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Sowmya Sundar

Thermax is actively exploring the export market.

INVESTORS can retain their exposure in the stock of Thermax. At 465, the stock trades at 15 times its 2004-05 expected consolidated per share earnings. The robust order backlog and a sharp growth in order booking even on a quarter-on-quarter basis indicate a pick-up in business, and suggest revenue visibility over the next couple of years. Also, manufacturing companies in core segments such as steel, cement and refinery are expanding capacities at a fast pace. The rising input costs could, however, depress profitability.

Thermax makes boilers and heaters, absorption chillers used in pharma, chemicals and commercial complexes and takes up turnkey engineering contracts for captive power plants. The ruling high oil prices are driving industries to look at alternative fuels such as biomass and petcoke for waste heat recovery systems.

The demand for boilers using alternative fuel options is picking up in South East Asian countries too where Thermax is expanding its presence. This trend is triggering replacement demand for its boiler business.

There has also been a pick-up in the captive power market after the passage of the Electricity Bill 2003. As of March 2004, projects for a total capacity of 4410 MW has been announced. Thermax has a presence in the below-50 MW segment.

It had received captive power orders worth Rs 200 crore during the year mostly in the 8-36 MW range. This segment, which suffered a sharp dip in revenues and profitability in 2003-04, is expected to put up a good show.

Earnings performance: The sharp revenue growth notwithstanding, lower treasury income and high input costs pressured Thermax's earnings performance for the quarter and half-year ended September 2004.

The primary reason for the fall in profitability is the sharp drop in treasury income, which had bolstered profitability for the previous corresponding quarter.

Treasury income slips: Thermax runs a huge investment portfolio of close to Rs 240 crore. Over 99 per cent of the investment was in debt funds. The poor performance of debt funds in the previous year eroded returns from treasury operations pulling down profitability substantially. Treasury income contributed 32 per cent of the net profit for the six months ended September 2004 against 74 per cent in the corresponding previous period.

The possibility of sharp capital erosion is limited and hence treasury incomes in the near to medium term can be expected to be in line with the current trend. Lower treasury income will suppress profits this year too.

Higher input costs pressure margins: Higher prices of key inputs such as steel and copper pulled down margins for the latest quarter by a percentage point. The raw material costs increased to 67 per cent of sales against 60 per cent in the half-year ended September 2003.

Thermax has been able to pass on cost increases in certain product categories. It has also introduced price escalation clause in projects signed in the recent months, whereby the price will be revised at frequent intervals based on cost inflation. This could arrest any sharp erosion in profits in the coming quarters.

Consolidated picture: Thermax's consolidated picture is rosier than its stand-alone earnings performance.

Its consolidated earnings per share rose 14 per cent for the first six months ended September 2004 over the corresponding previous period. Order booking for its subsidiaries, Thermax Babcock and Wilson (TBW) and MK Engineering, UK, has been robust this year.

Thermax has acquired the remaining 40 per cent stake in Thermax Babcock making it a wholly-owned subsidiary. It will continue to get technical support and a hold on its international business. This could enhance the consolidated revenues and the per share earnings this fiscal.

The two new subsidiaries in Hong Kong and Brazil could open up new markets in South East Asia, China and South America in the long term.

China accounts for 50 per cent of the global absorption chiller business. A breakthrough in this market could be a major step forward for Thermax.

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