Satyam Agarwal ([email protected]); +91 22 3982 5410 Amit Shah ([email protected]);+91 22 3029 5126 15 July 2015 Update | Sector: Capital Goods Thermax CMP: INR1,038 TP: INR1,275 (22%) Buy Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities , Bloomberg, Thomson Reuters, Factset and S&P Capital. Strategic ‘Reorientation’ Highlighting the broad contours of the journey TMX has seeded multiple growth levers over the last few years, with several of these initiatives already witnessing initial traction: Investments in product development are yielding new growth avenues, with ~15-18 new product lines commercialized in the last few years (aims to generate 30% revenues from innovations in the last five years). Indian power BTG ordering is now picking up, with TMX-Babcock JV receiving initial overseas orders (including an order for a supercritical boiler). Focus on selective Internationalization by i) setting up manufacturing hub in Indonesia (for ASEAN region, end-FY17), ii) overseas EPC capabilities (Africa). Gradual pick-up in large capex segments like cement, hydrocarbons, fertilizers and nuclear power will be an important medium-term driver. Expect 43% earnings CAGR in the next five years, strong ‘mid-cycle’ play During the last cycle, TMX revenues increased ~9x from INR7b in FY03 to INR60b in FY12. The Strategic ‘Reorientation’ now provides robust foundation to capitalize on the next leg of the growth. Over the next five years, we expect revenues to increase ~2.5x (from INR53b in FY15 to INR130b) and margins to expand from 8.7% in FY15 to 13.5-14% in FY20, driven by traction in i) large-sized projects, ii) internationalization, iii) Power BTG JV; this should drive 25% CAGR stock returns. TMX remains a very strong ‘mid-cycle’ play on revival in the domestic investment climate. We have cut FY16/17 EPS by 3.5-4% to factor in the near-term headwinds to investment climate; maintain Buy with target price of INR1,275/sh. BSE Sensex S&P CNX 28,198 8,524 Stock Info Bloomberg TMX IN Equity Shares (m) 119.2 52-Week Range (INR) 1,315/790 1, 6, 12 Rel. Per (%) 5/-2/4 M.Cap. (INR b)/(USD b) 124.4/2.0 Financial Snapshot (INR Billion) Y/E Mar 2015 2016E 2017E Net Sales 53.4 59.7 67.6 EBITDA 4.6 5.4 6.8 Adj PAT 2.6 3.5 4.6 EPS (INR) 21.8 29.0 38.4 EPS Gr. (%) -6.0 33.2 32.4 BV/Sh. ( ) 179.3 195.0 216.6 RoE (%) 12.1 14.9 17.7 RoCE (%) 16.3 18.4 21.8 P/E (X) 44.1 36.0 27.2 P/BV (X) 5.4 5.4 4.8 Motilal Oswal values your support in the Asiamoney Brokers Poll 2015 for India Research, Sales and Trading team. We request your ballot . Exhibit 1: Managing transition into the Big league, in the next economic upcycle TBW has received the initial order for a super critical boiler (from Vietnam). Expect BTG awards of 18-20GW in FY16. Setting up ASEAN manufacturing hub in Indonesia (to be commissioned by FY17); building EPC capabilities (received orders of 165MW in FY15 from Africa). Gradual pick-up in segments like cement, fertilizers, oil and gas, metals, etc will be a key driver. Expect 4-5 Fertilizer plants to be awarded in FY16. Commercialized 15-18 new products in last 4 years. Aims to generate 30% of revenues from products launched in last 5 years.
Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Strategic ‘Reorientation’ Highlighting the broad contours of the journey
TMX has seeded multiple growth levers over the last few years, with several of these initiatives already witnessing initial traction: Investments in product development are yielding new growth avenues, with
~15-18 new product lines commercialized in the last few years (aims to generate 30% revenues from innovations in the last five years).
Indian power BTG ordering is now picking up, with TMX-Babcock JV receiving initial overseas orders (including an order for a supercritical boiler).
Focus on selective Internationalization by i) setting up manufacturing hub in Indonesia (for ASEAN region, end-FY17), ii) overseas EPC capabilities (Africa).
Gradual pick-up in large capex segments like cement, hydrocarbons, fertilizers and nuclear power will be an important medium-term driver.
Expect 43% earnings CAGR in the next five years, strong ‘mid-cycle’ play During the last cycle, TMX revenues increased ~9x from INR7b in FY03 to
INR60b in FY12. The Strategic ‘Reorientation’ now provides robust foundation to capitalize on the next leg of the growth.
Over the next five years, we expect revenues to increase ~2.5x (from INR53b in FY15 to INR130b) and margins to expand from 8.7% in FY15 to 13.5-14% in FY20, driven by traction in i) large-sized projects, ii) internationalization, iii) Power BTG JV; this should drive 25% CAGR stock returns. TMX remains a very strong ‘mid-cycle’ play on revival in the domestic investment climate.
We have cut FY16/17 EPS by 3.5-4% to factor in the near-term headwinds to investment climate; maintain Buy with target price of INR1,275/sh.
BSE Sensex S&P CNX 28,198 8,524
Stock Info Bloomberg TMX IN
Equity Shares (m) 119.2
52-Week Range (INR) 1,315/790
1, 6, 12 Rel. Per (%) 5/-2/4
M.Cap. (INR b)/(USD b) 124.4/2.0
Financial Snapshot (INR Billion) Y/E Mar 2015 2016E 2017E Net Sales 53.4 59.7 67.6
EBITDA 4.6 5.4 6.8
Adj PAT 2.6 3.5 4.6
EPS (INR) 21.8 29.0 38.4
EPS Gr. (%) -6.0 33.2 32.4 BV/Sh. ( )
179.3 195.0 216.6
RoE (%) 12.1 14.9 17.7
RoCE (%) 16.3 18.4 21.8
P/E (X) 44.1 36.0 27.2
P/BV (X) 5.4 5.4 4.8
Motilal Oswal values your support in the Asiamoney Brokers Poll 2015 for India Research, Sales and Trading team. We request your ballot.
Exhibit 1: Managing transition into the Big league, in the next economic upcycle
TBW has received the initial order for a super critical boiler (from Vietnam). Expect BTG awards of 18-20GW in FY16.
Setting up ASEAN manufacturing hub in Indonesia (to be commissioned by FY17); building EPC capabilities (received orders of 165MW in FY15 from Africa).
Gradual pick-up in segments like cement, fertilizers, oil and gas, metals, etc will be a key driver. Expect 4-5 Fertilizer plants to be awarded in FY16.
Commercialized 15-18 new products in last 4 years. Aims to generate 30% of revenues from products launched in last 5 years.
Seeding ‘Multiple’ Growth Levers Several initiatives have already witnessed initial traction TMX has seeded multiple growth levers over the last few years, with several of these initiatives already witnessing initial traction. Investments in product development are yielding new growth avenues, with ~15-18
new product lines commercialized in the last few years (the company aims to generate 30% of the revenues from innovations of the last five years). The company’s CEO was honored with ‘Asia Innovator Award’ in 2012 for having innovation at the core of his organization.
TMX-Babcock JV (TBW) has received initial orders from overseas markets, including the first order for a supercritical boiler— an important milestone. Overall, the Indian power BTG segment is picking up and ~18-20GW project awards are expected in FY16.
Focus on selective Internationalization by i) setting up manufacturing facilities in Indonesia, ii) building EPC capabilities (with initial successes in Africa). TMX has already acquired land for setting up the manufacturing plant and aims for a meaningful traction in the ASEAN region (planned capex of USD25m; to be operational by end-FY17).
Service/Chemicals businesses now contribute 14-15% of revenues, and drivers are linked to opex instead of capex, thus providing revenue stability. New manufacturing facilities for resin exports and building material chemicals are being set up at Dahej and Coimbatore (cumulative capex of INR2.4b), and will be commissioned by end-FY17.
Gradual pick-up in large capex segments like cement, hydrocarbons, fertilizers and nuclear power over the medium term will be an important driver for TMX.
Culture of innovation: Targeting 30% revenue contribution from new product launches of the last five years The investments in product development are yielding new growth avenues, with ~15-18 new product lines commercialized in the last few years. Even during FY15, four new products were commercialized—including smaller capacity CFBC boiler, heat transformer, compact Sewage treatment plant and solar energy-based boilers (that can be integrated with operating boilers). TMX also partnered for setting up a 3MW solar-biomass hybrid plant at Bihar (with funding from European Union) besides achieving selective commercialization of the fuel cell development program (with an initial order from Indian defense). Several of these products are targeted at mid-sized industries, commercial establishments, etc. and thus provide a more stable and scalable business model. Most of these products are ‘Standard’ in nature (catalogue-based products with minimum design customization) and thus provide scalability. These products entail better margins, given the innovation involved in creating an ‘application’ segment, and leverage the existing marketing and sales network. Going forward, the company is eying 30% revenue contribution from the products launched in the past five years; the contribution stood at ~17-18% as of mid-FY14. The company also aims to maintain the share of contribution from ‘Standard’ products even when the project revenues pick up.
R&D Expenses (INR M)
Several of these products are targeted at mid-sized
industries, commercial establishments, etc and
thus provide a more stable and scalable business model
Thermax
15 July 2015 3
TMX MD and CEO MS Unnikrishnan was honored with the 'Asia Innovator Award' at the 11th CNBC Asia Business Leaders Awards in 2012. The citation notes that he was awarded "for his inventive thinking in business and his leadership in an organization that has innovation at its core". Exhibit 1: Key new product launches/commercialized over the last four years FY12 Triple Effect Absorption Chiller – 25% more efficient vs double effect technology Lambion Grate – Biomass based power plants Solar-Biomass Hybrid Cold storage pilot project for rural applications FY13 Hybrid Chiller – For Process applications Combloc - Smaller capacity CFBC boiler (1.5-6TPH) with multi-solid fuel capabilities Dry Coolers – For areas with water scarcity Aquaerotherm - Solid fuel fired hot air generator Performance Chemicals (Building Materials) Air Cooled Pusher Grate – Converts Municipal Waste to Reuse Derived Fuel Solar Biomass Hybrid (Pilot Project for 0.25MW) FY14 Guard Bed Resin Tulsion ASD057 Biomethanation of canteen waste to replace LPG in canteens Containerized Water treatment and Purification plants for Process applications FY15 Thermeon – Smaller capacity steam boilers (0.3-1.5TPH) Heat Transformer - Enhances energy efficiency BioCask - Compact sewage treatment plant which can be fitted in basements Solar Boiler - can be integrated with other operating boilers Solar-Biomass Hybrid (3MW) – Partnering for a pilot project, funding from European Union Fuel-cell development program reached selective commercialization with order from Defence
Source: MOSL, Company
Highlights of new product innovations TMX introduced a solid fuel and biomass fired packaged boiler ComBloc in the
1.5–6 ton range for medium-sized customers. The product offered the flexibility to switch between a wide variety of solid fuels depending on availability and cost. The company also launched a new product ‘Thermeon’ in the 0.3-1.5TPH range; a fully packaged boiler, its installation time is shorter and doesn’t involve the hassles of civil work.
The triple effect absorption chiller reduces energy consumption by 25%. One such chiller was initially installed at TMX facility in Chinchwad to demonstrate energy-efficient air conditioning for multiple locations from a central source.
Containerized water treatment and purification plant are ideal for hot, humid and dusty industrial sites. The containers save customers the complexity and hassles of constructing buildings to house such systems. This model is useful for remote locations, oil fields, power and chemical industries, mining and construction sites.
Asia Innovator Award for having innovation at the core of the organization
Thermax
15 July 2015 4
Our View: Currently, ‘Standard’ products catering to mid-sized industries like Food Processing, Pharma, Chemicals, Engineering, Paper, Tyres and Distilleries contribute INR5-6b/quarter to order intake and the trends have been fairly stable. With increased applications (led by innovation in segments such as solar hybrid, waste water and sewage treatment, small-sized boilers, cooling applications, and municipal waste management), we expect the contribution to increase meaningfully in next few years. Several of these products are at the core of various government initiatives, viz. Smart City Development (INR500b in five years), Namami Ganga (river cleaning project) and Renewables (TMX positioning in hybrid integration and distributed generation), and thus benefit from government directives toward strict adherence to environmental regulations (air/water pollution norms, etc), promoting energy efficiency, etc.
Power BTG JV (Boiler) receives initial orders, including one for a 660MW supercritical project In FY15, Thermax Babcock & Wilcox (TBW)—a 51% joint venture between TMX and Babcock & Wilcox—commissioned a utility boilers manufacturing facility ( annual capacity of 3GW; can be expanded to 5GW) at Shirwal, 50kms from Pune in Maharashtra. The initial project cost stands at INR7.7b, with DER of 50:50. The facility can manufacture both supercritical and subcritical boilers. Exhibit 2: Manufacturing facility of TBW JV at Pune
Source: MOSL, Company
Bags first supercritical project: An important milestone in the learning curve to make a winning bid During 2HFY15, TBW won two contracts for engineering and core pressure part
manufacturing: (i) Two 350MW (INR3.4b) boilers for the Dominican Republic, (ii) one 660MW (INR2.7b) supercritical boiler for Vietnam. The JV has also received an order for two biomass-fired boilers from B&W Volund, Denmark.
We believe that winning the supercritical project (from Vietnam) is an important milestone in terms of the learning curve associated with execution and making a successful bid in the domestic market.
Domestic intake largely from Standard products (INR b)
During FY15, TBW received orders of ~INR6.5b from
overseas
4.9
9.4
10.1
10.7
6.9
5.2
5.5
7.8
7.7
4.6
5.3
6.1
6.8
13.5
2.7
4QFY
12
2QFY
13
4QFY
13
2QFY
14
4QFY
14
2QFY
15
4QFY
15
Domestic RIL Order
Thermax
15 July 2015 5
In an important development, Babcock & Wilcox Ltd., USA—the joint venture partner—was demerged into two listed companies at the NY Stock Exchange in FY15. The power generation business has been spun off as a new public company Babcock & Wilcox Enterprises. The demerged company will retain the entire boiler portfolio apart from the construction, waste-to-energy, and services businesses. We believe this focused entity will greatly help the business prospects of the Indian JV. Exhibit 3: Power Gen Order wins by Babcock and Wilcox; expect several projects to be sub-contracted to the Indian JV Date Project USD M Country Jul-14 Two sub-critical coal fired boilers na Dominican Republic Jul-14 Biomass Power plant 80 Denmark Dec-14 Waste-to-Energy Power plant 230 Scotland Jan-15 Supercritical Coal-Fired Boiler and SCR system na Vietnam Jan-15 Biomass Power plant 200 Wales Mar-15 Biomass Power plant 220 England Mar-15 Emission control project 40.3 Colorado
Shaded areas indicate projects awarded to TBW, Indian JV Source: MOSL, Company
Expect pick-up in Indian BTG project awards, led by NTPC/state genco projects BTG award pipeline is showing signs of strong recovery in FY16, with ~18-20GW
of supercritical projects likely to be awarded during the year compared with average supercritical project awards of 4-5GW in FY14/FY15. This could be a tipping point, particularly for the equipment manufacturers, given that industry capacity for supercritical boilers and turbines stands at ~21-24GW pa.
We believe that ~30GW+ of projects will be possibly awarded over the next 24 months.
The market is witnessing a shift from EPC contracts to package awards. For instance, NTPC recently awarded the Katwa 1320MW project on package basis, with BHEL emerging as L1 in boilers and Bharat Forge-Alstom in turbines. The shift is favorable for players like TBW.
TBW is an important part of global competitiveness for powergen portfolio of the Babcock and Wilcox group
Thermax
15 July 2015 6
Exhibit 4: Approximately 30GW+ of projects likely to be awarded over the next 24 months
Bhusawal Mahagenco State 660 BHEL L1 Udangudi TN Genco State 1,320 Katwa NTPC Central 1,320 Pudimadaka NTPC Central 4,000 Ghatampur Neyveli Central 1,980 Hardauganj Extension UPRUVNL State 660 Maitree Project NTPC-Bangladesh Central 1,320 Krishnapatnam, Vijayawada, Kothugundem
Andhra Pradesh State 2,400
Talcher Expansion NTPC Central 1,320 Lakhisarai Bihar State (26%) - NTPC (74%) Central 1,320 Pirpainty Bihar State (26%) - NHPC(74%) Central 1,320 Gorakhpur Nuclear Power Central 1,400 Nuclear Chandrapur Mahagenco State 1,320 Koradi Mahagenco State 1,980 Latur Mahagenco State 1,320 Panipat Thermal (Unit 9) Haryana State 660/800 Orba Extension UPRUVNL State 600 Potential Pipeline ~30,000+
Source: MOSL, Company
Our View: Winning the supercritical project (from Vietnam) is an important milestone in terms of the learning curve associated with execution and making a successful bid in the domestic market. Indian BTG market is now picking up, with project awards likely at 18-20GW in FY16. Also, the market is moving from EPC projects to package awards; this opens up interesting possibilities for TBW. Manufacturing capacity of 3GW can possibly translate into peak revenues of ~INR40b (v/s reported FY15 consolidated revenues of INR53b); thus, any traction in domestic project wins will be a key monitorable and an important stock price trigger.
TBW JV has a huge operating leverage; expect this to be a meaningful contributor to earnings growth for TMX in the medium term
Exhibit 5: Revenue potential (INR b)—assume capacity utilization at 45% in FY20…
Source: MOSL, Company
Exhibit 6: …leading to strong earnings growth, given the low PAT break-even volumes at ~500MW (<20% utilization)
Source: MOSL, Company
- - 158
364
3,50
0
4,50
0
7,50
0
12,5
00
18,0
00
8.8% 11.3%18.8%
31.3%
45.0%
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
FY19
E
FY20
E
Revenues Capacity Utilization (%)
(191
)
(304
)
(531
)
(1,2
37)
(880
)
(410
)
384
1,20
2
2,03
3
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
FY19
E
FY20
E
PAT
Thermax
15 July 2015 7
Selective internationalization: An important focus area The exports strategy is undergoing reorientation through increased localization by setting up subsidiaries in overseas markets (particularly in Southeast Asia and Africa). As part of this strategy, the company plans to progressively localize more facets of its value chain in these markets. Overseas contributed 27% of the consolidated revenues in FY15 (up marginally from 26% in FY13) and the medium-term target is to increase the contribution to 40%. Increased localization is important for the next leg of growth to expand operations in terms of product size, consolidate EPC capabilities and possibly expand service revenues. Increased localization will also enable the company to shorten the delivery time and focus on cost optimization. The company had appointed a Global Consultancy Organization to work on a localization program in select countries. The strategy has already witnessed initial traction, with significant order wins in Southeast Asia and Africa in FY15. Product business: i) In Southeast Asia, the attempt is to localize a part of
operations in Indonesia, Malaysia, Thailand and Philippines by setting up subsidiary companies; ii) in Africa, offices have been opened and are now being converted into subsidiaries; the export strategy from India will continue in the interim; iii) in the Middle East, the strategy is to export from India as the market opportunities are largely centered around hydrocarbons.
Projects business: Earlier, the strategy was to export out of India and supervise the construction from India. However, the strategy has been reoriented and now key manufactured products are exported from India, but purchase of bought-out items (e.g., pumps and motors) and supervision of the construction is done locally. The initial success in terms of few EPC contracts in Africa has been encouraging.
Manufacturing facility in Indonesia to be commissioned in FY17; the company targets a meaningful traction in the ASEAN region To enhance presence in Southeast Asia, a wholly owned subsidiary Thermax Engineering Singapore Pte Ltd was incorporated in May 2014 in Singapore, through which operating subsidiaries are being set up Malaysia, Thailand and the Philippines; an operating subsidiary was set up in Indonesia in Oct 2014. The company has already procured land in Indonesia to construct a regional manufacturing hub to cater to the ASEAN markets, and it should be operational by end-FY17 (Capex USD25m).
Overseas intake (Standalone, INR M) up meaningfully
FOB Exports (INR M)
3.2
3.2
1.5 2.1
4.6
2.5
2.1
3.1 3.
72.
05.
6 6.2
2.9
4QFY
12
2QFY
13
4QFY
13
2QFY
14
4QFY
14
2QFY
15
4QFY
15
Overseas
7,00
9
6,12
2
7,25
7
6,56
7
10,1
46
9,93
1
FY10
FY11
FY12
FY13
FY14
FY15
FOB Exports
Thermax
15 July 2015 8
Exhibit 7: Architect’s impression of TMX’s manufacturing facility in Indonesia: Envisaged as a regional manufacturing hub for ASEAN
Source: Company
Project business is an important driver; to be supported by increased localization Post the initial success in EPC projects in the overseas market, TMX is now expanding presence—both in terms of the size and complexity of the business. In FY15, TMX won its biggest EPC order overseas when it received contract from Dangote Industries, Africa to supply two captive power plants with a cumulative capacity of 165MW. Southeast Asia and Africa are the key locations where the company is expanding the operations for larger-sized of boilers, heaters, EPC, etc; we understand that this is an important agenda for the localization plan. Project work needs contact points; hence, with the establishment of offices in countries such as Kenya, Nigeria and Egypt, the intake should increase. Exhibit 8: EPC contracts an important driver post the initial success Company Country MW Industry Lamson Inc Philippines 3.5 Corn Starch Bataan 2020 Philippines 13 Paper National Cement Company Yemen 28 Cement Yemen Co Sugar Refining Yemen 14 Sugar Dangote Industries Zambia 30 Cement Austcane Energy Australia 22 Sugar Lamson Inc Philippines 15 IPP (Biomass based) Dangote Industries Tanzania 75 CPP Dangote Industries Nigeria 90 CPP
Source: MOSL, Company
Thermax
15 July 2015 9
Exhibit 9: Captive power plant of 30MW under execution by TMX in Zambia
Source: Company
Service and chemicals businesses: Provide stability as revenues linked to ‘opex’ Increased contribution of the service and chemicals businesses (14% of revenues in FY15) acts as a balancing mechanism, given that the business driver here is ‘opex’ instead of ‘capex’. Contribution of the service business has increased from just 2.9% in FY11 to
8.2% in FY15, and is an important growth driver. Plant improvements, fuel shift retrofits and energy enhancement projects have contributed to the increased contribution. Power plant management (O&M) business also continues to report healthy growth, and the company has over 34 assets as part of the portfolio.
Resins and chemicals business reported revenues of INR2.7b in FY15 (up 7.3% YoY); decline in oil field chemicals business—given the sharp fall in crude prices—impacted revenues. During FY14, the construction chemicals business was launched. TMX now has four portfolios: (i) Ion-exchange resins, (ii) performance chemicals (iii) paper chemicals, and (iv) construction chemicals.
Our View: TMX has outlined a meaningful capex plan to expand the chemicals business: i) Procured land at Dahej to set up an export-oriented manufacturing facility (to be operational by mid FY17) at a capex of INR1.5b, ii) setting up a building materials chemicals plant at Coimbatore at a capex of INR600m. With plans to increase internationalization of the business and expand the product base, the growth prospects look strong in the medium term.
Service Revenues (INR M)
Chemicals Business (INR M)
1,39
3
2,59
0
3,69
8
4,84
1
3,82
8
2.9
4.9
7.9
11.4
8.2
FY11 FY12 FY13 FY14 FY15
Services % of Sales
Thermax
15 July 2015 10
Strongly positioned for the ‘Upcycle’ Expect 43% earnings CAGR in the next five years Over the next five years, expect revenues to increase ~2.5x/margins to expand ~60% During the last cycle, TMX revenues increased ~9x—from INR7b in FY03 to
INR60b in FY12. The Strategic ‘Reorientation’ of the business portfolios now provides a robust foundation to capitalize on the next leg of growth.
Over the next five years, we expect consolidated revenues to increase ~2.5x (from INR53b in FY15 to INR130b) and margins to expand from 8.7% in FY15 to 13.5-14% in FY20. The revenue expansion will be supported by i) pick-up in large capex segments like cement, hydrocarbons and fertilizers, ii) increased localization in overseas markets driving exports/overseas revenues, iii) strong traction in power BTG JV. Margin expansion will be supported by i) operating leverage, given that consolidated gross margins stand at 42% and reported EBIDTA margins at 8.7% in FY15; ii) increased contribution of power BTG JV (better fixed-cost absorption).
Initial progress and traction has been encouraging: i) Power BTG award pipeline is showing signs of pick-up (expect pipeline at 18-20GW in FY16) and TMX has won its first supercritical order; ii) five fertilizer projects are likely to be awarded in FY16; iii) overseas EPC business has witnessed traction—given the recent 165MW project wins in Africa, iv) the company has started work to set up the ASEAN manufacturing hub in Indonesia at a capex of USD25m (to be completed by end-FY17), v) 15-18 new products have been commercialized in the past few years.
Possibility of 43% earnings CAGR till FY20
Exhibit 10: Expect Consolidated revenues to grow 2.5x in the next five years (INR B)…
Source: MOSL, Company
Exhibit 11: …and EBIDTA margins to increase 60% (from 8.7% in FY15), given the operating leverage
Source: MOSL, Company
7.0
7.8
12.5
16.1
22.9
34.3
34.0
32.7 52
.5 60.3
54.3
50.3
53.4 59
.7 67.6 81
.7 103.
5 131.
4
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
FY19
E
FY20
E
10.2
%
9.9%
8.4%
11.0
% 12.6
%
12.4
%
12.4
%
12.1
%
10.8
%
9.8%
9.2%
8.7%
8.7% 9.0% 10
.0% 11
.6% 12
.8%
13.7
%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
FY17
E
FY18
E
FY19
E
FY20
E
Thermax
15 July 2015 11
Exhibit 12: Poor operating leverage has impacted TMX (Standalone) EBITDA margins; gross margins have remained range-bound FY09 FY10 FY11 FY12 FY13 FY14 FY15 Contribution margins have been stable Raw Material 65.4% 66.7% 71.3% 70.2% 68.5% 65.2% 65.5% Contribution Margins 34.6% 33.3% 28.7% 29.8% 31.5% 34.8% 34.5% EBIDTA volatility led by poor operating leverage Staff Costs 7.9% 9.5% 7.7% 7.4% 8.7% 10.0% 9.7% Other Expenses 15.4% 14.6% 11.1% 12.1% 13.1% 16.6% 15.8% Add: Operating Income 1.6% 2.3% 1.3% 1.1% 1.3% 1.4% 1.1% EBIDTA 12.9% 11.6% 11.2% 11.5% 10.9% 9.6% 10.1%
Source: MOSL, Company
Maintain Buy; core portfolio holding Strong commitment to the core ‘Strategy’ and the journey till date has improved the investor perception about ‘sustainable superior performance’ and hence premium valuations. Maintain Buy with a 12-month price target of INR1,275 (30x FY17E at INR1,117/sh and INR141/sh for subsidiaries). We marginally cut our earnings estimates by 3.5-4% for FY16-17 to factor in the constrained investment climate in the near term. Premium valuations are supported by: i) Expectations of strong 43% earnings CAGR over the next five years, ii) robust FY15 RoCE at 16.3% (in a downcycle), iii) FY15 net working capital at just eight days (reflecting the bargaining power of the business) and net cash at INR6.2b (up from INR4.2b in FY14). Well prepared to capitalize on domestic and global recovery TMX has created capacities both in terms of manufacturing and manpower, and
is thus prepared to capitalize on the recovery in the investment climate. We understand that the current capacity utilization in standalone business stands at 80%; excluding the increased levels of in-sourcing, it stands at 65% (as in an upturn, parts of the manufacturing can be outsourced).
Key factories commissioned in the last few years include chemicals (FY12, at Jhagadia), air pollution control (FY13, at Solapur) and TMX-Babcock (TBW) supercritical boiler capacity (~3GW, at Shirwal). TMX has also set up ~0.25msf of office space as ‘Energy House’ and ‘Environment House’ to house the various businesses; these modern offices will strengthen the company’s positioning as a knowledge-driven company. The company is currently working on a capex program of ~INR4b, comprising manufacturing facility in Indonesia and chemicals business in India.
Danstoker acquired a boiler manufacturing facility in Denmark on a slump sale basis; the acquisition was financed by the retained earnings of Danstoker and the facility is 150kms away from the existing manufacturing plant. In the existing plant, the capacity utilization was running at optimum levels and land was an important constraint. Fabrication work has already commenced at the new facility.
While contribution margins have been stable, staff
costs/other expenses have impacted reported margins
Shareholding pattern (%) Mar-15 Dec-14 Mar-14
Promoter 62.0 62.0 62.0
DII 7.7 7.9 6.8
FII 15.7 15.3 16.6
Others 14.7 14.8 14.6
FII includes depository receipts
Stock Performance (1-year)
600
800
1,000
1,200
1,400
Jul-1
4
Oct
-14
Jan-
15
Apr-
15
Jul-1
5
ThermaxSensex - Rebased
Thermax
15 July 2015 12
Exhibit 13: RoEs impacted, given the underutilization of fixed assets
Source: MOSL, Company
Exhibit 14: Consolidated net cash at comfortable levels (INR m)
Source: MOSL, Company
TMX has used the current downcycle to prepare for the next upcycle Thermax is one of the few examples of a product-driven engineering company from India and has acquired/absorbed various technologies over the current downcycle (FY10-15). Many of these tie-up agreements also provide opportunities to completely indigenize the technology and access to overseas markets.
Exhibit 15: TMX: Key technology tie-ups, also provide access to new geographies
Balcke-Durr GmbH Electrostatic Precipitators ESPs for industries and power plants up to 300MW; overseas markets that TMX would focus on include Southeast Asia, Middle East and Africa
Georgia-Pacific Chemicals
Chemicals Performance-enhancing chemicals in the paper industry
GE Water, USA Water and Waste Water Treatment
Ultra-filtration and membrane bio-reactor technology for waste water treatment for commercial and industrial use and distribution of GEs reverse osmosis membranes
Wehrle Umwelt GmbH Water and Waste Water Treatment
Hard-to-treat industrial biological and chemical oxygen effluents to address pharma and bulk drug manufacturers, dyes and pigments, chemicals
SPX, USA Electrostatic Precipitators JV, with TMX holding 51%, for ESPs for power plants >300MW
Babcock and Wilcox Supercritical Boilers Supercritical boilers for 300MW+ range
Lambion Energy Solutions
Biomass combustion Biomass combustion; TMX will have exclusive license to market heating systems in India and SAARC countries, Southeast Asia, the Middle East and Africa
Amonix Inc Concentrated Photovoltaic Technology
Amonix will offer solar power generation systems and TMX will be the EPC partner
Rifox (Acquisition) Steam Traps Steam traps and allied steam accessories manufacturer; will enable heating and cooling business to extend portfolio in Europe, SoutheastAsia and the Middle East
Danstoker (Acquisition) Heating Packaged boiler business, including from biomass and waste heat recovery boilers; enable the company to introduce products in Europe
Siemens HRSGs Registered with Siemens as its global supporting vendor
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