Thermax: Full steam ahead

Lower costs and better sourcing are set to further energise Thermax's growth

It was yet another quarter of excellent growth at Thermax. Its consolidated topline grew by 23 per cent y-o-y and the operating profit improved 48.45 per cent.

While some other engineering companies, such as BHEL and ABB, saw their margins shrink y-o-y in the September quarter owing to higher raw material costs, the consolidated operating profit margins at Thermax improved by 257 basis points to 14.23 per cent.

Even in the June quarter, its operating profit margin had improved by 400 basis points to 10.4 per cent. The stock went up over 6 per cent on Thursday.

While other engineering companies have seen rising raw material costs, Thermax reduced its raw material costs by 173 basis points to 60.86 per cent of the net sales. Even in FY06, the company had cut raw material costs by 450 basis points.

While a part of this cost-saving is owing to better sourcing efficiencies, a bulk of the improvement comes from a shift in its business mix to projects.

The UK-based subsidiary, ME Engineering, continued to make losses, and Thermax provided for diminution in the value of its investment in this company and in two other companies to the tune of Rs 12.1 crore.

Its consolidated order book increased by 11.5 per cent q-o-q to Rs 2,973 crore. The demand for its energy division remains strong going forward, which is why it is increasing capacity in Gujarat.

However, analysts expect margins to come under some pressure in the second half of FY07, as higher metal prices will increase costs.

The losses in ME Engineering will cease, as Thermax has handed it to an administrator as per UK's insolvency laws. At its current price of Rs 356, the stock, trading at nearly 24 times estimated FY07 earnings and 19 to 20 times FY08 earnings, appears fairly priced.

Exide: Charged up

Exide Industries was once again able to offset the rising cost of its key input, lead, in the September 2006 quarter.

The company's operating profit grew 37.6 per cent y-o-y to Rs 83.8 crore in Q2 FY07, as compared with a 34.2 per cent growth in net sales to Rs 451.19 crore. Analysts point out that this was owing to improved productivity, coupled with an expansion of its marketing network.

This strategy helped offset rising input costs in Q2 FY07, which as a percentage of net sales grew 100 basis points y-o-y to 54.5 per cent.

Also, its operating profit margin grew 50 basis points y-o-y to 18.6 per cent in the last quarter. In the June 2006 quarter too, Exide had seen its operating profit margin increase by 200 basis points y-o-y to 18.1 per cent.

The company's improved performance in the September quarter has not gone unnoticed "� the stock has gained 6.6 per cent over the past month as compared with a 4.5 per cent gain in the Sensex.

Going forward, Exide is expanding its capacity by setting up a 1 million unit plant, which will be an EOU. However, lead prices have risen 4 per cent since the end of Q2 FY07 on the LME. As a result, with the stock trading at 16 times estimated FY07 earnings, it is expensive.

Grasim: Better realisations

Grasim reported substantially improved September 2006 quarter results, thanks to a better performance in cement, fibre and pulp sectors. As a result, the company's consolidated operating profit grew 102.2 per cent y-o-y in Q2 FY07 as compared with a 35.85 per cent growth in net sales.

Also, its operating profit margin grew 865 basis points y-o-y to 26.4 per cent in the last quarter. In the June quarter too, the company's operating margin had improved by 604 basis points y-o-y to 28.88 per cent.

In its key cement division, sales grew 4 per cent y-o-y to 3.38 million tonne in Q2, coupled with 42 per cent growth in net realisations to Rs 2,822 a tonne. Gujarat Ambuja's realisations also grew at an estimated 38.4 per cent y-o-y in the last quarter.

The segment profit of this division grew a whopping 215 per cent y-o-y in the last quarter. Viscose sales volumes grew marginally to 63,119 tonne in the last quarter and a 15 per cent y-o-y improvement in realisations helped the segment profit of fibre and pulp business grow 57.6 per cent y-o-y.

The performance of its sponge iron division was mixed -- sales volume was down 21 per cent y-o-y in the last quarter, owing to inadequate supplies of natural gas.

But, improved prices helped the segment losses fall from Rs 8.24 crore in the September 2005 quarter to Rs 3.27 crore in Q2 FY07. Going forward, Grasim's cement division is expected to show strong performance, thanks to booming construction activity, post-monsoon.

Also, backward integration into pulp should help improve profitability of its fibre and pulp division. However, with the stock trading at about 15 to 16 times estimated FY07 earnings, there appears little room for further upside.