>THERMAX LIMITED (JAYPEE CAPITAL)

We initiate coverage on Thermax with an ‘ACCUMULATE’ recommendation and a target price of INR 450 per share implying an upside of 12.5% from current levels. Diminishing capital flows, falling investment growth due to liquidity crunch, will dampen the economic growth from 9% in
FY08 to 6.3% in FY09. While domestic financing conditions have improved, external financing
conditions are expected to remain tight. Private investment demand is, therefore, expected to
remain subdued. Pick up in the economy in the latter half of this fiscal, will improve the
performance of Thermax ltd. with muted growth expected this fiscal.

Muted Order backlog
The Consolidated order book for Thermax Group stands at Rs. 3078 crs up 17% yoy, with a book-to- bill ratio of 0.9x. The fall in order inflow of 5800 mlns by 20% yoy was on account of order cancellations and reduction in scope and value of some of the company's large orders secured during FY09. The Rs 800 cr Essar order has been reduced to 2 boilers from the previous 4 boilers and is now worth Rs 380 cr. Brahmani’s Rs 400 cr order is now worth Rs 297 cr. However, the management expects order inflows of approx Rs1,200 cr in H1FY10 and an improvement thereafter. Further, the company’s entry into subcritical boilers (800 MW) has enabled it to win large orders.

Dismal revival in IIP Index, positive signs for the Infrastructure sector
As the global slowdown has taken a toll on India’s industrial production, IIP for 2008-09 grew by
only 2.4% as against 8.5% in the 2007-08. A revival of industrial production is round the corner, with excess liquidity in the system, easing of financial conditions and declines in some key interest rate spreads suggest that industrial activity will pick up in the second half of 2009-10. The six -core infrastructure sectors has also registered a growth of 4.3% in April, the most since July 2008, compared to a growth of 2.3% in April 2008, backed by significant contribution from coal, electricity and cement sectors.

Worldwide Declining GDP growth rate
The World Bank has estimated GDP growth in the developing world to slow to a projected 2.1
percent in 2009 from 5.8 percent in 2008. The World Bank’s forecast predicts growth momentum to turn weakly positive in 2010 World GDP as growth is expected to increase to a modest 2.3 percent in 2010, as financial-sector consolidation, lost wealth and knock-on effects from the financial crisis continue to dampen the economic activity. India’s RBI has lowered the GDP growth forecast to 5.7 percent for this fiscal from the earlier projection of 6 percent because of a sharp downward revision in the anticipated expansion of industrial output.

With Recovery round the corner & entry in subcritical space, Accumulate with a price target of INR 432
An industry leader in the industrial boilers segment in the captive power segment, Thermax’s entry into a new arena into the subcritical space (800 MW), and a revival seen in the economy from H2 FY10, Thermax is confident of achieving higher inflow of order growth. For the fiscal ended FY10, the management expects revenues and margins to be maintained with a better picture from FY11. At the current price of Rs 395, the stock is quoting at 15x FY2010E EPS and 13x FY2011E EPS, which we believe is not inexpensive. We initiate with an Accumulate Rating on the stock, with a target price of Rs. 450 based on a PE of 15x consolidated FY11E EPS of Rs. 30 per share.

To see full report: THERMAX LTD.