2QFY2013 Result Update | Capital Goods

November 5, 2012

Thermax
Performance Highlights
Quarterly highlights (Standalone)
(` cr) Revenue EBITDA EBITDA margin (%) PAT 2QFY13 1,192 122 10.2 91 2QFY12 1,303 140 10.8 102 % chg (yoy) (8.5) (13.3) (57)bp (10.3) 1QFY13 983 96 9.8 67 % chg (qoq) 21.2 26.3 41bp 35.7

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 6,896 (1,026) 0.7 601/388 13,902 2 18,763 5,704 THMX.BO TMX@IN

`579 -

Source: Company, Angel Research

For 2QFY2013, Thermaxs top-line performance was below our estimates with revenue coming in at `1,192cr (down 8.5% yoy). However, the company was still able to maintain double digit margins at 10.2% (decline of 57bp yoy), in spite of few low margin orders being executed during the quarter. Consequently, the net profit came in at `91cr (down 10.3% yoy).

Key highlights:
The company reported a decline in its top-line by 8.5% yoy to `1,192cr on account of weak execution in both, the energy and the environment segment, which saw a fall in revenue by 9.7% yoy to `934cr and 7.3% to `275cr respectively. Order inflow for the quarter declined by 10% yoy to `1,162cr taking the total order backlog to `4,984cr (decline of 24% yoy) on a consolidated basis. The company secured a major EPC order of `280cr for a power plant in North India during the quarter. The companys Chinese subsidiary and Thermax Instrumentation (EPC arm of Thermax) are still making losses. Although, the Danstoker subsidiary has posted a profit of 1mn euros in 2QFY2012, it has lower margin orders. Outlook and valuation: Thermax remains one of the most expensive stocks in our coverage universe trading at 18.6x FY2014E 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.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 62.0 10.8 12.2 15.0

Abs. (%) Sensex Thermax

3m 9.1

1yr 6.8

3yr 16.8 7.3

17.9 18.0

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

FY2011
5,336 58.5 382 47.3 10.8 32.0 18.1 5.2 31.9 39.2 1.1 10.6

FY2012
6,091 14.1 404 5.7 9.7 33.9 17.1 4.2 27.4 30.8 1.0 10.2

FY2013E
5,514 (9.5) 335 (17.0) 9.3 28.1 20.6 3.7 19.2 21.6 1.0 12.5

FY2014E
5,813 5.4 371 10.8 10.2 31.2 18.6 3.2 18.5 22.2 0.9 10.4 Amit Patil 022-39357800 Ext: 6839 amit.patil@angelbroking.com

Please refer to important disclosures at the end of this report

Thermax | 2QFY2013 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

2QFY13 1,181 11.3 1,192 1.9 814 68.4 106 0.9 149 1.3 1,071 122 10.2 3.4 13.7 27.4 132 11.2 41 30.9 91 7.7 7.7

2QFY12 1,287 16.8 1,303 (0.6) 914 70.0 99 0.8 151 1.2 1,163 140 10.8 1.1 11.7 20.8 148 11.4 47 31.5 102 7.8 8.5

% chg (yoy) (8.2) (8.5) (10.9) 7.2 (1.3) (7.9) (13.3) 212.4 17.2 31.6 (11.1) (12.9) (10.3) (10.3)

1QFY13 973 10.4 983 (9.3) 666 66.8 90 0.9 140 1.4 887 96 9.8 3.7 13.2 18.7 98 10.0 30.9 31.5 67 6.8 5.6

% chg (qoq) 21.4 21.2 22.1 17.3 6.8 20.7 26.3 (7.9) 4.0 46.3 34.4 31.7 35.7 35.7

1HFY13 2,154 22 2,176 (7) 1,480 67.7 196 12.1 289 19.5 1,958 218 10.0 7 27 46 230 10.6 72 31.1 158 7.3 13.3

1HFY12 2,348 28 2,348 (20.3) 1,662 69.9 189.0 11.0 263.5 15.9 2,094 254 10.8 1 23 36 265 11 84 31.6 182 7.7 15.2

% chg (qoq) (8.3) (7.3)

3.5 9.8 (6.5) (14.2) 385.5 18.2 29.6 (13.3) (14.5) (12.8) -

Exhibit 2: Actual vs estimates

(` cr) Revenue EBITDA PAT
Source: Company, Angel Research

Actual
1,192 122 91

Estimates
1,238 125 83

Var (%)
(3.7) (2.6) 10.3

November 5, 2012

Thermax | 2QFY2013 Result Update

Exhibit 3: 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
9.9 9.6 9.8 10.7 10.8 10.7 10.7 10.1 10.6 10.3 9.9 10.2 10.8 11.1 10.9 77.3 22.7 77.7 22.3 75.9 24.1 76.6 23.4 76.6 23.4 92 26 119 110 32 142 (16.3) (17.1) (16.5) 82 25 107 12.2 8 11 175 51 226 199 63 261 (12.1) (18.4) (13.6) 934 275 1,210 1,035 297 1,332 (9.7) (7.3) (9.2) 765 243 1,009 22.1 13.1 19.9 1,700 518 2,218 1,837 562 2,399 (7.5) (7.7) (7.5)

2QFY13

2QFY12

% chg (yoy)

1QFY13

% chg (qoq)

1HFY13

1HFY12

% chg (yoy)

Source: Company, Angel Research *before intersegment revenue

Revenues decline, Subsidiaries still making losses: During 2QFY2013, Thermax reported an 8.5% yoy decline in revenues to `1,192cr. The decline in revenue was due to weak execution in both, the energy and the environment segment, which saw a fall in revenue by 9.7% yoy to `934cr and 7.3% yoy to `275cr respectively. On the OPM front, the company reported a slight decline by 57bp yoy to 10.2%. Consequently, the net profit declined by 10.3% to `91cr. The companys Chinese subsidiary and Thermax Instrumentation (EPC arm of Thermax) are still making losses. Although, the Danstoker subsidiary has posted a profit of 1mn euros in 2QFY2012, it has lower margin orders. The management also indicated that they have booked expenses of `24cr in 1HFY2013 on account of a supercritical JV.

Exhibit 4: Sales and Sales growth

2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 28.6 45.2 61.3 65.9 44.9 32.2 19.4 2.3 (5.9) (15.8) 75 (4.5) 60 (8.5) 45 30 (5.8) 15 0 (15) (30) 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13

Exhibit 5: EBITDAM declined slightly

200 180 160 140 120 100 80 60 40 20 0 10.6 11.7 11.9 12.2 11.8 11.8 10.9 10.8 10.7 11.0 20 16 9.8 10.2 12 8 2.6 4 0 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13

Sales (` cr, LHS)

Growth (yoy %, RHS)

EBITDA (` cr, LHS)

EBITDAM (%, RHS)

Source: Company, Angel Research

Source: Company, Angel Research

November 5, 2012

Thermax | 2QFY2013 Result Update

Tepid order inflow for the quarter

Order inflow for the quarter declined by 10% yoy to `1,162cr taking the total order backlog to `4,984cr (decline of 24% yoy) on a consolidated basis. The energy segment backlog stood at `3,880cr (78% of total) and the environment segment constituted `1,104cr (22% of total) of the order book. The company secured a major EPC order of `280cr for a power plant in North India during the quarter. The ferrous metal sector was another major contributor, consisting of 25% of the order intake. According to the management, there are enquiries from the food sector and the textile sector among others. However, the management is cautious on whether these enquires will result in orders.

Exhibit 6: Order book detail (Consolidated)

8,000 7,000 6,000 5,000 (` cr) 4,000 3,000 2,000 1,000 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13

Order inflows Source: Company, Angel Research

Order backlog

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 FY2014 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.

Valuation
Thermax remains one of the most expensive stocks in our coverage universe trading at 18.6x FY2014E 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.

November 5, 2012

Thermax | 2QFY2013 Result Update

Exhibit 7: One-year forward P/E band

980 840 700 560 420 280 140 0 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12
7.8 10.8 25.1 19.2

Share Price (`) Source: Company, Angel Research

5x

10x

15x

20x

Exhibit 8: Peer comparison

Company ABB* BHEL BGR Energy Crompton Greaves Jyoti Structures KEC International Thermax Reco. Sell Neutral Neutral Buy Buy Buy Neutral CMP (`)
722 231 266 113 43 61 579

Tgt. price (`)

593 145 54 73 -

Upside (%)
(17.9) 28.3 25.6 19.7 -

P/BV(x) FY13E
5.5 2.8 1.5 1.9 0.5 1.2 3.7

P/E(x) FY13E
50.0 9.4 8.8 28.4 4.0 6.8 20.6

FY2012-14E FY14E
29.2 10.6 8.2 14.6 3.2 5.3 18.6

RoE (%) FY13E

11.6 33.5 15.3

FY14E
4.8 2.4 1.4 1.7 0.4 1.0 3.2

EPS CAGR
68.4 (13.2) (3.4) 15.5 5.9 32.1 (8.5)

FY14E
17.6 24.5 16.7 9.7 12.3 24.0 18.5

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.

November 5, 2012

Oct-12

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Thermax | 2QFY2013 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) Depn & Amort. EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Others Recurring PBT % chg Extraord. Exp/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: earnings of associate 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

FY2009 FY2010 FY2011 FY2012 3,460 3,460 (0.6) 3,038 2,080 670 288 422 (1.1) 12.2 35.1 387 (4.2) 11.2 4 40 9.5 423 (5.0) (1.4) 425 136 32.0 289 289 288 (0.4) 8.3 24.1 24.1 (0.4) 3,368 3,368 (2.7) 2,973 2,027 616 330 395 (6.4) 11.7 44.2 351 (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 54.1 520 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 66.3 526 1.1 8.6 12 83 13.9 596 4.0 596 204 34.3 392 392 404 5.7 6.6 33.9 33.9 5.7

FY2013E FY2014E 5,514 5,514 (9.5) 5,001 3,760 717 524 513 (13.4) 9.3 84.4 428 (18.5) 7.8 3 74 14.8 500 (16.2) 500 165 33.0 335 335 335 (17.0) 6.1 28.1 28.1 (17.0) 5,813 5,813 5.4 5,221 3,953 744 523 593 15.6 10.2 96.3 497 15.9 8.5 3 60 10.8 554 10.8 554 183 33.0 371 371 371 10.8 6.4 31.2 31.2 10.8

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

November 5, 2012

Thermax | 2QFY2013 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

FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 24 968 991 4 16 1,011 661 170 491 18 143 1,732 370 222 41 1,372 359 0 1,011 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 24 1,291 1,315 52 148 30 1,545 1,068 282 785 35 241 2,997 750 360 73 2,514 482 0 1,545 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 24 1,843 1,867 112 80 38 2,096 1,438 437 1,001 15 485 2,722 333 358 110 2,127 595 2,096 24 2,116 2,140 112 80 38 2,370 1,572 534 1,039 21 535 3,234 527 320 116 2,459 775 2,370

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

November 5, 2012

Thermax | 2QFY2013 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

FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 425 35 (187) 40 133 99 (186) 417 40 272 (0) 4 70 7 (66) 312 58 370 286 44 469 52 142 604 (74) (227) 52 (249) 4 69 11 (66) 300 370 670 574 54 (212) 58 195 163 (350) 129 58 (163) 140 125 42 15 57 670 750 596 66 71 83 198 452 (194) (174) 83 (285) (61) (60) 98 131 (219) (52) 750 698 500 84 (600) 74 165 (254) (14) (70) 74 (10) (8) 98 4 (105) (365) 698 333 554 96 14 60 183 422 (140) (50) 60 (130) 98 (98) 194 333 527

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

November 5, 2012

Thermax | 2QFY2013 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

FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 24.0 21.4 7.0 0.9 1.9 15.2 6.3 0.9 24.1 24.1 27.1 5.0 83.2 11.2 0.7 3.9 29.5 127.1 29.5 43.3 127.6 32.9 6.3 26 58 46 (11) (0.5) (1.2) 101.5 26.6 22.7 6.4 0.9 1.7 14.9 5.3 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 18.1 15.8 5.2 1.6 1.1 10.6 3.9 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 (26) (0.6) (1.4) 126.8 17.1 14.7 4.2 1.2 1.0 10.2 3.2 0.8 33.9 33.9 39.4 7.0 136.7 8.6 0.7 3.6 20.3 7.0 20.3 30.8 172.9 27.4 5.4 22 65 56 (18) (0.5) (1.4) 43.2 20.6 16.5 3.7 1.2 1.0 12.5 3.1 0.8 28.1 28.1 35.2 7.0 156.7 7.8 0.7 2.8 14.5 2.0 14.5 21.6 86.5 19.2 4.2 24 70 57 (3) (0.3) (1.0) 168.6 18.6 14.8 3.2 1.2 0.9 10.4 2.6 0.8 31.2 31.2 39.2 7.0 179.6 8.5 0.7 2.6 14.9 2.2 14.9 22.2 39.1 18.5 3.9 24 72 55 16 (0.3) (1.2) 192.5

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

November 5, 2012

Thermax | 2QFY2013 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%)

November 5, 2012

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