THERMAX is a flight to quality play in times of uncertainty
Solid financials, robust order book, experienced management, and strong climate change orientation bodes well for THERMAX. We are LONG.
THERMAX is an engineering and capital goods company operating through 3 segments – Energy (75% revenue), Environment (16% revenue) and Chemicals (10% revenue). Incorporated in 1996 as a manufacturer of small boilers to cater to the steam requirements at hospitals, THERMAX is now present across 30 geographies (14 manufacturing locations) incl. Germany, China, Canada, Russia, Malaysia, UK, US & UAE. Long term macro outlook for capital goods remains favourable. Contributing around 12% to India’s domestic manufacturing, the sector is expected to grow by 4% annually till FY2025. Thanks to the National Capital Goods Policy, 2016, an increase in production is envisaged along with a rise in exports from 27% to 40%. Make in India (2014), the National Manufacturing Plan (2012) and a swift adoption of solar technology should push Indian manufacturers to increase their share of domestic demand from 60% to 80%. The company is well positioned to benefit from the ongoing push towards energy efficiency and climate consciousness, considering 70% of its order book is from “green” industrial solutions, including a market leadership in flue gas desulphurisation (FGD) systems.
Diversified offering in a capital intensive industry provides significant moat
THERMAX offers a wide range of power, heating, cooling, water, chemicals, and waste management solutions across the value chain including boilers, generators, solar concentrators, process heating & cooling, EPC solutions for captive power plants, waste & water treatment solutions etc. The company is among the world leaders when it comes to vapor absorption cooling and heating systems and has domain experience in setting up captive power plants. THERMAX is Asia’s leading manufacturer and exporter of ion exchange resins and a pioneer in waste water treatment chemicals.
Tie-ups to bring in global technologies to India creates strategic moat
THERMAX has entered into an agreement with Germany’s Steinmüller Babcock Environment GmbH (SBE) for exchange of know-how related to Waste-to-Energy technology. SBE GmbH is world famous for top-class technology in thermal waste treatment and flue gas cleaning. It has an agreement with Power Roll, a developer of unique, low-cost and lightweight flexible solar films.
Sound balance sheet & robust order book de-risk the investment profile
Revenue in FY 2021 stood at INR4,791cr, declining by 1.4% on Y-o-Y basis primarily on account of COVID-19 and a slowdown in industry. Despite that, EBITDA margins have improved to 9.7% as against 8.8% in FY 2020. Leverage is accommodative with debt-to-total assets of 0.05x resulting in 16.88x interest coverage as at FY 2021. Cash flow generation seems fairly strong with FCFF of INR530cr as at FY 2021. Order book is broad based and spread across different sectors. As at Q2 2022, it stood at INR6,516cr. Q2 2022 recorded orders/revenue of INR1,856cr/INR1,469cr, 67%/29% increase from Q2 2021. 77% of orders came from the energy segment.
Premium valuation supported by strategic advantages and broader tailwinds
THERMAX trades at 40.7x P/E and 25.7x EV/EBITDA on FY23F. Close comps Praj Industries (NSE: PRAJIND) trades at 26.8x P/E and 17.8x EV/EBITDA while ISGEC Heavy Engineering (NSE: ISGEC) trades at 17.1x P/E and 10.7x EV/EBITDA on FY23F. In times of uncertainty, it is a flight to quality play in our minds. But increasing commodity prices, project delays, rise of virus variants, increasing imports from FTA countries, rise in crude and styrene prices are risk factors to be watched closely.
Our Position
Solid financials, robust order book, experienced management, and strong climate change orientation bodes well for THERMAX. We are LONG.
Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.