Thermax Thunder

Thermax Limited (TMX), headquartered in Pune, India, is a leading energy and environment solutions provider. It is a Rs 7,407 crore company, one of the few companies in the world that offers integrated innovative and a range of engineering solutions in this sphere.

The company’s business portfolio includes products for heating, cooling, water and waste management, and specialty chemicals. It also designs, builds and commissions large boilers for steam and power generation, turnkey power plants, industrial and municipal wastewater treatment plants, waste heat recovery systems and air pollution control projects. The sustainable solutions Thermax develops for client companies are environment-friendly and enable efficient deployment of energy and water resources and are easy to operate.

The company’s solutions span 75 countries across Asia Pacific, Africa, Middle East, Europe, CIS countries, USA and South America. Its business operations are supported by 19 international offices, sales and service teams, a network of Thermax Channel Associates, a robust and innovative R&D setup, and 11 world class facilities – seven of which are in India, two in Denmark, one each in China and Germany – that manufacture to stringent international codes. The group consists of 5 wholly owned domestic subsidiaries, 20 wholly owned overseas subsidiaries and two joint ventures.

The energy business contributes 80 per cent to revenues, whereas the environment business contributes 20 per cent. Further, 20 per cent of revenues are from products and 80 per cent of revenues are from projects. The company’s market share for chillers is 90 per cent, 35 to 38 per cent for boilers and heaters, 8 per cent for water and waste water, 35 per cent for chemicals, and 60 per cent for air treatment divisions.

The first quarter of 2018 has been tepid for Thermax due to top line disruption owing to GST and losses in the environmental division and weak operating margin. The company is seeing margin pressure and pricing pressure in the energy segment. Its standalone revenue and EBITDA suffered 12 per cent and 33 per cent YoY decline led by temporary revenue slippage and weak gross margin, owing to revenue mix.

The company has reduced losses in the first quarter due to disruption and from second quarter onwards the numbers will be similar to that in the last year. However, orders in the environment sector were not that good. Though, in 2018 fiscal it is hopeful that the orders should be able to do better profitability.

The management has alluded at improving inquiry traction across industrials in larger sectors such as oil and gas, steel, cement, et al. The weak near term revenue visibility remains a challenge. Over next 12 to 15 months, these conventional sectors are yet to see any major pick up with fewer inquiries currently.

Performance across subsidiaries

Over several quarters, the performance of TMX’s subsidiaries has improved reasonably. The profit after tax of subsidiaries jumped two times to Rs 7.6 crore, primarily led by better numbers by Danstoker. The Danstocker joint venture posted profit, which was significantly better than last year. It has also seen significant improvement in order intake.

TMX has bagged a large order from the African continent’s largest cement producer, Dangote, where 14 equipments will be manufactured in different factories and assembled in the Mundra port facility and then shipped to Africa over 24 months. The large order from Dangote boosted order intake and book growth grew by 135 per cent and 22 per cent year over year (YoY), even as domestic ordering remained flattish at Rs 540 crore.

Investment Premise

During fiscal 2013-14, the domestic captive power plant (CPP) market was flat, greater than one mega watt (MW) at 1,200-1,300MW post declining from peak of 2,400-2,500MW during 2007-09. Presently, the domestic CPP market is less than 1000MW. With the economic scenario improving, corporate capital expenditure revival is expected to pick up by second half of 2018.

Order Inflows

Big-ticket order inflows from export market of Rs 15.7 crore led to sharp 135 per cent YoY spurt in group orders to Rs 1900 crore with order book at Rs 5000 crore jumped up 22 per cent YoY, of which domestic was Rs 2,270 crore and exports Rs 2,670 crore. The breakup for order intake across segments follows as: largest order intake was in the energy division of Rs 1,726 crore followed by Rs 100 crore in environment and Rs 90 crore in chemicals.  During the fiscal 2018, orders worth Rs 200 crore are to be finalised.

Factors that impacted revenue

GST: There has been a large inventory holed up in the factory which was not due to GST but is only an effect of the dispatch control that it has implemented. One of the large customers had informed the company in advance not to ship any of the products in June. Owing to GST and this implementation, the company had to borne a total of Rs 80 crore reductions. There was a malware attack on Jawaharlal Nehru port (JNPT) due to which TMX could not move stock as it was already in the port. Hence, it had to bear revenue loss of Rs 30 crore.

Enhanced enquiries inflow

The enquiries inflow has been much better than last year and management expects ordering to improve going forward.

• Standard products: There have been increased enquiries from the textile sector, specifically in polyester, yarn and weaving and knitting mainly in the regions of Gujarat and Coimbatore and some from Kanpur and Ludhiana.

• Food sector and hospitality: The enquiries were largely in the beverages and food processing units across the country. In the hospitality division, enquiries from Tier-2 cities for water heaters and baby boilers were received.

• Oil and gas: Bharat VI business is where the sulphur content in the oil is going to dip, which requires waste heat recovery and TMX is one of the players that can cater to this need. 25 per cent of the ordering is already over and 75 per cent will be done by fiscal 2019. The segment’s order worth Rs 190 crore has been finalised and out of which, orders worth Rs 80 crore have been received by TMX.

• Others: There has been movement in sponge iron sector, waste sheet recovery and conversion to captive power in the steel industry. In fertilizers, two to three good enquiries for captive power plants were recorded. In the cement category, enquiries are from waste heat recovery, however margins are low. Enquiries also followed up for the rubbers and tyres sector. Additionally, there will Brownfield expansion in commodity chemicals.

New Facilities

Indonesian plant: This plant is a manufacturing hub for ASEAN countries and it will make heating boilers, which has a potential market of USD400mn of which TMX is currently targeting USD200mn and a market share of 12 to 13 per cent in the next 6 years. Given there are no global players in the sphere thereby the management believes TMX will be able to gain market share without much difficulty and increase margin as well.

Chemical capacity: Presently, the company has just 10,000 tonnes of capacity and it plans to add 12,000 tonnes and thus it will be able to almost double the capacity over 24 months and increase it to 40,000 tonnes over the next three to four years. The customers are large process manufacturers in developed nations of US, UK and China. From the second quarter of 2018, export unit in Dahej will commence and revenue recognition from the last quarter of 2018.

Facility in Andhra Pradesh: This facilityis for absorption chillers and will be functional by the first quarter of 2019 financial year. The plant in Pune is facing capacity constraint and high cost as the factory is in a metro city.

Way forward

Over the period 2017-19, it is estimated of TMX to post reasonable 17 per cent and 30 per cent top line and earnings CAGR, respectively. The medium-risk export jobs are unlikely to drive re-rating. Despite the fact that the company is armed with a strong balance sheet and execution track record, broad-based recovery in the domestic industrial space warranting better utilisation remains key trigger for profitability growth.

During the quarter, Thermax-Babcox and Wilcox joint venture recorded Rs 7 crore loss; any major uptick in this joint venture is not expected, given limited growth avenues impacted by fewer orders from utilities.

Cautious outlook

The provider company’s domestic market recovery will be gradual owing to lower than capex threshold utilisation levels across core sectors such as cement, steel et al. There aren’t doubts on TMX’s capability to focus on cash flows and execution; however the stance for the company is watchful. Moreover, the utility market has its own challenges with ordering at a slower pace, that too from PSUs, and mostly in engineering, procurement, construction (EPC) jobs. While majority of the recent order surge seems one time, the stock at 26 times price-to-earnings remains expensive. Its major risk is higher than expected orders from the exports market and supercritical orders which might potentially change the revenues and earnings per share assumptions.

neha.seth@outlookindia.com