>THERMAX: Thermax had entered into a technology transfer agreement with Wilcox and Babcock

Thermax is a global solutions provider in energy and environment engineering. It caters to a wide range of industries such as cement, fertilizers, petrochemicals, power, textiles, dairy, sugar, food, pharmaceuticals, refineries, distillery and aluminum. Its business covers areas such as boilers and heaters, absorption cooling, chemicals, water and waste water solutions, power and air pollution control.


■ Diversified business model
Thermax caters to project and product requirements of diverse user industries. This diversity helps the company to reduce dependence on a single sector. Thermax two mainstay segments are energy (81% of the revenue) and environment (19% of revenue). In these segments, it provides business solutions to end-user industries such as power generation sector and textiles, petrochemical, food processing, cement, metals and mining industries and municipal bodies,.


■ Foray into super-critical boiler market through JV route
In CY08, Thermax had entered into a technology transfer agreement with Wilcox and Babcock for manufacturing and selling sub-critical boilers up to 300mw in India. This has helped Thermax to tap the market demand arising from small IPPs and captive power plants. With the power utility industry shifting towards more efficient super-critical technology, Thermax has entered into the super-critical boiler market through a JV (51:49) with Wilcox and Babcock.


■ Slow capex cycle resulting in deteriorating order book position
The existing high interest rate scenario, coupled with government’s policy deadlock, has resulted in weak a capex cycle, which has culminated into deteriorating order inflow for the company. Thermax derives a major portion of its revenue from the economy-linked segments such as steel, cement, and power. Thermax’s order inflow has deteriorated over the past six quarters. The company currently has an order book of Rs58bn providing revenue visibility of over a year.


■ Valuation and Rating
The stock currently trades at 17x FY13E earnings of Rs28.3 and 14.4x its FY14E EPS of Rs33.1. The stock, over the past six years has traded at average P/E of 20x its one-year forward earning and clocked 27% revenue CAGR and 30% earnings CAGR. We believe the current sluggish revenue CAGR of 4% and earnings CAGR of 1.6% over FY11-14E call for derating of the stock. However, the valuation of the company may remain at current levels in anticipation of a reversal in Interest rate cycle and capex cycle. We initiate coverage with hold rating and target price of Rs450 at 16x its FY13 estimated earnings of Rs28.3.


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