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Thermax Ltd: Environment segment curtails growth - Views on News from Equitymaster
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Thermax Ltd: Environment segment curtails growth
Jul 3, 2014

Thermax has announced its fourth quarter results for 2013-2014 (4QFY14). During 4QFY14, both topline and bottomline declined by 5.8% YoY and 8.2% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales declined by 5.8% YoY during 4QFY14.
  • Operating profits declined by 20% YoY during 4QFY14. Staff cost and other expenses on an absolute basis as well as in proportion to sales increased. This resulted in decline in margins from 11.4% in 4QFY13 to 9.7% in 4QFY14.
  • Increase in other income and decrease in tax rate arrested a steep decline in net profits despite bad operating level performance. Hence, net profit registered a decline of 8% YoY.
  • The standalone order back log of the company stood at Rs 53.9 bn (up 24% YoY). Standalone order inflow during the quarter stood at Rs 11.4 bn, down 1% YoY. On a consolidated basis, the order book stood at Rs 61.2 bn (up 25% YoY).
  • The company has declared a dividend of Rs 6 per share for FY14.

Standalone performance snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Income from operations 14,682 13,825 -5.8% 46,909 43,022 -8.3%
Expenditure 13,009 12,486 -4.0% 41,837 38,929 -7.0%
Operating profit (EBDITA) 1,672 1,339 -20.0% 5,071 4,092 -19.3%
Operating profit margin (%) 11.4% 9.7%   10.8% 9.5%  
Other income 244 351 43.8% 730 643 -11.9%
Interest 5 39 723.9% 96 88 -8.3%
Depreciation 145 148 2.1% 549 578 5.3%
Profit before tax 1,767 1,503 -14.9% 5,156 4,069 -21.1%
Tax 614 444 -27.7% 1,657 1,539 -7.1%
Profit after tax/(loss) 1,153 1,059 -8.2% 3,500 2,530 -27.7%
Net profit margin (%) 7.9% 7.7%   7.5% 5.9%  
No. of shares         119.2  
Basic & Diluted earnings per share (Rs)          21.2  
P/E ratio (x)*         46.0  
* On a trailing 12-months basis

What has driven performance in 4QFY14 and FY14?
  • Sales for the quarter have declined due to poor performance of both the segments- Energy and Environment where sales dropped by 3.7% YoY and 14.9% YoY respectively. The drop in sales was largely on account of slow pace of execution.

  • At the cost level, raw material cost has decreased as a percentage of sales. However, there is an absolute increase of about 10% YoY and 15% YoY respectively in the staff cost and other expenses. This has resulted into decline in operating profit and margins. Segment wise, EBIT margins has declined in environment segment from 11.8% in 4QFY13 to 2.6% in 4QFY14. This was due to losses on account of provisions made in the water treatment business.

  • Net profit for the company dropped by 8.2% YoY due to fall in operating profit partially offset by rise in other income. Other income increased by 43.8% YoY which helped curtail fall in the profits.

  • For FY14, the company's sales declined by 8.3% YoY. The operating profit declined by 19.3% YoY resulting in drop in margins from 10.8% in FY13 to 9.5% in FY14. The company reported a decline of 28% YoY in net profit mainly due to increase in tax expenses. The tax expenses for the year included provision made for estimated liability likely to arise in relation to certain business expenses.

    Segment-wise performance (Standalone)
      4QFY13 4QFY14 Change FY13 FY14 Change
    Energy
    Revenue (Rs m) 11,391 10,968 -3.7% 36,383 32,825 -9.8%
    % share 76.5% 78.6%   76.3% 75.6%  
    PBIT margin 10.5% 11.2%   10.4% 11.3%  
    Environment
    Revenue (Rs m)  3,500  2,978 -14.9% 11,310 10,598 -6.3%
    % share 23.5% 21.4%   23.7% 24.4%  
    PBIT margin 11.8% 2.6%   10.5% 5.6%  
    Total
    Revenue (Rs m)* 14,891 13,946 -6.3% 47,692 43,423 -9.0%
    PBIT margin 10.8% 9.4%   10.5% 9.9%  
    *Excluding other activities and inter-segment adjustments
What to expect?
Thermax's quarterly and annual sales were marred by slow pace of execution. Also, decline in margins was a result of reduced operating leverage as both its business segments suffered due to slowdown in business. Going forward, the management is hopeful of a revival in the domestic business post H1FY15. It expects order activity to pick up in the power sector particularly from the captive segment. Thermax's subsidiaries' performance has also been disappointing. However, the performance is expected to improve as the Reliance Industries order of Rs 17 bn for CFBC boilers is likely to be executed under the Thermax and Babcock-Wilcox joint venture.

At the current price of Rs 977, the stock is trading at a multiple of 46x its trailing twelve month earnings. Since FY14 is over, we shall revisit our estimates and view on Thermax. We shall soon update investors with a revised view, if any, and target price based on FY17 earnings. Till then, we maintain our SELL view on the stock and recommend investors to avoid buying the stock at this price levels.

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