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Thermax: Billing delays impact sales - Views on News from Equitymaster
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Thermax: Billing delays impact sales
Aug 7, 2008

Performance summary
  • Net sales grow by 8% YoY during 1QFY09, led by strong growth in the company’s environment solutions business. However, sales of the energy business drop by 3% YoY.
  • Operating margins expand by 0.5% YoY, aided by lower raw material costs (as percentage of sales).
  • Net profits grow by 5% YoY on the back of a stable operating performance. However, net profit margins contract by 0.2% YoY, due to higher tax and depreciation charges.

Consolidated financial snapshot
(Rs m) 1QFY08 1QFY09 Change
Net Sales 7,136 7,725 8.2%
Expenditure 6,372 6,861 7.7%
Operating profit (EBITDA) 764 864 13.1%
Operating profit margin (%) 10.7% 11.2%  
Other income 103 105 2.4%
Depreciation 53 73 38.1%
Interest 4 3 -35.2%
Profit before tax 810 894 10.3%
Tax 254 310 22.0%
Profit after tax/(loss) 556 584 5.0%
Net profit margin (%) 7.8% 7.6%  
No. of shares (m)   119.2  
Earnings per share (Rs)*   24.6  
P/E ratio (x)*   19.6  
* On a trailing 12-month basis

What has driven performance in 1QFY09?
  • Thermax recorded an 8% YoY growth in its topline during 1QFY09, led by a 56% YoY growth in the ‘environment’ solutions business. This segment contributed 24% of the total topline during the quarter, while the ‘energy’ solutions division forming the balance (76%). It must be noted that during the corresponding quarter last year, this segment contributed 16% of the total revenue. Thermax’s energy business witnessed a 3% YoY drop in revenues. However, the company’s management has attributed this fall to a delayed billing process.

  • During the quarter, both the business segments witnessed improvement in PBIT margins as compared to the previous year. The energy business’ margins improved by 1.3% YoY, while the environment solutions business’ margins expanded by 1.5% YoY. The company’s overall PBIT margins improved to 12.3% in 1QFY09 from 11% in 1QFY08.

    Segment wise performance table
    (Rs m) 1QFY08 1QFY09 Change
    Revenue 6,143 5,955 -3.1%
    % share 83.8% 76.2%  
    PBIT margin 11.3% 12.6%  
    Revenue 1,191 1,859 56.0%
    % share 16.2% 23.8%  
    PBIT margin 9.6% 11.1%  
    Revenue 7,334 7,814 6.5%
    PBIT Margin 11.0% 12.3%  
    * Excluding inter-segment adjustments

  • During 1QFY09, Thermax’s operating profits grew by 13% YoY and its margins expanded by 0.5% YoY. This was mainly on account of lower raw material costs (as a percentage of sales). While the employee costs and those on purchase of traded goods increased by 13% YoY and 80% YoY in absolute terms, their percentage towards sales grew by a minor 0.4% YoY. The other expenditures grew by 30% YoY in absolute terms, taking its share of sales to 19.7% in 1QFY09 from 16.4% in 1QY08. This was primarily because of two reasons - Rs 159 m forex loss and de-capitalisation of preoperative expenses of its Chinese unit (Rs 55 m). If we exclude both these one-off items, the percentage would be at 16.6% of sales during the latest quarter.

  • As compared to the growth in operating profits, Thermax’s bottomline grew at a slower pace of 5% YoY during the quarter. Growth was muted mainly on account of higher tax and depreciation costs. Also the fact that the other income grew by only 2% YoY led to a slower increase in profits.

  • Thermax recently bagged its largest ever order valued at about Rs 8.2 bn for four (750 tonnes per hour) utility boilers from an oil major. This order is likely to be completed within 30 months.

What to expect?
At the current price of Rs 482, the stock is trading at a multiple of 19.6 times its trailing twelve months earnings. The company’s consolidated order book as of June 2008 stands at Rs 28 bn (0.8 times its FY08 consolidated sales), of which 81% consist of orders in the energy segment and the balance in the environment solutions business. Of the total order backlog, 75% is for domestic while the balance is for exports.

Thermax’s management has mentioned that enquiries for products, in both the segments, have been strong. However, certain amounts of delays are being witnessed from the clients’ side, especially in the healthcare, automobile and textile sectors. This has been mainly due to high borrowing costs and an inflationary situation. The management further added that as most of the companies are going in for cost cutting methods, they are asking for better pricing from Thermax. It should be kept in mind that the company does cater to small and medium enterprises in their water and heating projects. If this inflationary situation sustains in the short to medium term, it could have a negative impact on the company’s margins going forward.

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