaries is concerned, it may be noted that Danstoker was profitable during the quarter. However, Thermax Instrumentation Ltd posted a loss. Considering the future outlook and expensive valuations we maintain our SELL view on the stock.

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