Rising industrial spend benefits Thermax

Thermax, one of the largest private boiler manufacturers and a leading renewable energy player in India, would benefit from increased private industrial capex and massive investments lined up in infrastructure projects in the country.

Business: Thermax provides a range of engineering products and solutions for energy and environment sectors in India and internationally. The company offers a wide range of products and services in heating, cooling, waste heat recovery, captive power, water treatment, recycling and waste management.

These products and services are used by companies across sectors such as iron and steel, oil and gas, refineries and petrochemical, power generation, cement and textiles to recover pollutants, reducing their hazardous impact on environment.

The company headquartered in Pune has 4 manufacturing facilities — three in India and one in China — and 19 global offices.

The company’s business can be divided into two main segments —energy and environment. Energy contributes 77% to consolidated revenues while environment segment the rest.

The company in its energy segment manufactures subcritical power boilers (100 mw to 800 mw) using technology from US-based Babcock & Wilcox.

The JV’s new plant with 3,000 mw capacity is expected to be ready by September 2012. The energy segment also covers setting up captive cogeneration plants, renewable plants and products such as absorption chillers and small heaters and boilers.

In the environmental segment, the company offers waste heat recovery units, waste water management systems, air pollution control systems and performance chemicals.

Investment rationale: With huge investments lined up in the infrastructure sector, the industrial sectors such as steel, cement and power continue to witness sustained capex from several small and medium new players apart from expansion by larger players.

Thermax would benefit from rising industrial capex and higher government infra spend as it is one of the major players in providing utility equipments and waste management systems. 

The company continues to see sustained demand from steel, cement, power, food processing and chemical segments in the domestic market. It has a strong and diversified order book that helps it to mitigate risk arising out of slowdown in any particular sector. 

Its consolidated order book at the end of December quarter stood at  rs7,154 crore with energy segment having outstanding orders worth Rs6,092 crore.

The company that has made decent strides in renewable energy segment to develop power plants running on solar thermal, biomass and waste heat would also benefit from government’s increased focus and 20% increased budgetary allocations in fiscal 2012 to develop renewable energy resources.

Thermax has been selected by the Maharashtra government to set up geothermal power plant.

The company’s water related environment business continues to see strong traction from the industrial power and municipal segments as it contributed 27% to the bottomline even as contribution to revenues was at 20%.

Higher growth in environmental segment due to stricter environmental regulations would help in increasing overall profitability as the company derives higher operating margins from this segment.

Thermax, which has zero debt and has covered its major raw materials against input price rise, has been able to maintain its operating margins in tough macro environment when interest rates and commodity prices are rising.  

Concerns: Rising interest rates along with higher commodity prices have forced some of the smaller new companies to delay their infrastructure projects. Even though this may affect order inflows, the company has diversified presence across sectors to protect itself from any slowdown in orders.

Also, the company may see slight pressure on operating margins as the rising commodity prices may affect the prices of conventional steel raw materials that constitute 15-18% of the total order book.

Valuations: Considering its healthy order book providing revenue visibility for next 15-18 months, strong execution and diversified presence across industrial sectors, the revenues are expected to grow at a CAGR of 32% over fiscals 2010-12 while the stable operating margins with no debt is likely to ensure that net profits are expected to rise at a CAGR of over 31% during the same period.

At the current market price of Rs606.50, it is available at 19.8 times its expected fiscal 2011 earnings and 16.1 times its expected fiscal 2012 earnings per share.

The stock has corrected over 30% in last four months and investors with medium- to long-term perspective can consider it at current levels.

Disclaimer: The writer does not hold any shares in the company.