Foray into manufacturing of super-critical boilers should augur well for the company.
Thermax and US-based Babcock & Wilcox Power signed a Rs 700-crore joint venture (JV) agreement to manufacture super-critical (660 Mw and above) and sub-critical (over 300 Mw) boilers in the country. Given Thermax’s 51 per cent stake in the JV and assuming a debt-equity ratio of one, it implies an investment of Rs 175 crore by the company, which it plans to fund through internal accruals.
Thermax expects production to commence in 2012-13 and achieve annual sales of Rs 3,000 crore in five years. With this move, Thermax will join the league of Bharat Heavy Electricals Limited, L&T-Mitsubishi Industries and JSW Group-Toshiba.
While the working capital requirement in this business is likely to be higher and margins lower during the initial years, which in turn is likely to lead to lower return ratios, the growth that can accrue from this diversification may negate the downward profile of return ratios in future, suggests Edelweiss Securities. To indicate the potential, a single equipment order for 800-Mw capacity (including engineering, procurement and construction work) can be upwards of Rs 3,500 crore.
Analysts expect the JV to turn profitable in 2012-13. At full capacity, Credit Suisse’ analysts estimate that the JV (for boilers and EPC) can add Rs 20-25 to Thermax’s earnings.
The foray augurs well for Thermax, as India targets to add around 170,000 Mw of generation capacity during FY2007-2017, thus creating a sizeable market for equipment vendors.
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Meanwhile, the company secured orders worth Rs 1,550 crore in the December 2009 quarter and is expected to end 2009-10 with an order backlog of Rs 5,900 crore, up 93 per cent over last year. This should provide a strong base to deliver robust revenue growth going ahead. While profit margins are seen stable around 12 per cent in 2010-11, there is a possibility of material-cost pressures rising marginally in the future.
Thermax’s stock surged 3 per cent to around Rs 680 post the announcement on March 10, which translates into a P/E of 21.9 and 17.2 for 2010-11 and 2011-12, respectively, according to consensus analysts’ estimates.
With contributions from : Puneet Wadhwa and Ram Prasad Sahu