Engineering stocks have gained significant ground over the last few months. Amongst these, Thermax has appreciated by more than 100% in the last 4 months. In this article, we analyse the business of the company, its key growth areas going forward, which will give a fair idea whether the current rally in the stock price of the company is justified based on its fundamentals.
Thermax Limited operates in a niche segment as 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. It 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.
The company has organised its business broadly in two categories, namely energy and environment engineering. FY03 was a good year for the company as it registered a 23% increase in the topline while the bottom line improved by over 100%! Though 74% of the net profit contribution came from fourth quarter, it was for the first time the company managed to post profits in all four quarters (of FY03). The revenue sharing for the company between energy and environment stood at 60:40 and the company expects it to remain unchanged for FY04.
However, 1QFY04 was not encouraging, as the company’s power business underperformed owing to lack of substantial orders and also, the margins from its environment business remained under pressure. However, in order to improve the topline from the domestic territory, the company is planning to revamp its dealer network and enter the services business e.g. servicing of existing power plants. Moreover, since Indian markets contribute almost 80% of revenues, it is important for Thermax to continue focusing on Indian markets.
The company is also increasingly focusing on international markets like Russia, South East Asia, Thailand and Malaysia to enhance its export presence. It has acquired two subsidiaries, one each in UK and US in the last 2 years. These subsidiaries bring business to the company in places where it is unable to export directly due to country-specific entry barriers. The revenues from its US subsidiary were US$ 6.6 m while its UK subsidiary contributed 5.5 m pounds in FY03. The company is aiming a 25 % growth from both these subsidiaries in FY04.
As far as the company’s other business is concerned, the trend of environmental friendly solutions is still to pick up in India. However, we believe that as India Inc. goes global, awareness to environmental concerns will definitely increase. The awareness to use energy efficient products and practices is also increasing because it is economical. Though they require an upfront investment, the long-term benefits are immense. Thermax, with its experience in this field, is ideally placed to capitalize on this long-term trend.
The stock gained momentum after the company declared impressive results for FY03. At the current price of Rs 270, the stock trades at P/E multiple of 13.4x, FY03 earnings. At the current juncture, the stock seems fairly valued.
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