trong demand, burgeoning order-book and improved operating margins spell good times for Thermax, a leading player in energy and environment management. Further, an increase in capacity and the planned manufacturing foray into the Chinese market on the back of good demand from user industries are expected to add to earnings growth.
At the current market price, the stock trades at about 20 times its likely FY-08 per share earnings. Investors with a one/two-year perspective can hold on to the stock, while any price weakness linked to the broad market can be used to build fresh exposure.
Investment rationale
Increase in input costs due to the rise in crude oil price has forced many industries to go on an energy diet. This augurs well for Thermax, which specialises in energy conservation systems and captive power projects. Further, anticipating this rising demand scenario, Thermax has chalked out a capacity expansion plan. The new capacity is likely to become operational in two phases — the first by October 2007 and the second by January 2008. This would, however, effectively contribute to the earnings from late FY-08. Thermax also plans to set up a manufacturing base in China for which it has obtained licence.
This would cater to the demands of only the Chinese and the export markets, thus helping it contain the operating cost. The manufacturing foray is also likely to widen the reach of Thermax's products in the export market.
hermax's order-book has grown steadily, thanks to a favourable demand environment and increased industrial capex. For the quarter ended December 2006, the order-book was pegged at Rs 3,024 crore, up 94 per cent (year-on-year). Given the capex plans lined up by various user industries — steel, textiles, chemicals — we believe these growth rates are likely to be sustained. Backed by this strong demand, both the energy and environment segments of Thermax registered impressive revenue growth of about 50 per cent for the December quarter. The energy division continues to be the major contributor to the bottomline (about 80 per cent). The operating profit margin too has improved by about 1.07 percentage points on a year-on-year basis. Better realisation for its products, coupled with higher volumes, has helped Thermax enjoy higher margins.
Thermax is likely to gain significantly from the closure of the hitherto loss-making subsidiary, ME Engineering. That apart, it also stands to gain from the increased thrust on biomass cogeneration. However, the company's thrust on R&D and new product development is likely to be the growth driver.
Further, its focused foray into South-East Asian markets such as China and Hong Kong and the planned expansion of its product range also hold significant upside potential.
Concerns
Though the stable raw material cost in the recent past has helped Thermax improve its margins, any unprecedented rise in the input cost could pose a risk to the earnings. While Thermax has successfully managed to navigate through a rising input cost scenario, its ability to sustain the same could be of concern.
Nevertheless, the company's continuous efforts to prune costs by increasing its sourcing from China is a positive. Further, any unexpected slowdown in the industrial cap expenditure also poses a downside risk to our recommendation.