Captive play

POUND WISE

Thermax is increasing its own capacity as India Inc is on an expansion mode.

Companies across sectors are aiming at a significant expansion in existing manufacturing capacities. This is also reflected in sharp increases in investments and a number of new projects over the last one year.

According to estimates, the number of projects under implementation in the manufacturing sector has gone up by 218 per cent while the value of these projects is up by 116 per cent over the last one year. Thus, companies in the engineering and capital goods sector have been major beneficiaries.

Thermax is one such company catering to two segments"�energy and environment segment. Energy, which accounts for 77 per cent of total revenues, offers products and services in heating, cooling, waste heat recovery and captive power. 

ROAD AHEAD
Industry	Investment
Steel	32,040
Aluminium	32,040
Paper	12,015
Cement	9,345
Petrochemicals	17,800
Textile	14,685
Oil & Gas	1,46,405
Automobiles	24,475
Total	2,88,805
Note: Estimated industry investment over the next five years, Rs crore. Source: Edelweiss

The remaining 23 per cent of sales comes from the environment segment, which includes water treatment and recycling, waste management and chemicals.

The energy segment has grown at 43 per cent a year over the last five years. The boiler sub-segment has about 21 per cent market share in the overall boiler market in India.

The company is considered to be a leader in small and medium-sized boilers used for small industrial applications and even in captive power generation plants. The company also undertakes engineering, procurement and construction (EPC) projects for captive power plants.

Powering growth
The energy segment accounts for an order book of about Rs 925 crore consisting of 265 MW of captive power projects. In India there is still some shortage of power for the industrial sector, and whatever available is costly.

In the current power deficit scenario, a large number of private and public sector companies have opted for their own captive power generation to save costs and make power supply uninterrupted.

This has become possible as companies have captive resources or cheaper source of feed required for generating power such as waste heat recovery, biomass etc. Here, Thermax has established itself as an expert in biomass and high pressure steam generation for sugar cogeneration plants.

Besides, there is huge capex going on in industries such as cement, steel, paper, auto, textile, oil and gas, and minerals. This also includes investments in captive power, heat boilers, turbines, chillers and other process equipments and solutions.

In the light of the booming industrial capex, the company is poised to capture higher market shares in industrial boilers and smaller capacity utility boilers.

Capex at home
Thermax is setting up a new boiler manufacturing plant in Baroda, which is expected to double its existing manufacturing capacity and also enable it to take larger projects up to 130 MW capacity, thus helping it to increase its market share.

"Our Baroda facility is operational and if it reaches the efficiencies of our Pune facility, it would add about Rs 1,000 crore of turnover every year," says CFO Gopal Mahadewan.

Thermax is making a capital expenditure of Rs 425 crore for establishing a new capacity at Baroda and a chiller facility in China. The company expects these new facilities to be operational by Q4 FY08 or Q1 FY09.

Its expansion into the Chinese market is considered to be strategic. "China is a large market. The size of the absorption chiller market there is approximately $300 million, which is almost 50 per cent of the world market. Thermax's intention is to target the upper segment of the market," says M S Unnikrishnan MD, Thermax. The company also believes that this facility will be used as a base for exports in other global markets.

Exports
Thermax is already active in some of the international markets focussing on Middle East and South East Asia for boilers and heaters, and China for absorption chillers. The company is currently generating about 18 per cent of its total income from exports.

This is expected to increase to 25 per cent of sales over next three years with a growth target of 40 per cent on the back of higher demand for energy equipment and foray into new geographies.

Besides the energy segment, the company also generates about 23 per cent of the total income from the environmental and other related businesses.

The company is the largest player in this segment with an estimated market share of 19 per cent. Its products include pollution control equipment for various applications across industries, including power, steel, fertilisers and chemicals.

This segment also includes other growing businesses such as water treatment and recycling, and waste management. Though these businesses account for a small portion of revenues, these are going to be high growth businesses in future.

In the long run, factors such as stringent emission norms and increasing capacity addition in basic industries will benefit these businesses. 

GROWTH STORY
Rs crore	FY07	FY08E	FY09E
Net sales	2289.70	3159.70	4170.70
Operating profit	253.70	363.37	479.63
OPM (%)	11.10	11.50	11.50
Net profit	199.20	268.60	375.40
EPS (Rs)	16.70	22.60	31.50
PE (x)	42.80	31.80	22.70

While at the same time, other related segments such as water conservation and treatment waste management are expected to benefit on the back of increasing spending from the private and government bodies and growing urbanisation and related water management problems.

Valuation
At the current market price of Rs 688, the stock is trading at a P/E multiple of 31 times and 22.7 times its estimated FY08 and FY09 earnings respectively. Based on the P/E multiple, the stock does appear expensive.

But considering factors like its good growth prospects, addition of new capacities, strong order book of Rs 2,725 crore and better industry outlook means that the stock still makes a good investment from a longer term perspective.

The management is expecting revenues to grow at about 40 per cent in FY08. Analysts say that the company should be able to maintain a growth rate of 35-40 per cent over the next few years, and will thus continue to command a higher multiple.