24 January 2013 Update | Sector: Capital Goods

Thermax
BSE SENSEX S&P CNX

19,982

6,049

CMP: INR577

TP: INR770

Upgrade to Buy

To benefit from structural trends in the economy

Period of exciting readjustment in Energy and Environment business
Bloomberg Equity Shares (m) M.Cap. (INR b)/(USD b) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) TMX IN 119.2 68.7/1.3 640/402 -7/-4/-2

Valuation summary (INR b)

Y/E March 2013E 2014E 2015E Net Sales 54.5 62.2 73.1 EBITDA 4.5 5.5 7.0 Adj PAT 3.1 3.5 4.6 EPS (INR) 26.0 29.2 38.9 EPS Gr. (%) (23.3) 12.4 33.2 BV/Sh. (INR) 157.8 176.5 200.3 RoE (%) 17.8 17.8 21.0 RoCE (%) 15.1 16.5 20.0 Payout (%) 26.9 30.8 33.4 Valuation P/E (X) 22.2 19.8 14.8 P/BV (X) 3.7 3.3 2.9 EV/EBITDA (X) 13.5 10.2 7.4 Div Yield (%) 1.2 1.6 2.3

Thermax (TMX) is benefiting from few structural trends: (1) continued energy shortages and increased energy pricing, driving demand for energy efficiency products, (2) hunt for alternative energy, given demanding regulations and improving viability, (3) increased environmental concerns and stringent regulatory intervention, (4) currency depreciation leading to increased possibilities of exports (currently at 22% of revenues), etc. There are also initial signs that the capex environment in base sectors (like Food Processing, Pharmaceuticals, Textiles, Chemicals, Engineering, etc) is improving. Few large Cement / Refinery projects are likely to be awarded in 1HFY14, leading to improved trend in Gross Fixed Capital Formation (GFCF). We expect TMX to report acceleration in revenue growth, driven by improvement in GFCF (particularly in base industries) and interplay of several structural trends. The company's revenues have been largely stagnant over FY11-13, impacted by macroeconomic volatility, and we expect 15% CAGR over FY13-15. While exports would grow at 27% CAGR, the domestic business is likely to grow at 11% CAGR. We believe TMX is uniquely positioned to benefit from the current trends, which will enable it to make a transition to the 'Big League' in the next economic upturn. We expect TMX to report earnings CAGR of 22% over FY12-15. The stock quotes at 20x FY14E and 15x FY15E EPS. We upgrade the stock to Buy, with an upgraded price target of INR770 (upside of 33%).

TMX: Managing transition to the 'Big League' in the next economic upturn (Revenues - INR b)
TMX: KEY GROWTH DRIVERS

TMX has emerged as a global player in various products like vapour Absorption
Chillers, Heating, Heat Recovery Steam Generators, etc. Still, apart from absorption chillers, its market share in overseas geographies stands at just 2-3% in most product segments. We believe that the recent currency movements provide opportunities to expand the contribution of the overseas business.

Green portfolio comprises ~30% of revenues, Exports at 22%, Standard products

at 35-40%. Many of these portfolios benefit from the structural trends in the economy and also provide support in down-cycle.

Within India, TMX has a dominating market share of ~25-35% in most of the
segments it operates in (except water, where the market share is 10-15%). Atempts being made to bridge the gap.

During the current downcycle (FY10-13), it has absorbed various technologies

and acquired companies (including access to overseas markets) to enhance the product offerings.

Possibly managing transition to Big League driven by: A New growth areas: Water, Renewables, Exports, Gas equipments B Structural trends: Energy pricing, Regulations, Environmental concerns

Satyam Agarwal (AgarwalS@MotilalOswal.com); +91 22 39820 5410 Deepak Narnolia (Deepak.Narnolia@MotilalOswal.com); +91 22 3029 5126

Thermax

Structural trends
Meaningfully increased demand for energy efficiency products
An important structural driver is that the energy scenario in India has changed: availability of energy is constrained (increasing power deficits), price of energy has increased (tariff increases of 15-20% over the last 18 months by
Power shortages increase steadily (Base power deficit, ttm)

SEBs), and government regulations are becoming demanding. We believe these changes will drive an increasing trend towards energy efficiency products, even for existing operations.
Power prices, in recent bids, have increased meaningfully

Currency movements have increased competitiveness of Indian manufacturing

Over CY11/CY12, the INR has depreciated 20% vis--vis the USD and 29% vis--vis the CNY. Over a five year period, the INR has depreciated 37% vis--vis the USD and a whopping 63% vis--vis the CNY. These currency
INR v/s USD and INR v/s CNY for five years
(% YoY)

movements, particularly over the last two years, have provided an opportunity to improve product exports from India quite meaningfully.

24 January 2013

Thermax

Government regulations have started becoming more demanding

Energy efficiency An important driver for waste heat recovery products will be 'The National Mission for Enhanced Energy Efficiency' (NMEEE), which covers all the large energy consuming sectors. These industries are required to lower their energy consumption levels by specific percentage points till 2015 and credible savings in energy consumption can be traded on the power exchanges through energy efficiency certificates. As against a biomass power capacity potential of 18,000MW, the installed capacity in India stands at just ~1,800MW. Several states have offered various incentives. MNRE plans to shortly launch The National Bio Energy Mission to act as a platform for achieving this potential, and envisages a capacity addition of 9,950MW by the end of the 13th Plan (FY22). The Jawaharlal Nehru National Solar Mission (JNNSM) released its phase-2 draft policy in December 2012, which envisages addition of 9GW capacity during FY13-17. Of this, 6.3GW will be solar PV and 2.7GW will be solar thermal. Several state governments have also imposed renewable purchase obligation (RPO) mandates on captive users, which has led to incremental costs to be offset through purchase of Renewable Energy Certificates from the power exchanges. Setting up of solar thermal applications for process applications, also provides a cost effective mechanism to the industries for offsetting the increased costs. Civic administration makes it mandatory for several industries, commercial establishments like offices, hotels, etc, and even large residential complexes to have their own effluent / sewage treatment facilities. TMX is a key player in this segment. Recycling of water is again an important driver, and there exist pressures on many companies to build water recycling facilities. Source: Company, MOSL

Biomass

Solar

Renewable purchase obligations for captive users Water

TMX has used the current downturn to prepare for the next upturn
TMX is one of the few examples of a product-driven engineering company from India. During the current downturn (FY10-13), it has acquired / absorbed various technologies. Many of its technology tie-ups also provide opportunities to completely indigenize the technology and access to overseas markets.

TMX: Key technology tie-ups; also provide access to new geographies

Balcke-Durr GmbH Electrostatic Precipitators Georgia-Pacific Chemicals Chemicals GE Water, USA Water and Waste Water Treatment Wehrle Umwelt GmbH Water and Waste Water Treatment ESPs for industries and power plants upto 300MW; overseas markets that TMX Precipitators would focus on include South East Asia, Middle East and Africa Performance enhancing chemicals in paper industry Ultra-filtration and membrane bioreactor technology for waste water treatment for commercial and industrial use, and distribution of GE reverse osmosis membranes Hard to treat industrial biological and chemical oxygen effluents to address manufacturers of pharmaceutical products, bulk drugs, dyes & pigments, chemicals JV, with TMX holding 51%, for ESPs for power plants >300MW

SPX, USA

Electrostatic Precipitators Babcock and Wilcox Supercritical Boilers Supercritical boilers for 300MW+ range Lambion Energy Solutions B i o m a s s Biomass combustion; TMX will have exclusive license to market heating systems Combustion in India and SAARC countries, South East Asia, Middle East and Africa Amonix Inc Concentrated TechnologyAmonix will offer solar power generation systems and TMX will be Photovoltaic the EPC partner Rifox (Acquisition) Steam Traps Steam traps and allied steam accessories manufacturer; will enable heating and cooling business to extend portfolio in Europe, SE Asia and Middle East Danstoker (Acquisition) Heating Packaged boiler business, including biomass and waste heat recovery boilers; also enable to introduce products in Europe Source: Company, MOSL

24 January 2013

Thermax

TMX: Track record of in-house innovations

TMX MD and CEO, MS Unnikrishnan was honored with the 'Asia Innovator Award' at the 11th CNBC Asia Business Leaders Awards in 2012. The citation notes that

he was awarded "for his inventive thinking in business and his leadership in an organization that has innovation at its core".

Spent wash fired boiler for distilleries Municipal solid waste fired boiler for urban waste disposal Waste heat recovery boiler for cement plants Internal recirculation circulating fluidized bed boiler for power generation Compact hot water fired chiller that fits into building basements and saves commercial establishments a lot in real estate Solar based cooling solutions by integrating vapor absorption machines with Thermax solar concentrators; developed the world's first triple effect absorption chiller - commissioned at National Solar Research Center on Solar Energy Solar biomass hybrid distributed power generation plant capable of being operated in rural conditions Working on range of products for the emerging market for solar energy based heat recovery systems Source: Company, MOSL

24 January 2013

Thermax

Mega trends: Period of exciting re-adjustment in Energy and Environment business

Despite the constrained investment climate, TMX is benefiting from few structural trends: (1) continued energy shortages and increased energy pricing, driving demand for energy efficiency products, (2) hunt for alternative energy, given demanding regulations and improving viability, (3) increased environmental concerns and stringent regulatory intervention, (4) currency depreciation leading to increased possibilities of exports (currently at 22% of revenues), etc. These trends have accentuated in the last 12-18 months but given the inertia in the system, capex finalizations took time. Now as the perception increasingly moves towards these changes being structural, rather than cyclical, we believe that we are fast approaching the time period when the project finalizations should start accelerating.
TMX: Mega trends driving robust business momentum
e ernativ t for alt o ry t la #3: Hun u n reg e iv g , y energ proving t and im suppor y viabilit

increa ingfully n a e M #1: ergy d for en deman ucts cy prod efficien

sed

ater uced w ingent #4: Red and str y it il b ntion availa interve y r o t la regu

tion, eprecia to d y c n rre access #2: Cu d with le p has u o c rkets, s / ma t c s u ie d pro ibilit d poss e v o r imp ully aningf to me rts d expo expan

Source: MOSL

Catalyst #1

Meaningfully increased demand for energy efficiency products

An important structural driver is that the energy scenario in India has changed: availability of energy is constrained (increasing power deficits), price of energy has increased (tariff increases of 15-20% over the last 18 months by SEBs), and government regulations are becoming demanding. We believe these changes will drive an increasing trend towards energy efficiency products, even for existing operations.

24 January 2013

Thermax

Power deficits, and thus shortages, increase steadily in South and North India (ttm)

Power prices, in recent bids, have increased meaningfully

Source: Company, MOSL

TMX business drivers - led by energy shortages and increased power prices
Captive power becoming an important business model Post the increase in industrial tariffs by 15-20% in several key states, captive power plants based on imported coal have become viable. In most of the industrialized states like Maharashtra, Gujarat, Tamil Nadu, etc, the industrial tariffs now stand at over INR6/unit, while the cost of generating power from a captive plant is INR4.5-5/unit. We believe that increasingly, companies will again start setting up excess captive power capacities, as despite open access not being permitted, states continue to be short of electricity. Captive power is again becoming an important business model. Also the 5-15MW segment will start witnessing traction given the continued power shortages. Industrial cogeneration driven by need for energy efficiency Cogeneration in India till date has been largely promoted as bagasse based. Industrial cogeneration, also known as waste heat recovery, has a potential of ~20,000MW and it is believed that just 6-7% of this potential has been tapped. Given the higher energy prices and also the policy thrust towards energy efficiency, several industrial units will have to put up waste heat recovery plants. Also, an important driver is government regulation, under 'The National Mission for Enhanced Energy Efficiency' (NMEEE). NMEEE covers large energy consuming sectors like steel, aluminum, chlor alkali, textiles, pulp and paper, fertilizers, cement, and petchem. These industries are required to lower their energy consumption levels by specific percentage points till 2015, from the baseline levels of 2010. Also, under the scheme, credible savings in energy consumption can be traded on the power exchanges through energy efficiency certificates. Alternative energy and efficiencies Hunt for alternative energy is also an important trend and TMX derives ~30% of its revenues from Green products. Energy efficiency is also driving businesses like vapor absorption chillers, etc for TMX.

Fuel conversion projects becoming a potential opportunity Fuel conversion projects in existing boilers could also become an important driver, as projects designed on domestic coal linkages will have to increasingly blend imported coal / alternative fuels, given the continued shortages. The conversion is also necessary to improve the competitive dynamics of the end user industries.

Source: Company, MOSL

24 January 2013

Thermax

Hunt for alternative energy is also an important trend and TMX derives ~30% of its revenues from Green products. These include waste heat recovery, vapor absorption chillers, biomass, spent wash boilers (for distilleries), etc.

TMX derives ~30% of revenues from Green Products Boilers and heaters Waste heat recovery
Biomass fired boiler Blast furnace gas / lean gas fired boiler Waste gas fired boiler Sponge Iron Coke Oven Non Ferrous Industry Refinery and Petchem Cement Chemical Plant Sulphur Recovery Plant Exhaust Gas Boiler Hydrogen Plant Glass Furnace Spent wash fired boilers

Indian power sector: Reforms process tardy, consensus yet to emerge on key variables
The Prime Ministers Office (PMO) intervened to resolve the logjam in Fuel Supply Agreement (FSA) by Coal India in January 2012. This period also marked heightened news flow/activity on Discoms restructuring, proposal to alter bidding document (CBD), possibility of coal price pooling etc. However, a year later, there is plenty to achieve - Financial Restructuring Plan (FRP) yet to be adopted by states (approved by the Cabinet though only in November, compared to earlier expectation of July), new CBD is not yet finalized (fuel cost pass-through), tussle still remains on FSAs and coal price pooling. Pace of reforms has been disappointing, in our view. However, key positives have been regular tariff revision by loss-making Discoms (FY12 average tariff hike of 15%), fuel adjustment surcharge being adopted by most Discoms, improving coal supply to power sector (up 11% YoY in 1HFY13) and revival of power demand (up 8.8% in YTDFY13, and 8.8% in FY12 v/s mere 4% in FY11).
Enter the PMO: Emerging like a Phoenix (February 8, 2012)

Government push inevitable to resolve issues Power sector in India remains a state subject and thus taking all states on the same footing on critical aspects like pooling, FRP etc remain key to the sectors revival. Power sectors exposure to banks/NBFC is huge (at ~INR6t, banks lending to sector is INR3.3t or 7.7% of gross bank credit) and persistent delays in resolving issues could increase the risk of distressed assets. State governments like Odhisa and West Bengal have publicly opposed coal price pooling and the matter has now been referred to the Cabinet for decision, while non-finalization of new CBD has delayed the process of new/fresh bids. Also, from a long term perspective, the ramp-up in domestic coal production remains crucial and hence the need for seamless environment/forest clearance. Concerted government action is critical to address the contentious issues.

PMO directive on COAL FSAs (February 21, 2012)

Pace of reforms tardy (December 4, 2012)

24 January 2013

Thermax

Catalyst #2

Currency depreciation, coupled with access to products / markets, has improved possibilities to meaningfully expand exports
Over CY11/CY12, the INR has depreciated 20% vis--vis the USD and 29% vis--vis the CNY. Over a five year period, the INR has depreciated 37% vis--vis the USD and a whopping 63% vis--vis the CNY. TMX derives 22% of its revenues from exports (including deemed exports), but this percentage has been fairly stable over the last decade. The company has expanded its product range / market access quite significantly over the last 3-4 years. In most product segments, TMX has a market share of just 2-3% (except absorption chillers) in the overseas markets largely due to intense competition. We believe that currency movements, particularly over the last two years coupled with tech tie-ups, provide an opportunity to accelerate product exports from India.
Currency movements provide an opportunity to accelerate product exports from India

Over the last few years, TMX has emerged as a global player in various products like vapor absorption chillers, heating, heat recovery steam generators, etc, which opens up interesting export opportunities. Also, most of its technology tie-ups and license agreements entail access to overseas markets, particularly in Asia, Africa and the Middle East. The recent acquisitions of Rifox (steam traps) and Danstoker (heating business) provide opportunities to access the European and American markets, and to expand offerings in the heating business. Source: MOSL

Exports as a percentage of revenues have remained largely stable over the last decade; expect FY14 to be inflexion point TMX derives 22% of its revenues from exports (including deemed exports), and this percentage has been fairly stable over the last decade. Given the access to new products and new markets, we expect the contribution of exports to improve meaningfully to 29% of revenues in FY15.

Exports have remained stable, with Energy dominating (INR m) International installations by TMX

Water Treatment Plants - 40+ Process Boilers - 50+ Power Boilers - 50+ Air Pollution Control - 200+ Chillers - 300+

Source: Company, MOSL

24 January 2013

Thermax

Many of TMX's technology tie-ups provide opportunities to completely indigenize the technology and access overseas markets.

Most technology tie-ups and license agreements entail access to overseas markets
Balcke-Durr GmbH Lambion Energy Solutions Electrostatic Precipitators Biomass Combustion Overseas markets that TMX would focus on include South East Asia, Middle East and Africa TMX will have exclusive license to market heating systems in India and SAARC countries, South East Asia, Middle East and Africa Source: Company, MOSL

Post the acquisitions of Danstoker and Rifox, TMX has increased the size of its heating business by ~50% and has emerged as one of the top 5 players globally. We believe that TMX's successful execution track record for EPC projects also expands possibilities for more such contracts.

Recent acquisitions in Europe provide opportunities to expand heating business

Rifox Danstoker Steam Traps Heating Will enable Heating and Cooling business to extend portfolio in Europe, SE Asia and the Middle East Mr Unnikrishnan, MD and CEO, TMX had stated in the press release: "We want Danstoker and Omnical to be the platform for our expansion in Europe. This means that through Danstoker we will be able to introduce our products in Europe." Source: Company, MOSL

Power EPC contracts an important driver, post the initial success

Company Lamson Inc Bataan 2020 Under Execution National Cement Company Yemen Co Sugar Refining Dangote Industries Country Phillipines Phillipines Yemen Yemen Zambia MW 3.5 12.5 28 13.5 30 Industry Corn Starch Paper Cement Sugar Cement Source: Company, MOSL

Expanding geographic base: Africa and Europe emerging as important markets (# Rank in TMX portfolio)

TMX's initial forays into Latin America, Canada and Saudi Arabia are likely to generate new orders and business plans are under discussion to convert these into sustainable markets. Also, there are possibilities to meaningfully expand presence in Europe and Africa.

#4 Europe #2 West Asia

#3 Africa

#1 SE Asia

Source: Company, MOSL

24 January 2013

Thermax

Catalyst #3

Hunt for alternative energy, given regulatory support and improving viability
Renewable energy also presents interesting possibilities, particularly for TMX, given integration with industrial and commercial applications. The business is being supported by government regulations, and also the need to hunt for renewable energy. Given the increased power tariffs, several renewable energy projects (including biomass and solar power projects) have started achieving commercial viability. TMX has positioned itself as the pioneer in several of these products and technologies in the country through in-house innovation, technology tie-ups and global acquisitions. We believe that several of these products can become important revenue contributors over the next three years.

TMX is accredited as a Ministry of New and Renewable Energy (MNRE) channel partner for off-grid and decentralized solar applications under Jawaharlal Nehru National Solar Mission (JNNSM). As against a biomass power capacity potential of 18,000MW, the installed capacity in India stands at just ~1,800MW.

Solar: TMX is the leading player in India

Steam for process applications: TMX's solar concentrators can generate steam, which can be utilized directly in various process applications (100-210C). Steam for absorption cooling: TMX created the world's first triple effect absorption chiller, commissioned at the National Solar Research Center based on solar energy. In this installation, for the first time in the world, TMX has integrated a triple effect chiller and solar parabolic concentrators (collectors), both indigenously developed by the company. This solar cooling solution could soon find applications across shopping malls, commercial complexes, office buildings, hospitals and industrial cooling requirements for project sizes ranging from 100KW to 3,000KW. Source: Company, MOSL

Biomass: TMX has expanded portfolio offerings meaningfully

Lambion grate technology has been fully indigenised to offer heating applications that use biomass as fuel. This will also open up markets in SAARC, Indonesia, Middle East, etc for TMX in biomass combustion. TMX, post Danstoker acquisition, will be able to increase product offerings in biomass combustion, as 50% of Danstoker's order booking was from renewable fuel based heating systems. Source: Company, MOSL

Applications that harness solar and hybrid forms of energy

Breakthrough project delivering 24-hour electricity integrating solar and biomass has been commissioned.

TMX, along with Department of Science & Technology and Shive village, has commissioned a technology demonstration project near Pune, which combines solar thermal with biomass to provide 24x7 power. 24x7 power would not have been possible through solar alone. This project has proved the concept of Hybrid Distributed Power Generation Plant capable of being operated in rural conditions. This is a feasible solution for rural areas with agricultural waste, given that grid penetration to remote areas will take a much longer time. Source: Company, MOSL

Due to regulatory push and increasing energy prices, renewable energy is becoming viable.
Solar thermal plates

Renewable energy: Strong regulatory push driving growth

Biomass: As against a biomass power capacity potential of 18,000MW, the installed capacity in India stands at just ~1,800MW. Several states offer various incentives including preferential tariffs, renewable purchase standards, etc, while the central government offers incentives like accelerated depreciation, fiscal incentives, etc. MNRE plans to shortly launch the National Bio Energy Mission and envisages a capacity addition of 9,950MW by the end of the 13th Plan (FY22). Solar: JNNSM has released its Phase-2 Draft Policy in December 2012, which envisages addition of 9GW during FY13-17. Of this, 6.3GW will be solar PV and 2.7GW will be solar thermal. RPO for captive users: Several state governments have also imposed RPO mandates on captive users, which has led to incremental costs to be offset through purchase of Renewable Energy Certificates from the power exchanges. Setting up of solar thermal applications for process applications, also provides a cost effective mechanism to the industries for offsetting the increased costs. Source: Company, MOSL 10

24 January 2013

Thermax

Catalyst #4

Reduced water availability and stringent regulatory intervention

India faces challenges in fresh water supply, sewage systems, and waste water treatment. TMX operates in three segments: (1) water treatment (as different industrial processes require consistent and specific quality of water), (2) effluent / sewage treatment, and (3) water recycling. There are constraints in terms of fresh water availability for the industry / municipal corporations, and this is driving orders for water treatment plants. Civic administration makes it mandatory for several industries and even commercial establishments like offices, hotels, etc, and even large residential complexes to have their own effluent / sewage treatment facilities. TMX is a key player in this segment. Recycling of water is again an important driver, and there exist pressures on many companies to recycle water. The TMX-SPX JV has introduced air cooled condensers for large power plants, which will help reduce water requirement by 90%, and thus, could be an important product category. TMX currently has a market share of 10-15% in the water segment, which is lower than the rest of the portfolio, where it enjoys a market share of 25-35% in India. The management believes that there exist possibilities for meaningful improvements, given that the market is opening up and TMX has expanded its product offerings / customer base in this segment.
Marquee orders by TMX creating a strong reference base
100% market share in 400km length of Delhi Metro [45 reverse osmosis (RO) plants - every station has 1 RO plant; 35 sewage treatment plants; 20 softeners] Delhi Municipal Corporation's Civic Center, which is among the largest buildings in India 80% market share in supplying water treatment, wastewater treatment plants for the Commonwealth Games T3, Delhi Airport Sewage treatment cum recycle plant for Sterling's export promotions on SEZ Source: Company, MOSL

24 January 2013

11

Thermax

Initial signs of improvement in GFCF

TMX's domestic revenues (excluding power EPC) are strongly correlated with gross fixed capital formation (GFCF) in the economy, with a coefficient of 0.69x since 2004. Recent trends suggest that the Capital Goods sector is seeing a fresh round of inquiries, which will possibly take 6-8 months to fructify into actual order intake. As a large part of the inquiries is from base sectors like Cement, Food Processing, Textiles, Engineering, Chemicals, Automobiles, Pharmaceuticals, etc, we believe there is a high probability of their getting converted into actual project awards. In terms of mega projects, there are pockets of opportunities emerging in segments like Refineries, Power Generation, etc. However, a broad investment cycle recovery is still far away, as there are several contentious issues that remain unaddressed.
TMX: Domestic revenues strongly correlated with macro trends

TMX's domestic revenues (excluding power EPC) are strongly correlated with gross fixed capital formation, with a coefficient of 0.69x since 2004. We have excluded EPC revenues, as the project business is relatively insulated in the interim periods, given the order backlog.

Manufacturing revival: An event to watch

Extract from our January 2013 INDIA STRATEGY report, Happy Times India's manufacturing sector has virtually collapsed, as reflected in the IIP growth of 1.4% in FY13. This has been the key contributor to India's economic slowdown. The past few months have raised hopes of a likely recovery in FY14. While the base itself will be favorable for growth, we believe that few other catalysts that could drive growth are emerging now: #1 Monetary easing, lowering cost of funds. #2 Policy engine to help kick-start several stalled projects, to start new projects. #3 Favorable currency driving manufacturing exports.
Manufacturing sector seems poised for mean reversion
January 2013 India Strategy
18 12 6 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

(manufacturing IIP % YoY)

LPA: 6.9%

24 January 2013

12

Thermax

Upgrading price target to INR770; Upgrade to Buy

We believe TMX is uniquely positioned to benefit from the current trends, which will enable it to make a transition to the 'Big League' in the next economic upturn. We expect TMX to report earnings CAGR of 22% over FY12-15. The stock quotes at 20x FY14E and 15x FY15E EPS. We upgrade the stock to Buy, with an upgraded price target of INR770 (upside of 33%). Expect revenue growth to accelerate: We expect TMX to report acceleration in revenue growth, driven by improvement in GFCF (particularly in base industries) and interplay of several structural trends. The company's revenues have been largely stagnant over FY11-13, impacted by macroeconomic volatility, and we expect 15% CAGR over FY1315. While exports would grow at 27% CAGR, the domestic business is likely to grow at 11% CAGR (given the constrained investment climate). Quarterly order intake has bounced back to normalized levels of INR13b-14b and we expect a gradual pick-up in the domestic market, largely driven by new product introductions. Estimate margins at 10.7% for FY15: Margins remain the key swing factor, given the increased competitive intensity. We estimate margins at 10.7% for FY15 (up 59bp since FY13), supported by increased contribution of exports, lower share of project business, and focus on productivity improvement / cost reduction initiatives. NWC to improve meaningfully in FY15: Net working capital (NWC) has deteriorated meaningfully from 3 days in September 2011 to 15 days in September 2012, given increased debtors. Despite the constrained environment, TMX has been able to maintain NWC in a tight range, which is commendable and indicates strict preference for cash flows. We expect further deterioration to 17 days in March 2013, sustaining at 16 days in FY14. We expect meaningful improvement in FY15, with NWC declining to 3 days, given the expected improvement in investment climate, and hence, customer advances.
Expect revenue growth at 15% till FY15, driven by exports (INR b)

While exports would grow at 27% CAGR, the domestic business is likely to grow at 11% CAGR (given the constrained investment climate).

Source: Company, MOSL

24 January 2013

13

Thermax

Order intake showing signs of stabilization (INR b)

Quarterly order intake has bounced back to usual levels of INR13b-14b and we expect a gradual pickup in the domestic market, largely driven by new product introductions. Source: Company, MOSL

Confident of maintaining double-digit margins through cost engineering

Competition is intense, but we model 59bp margin expansion till FY15, driven by increased contribution of exports, lower share of project business and focus on productivity improvement/cost reduction. TMX has stayed away from projects (like EPC bids for supercritical plants), where risk profile is high or competitive intensity is strong. Source: Company, MOSL

Trend in margins (TTM; Energy and Environment)

TMX raw material cost has high co-relation with steel prices

Source: Company, MOSL

24 January 2013

14

Thermax

Net working capital has deteriorated, but still in a tight range

Trend in standalone and consolidated EPS

Source: Company, MOSL

TMX: SOTP Valuation; upgrade to Buy with an upside of 33%

SOTP Standalone Subsidiaries Target Price INR m 87,868 3,510 INR/share 737 29 770 18x FY15E EPS (based on average multiple across cycles 1 x BV of Investments Source: Company, MOSL

TMX: Business model

Source: Company, MOSL

24 January 2013

15

Thermax

TMX: Operating matrix

FY11 Standalone Order intake (INR m) Energy - Power EPC - Energy Ex Power EPC Environment Order intake growth (%) Energy (%) - Power EPC - Energy Ex Power EPC Environment Revenues Energy Environment % YoY Energy (%) Environment (%) Revenue Composition Domestic (excl Power EPC) Domestic (Power EPC) Exports % YoY Domestic (excl Power EPC, %) Domestic (Power EPC, %) Exports EBIT Margin (%) Energy Environment 53,180 41,736 15,300 26,436 11,444 -8.3 -10.0 -28.5 5.8 -1.2 50,235 38,796 11,439 54 61 36 50,235 24,565 15,010 10,660 54 22 157 63 FY12 40,300 28,830 5,169 23,661 11,470 -24.2 -30.9 -66.2 -10.5 0.2 54,360 41,509 12,851 8 7 12 54,360 27,530 15,400 11,430 8 12 3 7 FY13E 49,500 37,500 15,000 22,500 12,000 22.8 30.1 190.2 -4.9 4.6 49,751 37,488 12,263 -8 -10 -5 49,751 25,358 12,500 11,892 -8 -8 -19 4 FY14E 60,675 46,875 20,000 26,875 13,800 22.6 25.0 33.3 19.4 15.0 56,639 42,599 14,040 14 14 14 56,639 28,024 13,750 14,866 14 11 10 25 FY15E 77,498 60,938 27,000 33,938 16,560 27.7 30.0 35.0 26.3 20.0 65,862 48,940 16,922 16 15 21 65,862 31,152 15,385 19,325 16 11 12 30

10 13

11 12

10 10

10 11 11 12 Source: Company, MOSL

24 January 2013

16

Thermax

Financials and Valuation

Income Statement
Y/E March Total Revenues Change (%) Raw Materials Staff Cost Other Expenses EBITDA % of Total Revenues Depreciation Other Income Interest PBT Tax Rate (%) Adjusted PAT EO Income (net) Reported PAT Change (%) 2010 32,742 -3.8 20,271 3,300 6,160 3,947 12.1 442 519 20 4,004 1,432 35.8 2,568 -1,149 1,419 -50.9 2011 52,472 60.3 34,803 4,547 8,266 5,669 10.8 541 652 45 5,736 1,965 34.3 3,818 0 3,818 169.0 2012 60,313 14.9 38,435 5,578 10,795 5,919 9.8 663 830 122 5,964 2,043 34.3 4,034 0 4,034 5.7 2013E 54,540 -9.6 34,908 5,439 10,336 4,516 8.3 763 956 220 4,489 1,650 36.8 3,096 0 3,096 -23.3 2014E 62,238 14.1 39,459 6,135 11,821 5,548 8.9 1,220 1,028 583 4,773 1,928 40.4 3,478 0 3,478 12.4

(INR Million)
2015E 73,124 17.5 46,055 6,817 14,083 6,966 9.5 1,279 1,226 590 6,322 2,345 37.1 4,633 0 4,633 33.2

Balance Sheet
Y/E March Share Capital Reserves Net Worth Loans Deferred Tax Liability Capital Employed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Debtors Cash & Bank Balance Loans & Advances Other Assets Current Liab. & Prov. Creditors Other Liabilities Provisions Net Current Assets Application of Funds E: MOSL Estimates 2010 238 10,544 10,926 80 144 11,099 7,418 2,048 5,369 115 3,703 23,712 2,563 7,984 6,702 3,282 3,181 2011 238 12,911 13,448 1,480 299 15,448 10,678 2,825 7,853 354 2,415 30,370 3,657 10,209 6,880 4,015 5,610 2012 238 16,055 16,671 2,704 378 20,491 11,929 3,488 8,441 2,466 2,395 33,427 3,666 13,707 6,983 3,560 5,512 2013E 238 18,181 18,797 2,704 378 22,361 13,929 4,251 9,678 400 2,395 32,445 3,272 11,999 8,156 3,563 5,454 2014E 238 20,413 21,029 2,704 378 23,960 14,929 5,471 9,457 400 2,395 37,856 3,734 12,448 12,202 3,871 5,601

(INR Million)
2015E 238 23,246 23,862 2,704 378 26,136 15,929 6,751 9,178 400 2,395 47,473 4,387 14,625 17,573 4,306 6,581

7,583 2,359 1,368 1,318 11,099

8,928 3,264 2,782 4,825 15,448

9,690 5,495 2,721 7,190 20,491

8,726 4,848 2,461 9,888 22,361

9,958 5,464 2,808 11,707 23,960

13,162 6,335 3,299 14,163 26,136

24 January 2013

17

Thermax

Financials and Valuation

Ratios
Y/E March Basic (INR) EPS Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Inventory (Days) Creditors. (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) 2010 21.6 25.3 91.7 5.0 23.2 2011 32.0 36.6 112.9 9.0 28.1 2012 33.9 39.4 139.9 7.0 20.7 2013E 26.0 32.4 157.8 7.0 26.9 2014E 29.2 39.4 176.5 9.0 30.8 2015E 38.9 49.6 200.3 13.0 33.4

15.1 13.0 9.2 0.9 3.7 1.4

22.2 17.8 13.5 1.1 3.7 1.2

19.8 14.6 10.2 0.9 3.3 1.6

14.8 11.6 7.4 0.7 2.9 2.3

24.8 24.3

31.9 29.0

27.4 22.9

17.8 15.1

17.8 16.5

21.0 20.0

89 29 85 2.9

71 25 62 3.4

83 22 59 2.9

80 22 58 2.4

73 22 58 2.6

73 22 66 2.8

0.0

0.1

0.2

0.1

0.1

0.1

Cash Flow Statement

Y/E March PBT before EO Items Add: Depreciation Interest Less: Direct Taxes Paid (Inc)/Dec in WC CF from Operations EO Income CF from Oper. Incl. EO Items (Inc)/Dec in FA CF from Investments (Inc)/Dec in Net Worth (Inc)/Dec in Debt Less: Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance E: MOSL Estimates 24 January 2013 2010 4,004 442 20 1,432 5,283 8,317 -1,149 7,168 (838) (3,109) 218 39 20 697 (460) 3,599 3,696 6,726 2011 5,736 541 45 1,965 (3,880) 477 0 477 (3,265) (1,976) 423 1,401 45 695 1,084 (416) 6,702 6,880 2012 5,964 663 122 2,043 (1,985) 2,719 0 2,719 (3,361) (3,342) (1,439) 1,224 122 1,246 (1,583) (2,205) 6,880 7,021 2013E 4,489 763 220 1,650 (1,524) 2,297 0 2,297 66 66 295 0 220 969 (894) 1,469 6,983 8,452

(INR Million)
2014E 4,773 1,220 583 1,928 2,226 6,874 0 6,874 (1,000) (1,000) 633 0 583 1,246 (1,196) 4,678 8,156 12,835 2015E 6,322 1,279 590 2,345 2,915 8,762 0 8,762 (1,000) (1,000) 579 0 590 1,800 (1,812) 5,950 12,202 18,152

18

Thermax

Capital Goods Report Gallery

24 January 2013

19

Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Group/Directors ownership of the stock 3. Broking relationship with company covered 4. Investment Banking relationship with company covered Thermax No No No No

Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

Regional Disclosures (outside India)

This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.

For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to which this document relates is only available to investment professionals and will be engaged in only with such persons.

For U.S.
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Nihar Oza Kadambari Balachandran Email: niharoza.sg@motilaloswal.com Email : kadambari.balachandran@motilaloswal.com Contact: (+65) 68189232 Contact: (+65) 68189233 / 65249115 Office address: 21 (Suite 31), 16 Collyer Quay, Singapore 049318

Motilal Oswal Securities Ltd

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com