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Thermax: Riding the investment cycle

Aug 9, 2004

Performance summary
Pune based engineering major, Thermax India, declared good results for 1QFY05. On the back of a good performance of both its business segments - energy and environment, the topline of the company showed a strong growth. However, despite the improvement in operating margins, the company's bottomline registered a de-growth. We analyse the 1QFY05 results below.

(Rs m) 1QFY04 1QFY05 Change
Net sales 779 1,248 60.2%
Other income 88 38 -56.3%
Expenditure 760 1,191 56.7%
Operating profit (EBDITA) 19 57 196.4%
Operating profit margin (%) 2.5% 4.6%  
Interest 1 2 50.0%
Depreciation 23 21 -8.0%
Profit before tax 83 73 -12.4%
Extraordinary items (14)    
Tax 12 17 44.1%
Profit after tax/(loss) 57 56 -2.1%
Net profit margin (%) 7.3% 4.5%  
No. of shares (m) 23.8 23.8  
Diluted earnings per share (Rs)* 9.6 9.4  
P/E ratio (x)   40.4  
(* annualised)      

Company background
Thermax India operates in a niche segment of the engineering sector. 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. The company manufactures all kinds of fuel boilers and is amongst the market leaders in the same. Thermax updates its technology through joint ventures and strategic alliances with global technology leaders and exports its systems to around 40 countries all over the world.

What has driven performance in 1QFY05?
Sales:  The topline of the company surged smartly by 60% YoY during the quarter aided by a 50% growth of its energy division. Since boilers are one of the largest contributors to the energy division's sale, upturn in investment cycle is likely to continue to benefit this division going forward. With industries like steel, copper, zinc, paper and chemicals on a capacity expansion spree over the next few years, Thermax's boilers business is likely to witness a steady growth.

Also another growth driver for the division is the captive power business. The revenues from the captive power business declined in FY04 due to poor order backlog. However, as on 31st March 2004, the company had orders to set up around 77 MW captive power capacity, which amounts to approximately Rs 2 bn. Going forward, with the textile industry expected to set up captive power plants, the order inflow is likely to remain stable.

Segmental break-up
(Rs m) 1QFY04 1QFY05 Change
Energy 544 813 49.5%
PBIT margins (%) 5.0% 4.3%  
Environment 266 498 86.9%
PBIT margins (%) -0.4% 9.8%  

Thermax's environment business grew significantly (87% YoY) in the June quarter. It must be noted that the company's air pollution division had witnessed a 200% increase in the order booking during FY04. Further, we believe that its water and waste business is also likely to have steady revenue inflows.

For the company as a whole, the order inflow increased by 76% during the quarter and stood at Rs 3 bn. The order backlog for the company was at Rs 6 bn, which is more than 100% of the company's FY04 revenues. Since, order execution cycle is shorter, large part of the orders received will filter in the revenues of the company in the near future.

Operating margins:  The operating margins improved by around 210 basis points due to the turnaround performance of the company's environment division (10% PBIT margins during 1QFY05 as compared to 0.4% same quarter last year). Though consumption of raw materials as a percentage of sales increased by 6%, this increase was partially negated by the savings on staff costs and other expenditure, which helped the company's performance at operating level.

Net Profit Margins:  However, despite the improvement in operating margins, the company's bottomline showed a de-growth during the quarter. This could be attributed to the lower other income during the quarter, which fell by 56% YoY. Just to put things in perspective the impact of the other income component on the company's bottomline, on excluding the other income, the net profit of the company stood at Rs 30 m as compared to loss of Rs 16 m last year.

What to expect?
At the current price of Rs 380, the stock trades at P/E multiple of 40.4x annualised 1QFY05 earnings. Investors should borne in mind the fact that for engineering companies, first quarter extrapolation would not be the true representation of the full year performance. The management has forecasted a 40% topline growth, which sounds realistic considering the order backlog. Further, with the investment cycle on the upturn, we believe that the company would continue to benefit from higher order inflows.

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