>THERMAX: Settles pending legal dispute with Purolite (SHAREKHAN)

■ Thermax settles pending legal dispute

Thermax has entered into amicable settlement with Purolite International (Purolite) ending a five-year-long legal dispute regarding its ion exchange resin business in USA. The settlement is for a lawsuit filed by Purolite in the Eastern District Court of Pennsylvania, USA in 2005. Attached below is the series of events related to the litigation. As per the out-of-court settlement, Thermax will pay Purolite four installments of USD9.5 million each spread over calendar year 2010 to settle the litigation. The two parties will now be joint co-owners in perpetuity of the information and technology in dispute. The agreement permanently resolves all claims and counter claims.

■ One-time expense of Rs175.7 crore—a negative surprise

Though there will be one-time extraordinary expense of Rs43.9 crore in Q4FY2010 and Rs131.8 crore in FY2011 assuming an exchange rate of Rs46.23/USD, it is a long-term positive given the uncertainties associated with jury trials as well as cost and time. Now, the company will also be joint co-owners in perpetuity of the information and technology involved in ion exchange resin business, which is another positive. The management has also confirmed that there will be no further financial obligation on this account in the form of royalty.

■ Outlook remains intact, maintain Hold

We continue to remain positive on Thermax’ long-term business prospects and its possible entry into super critical boiler business in the near term. Nonetheless, the quantum of settlement charges has surprised us negatively. The management has however indicated that there are no more litigations of such nature in the offing. Hence, we maintain our adjusted earnings estimates at Rs22.7 for FY2010 and Rs29.7 for FY2011. At the current levels, the stock is trading at 21.3x FY2011 earnings per share (EPS) and 17.3x FY2012 EPS. We maintain our Hold recommendation on the stock with a price target of Rs662.

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