Thermax International Installations

Satyam Agarwal ([email protected]); +91 22 39820 5410

Deepak Narnolia ([email protected]); +91 22 3029 5126

CMP: INR577 TP: INR770 Upgrade to Buy

ThermaxBSE SENSEX S&P CNX

19,982 6,049

Bloomberg TMX IN

Equity Shares (m) 119.2

M.Cap. (INR b)/(USD b) 68.7/1.3

52-Week Range (INR) 640/402

1,6,12 Rel. Perf. (%) -7/-4/-2

To benefit from structural trends in the economyPeriod of exciting readjustment in Energy and Environment business

Thermax (TMX) is benefiting from few structural trends: (1) continued energy shortages

and increased energy pricing, driving demand for energy efficiency products, (2) hunt

for alternative energy, given demanding regulations and improving viability, (3) increased

environmental concerns and stringent regulatory intervention, (4) currency depreciation

leading to increased possibilities of exports (currently at 22% of revenues), etc.

There are also initial signs that the capex environment in base sectors (like Food

Processing, Pharmaceuticals, Textiles, Chemicals, Engineering, etc) is improving. Few

large Cement / Refinery projects are likely to be awarded in 1HFY14, leading to

improved trend in Gross Fixed Capital Formation (GFCF).

We expect TMX to report acceleration in revenue growth, driven by improvement in

GFCF (particularly in base industries) and interplay of several structural trends. The

company's revenues have been largely stagnant over FY11-13, impacted by

macroeconomic volatility, and we expect 15% CAGR over FY13-15. While exports would

grow at 27% CAGR, the domestic business is likely to grow at 11% CAGR.

We believe TMX is uniquely positioned to benefit from the current trends, which will

enable it to make a transition to the 'Big League' in the next economic upturn. We

expect TMX to report earnings CAGR of 22% over FY12-15. The stock quotes at 20x

FY14E and 15x FY15E EPS. We upgrade the stock to Buy, with an upgraded price target

of INR770 (upside of 33%).

Valuation summary (INR b)Y/E March 2013E 2014E 2015E

Net Sales 54.5 62.2 73.1

EBITDA 4.5 5.5 7.0

Adj PAT 3.1 3.5 4.6

EPS (INR) 26.0 29.2 38.9

EPS Gr. (%) (23.3) 12.4 33.2

BV/Sh. (INR) 157.8 176.5 200.3

RoE (%) 17.8 17.8 21.0

RoCE (%) 15.1 16.5 20.0

Payout (%) 26.9 30.8 33.4

Valuation

P/E (X) 22.2 19.8 14.8

P/BV (X) 3.7 3.3 2.9

EV/EBITDA (X) 13.5 10.2 7.4

Div Yield (%) 1.2 1.6 2.3

24 January 2013

Update | Sector: Capital Goods

Within India, TMX has a dominating market share of ~25-35% in most of the

segments it operates in (except water, where the market share is 10-15%).

Atempts being made to bridge the gap.

Possibly managing

transition to ‘Big League’

driven by:

New growth areas:

Water, Renewables,

Exports, Gas

equipments

Structural trends:

Energy pricing,

Regulations,

Environmental

concerns

TMX has emerged as a global player in various products like vapour Absorption

Chillers, Heating, Heat Recovery Steam Generators, etc. Still, apart from

absorption chillers, its market share in overseas geographies stands at just

2-3% in most product segments. We believe that the recent currency movements

provide opportunities to expand the contribution of the overseas business.

Green portfolio comprises ~30% of revenues, Exports at 22%, Standard products

at 35-40%. Many of these portfolios benefit from the structural trends in the

economy and also provide support in down-cycle.

During the current downcycle (FY10-13), it has absorbed various technologies

and acquired companies (including access to overseas markets) to enhance

the product offerings.

TMX: KEY GROWTH DRIVERS

TMX: Managing transition to the 'Big League' in the next economic upturn (Revenues - INR b)

A

B

Thermax

24 January 2013 2

Power shortages increase steadily (Base power deficit, ttm) Power prices, in recent bids, have increased meaningfully

Currency movements have increased competitiveness of Indian manufacturing

Over CY11/CY12, the INR has depreciated 20% vis-à-vis

the USD and 29% vis-à-vis the CNY. Over a five year

period, the INR has depreciated 37% vis-à-vis the USD

and a whopping 63% vis-à-vis the CNY. These currency

An important structural driver is that the energy scenario

in India has changed: availability of energy is constrained

(increasing power deficits), price of energy has increased

(tariff increases of 15-20% over the last 18 months by

Meaningfully increased demand for energy efficiency products

INR v/s USD and INR v/s CNY for five years

Structural trends

SEBs), and government regulations are becoming

demanding. We believe these changes will drive an

increasing trend towards energy efficiency products,

even for existing operations.

movements, particularly over the last two years, have

provided an opportunity to improve product exports

from India quite meaningfully.

(% YoY)

Thermax

24 January 2013 3

Government regulations have started becoming more demandingEnergy efficiency An important driver for waste heat recovery products will be 'The National Mission for Enhanced Energy

Efficiency' (NMEEE), which covers all the large energy consuming sectors. These industries are required

to lower their energy consumption levels by specific percentage points till 2015 and credible savings in

energy consumption can be traded on the power exchanges through energy efficiency certificates.

Biomass As against a biomass power capacity potential of 18,000MW, the installed capacity in India stands at

just ~1,800MW. Several states have offered various incentives. MNRE plans to shortly launch The National

Bio Energy Mission to act as a platform for achieving this potential, and envisages a capacity addition

of 9,950MW by the end of the 13th Plan (FY22).

Solar The Jawaharlal Nehru National Solar Mission (JNNSM) released its phase-2 draft policy in December

2012, which envisages addition of 9GW capacity during FY13-17. Of this, 6.3GW will be solar PV and

2.7GW will be solar thermal.

Renewable purchase Several state governments have also imposed renewable purchase obligation (RPO) mandates on

obligations for captive users, which has led to incremental costs to be offset through purchase of Renewable Energy

captive users Certificates from the power exchanges. Setting up of solar thermal applications for process applications,

also provides a cost effective mechanism to the industries for offsetting the increased costs.

Water Civic administration makes it mandatory for several industries, commercial establishments like offices,

hotels, etc, and even large residential complexes to have their own effluent / sewage treatment facilities.

TMX is a key player in this segment. Recycling of water is again an important driver, and there exist

pressures on many companies to build water recycling facilities.

Source: Company, MOSL

TMX has used the current downturn to prepare for the next upturn

TMX: Key technology tie-ups; also provide access to new geographies

Balcke-Durr GmbH Electrostatic ESPs for industries and power plants upto 300MW; overseas markets that TMX

Precipitators Precipitators would focus on include South East Asia, Middle East and Africa

Georgia-Pacific Chemicals Chemicals Performance enhancing chemicals in paper industry

GE Water, USA Water and Waste Ultra-filtration and membrane bioreactor technology for waste water

Water Treatment treatment for commercial and industrial use, and distribution of GE reverse

osmosis membranes

Wehrle Umwelt GmbH Water and Waste Hard to treat industrial biological and chemical oxygen effluents to address

Water Treatment manufacturers of pharmaceutical products, bulk drugs, dyes & pigments,

chemicals

SPX, USA Electrostatic JV, with TMX holding 51%, for ESPs for power plants >300MW

Precipitators

Babcock and Wilcox Supercritical Boilers Supercritical boilers for 300MW+ range

Lambion Energy Solutions Biomass Biomass combustion; TMX will have exclusive license to market heating systems

Combustion in India and SAARC countries, South East Asia, Middle East and Africa

Amonix Inc Concentrated TechnologyAmonix will offer solar power generation systems and TMX will be

Photovoltaic 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, SE Asia and Middle East

Danstoker (Acquisition) Heating Packaged boiler business, including biomass and waste heat recovery boilers;

also enable to introduce products in Europe


TMX is one of the few examples of a product-driven

engineering company from India. During the current

downturn (FY10-13), it has acquired / absorbed various

technologies. Many of its technology tie-ups also

provide opportunities to completely indigenize the

technology and access to overseas markets.

Thermax

24 January 2013 4

TMX: Track record of in-house innovationsTMX 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".

Spent wash fired boiler for distilleries

Municipal solid waste fired boiler for urban waste disposal

Waste heat recovery boiler for cement plants

Internal recirculation circulating fluidized bed boiler for power generation

Compact hot water fired chiller that fits into building basements and saves commercial establishments a lot in real estate

Solar based cooling solutions by integrating vapor absorption machines with Thermax solar concentrators; developed the

world's first triple effect absorption chiller - commissioned at National Solar Research Center on Solar Energy

Solar biomass hybrid distributed power generation plant capable of being operated in rural conditions

Working on range of products for the emerging market for solar energy based heat recovery systems


Thermax

24 January 2013 5

Mega trends: Period of exciting re-adjustment in Energyand Environment business

Despite the constrained investment climate, TMX is benefiting from few structural

trends: (1) continued energy shortages and increased energy pricing, driving demand

for energy efficiency products, (2) hunt for alternative energy, given demanding

regulations and improving viability, (3) increased environmental concerns and

stringent regulatory intervention, (4) currency depreciation leading to increased

possibilities of exports (currently at 22% of revenues), etc. These trends have

accentuated in the last 12-18 months but given the inertia in the system, capex

finalizations took time. Now as the perception increasingly moves towards these

changes being structural, rather than cyclical, we believe that we are fast approaching

the time period when the project finalizations should start accelerating.

#1: Meaningfully increased

demand for energy

efficiency products

#2: Currency depreciation,

coupled with access to

products / markets, has

improved possibilities

to meaningfully

expand exports

#3: Hunt for alternative

energy, given regulatory

support and improving

viability

#4: Reduced water

availability and stringent

regulatory intervention

Source: MOSL

Meaningfully increased demand for energy efficiency products

An important structural driver is that the energy scenario in India has changed:

availability of energy is constrained (increasing power deficits), price of energy has

increased (tariff increases of 15-20% over the last 18 months by SEBs), and government

regulations are becoming demanding. We believe these changes will drive an

increasing trend towards energy efficiency products, even for existing operations.

Catalyst #1

TMX: Mega trends driving robust business momentum

Thermax

24 January 2013 6

Power deficits, and thus shortages, increase steadily in Southand North India (ttm) Power prices, in recent bids, have increased meaningfully


TMX business drivers - led by energy shortages and increased power prices

Captive power becoming an important business model

Post the increase in industrial tariffs by 15-20% in several

key states, captive power plants based on imported coal

have become viable. In most of the industrialized states

like Maharashtra, Gujarat, Tamil Nadu, etc, the industrial

tariffs now stand at over INR6/unit, while the cost of

generating power from a captive plant is INR4.5-5/unit.

We believe that increasingly, companies will again start

setting up excess captive power capacities, as despite open

access not being permitted, states continue to be short of

electricity. Captive power is again becoming an important

business model.

Also the 5-15MW segment will start witnessing traction

given the continued power shortages.

Industrial cogeneration driven by need for energy efficiency

Cogeneration in India till date has been largely promoted

as bagasse based. Industrial cogeneration, also known

as waste heat recovery, has a potential of ~20,000MW and

it is believed that just 6-7% of this potential has been

tapped. Given the higher energy prices and also the policy

thrust towards energy efficiency, several industrial units

will have to put up waste heat recovery plants.

Also, an important driver is government regulation, under

'The National Mission for Enhanced Energy Efficiency'

(NMEEE). NMEEE covers large energy consuming sectors

like steel, aluminum, chlor alkali, textiles, pulp and

paper, fertilizers, cement, and petchem. These industries

are required to lower their energy consumption levels by

specific percentage points till 2015, from the baseline

levels of 2010. Also, under the scheme, credible savings

in energy consumption can be traded on the power

exchanges through energy efficiency certificates.

Fuel conversion projects becoming a potential opportunity

Fuel conversion projects in existing boilers could also

become an important driver, as projects designed on

domestic coal linkages will have to increasingly blend

imported coal / alternative fuels, given the continued

shortages.

The conversion is also necessary to improve the

competitive dynamics of the end user industries.

Alternative energy and efficiencies

Hunt for alternative energy is also an important trend and

TMX derives ~30% of its revenues from Green products.

Energy efficiency is also driving businesses like vapor

absorption chillers, etc for TMX.


Thermax

24 January 2013 7

Waste heat recovery

Sponge Iron

Coke Oven

Non Ferrous Industry

Refinery and Petchem

Cement

Chemical Plant

Sulphur Recovery Plant

Exhaust Gas Boiler

Hydrogen Plant

Glass Furnace

Spent wash fired boilers

Boilers and heaters

Biomass fired boiler

Blast furnace gas / lean gas fired boiler

Waste gas fired boiler

Indian power sector: Reforms process tardy, consensus yet to emerge on key variables

Enter the PMO: Emerging like a Phoenix

(February 8, 2012)PMO directive on COAL FSAs

(February 21, 2012)

Pace of reforms tardy

(December 4, 2012)

The Prime Minister’s Office (PMO) intervened to

resolve the logjam in Fuel Supply Agreement (FSA) by

Coal India in January 2012. This period also marked

heightened news flow/activity on Discoms’

restructuring, proposal to alter bidding document

(CBD), possibility of coal price pooling etc. However, a

year later, there is plenty to achieve - F inancial

Restructuring Plan (FRP) yet to be adopted by states

(approved by the Cabinet though only in November,

compared to earlier expectation of July), new CBD is

not yet finalized (fuel cost pass-through), tussle still

remains on FSAs and coal price pooling. Pace of reforms

has been disappointing, in our view.

However, key positives have been regular tariff revision

by loss-making Discoms (FY12 average tariff hike of

15%), fuel adjustment surcharge being adopted by most

Discoms, improving coal supply to power sector (up 11%

YoY in 1HFY13) and revival of power demand (up 8.8% in

YTDFY13, and 8.8% in FY12 v/s mere 4% in FY11).

Government push inevitable to resolve issues

Power sector in India remains a state subject and thus

taking all states on the same footing on critical aspects

like pooling, FRP etc remain key to the sector’s revival.

Power sector’s exposure to banks/NBFC is huge (at

~INR6t, bank’s lending to sector is INR3.3t or 7.7% of

gross bank credit) and persistent delays in resolving

issues could increase the risk of distressed assets.

State governments like Odhisa and West Bengal have

publicly opposed coal price pooling and the matter has

now been referred to the Cabinet for decision, while

non-finalization of new CBD has delayed the process of

new/fresh bids. Also, from a long term perspective, the

ramp-up in domestic coal production remains crucial

and hence the need for seamless environment/forest

clearance. Concerted government action is critical to

address the contentious issues.

TMX derives ~30% of revenues from Green ProductsHunt for alternative

energy is also an

important trend and TMX

derives ~30% of its

revenues from Green

products. These include

waste heat recovery,

vapor absorption chillers,

biomass, spent wash

boilers (for distilleries),

etc.

Thermax

24 January 2013 8

Currency depreciation, coupled with access to products / markets, hasimproved possibilities to meaningfully expand exports

Over CY11/CY12, the INR has depreciated 20% vis-à-vis the USD and 29% vis-à-vis the

CNY. Over a five year period, the INR has depreciated 37% vis-à-vis the USD and a

whopping 63% vis-à-vis the CNY. TMX derives 22% of its revenues from exports

(including deemed exports), but this percentage has been fairly stable over the last

decade. The company has expanded its product range / market access quite

significantly over the last 3-4 years. In most product segments, TMX has a market

share of just 2-3% (except absorption chillers) in the overseas markets largely due to

intense competition. We believe that currency movements, particularly over the last

two years coupled with tech tie-ups, provide an opportunity to accelerate product

exports from India.

Catalyst #2

Currency movements provide an opportunity to accelerate product exports from India

Over the last few years, TMX has emerged as a global player in various products like vapor

absorption chillers, heating, heat recovery steam generators, etc, which opens up interesting

export opportunities.

Also, most of its technology tie-ups and license agreements entail access to overseas

markets, particularly in Asia, Africa and the Middle East.

The recent acquisitions of Rifox (steam traps) and Danstoker (heating business) provide

opportunities to access the European and American markets, and to expand offerings in the

heating business.

Source: MOSL

Exports as a percentage of revenues have remained largely stable over the last decade;

expect FY14 to be inflexion point

TMX derives 22% of its revenues from exports (including deemed exports), and this

percentage has been fairly stable over the last decade. Given the access to new

products and new markets, we expect the contribution of exports to improve

meaningfully to 29% of revenues in FY15.

Exports have remained stable, with Energy dominating (INR m) International installations by TMX


Water Treatment Plants - 40+

Process Boilers - 50+

Power Boilers - 50+

Air Pollution Control - 200+

Chillers - 300+

naveena

Highlight

naveena

Highlight

Thermax

24 January 2013 9

Recent acquisitions in Europe provide opportunities to expand heating business

Rifox Steam Traps Will enable Heating and Cooling business to extend

portfolio in Europe, SE Asia and the Middle East

Danstoker Heating Mr Unnikrishnan, MD and CEO, TMX had stated in the press

release: "We want Danstoker and Omnical to be the platform

for our expansion in Europe. This means that through Danstoker

we will be able to introduce our products in Europe."


Power EPC contracts an important driver, post the initial success

Company Country MW Industry

Lamson Inc Phi l l ip ines 3.5 Corn Starch

Bataan 2020 Phi l l ip ines 12.5 Paper

Under Execution

National Cement Company Yemen 28 Cement

Yemen Co Sugar Refining Yemen 13.5 Sugar

Dangote Industries Zambia 30 Cement


Post the acquisitions of

Danstoker and Rifox, TMX

has increased the size of

its heating business by

~50% and has emerged as

one of the top 5 players

globally.

We believe that TMX's

successful execution

track record for EPC

projects also expands

possibilities for more

such contracts.

TMX's initial forays into

Latin America, Canada

and Saudi Arabia are

likely to generate new

orders and business

plans are under

discussion to convert

these into sustainable

markets. Also, there are

possibilities to

meaningfully expand

presence in Europe and

Africa.

Expanding geographic base: Africa and Europe emerging as important markets(# Rank in TMX portfolio)

#1 SEAsia

#2 WestAsia#3

Africa

#4 Europe


Most technology tie-ups and license agreements entail access to overseas markets

Balcke-Durr Electrostatic Overseas markets that TMX would focus on include

GmbH Precipitators South East Asia, Middle East and Africa

Lambion Energy Biomass TMX will have exclusive license to market heating systems

Solutions Combustion in India and SAARC countries, South East Asia, Middle East

and Africa


Many of TMX's

technology tie-ups

provide opportunities to

completely indigenize

the technology and

access overseas markets.

Thermax

24 January 2013 10

Hunt for alternative energy, given regulatory support and improving viability

Renewable energy also presents interesting possibilities, particularly for TMX, given

integration with industrial and commercial applications. The business is being

supported by government regulations, and also the need to hunt for renewable

energy. Given the increased power tariffs, several renewable energy projects

(including biomass and solar power projects) have started achieving commercial

viability. TMX has positioned itself as the pioneer in several of these products and

technologies in the country through in-house innovation, technology tie-ups and

global acquisitions. We believe that several of these products can become important

revenue contributors over the next three years.

Solar: TMX is the leading player in India

Steam for process applications: TMX's solar concentrators can generate steam, which can be utilized

directly in various process applications (100-210°C).

Steam for absorption cooling: TMX created the world's first triple effect absorption chiller,

commissioned at the National Solar Research Center based on solar energy. In this installation,

for the first time in the world, TMX has integrated a triple effect chiller and solar parabolic

concentrators (collectors), both indigenously developed by the company. This solar cooling

solution could soon find applications across shopping malls, commercial complexes, office

buildings, hospitals and industrial cooling requirements for project sizes ranging from 100KW

to 3,000KW.


Biomass: TMX has expanded portfolio offerings meaningfully

Lambion grate technology has been fully indigenised to offer heating applications that use

biomass as fuel. This will also open up markets in SAARC, Indonesia, Middle East, etc for TMX

in biomass combustion.

TMX, post Danstoker acquisition, will be able to increase product offerings in biomass

combustion, as 50% of Danstoker's order booking was from renewable fuel based heating

systems.


Applications that harness solar and hybrid forms of energy

TMX, along with Department of Science & Technology and Shive village, has commissioned a

technology demonstration project near Pune, which combines solar thermal with biomass to

provide 24x7 power. 24x7 power would not have been possible through solar alone. This project

has proved the concept of Hybrid Distributed Power Generation Plant capable of being operated

in rural conditions. This is a feasible solution for rural areas with agricultural waste, given that

grid penetration to remote areas will take a much longer time.


Renewable energy: Strong regulatory push driving growthBiomass: As against a biomass power capacity potential of 18,000MW, the installed capacity in

India stands at just ~1,800MW. Several states offer various incentives including preferential

tariffs, renewable purchase standards, etc, while the central government offers incentives like

accelerated depreciation, fiscal incentives, etc. MNRE plans to shortly launch the National Bio

Energy Mission and envisages a capacity addition of 9,950MW by the end of the 13th Plan (FY22).

Solar: JNNSM has released its Phase-2 Draft Policy in December 2012, which envisages addition

of 9GW during FY13-17. Of this, 6.3GW will be solar PV and 2.7GW will be solar thermal.

RPO for captive users: Several state governments have also imposed RPO mandates on captive

users, which has led to incremental costs to be offset through purchase of Renewable Energy

Certificates from the power exchanges. Setting up of solar thermal applications for process

applications, also provides a cost effective mechanism to the industries for offsetting the

increased costs.


Catalyst #3

TMX is accredited as a

Ministry of New and

Renewable Energy

(MNRE) channel partner

for off-grid and

decentralized solar

applications under

Jawaharlal Nehru

National Solar Mission

(JNNSM).

As against a biomass

power capacity potential

of 18,000MW, the

installed capacity in India

stands at just ~1,800MW.

Breakthrough project

delivering 24-hour

electricity integrating

solar and biomass has

been commissioned.

Due to regulatory push

and increasing energy

prices, renewable energy

is becoming viable.

Solar thermal plates

Thermax

24 January 2013 11

Catalyst #4 Reduced water availability and stringent regulatory intervention

India faces challenges in fresh water supply, sewage systems, and waste water

treatment. TMX operates in three segments: (1) water treatment (as different

industrial processes require consistent and specific quality of water), (2) effluent /

sewage treatment, and (3) water recycling.

There are constraints in terms of fresh water availability for the industry / municipal

corporations, and this is driving orders for water treatment plants. Civic administration

makes it mandatory for several industries and even commercial establishments like

offices, hotels, etc, and even large residential complexes to have their own effluent

/ sewage treatment facilities. TMX is a key player in this segment.

Recycling of water is again an important driver, and there exist pressures on many

companies to recycle water. The TMX-SPX JV has introduced air cooled condensers for

large power plants, which will help reduce water requirement by 90%, and thus,

could be an important product category.

TMX currently has a market share of 10-15% in the water segment, which is lower than

the rest of the portfolio, where it enjoys a market share of 25-35% in India. The

management believes that there exist possibilities for meaningful improvements,

given that the market is opening up and TMX has expanded its product offerings /

customer base in this segment.

Marquee orders by TMX creating a strong reference base

100% market share in 400km length of Delhi Metro [45 reverse osmosis (RO) plants - every

station has 1 RO plant; 35 sewage treatment plants; 20 softeners]

Delhi Municipal Corporation's Civic Center, which is among the largest buildings in India

80% market share in supplying water treatment, wastewater treatment plants for the

Commonwealth Games

T3, Delhi Airport

Sewage treatment cum recycle plant for Sterling's export promotions on SEZ


Thermax

24 January 2013 12

Initial signs of improvement in GFCF

TMX's domestic revenues (excluding power EPC) are strongly correlated with gross

fixed capital formation (GFCF) in the economy, with a coefficient of 0.69x since 2004.

Recent trends suggest that the Capital Goods sector is seeing a fresh round of inquiries,

which will possibly take 6-8 months to fructify into actual order intake. As a large part

of the inquiries is from base sectors like Cement, Food Processing, Textiles,

Engineering, Chemicals, Automobiles, Pharmaceuticals, etc, we believe there is a

high probability of their getting converted into actual project awards. In terms of

mega projects, there are pockets of opportunities emerging in segments like

Refineries, Power Generation, etc. However, a broad investment cycle recovery is

still far away, as there are several contentious issues that remain unaddressed.

TMX: Domestic revenues strongly correlated with macro trends

0

6

12

18

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY1

3E

FY1

4E

LPA: 6.9%

TMX's domestic revenues (excluding power EPC) are strongly correlated with gross fixed capital formation, with a coefficient of 0.69x since

2004. We have excluded EPC revenues, as the project business is relatively insulated in the interim periods, given the order backlog.

Manufacturing revival: An event to watchExtract from our January 2013 INDIA STRATEGY report, Happy Times

India's manufacturing sector has virtually collapsed, as reflected in the IIP growth of

1.4% in FY13. This has been the key contributor to India's economic slowdown. The

past few months have raised hopes of a likely recovery in FY14. While the base itself

will be favorable for growth, we believe that few other catalysts that could drive

growth are emerging now:

#1 Monetary easing, lowering cost of funds.

#2 Policy engine to help kick-start several stalled projects, to start new projects.

#3 Favorable currency driving manufacturing exports.

Manufacturing sector seems poised for mean reversion

January 2013 India Strategy (manufacturing IIP % YoY)

Thermax

24 January 2013 13

Upgrading price target to INR770; Upgrade to Buy

We believe TMX is uniquely positioned to benefit from the current trends, which will

enable it to make a transition to the 'Big League' in the next economic upturn. We

expect TMX to report earnings CAGR of 22% over FY12-15. The stock quotes at 20x

FY14E and 15x FY15E EPS. We upgrade the stock to Buy, with an upgraded price target

of INR770 (upside of 33%).

Expect revenue growth to accelerate: We expect TMX to report acceleration in revenue

growth, driven by improvement in GFCF (particularly in base industries) and interplay

of several structural trends. The company's revenues have been largely stagnant over

FY11-13, impacted by macroeconomic volatility, and we expect 15% CAGR over FY13-

15. While exports would grow at 27% CAGR, the domestic business is likely to grow at

11% CAGR (given the constrained investment climate). Quarterly order intake has

bounced back to normalized levels of INR13b-14b and we expect a gradual pick-up in

the domestic market, largely driven by new product introductions.

Estimate margins at 10.7% for FY15: Margins remain the key swing factor, given the

increased competitive intensity. We estimate margins at 10.7% for FY15 (up 59bp

since FY13), supported by increased contribution of exports, lower share of project

business, and focus on productivity improvement / cost reduction initiatives.

NWC to improve meaningfully in FY15: Net working capital (NWC) has deteriorated

meaningfully from 3 days in September 2011 to 15 days in September 2012, given

increased debtors. Despite the constrained environment, TMX has been able to

maintain NWC in a tight range, which is commendable and indicates strict preference

for cash flows. We expect further deterioration to 17 days in March 2013, sustaining at

16 days in FY14. We expect meaningful improvement in FY15, with NWC declining to

3 days, given the expected improvement in investment climate, and hence, customer

advances.

Expect revenue growth at 15% till FY15, driven by exports (INR b)

While exports would

grow at 27% CAGR, the

domestic business is

likely to grow at 11%

CAGR (given the

constrained investment

climate).


Thermax

24 January 2013 14


Confident of maintaining double-digit margins through cost engineering

Quarterly order intake has bounced back to usual levels of INR13b-14b and we expect a gradual pick-

up in the domestic market, largely driven by new product introductions.

Order intake showing signs of stabilization (INR b)

Competition is intense, but we model 59bp margin expansion till FY15, driven by increased contribution

of exports, lower share of project business and focus on productivity improvement/cost reduction. TMX

has stayed away from projects (like EPC bids for supercritical plants), where risk profile is high or

competitive intensity is strong.



Trend in margins (TTM; Energy and Environment) TMX raw material cost has high co-relation with steel prices

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24 January 2013 15

Net working capital has deteriorated, but still in a tight range Trend in standalone and consolidated EPS


TMX: SOTP Valuation; upgrade to Buy with an upside of 33%

SOTP INR m INR/share

Standalone 87,868 737 18x FY15E EPS (based on

average multiple across cycles

Subsidiaries 3,510 29 1 x BV of Investments

Target Price 770



TMX: Business model

Thermax

24 January 2013 16

TMX: Operating matrix

FY11 FY12 FY13E FY14E FY15E

Standalone Order intake (INR m) 53,180 40,300 49,500 60,675 77,498

Energy 41,736 28,830 37,500 46,875 60,938

- Power EPC 15,300 5,169 15,000 20,000 27,000

- Energy Ex Power EPC 26,436 23,661 22,500 26,875 33,938

Environment 11,444 11,470 12,000 13,800 16,560

Order intake growth (%) -8.3 -24.2 22.8 22.6 27.7

Energy (%) -10.0 -30.9 30.1 25.0 30.0

- Power EPC -28.5 -66.2 190.2 33.3 35.0

- Energy Ex Power EPC 5.8 -10.5 -4.9 19.4 26.3

Environment -1.2 0.2 4.6 15.0 20.0

Revenues 50,235 54,360 49,751 56,639 65,862

Energy 38,796 41,509 37,488 42,599 48,940

Environment 11,439 12,851 12,263 14,040 16,922

% YoY 54 8 -8 14 16

Energy (%) 61 7 -10 14 15

Environment (%) 36 12 -5 14 21

Revenue Composition 50,235 54,360 49,751 56,639 65,862

Domestic (excl Power EPC) 24,565 27,530 25,358 28,024 31,152

Domestic (Power EPC) 15,010 15,400 12,500 13,750 15,385

Exports 10,660 11,430 11,892 14,866 19,325

% YoY 54 8 -8 14 16

Domestic (excl Power EPC, %) 22 12 -8 11 11

Domestic (Power EPC, %) 157 3 -19 10 12

Exports 63 7 4 25 30

EBIT Margin (%)

Energy 10 11 10 10 11

Environment 13 12 10 11 12


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24 January 2013 17

Financials and Valuation

Income Statement (INR Million)

Y/E March 2010 2011 2012 2013E 2014E 2015E

Total Revenues 32,742 52,472 60,313 54,540 62,238 73,124

Change (%) -3.8 60.3 14.9 -9.6 14.1 17.5

Raw Materials 20,271 34,803 38,435 34,908 39,459 46,055

Staff Cost 3,300 4,547 5,578 5,439 6,135 6,817

Other Expenses 6,160 8,266 10,795 10,336 11,821 14,083

EBITDA 3,947 5,669 5,919 4,516 5,548 6,966

% of Total Revenues 12.1 10.8 9.8 8.3 8.9 9.5

Depreciation 442 541 663 763 1,220 1,279

Other Income 519 652 830 956 1,028 1,226

Interest 20 45 122 220 583 590

PBT 4,004 5,736 5,964 4,489 4,773 6,322

Tax 1,432 1,965 2,043 1,650 1,928 2,345

Rate (%) 35.8 34.3 34.3 36.8 40.4 37.1

Adjusted PAT 2,568 3,818 4,034 3,096 3,478 4,633

EO Income (net) -1,149 0 0 0 0 0

Reported PAT 1,419 3,818 4,034 3,096 3,478 4,633

Change (%) -50.9 169.0 5.7 -23.3 12.4 33.2

Balance Sheet (INR Million)

Y/E March 2010 2011 2012 2013E 2014E 2015E

Share Capital 238 238 238 238 238 238

Reserves 10,544 12,911 16,055 18,181 20,413 23,246

Net Worth 10,926 13,448 16,671 18,797 21,029 23,862

Loans 80 1,480 2,704 2,704 2,704 2,704

Deferred Tax Liability 144 299 378 378 378 378

Capital Employed 11,099 15,448 20,491 22,361 23,960 26,136

Gross Fixed Assets 7,418 10,678 11,929 13,929 14,929 15,929

Less: Depreciation 2,048 2,825 3,488 4,251 5,471 6,751

Net Fixed Assets 5,369 7,853 8,441 9,678 9,457 9,178

Capital WIP 115 354 2,466 400 400 400

Investments 3,703 2,415 2,395 2,395 2,395 2,395

Curr. Assets 23,712 30,370 33,427 32,445 37,856 47,473

Inventory 2,563 3,657 3,666 3,272 3,734 4,387

Debtors 7,984 10,209 13,707 11,999 12,448 14,625

Cash & Bank Balance 6,702 6,880 6,983 8,156 12,202 17,573

Loans & Advances 3,282 4,015 3,560 3,563 3,871 4,306

Other Assets 3,181 5,610 5,512 5,454 5,601 6,581

Current Liab. & Prov.

Creditors 7,583 8,928 9,690 8,726 9,958 13,162

Other Liabilities 2,359 3,264 5,495 4,848 5,464 6,335

Provisions 1,368 2,782 2,721 2,461 2,808 3,299

Net Current Assets 1,318 4,825 7,190 9,888 11,707 14,163

Application of Funds 11,099 15,448 20,491 22,361 23,960 26,136

E: MOSL Estimates

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24 January 2013 18

Financials and Valuation

Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Basic (INR)

EPS 21.6 32.0 33.9 26.0 29.2 38.9

Cash EPS 25.3 36.6 39.4 32.4 39.4 49.6

Book Value 91.7 112.9 139.9 157.8 176.5 200.3

DPS 5.0 9.0 7.0 7.0 9.0 13.0

Payout (incl. Div. Tax.) 23.2 28.1 20.7 26.9 30.8 33.4

Valuation (x)

P/E 15.1 22.2 19.8 14.8

Cash P/E 13.0 17.8 14.6 11.6

EV/EBITDA 9.2 13.5 10.2 7.4

EV/Sales 0.9 1.1 0.9 0.7

Price/Book Value 3.7 3.7 3.3 2.9

Dividend Yield (%) 1.4 1.2 1.6 2.3

Profitability Ratios (%)

RoE 24.8 31.9 27.4 17.8 17.8 21.0

RoCE 24.3 29.0 22.9 15.1 16.5 20.0

Turnover Ratios

Debtors (Days) 89 71 83 80 73 73

Inventory (Days) 29 25 22 22 22 22

Creditors. (Days) 85 62 59 58 58 66

Asset Turnover (x) 2.9 3.4 2.9 2.4 2.6 2.8

Leverage Ratio

Debt/Equity (x) 0.0 0.1 0.2 0.1 0.1 0.1

Cash Flow Statement (INR Million)

Y/E March 2010 2011 2012 2013E 2014E 2015E

PBT before EO Items 4,004 5,736 5,964 4,489 4,773 6,322

Add: Depreciation 442 541 663 763 1,220 1,279

Interest 20 45 122 220 583 590

Less: Direct Taxes Paid 1,432 1,965 2,043 1,650 1,928 2,345

(Inc)/Dec in WC 5,283 (3,880) (1,985) (1,524) 2,226 2,915

CF from Operations 8,317 477 2,719 2,297 6,874 8,762

EO Income -1,149 0 0 0 0 0

CF from Oper. Incl. EO Items 7,168 477 2,719 2,297 6,874 8,762

(Inc)/Dec in FA (838) (3,265) (3,361) 66 (1,000) (1,000)

CF from Investments (3,109) (1,976) (3,342) 66 (1,000) (1,000)

(Inc)/Dec in Net Worth 218 423 (1,439) 295 633 579

(Inc)/Dec in Debt 39 1,401 1,224 0 0 0

Less: Interest Paid 20 45 122 220 583 590

Dividend Paid 697 695 1,246 969 1,246 1,800

CF from Fin. Activity (460) 1,084 (1,583) (894) (1,196) (1,812)

Inc/Dec of Cash 3,599 (416) (2,205) 1,469 4,678 5,950

Add: Beginning Balance 3,696 6,702 6,880 6,983 8,156 12,202

Closing Balance 6,726 6,880 7,021 8,452 12,835 18,152

E: MOSL Estimates

Thermax

24 January 2013 19

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