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Thermax Ltd: Higher taxes mars profits - Views on News from Equitymaster

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Thermax Ltd: Higher taxes mars profits

Dec 3, 2013

Thermax has announced its second quarter results for 2013-2014 (2QFY14). During 2QFY14, both topline and bottomline declined by 12.5% YoY and 66.9% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales declined by 12.5% YoY during 2QFY14. The fall has come in on the back of about 16.0% YoY decline in the energy segment and 2.4% YoY decline in the environmental segment.
  • Operating profits decline by 23.1% YoY during 2QFY14 with margins registering a decline of 120 bps on a YoY basis.
  • Net profits decline 66.9% YoY due to muted performance at the operating level and fall in other income by 72.4% YoY. Rise in tax rates from 30.9% in 2QFY13 to 64.6% in 2QFY14 further impacted the bottomline. Tax figure was up by 35.4% YoY as the company undertook provision for certain expenses which were disputed as per the IT act.
  • The standalone order back log of the company stood at Rs 53.0 bn during 2QFY14, up 20.3% YoY. Order inflow during the quarter stood at Rs 7.6 bn. On a consolidated basis the order book stood at Rs 61.2 bn, up 22.9% YoY. Consolidated order inflow for the quarter stood at Rs 9.7 bn. Sectors such as food, refinery, sugar and chemicals contributed to the order inflow during the quarter.

Standalone performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Income from operations  11,924 10,433 -12.5% 21,759 19,061 -12.4%
Expenditure 10,706 9,496 -11.3% 19,479 17,310 -11.1%
Operating profit (EBDITA) 1,218 937 -23.1% 2,280 1,751 -23.2%
Operating profit margin (%) 10.2% 9.0%   10.5% 9.2%  
Other income 274 75 -72.4% 362 157 -56.7%
Interest 34 19 -45.0% 72 27 -62.6%
Depreciation 139 140 0.9% 271 282 4.3%
Profit before tax 1,318 853 -35.3% 2,299 1,598 -30.5%
Tax 407 551 35.4% 717 794 10.8%
Profit after tax/(loss) 911 302 -66.9% 1,583 804 -49.2%
Net profit margin (%) 7.6% 2.9%   7.3% 4.2%  
No. of shares         119.2  
Basic & Diluted earnings per share (Rs)         6.7  
P/E ratio (x)*         29.3  
* On a trailing 12-months basis

What has driven performance in 2QFY14?
  • Revenues declined 12.5% YoY during 2QFY14. This was mainly due to a 16.0% YoY decline in revenues from the energy segment. Revenues from the energy segment declined due to slowdown in large EPC projects. However, the service business increased 18% YoY. During the quarter the share of international revenues (exports + overseas) touched 37%. Higher share of international revenues is making the company immune to domestic slowdown.

    Segment-wise performance (Standalone)
      2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Revenue (Rs m) 9,345 7,851 -16.0% 16,999 14,190 -16.5%
    % share 77.3% 74.5%   76.6% 73.6%  
    PBIT margin 9.9% 9.0%   10.3% 10.1%  
    Revenue (Rs m) 2,751 2,684 -2.4% 5,183 5,081 -2.0%
    % share 22.7% 25.5%   23.4% 26.4%  
    PBIT margin 9.6% 8.6%   9.9% 8.8%  
    Revenue (Rs m)* 12,096 10,535 -12.9% 22,182 19,271 -13.1%
    PBIT margin 9.8% 8.9%   10.2% 9.8%  
    *Excluding other activities and inter-segment adjustments

  • Operating profits declined 23.1% YoY during the quarter with margins declining by 120 bps on a YoY basis to 9.0%. Fall in revenues led to a leverage loss and thus operating profits declined at a faster pace. On a segmental basis, margins from the energy and environmental segment decreased by 90 bps YoY and 100 bps YoY to 9.0% and 8.6% respectively.

  • Net profits declined 66.9% YoY during the quarter due to muted performance at the operating level and fall in other income. Other income declined by 72.4% YoY due to base effect. Further, a 35.4% YoY increase in tax expenses also impacted the profitability. Taxes increased due to additional provisioning pertaining to some expenses that were disputed in the past.
What to expect?
At the current price of Rs 670, the stock is trading at a multiple of 29.3x its trailing twelve month earnings. The current quarter results were a big disappointment. Also, the Babcock JV is into losses. However, the overseas subsidiary namely the one in China has managed to break even. Further, the subsidiary in Denmark did exceptionally well both in terms of revenues and order bookings. As a result, the consolidated performance of the company improved in the current quarter. Going forward, management does not expect the situation in the power sector to improve. As such, we expect the ordering environment to remain muted. On the other hand, rising competitive intensity means that pricing is going to take a further backseat. Given the expensive valuations and muted ordering environment, we maintain our SELL view on the stock.

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