Thermax's annual report: Near-term upside limited, accumulate for mid- to long-term #BrokerAdvice http://goo.gl/9PO6LY

1.
Thermax
July 15, 2015
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Annual Report Analysis
Taking internationalisation strategy to next level!
Kunal Sheth
kunalsheth@plindia.com
+91‐22‐66322257
Samir Bendre
samirbendre@plindia.com
+91‐22‐66322256
Rating Accumulate
Price Rs1,041
Target Price Rs1,102
Implied Upside 5.9%
Sensex 28,198
Nifty 8,524
(Prices as on July 15, 2015)
Trading data
Market Cap. (Rs bn) 123.9
Shares o/s (m) 119.0
3M Avg. Daily value (Rs m) 100.6
Major shareholders
Promoters 61.98%
Foreign 15.65%
Domestic Inst. 7.66%
Public & Other 14.71%
Stock Performance
(%) 1M 6M 12M
Absolute 11.1 0.8 13.1
Relative 5.0 0.4 1.3
How we differ from Consensus
EPS (Rs) PL Cons. % Diff.
2016 26.1 27.3 ‐4.5
2017 35.6 35.5 0.1
Price Performance (RIC: THMX.BO, BB: TMX IN)
Source: Bloomberg
0
200
400
600
800
1,000
1,200
1,400
Jul‐14
Sep‐14
Nov‐14
Jan‐15
Mar‐15
May‐15
Jul‐15
(Rs)
Key highlights from the FY15 Annual report of Thermax (TMX):
1) Recovery in core sector orders to be 12‐18 months away
(Steel/Oil&Gas/Cement/Fertilizer) 2) B‐to‐C segments such as Food processing,
Pharma, Textiles, Beverages, Alcohol and FMCG driving near‐term order inflow 3) To
take internationalisation to the next level, a manufacturing facility is being set up in
Indonesia, which is expected to be ready by the end of FY17 which will act as a
regional manufacturing hub to cater to the ASEAN markets 4) Losses from
subsidiaries widened to Rs1.3bn (Rs356m in FY14) largely driven by B&W JV 5) Cash
from operation down 16% YoY to Rs2.8bn and free cash flow of Rs2.3bn for FY15.
While near‐term upside is limited, we continue to be a buyer in TMX from
medium/long term perspective
 Capex driven by B‐to‐C segment, recovery in core sector 12‐18 months away:
TMX is cautious on recovery in its key sectors in the near term. The company
cited no new capacity additions in Steel, Cement, Fertilizer, Oil & Gas – the
sectors that propel order book of the company. In the Cement sector, TMX cited
low utilization levels. In Steel, TMX expects no recovery in the near term. In Oil
& Gas and Power, TMX expects large capex in the 18‐24 months’ timeframe.
Most of the Greenfield and Brownfield investments were confined to the B‐to‐C
segments such as Food processing, Pharma, Textiles, Beverages, Alcohol and
FMCG. TMX was able to increase their market‐share in these segments through
new product introductions and enhanced market coverage. During the year, the
company’s focus would be on retaining top‐line through its capacity to execute
short‐cycle orders and orders received in H1FY16.
Contd…2
Key financials (Y/e March) 2014 2015 2016E 2017E
Revenues (Rs m) 50,999 53,955 57,002 65,120
Growth (%) (7.1) 5.8 5.6 14.2
EBITDA (Rs m) 4,373 4,636 5,036 6,387
PAT (Rs m) 2,460 1,964 3,105 4,238
EPS (Rs) 20.6 16.5 26.1 35.6
Growth (%) (23.2) (20.2) 58.2 36.5
Net DPS (Rs) 7.2 6.2 9.1 12.4
Profitability & Valuation 2014 2015 2016E 2017E
EBITDA margin (%) 8.6 8.6 8.8 9.8
RoE (%) 12.3 9.2 14.1 17.9
RoCE (%) 8.8 6.5 10.5 13.8
EV / sales (x) 2.3 2.2 2.1 1.8
EV / EBITDA (x) 27.4 25.4 23.3 18.2
PE (x) 50.4 63.2 39.9 29.3
P / BV (x) 5.8 5.8 5.5 5.0
Net dividend yield (%) 0.7 0.6 0.9 1.2
Source: Company Data; PL Research

2.
July 15, 2015 2
Thermax
 Taking strategy of selective internationalisation to next level: TMX’s efforts at
internationalisation have made headway, as nearly one‐fourth of their revenue
currently comes from international business. TMX will continue to promote
product businesses in select countries in order to hedge risks. TMX had launched
a company‐wide initiative to enhance revenue and profits from overseas
business. Selective internationalisation programme helped the company
weather slowdown in domestic markets with some significant orders garnered
from the African and South East Asian markets. To take internationalisation to
the next level, TMX has decided to establish local manufacturing. As part of
efforts to internationalise its operations, a manufacturing facility is being set up
in Indonesia which will act as a regional manufacturing hub to cater to the
ASEAN markets. This facility should be operational by the end of FY17.
 Subsidiaries: Subsidiaries continued to be in red with a total loss of Rs1.3bn
(including share of boiler JV) in FY15 against a loss of Rs358m in FY14. Major
contribution to losses came from Thermax ‐ Babcock & Wilcox JV (Rs1.2bn);
however, given the better order carry, performance should improve in FY16.
Danstoker reported loss of Rs422m (Profit of Rs155m in FY14). The Russian
market, which is important to Danstoker, was adversely affected by the
economic troubles on account of Ukraine crisis and low oil prices, which in turn
was responsible for Danstoker’s negative performance. As several under‐utilised
boiler manufacturing facilities in Europe faced bankruptcy and closure, the
Danstoker Group was also impacted and its German subsidiary Omnical Kessel
und Apparatebau GmbH was placed under Administration. Thermax (Zhejiang)
Cooling and Heating Engineering Company reported minor losses (Rs10m),
 Working capital and cash: Working capital days remained flat at 13 days in
FY15. TMX continues to generate positive cash from operation of Rs2.8bn (down
16% YoY and free cash of Rs2.3bn (down 10% YoY) (before investment in
subsidiaries).
 Outlook and Valuation: The stock is trading at 29x FY17E earnings. TMX’s ability
to bag base orders of ~Rs7‐8bn per quarter, increasing market share, strong
product profile, increasing traction in export market and strong management
pedigree gives us confidence that it will be able to participate in the upturn of
the cycle meaningfully and continue to surprise positively in terms of order flow.
While near‐term upside is limited, we continue to be a buyer in TMX from
medium/long term perspective.

3.
July 15, 2015 3
Thermax
Exhibit 1: 1yr forward PE Band
12.0x
20.0x
28.0x
36.0x
44.0x
0
200
400
600
800
1,000
1,200
1,400
1,600
Mar‐05
Jul‐05
Nov‐05
Mar‐06
Jul‐06
Nov‐06
Mar‐07
Jul‐07
Nov‐07
Mar‐08
Jul‐08
Nov‐08
Mar‐09
Jul‐09
Nov‐09
Mar‐10
Jul‐10
Oct‐10
Feb‐11
Jun‐11
Oct‐11
Feb‐12
Jun‐12
Oct‐12
Feb‐13
Jun‐13
Oct‐13
Feb‐14
Jun‐14
Oct‐14
Feb‐15
Jun‐15
Source: Company Data, Bloomberg, PL Research
Exhibit 2: 1yr forward PE
36.849.7
23.4
20.1 7.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Mar‐05
Sep‐05
Mar‐06
Aug‐06
Feb‐07
Jul‐07
Jan‐08
Jul‐08
Dec‐08
Jun‐09
Nov‐09
May‐10
Oct‐10
Apr‐11
Oct‐11
Mar‐12
Sep‐12
Feb‐13
Aug‐13
Feb‐14
Jul‐14
Jan‐15
Jun‐15
P/E (x) Peak(x) Avg(x) Median(x) Min(x)
Source: Company Data, Bloomberg, PL Research

4.
July 15, 2015 4
Thermax
International Markets‐ Increasing focus areas/growth drivers
TMX’s efforts at internationalisation have made a headway, as nearly one‐fourth of
our revenue currently comes from international business. The company will continue
to promote product businesses in select countries, in order to hedge risks. TMX had
launched a company‐wide initiative to enhance revenue and profits from overseas
business. Selective internationalisation programme helped company weather the
slowdown in domestic markets with some significant orders garnered from the
African and South East Asian markets. To take the internationalisation to next level,
TMX has decided to establish local manufacturing. As part of the efforts to
internationalise its operations, a manufacturing facility is being set up in Indonesia,
which is expected to be ready by the end of FY17 which will act as a regional
manufacturing hub to cater to the ASEAN markets. This facility should be operational
by the end of FY17.
Exhibit 3: Export Sales (Rs m)
‐40.0%
‐20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
‐
10,000
20,000
30,000
40,000
50,000
60,000
FY09 FY10 FY11 FY12 FY13 FY14 FY15
Sales Exports Exports YoY gr. (RHS)
Source: Company Data, PL Research
Exhibit 4: Contribution of Exports in Sales, Order Book and Order Inflow
Exports
19%
Sales
Domestic
81%
Exports
27%
Order Backlog
Domestic
73%
Exports
30%
Order Inflow
Domestic
70%
Source: Company Data, PL Research
As part of the efforts to internationalise its
operations, a manufacturing facility is
being set up in Indonesia
Selective internationalisation programme
helped company weather the slowdown in
domestic markets with some significant
orders garnered from the African and
South East Asian markets

5.
July 15, 2015 5
Thermax
Energy Segment
Energy business of the TMX group comprising heating, cooling, EPC power
generation and solar contributed 82.3% of the group's operating revenues.
Exhibit 5: Energy segment revenues (Rs m)
Energy FY11 FY12 FY13 FY14 FY15
Net Revenues 39,178 41,510 36,382 32,828 37,734
EBIT Margin 11% 10% 10% 11% 11%
Source: Company Data, PL Research
TMX highlighted that there were no new capacity additions in Steel, Cement,
Fertilizer, Oil & Gas and most of the Greenfield and Brownfield investments were
confined to B‐to‐C segments, such as Food processing, Pharma, Textiles, Beverages,
Alcohol and FMCG. TMX was able to increase its market share in these segments
through new product introductions and enhanced market coverage.
Boilers segment had better sales than last year (up 50% YoY) mainly because of a
healthy opening order book ( large Reliance order received in FY14). A weak closing
order book is likely to lead to muted performance in FY16 for the segment. While
negative oil prices have had an impact on TMX boiler sales, its waste heat boilers
help counterbalance sales to certain extent
Power EPC business sales was down 33% YoY; however, owing to improved intake of
captive power orders, repeat from customers in Africa and South East Asia, outlook
for Power business has improved for FY16.
Heating business witnessed a decline last year. Orders were mainly executed in the
industry segments of Food processing, Textile, Chemical, Pharma and Distillery.
Cooling business performed better than the previous year, mainly because of a
noticeable growth in export revenue. Key markets like Denmark, North America,
Middle‐ East and South East Asia have also shown encouraging signs. Food, Beverage
and Dairy sectors were prominent customers for cooling business and new products
were developed during the year specifically to cater to these sectors.
TMX’s solar business established its presence as a reliable roof‐top PV solution
provider. The business won its first ever megawatt‐sized order and completed the
project during the year. TMX’s solar thermal segment made inroads in the large
automobile components industry for process heat requirements. With the
Government of India’s extensive plans of setting up renewable energy projects over
the next seven years, this business should witness a steady growth in the coming
years.
TMX highlighted that there were no new
capacity additions in Steel, Cement,
Fertilizer, Oil & Gas and most of the
Greenfield and Brownfield investments
were confined to B‐to‐C segments

6.
July 15, 2015 6
Thermax
Environment segment
Environment segment comprising Air pollution control, Water & Wastewater
solutions and Chemical businesses accounted for 17.7% of revenues
Exhibit 6: Environment segment revenues (Rs m)
Environment FY11 FY12 FY13 FY14 FY15
Net Revenues 11,471 12,851 11,310 10,591 10,738
EBIT Margin 13% 13% 11% 6% 7%
Source: Company Data, PL Research
Air pollution control business, in a tough market, has registered growth and gained
turnkey projects that promise a positive outlook for the coming year. The company’s
air pollution control business grew by expanding its existing capacities in core
industries in the Steel and Energy sector. Margins have been under pressure because
of many players chasing limited orders and also because fewer orders were
concluded. This business secured some prestigious turnkey projects including an
order from an EPC major in Canada for dry sorbent injection type flue gas
desulphurization system. It successfully commissioned a fume extraction system of
2,40,000 m3/hour capacity for hot metal pooling at a leading steel company in
Eastern India. There are some projects in sectors like Steel, Power and Cement at a
conceptual stage and their financial closure and execution could be expected in
FY16.
Water and waste solutions business incurred an overall loss during the year, even
though the product group continued to be profitable. The water business has
launched new products and solutions for treatment of water and wastewater
including sewage to meet specific needs of customers and stringent pollution control
norms. The business will continue to focus on its efforts in operational excellence to
optimize cost and improve competitiveness.
Chemical business had a profitable year though its revenue growth was modest. The
substantial price drop in global crude had a negative impact on the oil field chemicals
business. However, the ion exchange resin and construction chemicals businesses
recorded good growth and performance. As the major share of the resin portfolio of
this business is in the international market, a brand new export oriented unit is being
set up. The company has already acquired land for this at Dahej, Gujarat. The
commercial production from this facility is expected to commence in FY17‐18.
Air pollution control business, in a tough
market, has registered growth and gained
turnkey projects that promise a positive
outlook for the coming year
The water business has launched new
products and solutions for treatment of
water and wastewater including sewage to
meet specific needs of customers and
stringent pollution control norms.
Chemical business had a profitable year
though its revenue growth was modest

7.
July 15, 2015 7
Thermax
New products
In FY14‐15, TMX launched several new products:
Thermeon, a multi‐fuel steam boiler was introduced to meet the energy needs of
small and medium scale industries. The skid mounted unit in the 300 to 1500kg
range has a small footprint and generates high quality dry steam.
Heat transformer enhances energy efficiency by stepping up medium grade heat to
high grade levels and converting to steam. Successfully commissioned by a
photovoltaic poly film unit in China, it is expected to gain more customers.
BioCask is a compact sewage treatment plant which can be fitted in basements. It is
a viable option for small and medium industries and commercial complexes.
Solar boiler, a packaged non‐IBR unit, can be seamlessly integrated with other
operating boilers so that it generates steam during the day and uses conventional
fuel during non sunny hours.
Exhibit 7: Break‐up and share of service business (Rs m)
Service Revenue FY11 FY12 FY13 FY14 FY15
O&M 925 1,333 1,757 2,138 2223.9
E&C 379 1,088 1,821 2,177 1422.9
Other services 89 170 120 526 181.2
Total 1,393 2,590 3,698 4,841 3878
% sales 2.9% 4.9% 8.0% 11.4% 8.3%
Source: Company Data, PL Research
Service business declined to 8.3% of sales

8.
July 15, 2015 8
Thermax
Subsidiary performance
Exhibit 8: Subsidiary financial snapshot (Rs m)
FY09 FY10 FY11 FY12 FY13 FY14 FY15
Total Sales 1,959 1,850 4,158 7,872 8,003 7,977 6981
Total PBT 71 136 6 (39) (288) (176) (1287)
Total PAT 33 60 (7) (28) (245) (356) (1384)
Thermax Engineering Construction Co (TEC)
Sales 999 968 1,201 1,710 1,909 1,554 2,059
PBT 30 51 94 105 67 9 79
PAT 15 30 64 71 45 1 6
Thermax Instrumentation (TIL)
Sales 1,032 1,291 2,365 2,495 2,102 1,448 1,002
PBT 9 35 51 (116) (176) 60 74
PAT 4 20 34 (104) (200) (16) 37
Thermax Europe (UK)
Sales 408 258 310 409 435 483 873
PBT 56 41 41 47 52 27 63
PAT 40 30 29 35 40 20 50
Thermax Inc (USA)
Sales 750 671 582 652 663 684 935
PBT 6 55 8 24 14 41 83
PAT 5 43 2 10 9 26 53
Thermax (Zhejiang) Cooling & Heating Engineering co (TZ)
Sales 20 136 213 492 707 629 788
PBT (88) (81) (80) (70) (87) (80) (10)
PAT (88) (81) (80) (70) (87) (80) (10)
Danstoker A/S
Sales 2,962 2,052 283 1,678
PBT 245 209 216 (429)
PAT 184 157 155 (423)
Omnical
Sales 2,118 1,514 202 461
PBT (26) (36) (87) (74)
PAT (14) (30) (63) (72)
Thermax Babcock & Wilcox – JV
Sales ‐ 158 364
PBT (304) (530) (1,237)
PAT (304) (530) (1,237)
Source: Company Data, PL Research
A host of factors were responsible for
Danstoker’s negative performance: the
Russian market, which is important to
Danstoker, was adversely affected by the
economic troubles flowing from the
Ukraine crisis and low oil prices
As several under‐utilised boiler
manufacturing facilities in Europe faced
bankruptcy and closure, the Danstoker
Group was also impacted and its German
subsidiary Omnical Kessel und
Apparatebau GmbH was placed under
Administration
During the year, B&W JV received two
export orders from B&W PGG for detailed
engineering, manufacturing and supply of
select items for three pulverized coal‐fired
utility boilers for international projects,
besides an export order for detailed
engineering, manufacturing and supply of
two smaller biomass fired units. In the
medium term, the company is hopeful of
mitigating its losses, and becoming
profitable once the Indian power sector
gets activated and moves ahead

9.
July 15, 2015 9
Thermax
Working capital and Cash flows
Working capital days remained flat at to 13 days in FY15. The company continues to
generate positive cash from operation of Rs2.8bn (down 16% YoY and free cash of
Rs2.3bn (down 10% YoY) (before investment in subsidiaries).
Exhibit 9: Working Capital Cycle
(60.0)
(50.0)
(40.0)
(30.0)
(20.0)
(10.0)
‐
10.0
20.0
30.0
(5,000)
(4,000)
(3,000)
(2,000)
(1,000)
‐
1,000
2,000
3,000
FY10 FY11 FY12 FY13 FY14 FY15
Net Working Capital (Rs m) NWC (Days) (RHS)
Source: Company Data, PL Research
Exhibit 10: Order book details
‐40.0%
‐30.0%
‐20.0%
‐10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
FY09 FY10 FY11 FY12 FY13 FY14 FY15
(Rs m)
Order book Order Inflow Inflow YoY gr. (RHS)
Source: Company Data, PL Research

10.
July 15, 2015 10
Thermax
Exhibit 11: Cash flow and FCF
‐1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY10 FY11 FY12 FY13 FY14 FY15
Cash from operation FCF
Source: Company Data, PL Research

11.
July 15, 2015 11
Thermax
Income Statement (Rs m)
Y/e March 2014 2015 2016E 2017E
Net Revenue 50,999 53,955 57,002 65,120
Raw Material Expenses 28,616 31,377 34,435 39,360
Gross Profit 22,382 22,578 22,567 25,760
Employee Cost 7,019 7,057 7,582 8,150
Other Expenses 10,991 10,886 9,949 11,223
EBITDA 4,373 4,636 5,036 6,387
Depr. & Amortization 922 1,341 1,408 1,479
Net Interest 274 820 703 640
Other Income 716 1,209 1,446 1,639
Profit before Tax 3,893 3,684 4,371 5,908
Total Tax 1,696 1,708 1,851 2,197
Profit after Tax 2,198 1,976 2,520 3,711
Ex‐Od items / Min. Int. (842) (1,965) (586) (527)
Adj. PAT 2,460 1,964 3,105 4,238
Avg. Shares O/S (m) 119.2 119.2 119.2 119.2
EPS (Rs.) 20.6 16.5 26.1 35.6
Cash Flow Abstract (Rs m)
Y/e March 2014 2015 2016E 2017E
C/F from Operations 3,584 3,181 1,719 2,395
C/F from Investing (4,192) (672) (554) (361)
C/F from Financing 1,905 (3,523) (527) (821)
Inc. / Dec. in Cash 1,297 (1,014) 638 1,213
Opening Cash 3,211 4,508 3,494 4,131
Closing Cash 4,508 3,494 4,131 5,344
FCFF (4,417) 5,168 2,391 3,520
FCFE (1,239) 3,315 2,391 3,520
Key Financial Metrics
Y/e March 2014 2015 2016E 2017E
Growth
Revenue (%) (7.1) 5.8 5.6 14.2
EBITDA (%) (10.8) 6.0 8.6 26.8
PAT (%) (23.2) (20.2) 58.2 36.5
EPS (%) (23.2) (20.2) 58.2 36.5
Profitability
EBITDA Margin (%) 8.6 8.6 8.8 9.8
PAT Margin (%) 4.8 3.6 5.4 6.5
RoCE (%) 8.8 6.5 10.5 13.8
RoE (%) 12.3 9.2 14.1 17.9
Balance Sheet
Net Debt : Equity (0.2) (0.3) (0.3) (0.3)
Net Wrkng Cap. (days) (84) 42 (60) (59)
Valuation
PER (x) 50.4 63.2 39.9 29.3
P / B (x) 5.8 5.8 5.5 5.0
EV / EBITDA (x) 27.4 25.4 23.3 18.2
EV / Sales (x) 2.3 2.2 2.1 1.8
Earnings Quality
Eff. Tax Rate 43.6 46.4 42.4 37.2
Other Inc / PBT 18.4 32.8 33.1 27.7
Eff. Depr. Rate (%) 4.5 6.5 6.3 6.0
FCFE / PAT (50.4) 168.8 77.0 83.1
Source: Company Data, PL Research.
Balance Sheet Abstract (Rs m)
Y/e March 2014 2015 2016E 2017E
Shareholder's Funds 21,432 21,460 22,710 24,640
Total Debt 7,387 5,534 5,534 5,534
Other Liabilities 1,714 780 780 780
Total Liabilities 30,534 27,775 29,024 30,954
Net Fixed Assets 15,795 14,741 15,333 15,854
Goodwill — — — —
Investments — — — —
Net Current Assets 14,739 12,930 13,690 15,099
Cash & Equivalents 11,587 11,710 12,348 13,561
Other Current Assets 32,031 31,724 29,175 33,606
Current Liabilities 28,880 30,505 27,832 32,068
Other Assets — 104 — —
Total Assets 30,534 27,775 29,023 30,954
Quarterly Financials (Rs m)
Y/e March Q2FY15 Q3FY15 Q4FY15 Q1FY16
Net Revenue 11,908 11,466 15,207 9,066
EBITDA 1,223 1,314 1,572 924
% of revenue 10.3 11.5 10.3 10.2
Depr. & Amortization 182 156 153 150
Net Interest 24 19 124 50
Other Income 232 71 629 120
Profit before Tax 1,248 1,209 1,924 844
Total Tax 388 447 601 265
Profit after Tax 860 762 1,323 579
Adj. PAT 860 762 1,323 579
Source: Company Data, PL Research.

12.
July 15, 2015 12
Thermax
Prabhudas Lilladher Pvt. Ltd.
3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage PL’s Recommendation Nomenclature
42.3% 40.2%
17.5%
0.0%
0%
10%
20%
30%
40%
50%
BUY Accumulate Reduce Sell
% of Total Coverage
BUY : Over 15% Outperformance to Sensex over 12‐months
Accumulate : Outperformance to Sensex over 12‐months
Reduce : Underperformance to Sensex over 12‐months
Sell : Over 15% underperformance to Sensex over 12‐months
Trading Buy : Over 10% absolute upside in 1‐month
Trading Sell : Over 10% absolute decline in 1‐month
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly
DISCLAIMER/DISCLOSURES
ANALYST CERTIFICATION
We/I, Mr. Kunal Sheth (MBA), Mr. Samir Bendre (BE,MBA), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our
views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
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