Multibagger - Thermax - stock analysis and stock market investing - technical analysis- 15 August 2008

The Pune-based Rs 3,400 crore Thermax is corrected more than 50 per cent from its December 2007 high of Rs 893 to its current Rs 430 levels. Company entrenched presence in the energy and environment verticals. The company, which has seen a 45 CAGR in profit and sales over the last five years, did hit a purple patch recently as delayed orders and rising inputs costs tempered its FY08 performance.While today most peers have average order positions twice their FY08 revenues, Thermax’s order book of Rs 2,637 crore as on March 2008 does not make up for even one year’s revenues. So, does that ring an alarm bell?
What’s endearing about Thermax is that both its businesses have been growing steadily over the years. Today, the company has a 21 per cent share of the domestic boiler market, second to market leader BHEL (69 per cent). While the PSU is dominant in utility boilers, Thermax is strong in industrial boilers. With BHEL looking to tap the high capacity or super critical utility boiler market, Thermax is now looking to exploit the potential for lower capacity or sub-critical utility boilers. Besides, the company is dominant in environment-friendly technologies such as industrial and waste water treatment, waste heat recovery and air pollution control. Given the rising awareness of green technologies and tightening emission norms under the Kyoto Protocol, Thermax is well- primed to ride the green wave. Building up
Thermax, which earns around 80 per cent of its revenues from the energy segment, saw FY08 sales rise 50 per cent to Rs 3,482 crore, but its order book declined 15 per cent to Rs 2,636 crore by end of the fiscal year.
The drop, according to M S Unnikrishnan, managing director, was on account of a slowdown in orders in its captive power plant division, as user industries delayed projects owing to higher coal prices and supply constraints. But order intake visibility has improved with the government removing coal-linkage restrictions on smaller captive power projects. “There are lot more firm enquiries now with financial backup unlike last year,” points out Unnikrishnan.
Though the captive power business is going through a lean patch, the company is looking at exploiting the potential in the utifity boiler segment. It has invested in two manufacturing plants, one in Vadodara and the other in China. The first phase of the Vadodara plant for boilers and heaters is complete and production has begun. The first plant, which makes coils—alloy steel, stainless steel, and carbon steel coil—will begin production in November.
Besides gaining scale, the expansion is also aimed at helping the company execute captive power plant projects of up to 135 mw, from the present 25 mw to 100 mw capacity. Besides, to ensure a strong foothold in the utility boiler space, Thermax last year entered into a 15-year technical collaboration with the UK-based Babcock & Wilcox for design, manufacture and supply of boilers up to 800 mw capacity. The company is investing around Rs 4,000 crore to boost the utility boiler manufacturing capacity to 1500 mw in the first phase and expand to 3000 mw in the second phase.

“We have already had the first level of prospecting done with five large Indian power developers for pre-qualification. The response has been fairly positive and we will receive the request for quotations as a pre-qualified company for at least two of them in the current quarter,” says Unnikrishnan.
The gambit in the utility boiler that Unnikrishnan is working out hinges on how quickly BHEL is able to move away from the sub-critical market to super-critical boiler segment. Currently, BHEL and some Chinese players are focusing on the larger and super critical segments, while Thermax has primarily targeted smaller sizes ranging from 200 mw to 300 mw to begin with.
Given that under the 11th and 12th five-year plans, majority of the capacity addition will be based on higher unit size, Thermax will have a decent play in the sub-critical boiler space. “In the next 10 years there will be ample opportunities in the sub-critical as well as super-critical segments. With BHEL looking to enter the super critical bandwagon, I am sure there is gap for somebody like Thermax,” the managing director concurs.
On why demand for sub-critical boilers will continue, Unnikrishnan says, “Not many generation companies have the capacity to set up super-critical projects, so there will be demand for smaller plants and that is the target market for Thermax.”
In the chillers segment, which accounts for around 24 per cent of Thermax’s revenues, the company is setting up an absorption chiller manufacturing facility in China, which commands more than 50 per cent of the market for absorption chillers. The unit has started trial production and will commence operations by the end of July. The plant, having an installed capacity of 350 units, will initially produce 100 units annually and will also serve as an export base.
Green light
The environment segment, comprising of air pollution, water treatment and chemicals businesses, accounts for almost 20 per cent of its revenues and has been growing at 26 per cent CAGR over the last five years.
Within this segment, the company has a leadership position in the environmental control equipment industry with standard air pollution control products, engineered air pollution control systems and air purification systems. Steel and cement industries are the big demand drivers in the segment.
In FY08 revenues from the business grew at 9 per cent to Rs 651 crore. The water business, another wild card for Thermax, offers a complete range of solutions using the latest technology with strong execution skills. Under this segment it manufactures and sells products like deionizers, filters, and membrane separators. It also executes turnkey projects like waste water recycling, resource recovery, and waster water management and desalination plants.
The company plans to consolidate its position in the Rs 1,200 crore industrial water treatment business, where it has a 10 per cent market share, and exploit the opportunity in urban water projects.

Under the Jawaharlal Nehru Urban Renewal Mission (JNURM), which is funding the country’s urban infrastructure, nearly Rs 1,500 crore is disbursed every year to municipalities. Thermax, which has pre-qualified for JNURM projects, plans to form a consortium with local ëivil contractors to bid for such projects in Gujarat, Maharashtra and the southern states. The company could also partner multinationals such as GE and Siemens.
The company is currently executing a Rs 34 crore project for the Chandigarh Municipal Corporation. Given that the company has pre-qualified for a couple of projects, there is a separate team with a general manager focusing only on municipalities, according to Unnikrishnan.
The reason for a consortia-based approach, according to Misal Singh, analyst with Edeiweiss, is that though Thermax has a strong product knowledge it is not well-versed with the EPC part of the business.
Though volumes in the waste water treatment business have increased in the recent past, the overall contribution to the revenues has been stagnant at 7 per cent of sales over the past three years.
But Unnikrishnan expects an inflection point soon. “It is not an area where I am anticipating any slowdown as in-creasing urbanisation will put pressure on water resources resulting in an uptake in the sale of this kind of products.”
The chemical business, which contributes 6-8 per cent to revenues, has two major product categories: fuel and water treatment chemicals, and oil- field chemicals.
Besides, the company also manufactures ion exchange resins and specialty chemicals that improve process and product performance. Thermax has tied up with Georgia-Pacific Chemicals LLC, USA for technology and manufacturing licensing for performance enhancing chemicals to help customers in the paper industry to improve productivity and reduce costs. Besides, the company exports these chemicals and ion resins to countries such as the US, UK, Japan and East Asian countries.
The way ahead
Last fiscal, the company’s revenue and net profit grew by more than 50 per cent, but the slowdown in the captive power plant business impacted its order book at the beginning of the fiscal. The company, however, notched up fresh orders worth Rs 1,700 crore in the current fiscal.
Analysts expect turnover to grow 16 per cent to Rs 4,030 crore in the current year on the back of its foray into the utility boiler market and robust demand in the environment business. As part of a derisking exercise, the company is also focusing on the export business, which grew 69 per cent last fiscal to Rs 678 crore.
The stock, which is quoting at 17x and 13x of its FY09 and FY10 earnings, is worth a look for investors with a two- three year perspective.

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