4QFY2013 Result Update | Capital Goods

May 23, 2013

Thermax
Performance Highlights
Quarterly highlights (Standalone)
(` cr) Revenue EBITDA EBITDA margin (%) PAT 4QFY13 1,468 167 11.4 115 4QFY12 1,687 185 11.0 130 % chg (yoy) (13.0) (9.7) 41bp (11.2) 3QFY13 1,047 112 10.7 76 % chg (qoq) 40.3 49.7 72bp 51.4

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Capital Goods 7,076 (676) 0.9 684/424 13,047 2 19,674 5,967 THMX.BO TMX@IN

`594 -

Source: Company, Angel Research

For 4QFY2013, Thermaxs top-line performance was below our estimates with revenue coming in at `1,468cr, down 13.0% yoy (due to lower order book). The Energy segment as well as Environment segment witnessed a sharp decline in revenues (13.7% yoy decline to `1,139cr for energy segment and 16.9% yoy decline in environment segment to `350cr). However softening of commodity prices and cost control measures aided the company to post 41bp yoy expansion in margins to 11.4%. On the bottom-line front, net profit declined by 11.2% yoy to `115cr.

Declining order book: Although order inflow for the quarter grew by robust ~49% yoy to `1,366cr on a consolidated basis (aided by a lower base), order visibility continues to remain key concern after 6.0% sequential de-growth in order book to `4,878cr (1.0x its trailing 4 quarters revenue). The management commentary indicated that order enquiries in power, cement and steel sector continue to be muted.
Thermax- BW JV to weigh on the consolidated profits: The Companys supercritical boiler plant is nearly completed. However, securing orders is expected to be difficult as the slowdown in investments has led to lower orders and higher competitive intensity. Hence, the company is expected to incur losses (`100cr plus) from fixed cost and interest. Outlook and valuation: Thermax remains one of the most expensive stocks in our coverage universe trading at 18.0x FY2015 EPS estimates. Amid a weakening order inflow and working capital outlook, we expect Thermaxs return ratios to continue to deteriorate. We also expect Thermax- BW JV to weigh on the consolidated profits going forward as its utilization remains muted. Hence, we maintain our Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 62.0 10.5 13.7 13.8

Abs. (%) Sensex Thermax

3m

1yr

3yr 19.6 (12.7)

0.2 22.8 3.2 36.6

Key financials (Consolidated)

Y/E March (` cr) Net Sales % chg Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2012
6,091 14.1 404 5.7 9.7 33.9 17.5 4.3 27.4 30.8 1.0 10.5

FY2013E
5,492 (9.8) 321 (20.4) 9.2 27.0 22.0 3.8 18.4 21.2 1.0 12.6

FY2014E
5,780 5.2 355 10.6 9.5 29.8 19.9 3.4 17.9 20.4 0.9 11.4

FY2015E
6,430 11.2 393 10.7 9.6 33.0 18.0 2.9 17.4 20.3 1.0 10.0 Amit Patil 022-39357800 Ext: 6839 amit.patil@angelbroking.com

Please refer to important disclosures at the end of this report

Thermax | 4QFY2013 Result Update

Exhibit 1: Quarterly performance (Standalone)

(` cr) Net Sales Other operating income Total income Stock adjustments Raw Material (% of total income) Employee Cost (% of total income) Other Expenses (% of total income) Total Expenditure EBITDA (EBITDA %) Interest Depreciation Other Income PBT (% of total income) Total Tax (% of PBT) Reported PAT (PAT %) EPS (`)
Source: Company, Angel Research

4QFY13 1,449 19.5 1,468 5.0 998 68.3 108 0.7 190 1.3 1,301 167 11.4 1 15 24 177 12.0 61 34.7 115 7.9 9.7

4QFY12 1,661 25.6 1,687 21.5 1,149 69.4 94 0.6 237 1.4 1,502 185 11.0 3 12 27 197 11.7 67 34.1 130 7.7 10.9

% chg (yoy) (12.8) (13.0) (13.2) 14.4 (19.5) (13.4) (9.7) (86.1) 20.3 (10.2) (10.3) (8.8) (11.2) (11.2)

3QFY13 1,029 17.6 1,047 (0.2) 698 66.7 98 0.9 139 1.3 935 112 10.7 2 13 12 109 10.4 33 30.0 76 7.3 6.4

% chg (qoq) 40.8 40.3 42.9 9.8 37.4 39.1 49.7 (76.3) 9.4 97.3 62.4 88.0 51.4 51.4

FY2013 4,632 59 4,691 (3) 3,176 67.7 402 10.0 618 19.5 4,194 497 10.6 10 55 83 515 11.0 166 32.1 350 7.5 29.4

FY2012 5,244 60 5,304 (4) 3,684 69.4 387 8.6 661 17.9 4,729 575 10.8 6 47 78 601 11.3 194 32.3 407 7.7 34.1

% chg (qoq) (11.7) (11.6)

3.6 (6.4) (11.3) (13.5) 73.3 17.1 5.7 (14.2) (14.6) (14.0) -

Exhibit 2: Segmental performance

Y/E March (` cr) Revenue Energy Environment Total Revenue* EBIT Energy Environment Total EBIT Revenues mix (%) Energy Environment EBIT Margin (%) Energy Environment Total 10.5 11.8 10.8 10.2 14.0 11.2 10.8 10.1 10.6 10.4 10.5 10.5 10.7 12.4 11.1 76.5 23.5 75.8 24.2 75.3 24.7 76.3 23.7 76.4 23.6 119 41 160 135 59 194 (12.0) (30.2) (17.5) 86 26 113 38.2 56 42 380 119 499 443 160 602 (14.2) (25.6) (17.2) 1,139 350 1,489 1,321 421 1,742 (13.7) (16.9) (14.5) 799 263 1,062 42.5 33.2 40.2 3,638 1,131 4,769 4,151 1,285 5,436 (12.4) (12.0) (12.3) 4QFY13 4QFY12 % chg (yoy) 3QFY13 % chg (qoq) FY2013 FY2012 % chg (yoy)

Source: Company, Angel Research *before intersegment revenue

May 23, 2013

Thermax | 4QFY2013 Result Update

Revenue declines sharply by 13.0%

During 4QFY2013, Thermaxs top-line performance was below our estimates with revenue coming in at `1,468cr, down 13.0% yoy (due to lower order book). The Energy segment as well as Environment segment witnessed a sharp decline in revenues (13.7% yoy decline to `1,139cr for energy segment and 16.9% yoy decline in environment segment to `350cr). However softening of commodity prices and cost control measures aided the company to post 41bp yoy expansion in margins to 11.4%. On the bottom-line front, net profit declined by 11.2% yoy to `115cr.

Exhibit 3: Sales and Sales growth

2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 44.9
32.2 19.4

Exhibit 4: EBITDAM expands yoy

60
45 30 15 0 200 180 160 140 120 100 80 60 40 20 0 11.0 10.8 12.2 11.8 11.8 10.9 10.6 10.7 9.8 11.4 20

(4.5)

1,767

1,687

(5.8)

(8.5)
(17.5)

(13.0)

10.2

16

1,468

10.7

1,303

12

1,269

1,044

1,047

2.3

1,192

983

8
2.6

-15
-30

4
0

4QFY10

2QFY11

3QFY11

1QFY12

2QFY12

3QFY12

4QFY12

2QFY13

3QFY13

1QFY11

4QFY11

1QFY13

4QFY11

1QFY12

2QFY12

4QFY12

1QFY13

2QFY13

4QFY13

3QFY12

3QFY13

Sales (` cr, LHS)

Growth (yoy %, RHS)

EBITDA (` cr, LHS)

EBITDAM (%, RHS)

Source: Company, Angel Research

Source: Company, Angel Research

Thermax- BW JV to weigh on the consolidated profits

The Companys super-critical boiler plant is nearly completed. However, securing orders is expected to be difficult as the slowdown in investments has led to lower orders and higher competitive intensity. Hence, the company is expected to incur losses (`100cr plus) from fixed cost and interest.

4QFY13

May 23, 2013

Thermax | 4QFY2013 Result Update

Declining order book

Although order inflow for the quarter grew by robust ~49% yoy to `1,366cr on a consolidated basis (aided by a lower base), order visibility continues to remain key concern after 6.0% sequential de-growth in order book to `4,878cr (1.0x its trailing 4 quarters revenue). Exhibit 5: Order book detail (Consolidated)
8,000
7,000 6,000 5,000 5,966

6,984

7,276 7,154
6,446

6,804 6,531

5,809
5,190 4878 4,828 5,042 4,984

(` cr)

4,000 3,000
2,000 1,464 1,000 1,840

1,408 1,234 1,528 1,688 1,284

742

918

1,412 1,320 1,454 1366

4QFY10 2QFY11 3QFY11 4QFY11 2QFY12 3QFY12 1QFY13 2QFY13 4QFY13

1QFY11 1QFY12 4QFY12 3QFY13

Order inflows
Source: Company, Angel Research

Order backlog

For 4QFY2013, the ferrous sector has contributed 19% to order inflow followed by power (18%), food processing sector (10%), cement sector (7%). Textile, mining and distillery put together contributes 13% to the order inflow. The Energy segment backlog stood at `3,789cr (78% of total) and the environment segment constituted `1,089cr (22% of total) of the order book. The management commentary indicated that order enquiries in power, cement and steel sector continue to be muted. However, the company is getting enquiries for small orders (`100-`500cr ticket size orders) from sectors such as food processing, pharma, among others. The management expects order inflow to be subdued from domestic markets. Hence, they are increasingly looking at South East Asian and African markets to boost their order inflows.

Outlook
Subsidiaries profitability a concern
Over the years, Thermax has commanded a premium over its peers in the capital goods space due to its excellent return ratios and strong balance sheet owing to excellent working capital and stable operating margins. However, due to the current persistent slowdown, we expect both these levers to be under pressure, leading to pressure on return ratios (from ~31.9% in FY2011 to ~18.5% in FY2014E) along with stretched working capital requirements. Moreover, we expect Thermax- BW JV to weigh on the consolidated profitability of the group going forward as utilization remains muted.

May 23, 2013

Thermax | 4QFY2013 Result Update

Valuation
Thermax remains one of the most expensive stocks in our coverage universe trading at 18.0x FY2015 EPS estimates. Amid a weakening order inflow and working capital outlook, we expect Thermaxs return ratios to continue to deteriorate. We also expect Thermax- BW JV to weigh in on consolidated profits going forward as its utilization remains muted. Hence, we maintain Neutral rating on the stock.

Exhibit 6: One-year forward P/E band

1,000 900 800 700 600 500 400 300 200 100 0
Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 May-07 May-08 Sep-12 May-13
May-09 May-10 May-11 May-12

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Share Price (`)

Source: Company, Angel Research

6x

12x

18x

24x

Exhibit 7: Peer comparison

Company ABB* BHEL BGR Energy Crompton Greaves Jyoti Structures KEC International Thermax Reco. Sell Neutral Neutral Buy Buy Buy Neutral CMP (`) 629 196 190 97 28 45 594 Tgt. price (`) 461 117 33 63 Upside (%) (26.7) 20.2 16.7 40.3 P/BV(x) FY14E 5.0 2.1 1.0 1.6 0.3 0.9 3.4 FY15E 4.8 1.8 0.9 1.4 0.3 0.8 2.9 P/E(x) FY14E 54.6 9.4 7.6 14.1 3.2 7.4 19.9 FY15E 37.1 10.3 6.8 10.4 2.7 5.3 18.0 FY2013-15E EPS CAGR 61.6 (11.3) 11.2 111.6 15.2 83.5 10.7 RoE (%) FY14E 9.3 23.7 25.2 11.7 9.9 20.2 17.9 FY15E 13.1 18.8 22.6 14.5 10.5 23.0 17.4

Source: Company, Angel Research; Note:*December year ending.

Company description
Thermax provides a range of engineering solutions to the Energy and Environment sectors, aided through a combination of technology and strategic alliances. The company offers industrial boilers (small/medium-sized) and integrated solutions in the areas of heating, cooling, power, waste management, air pollution controls and chemicals. After attaining a leadership position in the mid-sized industrial boilers market, the company (through a JV with Babcock and Wilcox) has forayed into supercritical boilers to reap the opportunities outlined in the Indian power sector.

Jan-13

May 23, 2013

Thermax | 4QFY2013 Result Update

Profit & Loss statement (consolidated)

Y/E March (` cr) Net Sales Other Opr. income Total Income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Others Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg
previous year numbers

FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E 3,368 3,368 (2.7) 2,973 2,027 616 330 395 (6.4) 11.7 44 351 (9.4) 10.4 2 52 13.0 400 (5.4) 114.9 286 142 49.6 144 (0.4) 144 259 (9.9) 7.7 21.8 21.8 (9.9) 5,336 5,336 58.5 4,763 3,625 678 460 574 45.4 10.8 54 520 48.3 9.7 4 58 10.1 574 43.3 574 197 34.3 377 (4.7) 382 382 47.3 7.2 32.0 32.0 47.3 6,091 6,091 14.1 5,499 3,844 1,098 558 592 3.1 9.7 66 526 1.1 8.6 12 83 13.9 596 4.0 596 204 34.3 392 (11.4) 404 404 5.7 6.6 33.9 33.9 5.7 5,492 5,492 (9.8) 4,988 3,729 743 516 504 (14.9) 9.2 84 419 (20.2) 7.6 13 83 17.0 489 (18.0) 489 168 34.3 321 321 321 (20.4) 5.8 27.0 27.0 (20.4) 5,780 5,780 5.2 5,231 3,925 763 543 549 9.0 9.5 96 453 8.0 7.8 13 91 17.2 530 8.5 530 175 33.0 355 355 355 10.6 6.1 29.8 29.8 10.6 6,430 6,430 11.2 5,812 4,366 842 604 617 12.4 9.6 109 508 12.2 7.9 14 93 15.8 587 10.7 587 194 33.0 393 393 393 10.7 6.1 33.0 33.0 10.7

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with

May 23, 2013

Thermax | 4QFY2013 Result Update

Balance Sheet (consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets
previous year numbers

FY2010 24 1,054 1,078 9 8 14 1,110 742 205 537 11 370 2,431 670 328 59 2,239 191 0 1,110

FY2011 24 1,291 1,315 52 148 30 1,545 1,068 282 785 35 241 2,997 688 360 135 2,514 482 0 1,545

FY2012 24 1,606 1,629 112 88 38 1,866 1,193 349 844 247 415 3,167 698 180 160 2,807 360 1,866

FY2013E 24 1,829 1,853 112 87 38 2,089 1,438 437 1,001 15 704 2,760 386 357 110 2,390 370 2,089

FY2014E 24 2,087 2,111 112 92 38 2,352 1,572 534 1,039 21 754 3,160 466 318 116 2,621 539 2,352

FY2015E 24 2,383 2,407 112 99 38 2,655 1,848 643 1,205 45 821 3,306 450 386 129 2,723 584 2,655

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with

May 23, 2013

Thermax | 4QFY2013 Result Update

Cash flow statement (consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in WC Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances
previous year numbers

FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E 286 44 469 52 142 604 (74) (227) 52 (249) 4 69 11 (66) 300 370 670 574 54 (273) 58 195 101 (350) 129 58 (163) 140 125 42 15 (4) 670 688 596 66 132 83 198 514 (336) (174) 83 (427) (61) (60) 98 143 (219) 10 688 698 489 84 (322) 83 168 1 (14) (288) 83 (219) (1) 98 4 (98) (312) 698 386 530 96 (89) 91 175 271 (140) (50) 91 (99) 5 98 (93) 80 386 466 587 109 (61) 93 194 349 (300) (68) 93 (275) 7 98 (91) (16) 466 450

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with

May 23, 2013

Thermax | 4QFY2013 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets OB/Sales Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin (%) Tax retention ratio Asset turnover (x) ROIC (Post-tax) (%) Cost of Debt (Post Tax) (%) Leverage (x) Operating RoE (%) Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Int. coverage (EBIT / Int.)
previous year numbers

FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E 27.3 23.3 6.6 0.8 1.8 15.3 5.5 1.8 21.8 21.8 25.5 5.0 90.5 10.4 0.5 3.2 16.7 17.0 16.7 33.0 118.1 25.0 4.8 29 74 64 (27) (0.9) (2.6) 172.7 18.5 16.2 5.4 1.5 1.2 11.0 4.1 1.2 32.0 32.0 36.6 9.0 110.4 9.7 0.7 4.0 25.7 3.5 25.7 39.2 123.0 31.9 5.9 21 64 56 (23) (0.6) (1.3) 126.8 17.5 15.1 4.3 1.2 1.0 10.5 3.3 0.8 33.9 33.9 39.4 7.0 136.7 8.6 0.7 3.6 20.3 6.8 20.3 30.8 156.8 27.4 5.4 22 65 56 (16) (0.5) (1.4) 43.2 22.0 17.5 3.8 1.2 1.0 12.6 3.0 0.9 27.0 27.0 34.0 7.0 155.5 7.6 0.7 2.8 13.9 10.1 13.9 21.2 82.3 18.4 4.2 24 70 57 (12) (0.4) (1.4) 31.3 19.9 15.7 3.4 1.2 0.9 11.4 2.7 0.9 29.8 29.8 37.9 7.0 177.1 7.8 0.7 2.6 13.7 10.1 13.7 20.4 42.8 17.9 3.8 24 72 55 2 (0.4) (1.5) 33.7 18.0 14.1 2.9 1.2 1.0 10.0 2.3 0.9 33.0 33.0 42.2 7.0 202.0 7.9 0.7 2.6 13.6 0.0 13.6 20.3 33.8 17.4 3.8 24 72 55 6 (0.4) (1.4) 37.4

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with

May 23, 2013

Thermax | 4QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Thermax No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

May 23, 2013

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