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Thermax Ltd: International markets drive orders
Nov 10, 2014

Thermax has announced its second quarter (2QFY15) results. During 2QFY15, both topline and bottomline grew by 15% YoY and 185% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales grew by 15% YoY during 2QFY15.
  • Operating profits increased by 41% YoY during 2QFY15. Margins thus grew by 1.7% from 7.8% to 9.5%.
  • Profit after tax grew a whopping 185% YoY due to the growth operating profit, a rise in other income as well as lowering of the effective tax rate during the quarter.
  • The consolidated order back log of the company stood at Rs 60.7 bn at the end of 2QFY15.

Standalone performance snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Income from operations  10,296 11,813 14.7% 18,807 20,120 7.0%
Expenditure 9,496 10,685 12.5% 17,310 18,488 6.8%
Operating profit (EBDITA) 800 1,128 40.9% 1,496 1,633 9.1%
Operating profit margin (%) 7.8% 9.5%   8.0% 8.1%  
Other income 212 326 54.2% 411 590 43.5%
Interest 19 24 27.5% 27 54 100.7%
Depreciation 140 182 30.1% 282 332 17.4%
Profit before tax 853 1,248 46.3% 1,598 1,837 14.9%
Tax 551 388 -29.6% 794 563 -29.1%
Profit after tax/(loss) 302 860 185.0% 804 1,274 58.4%
Net profit margin (%) 2.9% 7.3%   4.3% 6.3%  
No. of shares         119.15  
Basic & Diluted earnings per share (Rs)*         25.2  
P/E ratio (x)*         37.5  
* On a trailing 12-months basis

What has driven performance in 2QFY15?
  • The energy segment managed to see a robust increase in revenues of 22% YoY which propelled the growth in overall revenues; while environmental segment’s revenues decreased 1% YoY.

  • The margin expansion was led by a fall in staff costs as well as other expenditure as a percentage of sales. Raw material costs as a percentage sales, however, saw a marginal increase. EBIT margins in the Energy segment saw an expansion thus driving the company’s operating margin expansion this quarter. Other income has been boosted by interest paid by tax authorities to the company and forex gains made during the period.

  • Standalone order inflows grew 42% YoY, and have been driven by an improvement in the demand of the company's standard products in the domestic market and by project orders from the international market.

  • During the quarter, the company's joint venture - Thermax Babcock & Wilcox Energy Solutions - received a Rs 3.4 bn export order for engineering, manufacturing and supply of selected items for two boilers for an international project. The boilers will be manufactured at the JV's manufacturing facility in Shirwal, Maharashtra which has been hereto suffering from idle capacity on the back poor demand.

    Segment-wise performance (Standalone)
      2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Energy
    Revenue (Rs m) 7,851 9,562 21.8% 14,190 16,008 12.8%
    % share  74.5% 78.3%   73.6% 77.0%  
    PBIT margin 11.7% 12.2%   11.7% 9.9%  
    Environment 
    Revenue (Rs m) 2,684 2,646 -1.4% 5,081 4,794 -5.7%
    % share  25.5% 21.7%   26.4% 23.0%  
    PBIT margin 9.0% 7.5%   9.0% 6.2%  
    Total
    Revenue (Rs m)* 10,535 12,208 15.9% 19,271 20,802 7.9%
    PBIT margin 11.0% 11.2%   10.9% 9.0%  
    * Excluding others & inter-segment adjustments
What to expect?
This is the first quarter for the company where international order intake has surpassed domestic order intake. The management has indicated that excluding this boost from international orders, it would have been a fairly low performance as far as order inflows are concerned.

The management has opined that the company has passed through the worst of the times over the past 18 months or so. Going forward, while the signals are positive, actions are yet to be initiated. The management has expressed its intent to be calibrated in taking orders in the international market and not just take orders in various countries for the sake of building revenues and then have difficulties later, which is a situation that many other Indian engineering majors have found themselves in.

At the current price of Rs 945, the stock is trading at a multiple of 20.4 times our FY17 earnings estimates for the company. Given its expensive valuations; we maintain a SELL view on the stock.

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