3QFY2012 Result Update | Capital Goods

February 3, 2011

Thermax
Performance Highlights
(` cr) Revenue EBITDA EBITDA margin (%) PAT
Source: Company, Angel Research

REDUCE
CMP Target Price
% chg (yoy) 2.3 (7.5) (113) (4.7) 2QFY12 1,303 140.5 10.8 101.7 % chg (qoq) (2.6) (3.6) (10.9) (6.1)

`522 `456
12 Months

3QFY12 1,269 135.4 10.7 95.5

3QFY11 1,241 146.4 11.8 100.2

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Capital Goods 6,026 0.7 720/ 388 125,240 2 17,605 5,326 THMX.BO TMX@IN

Thermax 3QFY2012 number were broadly in line were estimates high base created in corresponding period last year masked down the top-line growth, thus leading to a subdued earnings growth, as expected. The company also reported a 40% yoy decline in order intake, which was below the expectations. Amidst weakened business environment, we remain cautious with downward bias over the order intake for next couple of quarters, and accordingly lower our estimates by for FY2012/FY2013E. We downgrade the stock to Reduce with a target Price of `456 and a potential downside of ~13%. Execution decelerates; margins contract leads to PAT decline, as expected: For 3QFY2012, Thermax posted a muted growth of 2.3% yoy to `1,269cr (`1,241cr) which was marginally higher than our estimate of `1,204cr. The muted growth was along expected lines, mainly on account of high base created in 3QFY2011. Segment wise, the energy segment posted flat growth to `993.1cr, while the environment segment grew by 2.8% yoy to `302.4cr (`294.3cr). On the operating front, EBITDA margin witnessed a contraction of 114bp yoy to 10.7% again in line of expectations. Muted topline growth and margin compression led to PAT decline of 4.7% yoy to 95.3cr (`100.2cr), slightly higher than our estimates of `89.4cr.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 62.0 13.5 11.3 13.2

Abs. (%) Sensex Thermax

3m 0.7

1yr (4.6)

3yr (3.5) (14.3)

Outlook and valuation: The stock has witnessed decent rally >25% in the past one month, vindicating our positive stance, and is currently trading at PE multiples of 17.2x FY2013E EPS, premium to other capital goods company which we believe is unjustifiable. Hence, we expect the stock to underperform and downgrade the stock to Reduce from Buy with a Target Price of `456 implying a potential downside of ~13% from current levels. We recommend long term investors to wait for better entry points given next couple of quarters are we expect decline on earnings and order inflow front.
Key financials (Consolidated)
Y/E March (` cr) Net Sales % chg Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

5.7 (20.1)

FY2010 3,368 (2.7) 259 (9.9) 11.7 21.8 24.0 5.8 25.0 33.0 1.5 13.2

FY2011 5,336 58.5 382 47.3 10.8 32.0 16.3 4.7 31.9 39.2 1.0 9.4

FY2012E 5,856 9.7 420 10.1 10.7 35.3 14.8 3.8 28.5 33.3 1.0 9.2

FY2013E 5,473 (6.5) 362 (13.9) 10.1 30.4 17.2 3.3 20.5 24.3 0.9 10.3

Shailesh Kanani
+91 22 3937 7600 Ext: 6829 shailesh.kanani@angelbroking.com

Hemang Thaker
+91 22 3937 7600 Ext: 6817 hemang.thaker@angelbroking.com

Please refer to important disclosures at the end of this report

Thermax | 3QFY2012 Result Update

Exhibit 1: Quarterly performance (Standalone)

(` cr) Net Sales Other operating income Total income Stock adjustments Raw Material (% of total income) Employee Cost (% of total income) Other Expenses (% of total income) Total Expenditure EBITDA (EBITDA %) Interest Depreciation Other Income PBT (% of total income) Total Tax (% of PBT) Reported PAT (PAT %) EPS (`)
Source: Company, Angel Research

3QFY12 1,263 6.4 1,269 (4.8) 873.7 68.5 104.2 0.8 160.8 1.3 1,134 135.4 10.7 0.7 12.0 15.7 138.4 10.9 43 31.0 95.5 7.5 8.0

3QFY11 1,216 25.0 1,241 (1.0) 865.6 69.7 97.5 0.8 132.7 1.1 1,095 146.4 11.8 0.2 10.6 11.7 147.3 11.9 47 32.0 100.2 8.1 8.4

% chg (yoy) 3.9 2.3 0.9 6.9 21.2 3.6 (7.5) 242.3 13.5 34.1 (6.1) (8.9) (4.7) (4.7)

2QFY12 1,287 16.8 1,303 (0.6) 913.7 70.0 98.5 0.8 151.4 1.2 1,163 140.5 10.8 1.1 11.7 20.8 148.5 11.4 46.8 31.5 101.7 7.8 8.5

% chg (qoq) (1.8) (2.6) (4.4) 5.7 6.2 (2.5) (3.6) (36.8) 2.2 (24.6) (6.8) (8.2) (6.1) (6.1)

9MFY12 3,583 34.7 3,617 (11.9) 2,522 69.4 293.2 10.0 424.3 16.8 3,228 389.6 10.8 2.2 34.8 51.2 403.8 11.2 126.8 31.4 277.1 7.7 23.3

9MFY11 3,043 79.9 3,123 (6.8) 2,140 68.3 271.7 10.9 347.1 16.2 2,752 371.0 11.9 1.2 31.6 39.0 377.1 12.1 121.2 32.1 255.9 8.2 21.5

% chg (yoy) 17.7 15.8

7.9 22.2 17.3 5.0 78.9 9.9 31.3 7.1 4.6 8.3 -

Exhibit 2: Actual vs. estimates

(` cr) Revenue EBITDA Interest Tax PAT
Source: Company, Angel Research

Actual 1,269 135.4 0.7 42.9 95.5

Estimates 1,204 128.8 1.2 43.0 89.4

Var (%) 5.4 5.1 (41.9) (0.3) 6.8

February 3, 2011

Thermax | 3QFY2012 Result Update

Exhibit 3: Segmental performance (Standalone)

Y/E March (` cr) Revenue Energy Environment Total Revenue EBIT Energy Environment Total EBIT Revenues mix (%) Energy Environment EBIT Margin (%) Energy Environment Total
Source: Company, Angel Research

3QFY12 993.1 302.4 1,295 94.7 39.3 134.0 76.7 23.3 9.5 13.0 10.3

3QFY11 990.4 294.3 1,285 107.3 39.9 147.2 77.1 22.9 10.8 13.6 11.5

% chg (yoy) 0.3 2.8 0.8 13.3 1.6 9.9

2QFY12 1,035 297 1,332 110 32 142 77.7 22.3 10.7 10.8 10.7

% chg (qoq) (4.0) 1.9 (2.7) (14.1) 22.9 (5.8)

9MFY12 2,830 864.0 3,694 285.9 102.5 388.5 76.6 23.4 10.1 11.9 10.5

9MFY11 2477.9 764.6 3,243 266.6 97.6 364.3 76.4 23.6 10.8 12.8 11.2

% chg (yoy) 14.2 13.0 13.9 7.2 5.0 6.6

Segmental performance: Environment segment provided all of the upside to revenues it grew by 2.8% yoy to `302.4cr (`294.3cr) with a fairly stable EBITM of 13%. Energy segment posted a flat growth to `993.1cr. Likewise, the segment EBITM contracted by ~130bp yoy/qoq to 9.5%, thus putting pressure on the overall blended margins.

Exhibit 4: Revenues headed southwards

1,200 1,000 800 600 400 200 0 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 (4.7) 2.8 28.6 45.2 61.3 65.9 45.3 32.2 19.4 2.3 75.0 60.0 45.0 30.0 15.0 0.0 (15.0) (30.0)

Exhibit 5: EBITDAMs under threat going ahead

250 200 150 100 50 0 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 2.6 13.5 16.8 12.7 11.7 11.9 12.2 11.8 11.8 20.0 16.0 11.0 10.9 10.8 10.7 12.0 8.0 4.0 -

(5.9) (15.8) (24.1)

Sales (` cr, LHS)

Growth (yoy %, RHS)

EBITDA (` cr, LHS)

EBITDAM (%, RHS)

Source: Company, Angel Research

Source: Company, Angel Research

February 3, 2011

Thermax | 3QFY2012 Result Update

Disappointing order intake: Weak investment climate prevailing in the domestic markets led to poor order disbursements across major sectors. Against this backdrop, Thermax reported a 40% yoy decline in order intake to `742cr (energy segment `532cr and environment segment `210cr), mostly comprising of short cycle orders. Amidst weak inflows, the order backlog declined by 18.8% yoy to `5,809cr (energy segment `4,728cr and environment segment `1,080cr). Management commentary indicated a weakening outlook and a tougher business environment, which imply slackening order intake for the rest of the year. We remain cautious with downward bias and estimate an order inflow of `4,765cr and `5,715cr for FY2012E and FY2013E, respectively.

Exhibit 6: Order book detail (Consolidated)

8,000 7,000 6,000 (` cr) 5,000 4,000 3,000 2,000 1,000 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12

Order inflows Source: Company, Angel Research

Order backlog

Key highlights of the conference call

Investment climate remains plagued by due to elevated interest rate, land acquisition challenges and deepening fuel crisis. This has considerably affected order finalization across various sectors. Order booking for the next one/two quarters is likely to remain muted. Management indicated that revenue growth as per the previous quarters will be tough to deliver and in fact would find it tough to post flattish numbers. During the quarter, orders were scarce and company experienced significant pricing pressures in the market; however, management will maintain its strategy of remaining selective in picking orders. In the case, the situation worsens and persists for few more quarters; the company may sacrifice on margins in order to cover the fixed costs.

February 3, 2011

Thermax | 3QFY2012 Result Update

Change in estimates: Amidst weakened business environment, we remain cautious with downward bias over the order intake for next couple of quarters, and accordingly lower our revenue estimates by 7.2% for FY2013E. We slightly tweak our margin assumptions for FY2012E retain our margin estimates for FY2013E Exhibit 7: Change in estimates
FY2012E (` cr) Revenue EBITDA EBITDA (%) Adj. PAT EPS (`) Order Inflows
Source: Company, Angel Research

FY2013E Var. (%) 0.5 (0.4) (10) 2.0 2.0 (7.5) Earlier estimates 5,896 596 10.1 389 32.6 6,160.0 Revised estimates 5,473 553 10.1 362 30.4 5,718 Var. (%) (7.2) (7.2) (6.9) (6.9) (7.2) 5,856 627 10.7 420 35.3 4,765

Earlier estimates 5,826 629 10.8 412 34.6 5,150

Revised estimates

Outlook
Detoriated business environment pressure on Return Ratios and WC

Over the years, Thermax has commanded premium over its peers in capital goods space due to its excellent return ratios and strong balance sheet owing to excellent working capital and stable operating margins. However, due to current persistent slowdown (as explained before) we expect both this levers to be under pressure, in line with management guidance, leading to pressure on return ratios (from ~30% in FY2011 to ~20% in FY2013) and its strong balance sheet (we expect reduction in cash balance for the company from `750cr in FY2011 to `400cr in FY2013E). Thereby we believe that the premium commanded by the company in past would fade away.

Exhibit 8: Return ratios on declining note...

50.0 40.0 30.0 (%) 20.0 10.0 FY2009 FY2010 FY2011 FY2012E ROCE ROE FY2013E

Exhibit 9: Reduction in cash balance over FY11-FY13E

800.0 700.0 600.0 500.0 (` cr) 400.0 300.0 200.0 100.0 FY2009 FY2010 FY2011 FY2012E FY2013E

Cash Source: Company, Angel Research

Investments

Source: Company, Angel Research

February 3, 2011

Thermax | 3QFY2012 Result Update

Valuation Recent run up in share price makes stock expensive better entry points Wait for

The stock has witnessed decent rally >25% in the past one month, vindicating our positive stance, and is currently trading at PE multiples of 17.2x FY2013E EPS, premium to other capital goods company which we believe is unjustifiable. Hence, we expect the stock to underperform and downgrade the stock to Reduce from Buy with a Target Price of `456 implying a potential downside of ~13% from current levels. We recommend long term investors to wait for better entry points given next couple of quarters are we expect decline on earnings and order inflow front.

Exhibit 10: Angel EPS forecast

Angel FY2012E FY2013E
Source: Company, Angel Research

B'berg 33.1 32.7

Var 6.7 (7.0)

35.3 30.4

Exhibit 11: One-year forward P/E band

980 840 700 560 420 280 140 0 May-07 May-08 May-09 May-10 May-11 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11
20x

Jan-07

Share Price (`) Source: Company, Angel Research

Jan-08

Jan-09

5x

10x

Jan-10

15x

Exhibit 12: Peer comparison

Company Reco. CMP Tgt. price Upside (`) ABB* BHEL BGR Energy Crompton Greaves Jyoti Structures KEC International Thermax Sell Neutral Sell Accum. Accum. Neutral Reduce 888 264 241 144 49 60 522 (`) 427 168 152 54 58 456 P/BV(x) P/E(x) FY2011-13E RoCE (%) RoE (%)

(%) FY12E FY13E FY12E FY13E (51.9) (30.3) 5.8 12.1 (2.1) (12.8) 7.3 2.5 1.5 2.6 0.6 1.4 3.8 6.5 2.2 1.4 2.3 0.5 1.2 3.3 100.0 9.3 6.7 21.8 4.1 9.0 14.8 49.9 11.2 7.2 13.2 4.5 6.1 17.2

EPS CAGR FY12E FY13E FY12E FY13E 144.2 (2.4) (13.4) (13.3) (5.3) 10.4 (2.6) 11.4 39.5 14.2 13.7 21.7 17.0 33.3 20.2 26.5 10.6 19.5 18.2 19.0 24.3 7.6 30.6 25.0 12.5 15.8 23.9 28.5 13.9 21.1 23.4 20.1 12.7 27.6 20.5

Source: Company, Angel Research; Note:*December year ending.

February 3, 2011

Jan-11

Jan-12

Thermax | 3QFY2012 Result Update

Profit & loss statement (consolidated)

Y/E March (` cr) Net Sales Other Opr. income Total Income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depn & Amort. EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Others Recurring PBT % chg Extraord. Exp/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: earnings of associate Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 FY2009 FY2010 FY2011 3,482 3,482 49.6 3,055 2,220 567 267 427 47.7 12.3 23.2 403 49.8 11.6 2 44 9.8 446 46.7 (2.1) 448 157.1 35.1 291 291 289 44.9 8.3 24.2 24.2 44.9 3,460 3,460 (0.6) 3,038 2,080 670 288 422 (1.1) 12.2 35.1 387 (4.2) 11.2 4 40 9.5 423 (5.0) (1.4) 425 135.7 32.0 289 289 288 (0.4) 8.3 24.1 24.1 (0.4) 3,368 3,368 (2.7) 2,973 2,027 616 330 395 (6.4) 11.7 44.2 351 (9.4) 10.4 2 52 13.0 400 (5.4) 114.9 286 141.6 49.6 144 144 259 (9.9) 7.7 21.8 21.8 (9.9) 5,336 5,336 58.5 4,763 3,625 678 460 574 45.4 10.8 54.1 520 48.3 9.7 4 58 10.1 574 43.3 574 196.7 34.3 377 377 382 47.3 7.2 32.0 32.0 47.3 FY2012E FY2013E 5,856 5,856 9.7 5,230 3,941 761 527 627 9.2 10.7 70.5 556 7.0 9.5 3 65 10.5 618 7.7 618 198 32.0 420 420 420 10.1 7.2 35.3 35.3 10.1 5,473 5,473 (6.5) 4,920 3,755 690 476 553 (11.8) 10.1 84.4 468 (15.8) 8.6 3 70 13.1 536 (13.3) 536 174 32.5 362 362 362 (13.9) 6.6 30.4 30.4 (13.9)

February 3, 2011

Thermax | 3QFY2012 Result Update

Balance Sheet (consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 433 145 288 61 560 1,119 58 219 32 1,259 (140) 4 773 661 170 491 18 143 1,732 370 222 41 1,372 359 1,011 742 205 537 11 370 2,431 670 328 59 2,239 191 1,110 1,068 282 785 35 241 2,997 750 360 73 2,514 482 1,545 1,283 353 930 20 482 2,731 322 378 105 2,364 367 1,799 1,438 437 1,001 15 552 2,944 393 370 99 2,448 495 2,064 24 736 760 13 773 24 968 991 4 16 1,011 24 1,054 1,078 9 8 14 1,110 24 1,291 1,315 52 148 30 1,545 24 1,614 1,638 52 80 30 1,799 24 1,878 1,902 52 80 30 2,064 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

February 3, 2011

Thermax | 3QFY2012 Result Update

Cash flow statement (consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in WC Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 448 23 (54) 44 148 225 (190) 14 44 (132) (2) 112 (19) (114) (39) 97 58 425 35 (187) 40 133 99 (186) 417 40 272 4 70 7 (66) 312 58 370 286 44 469 52 142 604 (74) (227) 52 (249) 4 69 11 (66) 300 370 670 574 54 (212) 58 195 163 (350) 129 58 (163) 140 125 42 15 57 670 750 618 71 (311) 65 198 114 (200) (241) 65 (376) (68) 98 (165) (427) 750 322 536 84 (58) 70 174 318 (150) (70) 70 (150) 98 (98) 70 322 393

February 3, 2011

Thermax | 3QFY2012 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets OB/Sales Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin (%) Tax retention ratio Asset turnover (x) ROIC (Post-tax) (%) Cost of Debt (Post Tax) (%) Leverage (x) Operating RoE (%) Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Int. coverage (EBIT / Int.) (0.7) (1.3) 244.5 (0.5) (1.2) 101.5 (0.9) (2.6) 172.7 (0.6) (1.4) 126.8 (0.3) (0.7) 173.9 (0.3) (1.0) 181.6 9.6 22 49 40 (24) 6.3 26 58 46 (11) 4.8 29 74 64 (27) 5.9 21 64 56 (26) 4.9 22 65 56 (7) 4.5 21 64 57 5 58.8 60.6 42.9 43.3 127.6 32.9 33.0 118.1 25.0 39.2 123.0 31.9 33.3 172.9 28.5 24.3 63.0 20.5 11.6 0.6 5.1 38.2 98.7 38.2 11.2 0.7 3.9 29.5 127.1 29.5 10.4 0.5 3.2 16.7 17.0 16.7 9.7 0.7 4.0 25.7 3.5 25.7 9.5 0.7 3.5 22.5 1.9 22.5 8.6 0.7 3.2 18.5 2.2 18.5 24.2 24.2 26.2 8.0 63.4 24.1 24.1 27.1 5.0 83.2 21.8 21.8 25.5 5.0 90.5 32.0 32.0 36.6 9.0 110.4 35.3 35.3 41.2 7.0 137.4 30.4 30.4 37.5 7.0 159.6 21.6 20.0 8.2 1.5 1.6 13.3 7.3 0.8 21.6 19.3 6.3 1.0 1.7 13.6 5.7 0.9 24.0 20.5 5.8 1.0 1.5 13.2 4.7 1.8 16.3 14.3 4.7 1.7 1.0 9.4 3.5 1.2 14.8 12.7 3.8 1.3 1.0 9.2 3.2 0.9 17.2 13.9 3.3 1.3 0.9 10.3 2.8 1.0 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

February 3, 2011

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Thermax | 3QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Thermax No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 3, 2011

11