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Thermax: new opportunities

Thermax: new opportunities

Financial Express | April 27, 2010

Pune-headquartered Thermax, an energy and environment solution provider, has set its sights on renewable energy. It has identified four segments as having domestic potential. “There is a renewed thrust on renewable energy and we believe the biomass, wind, solar and geothermal have potential for growth in India,” says managing director, MS Unnikrishnan.

Keen not to miss the opportunities presented by the growing energy market, Thermax will focus on rural power generation in the biomass and solar segments. Unnikrishnan won't give away any specifics just yet but points out that there is a need for 20,000 MW both on and off the grid. “So, even if a part of it fructifies, it will still be a large market,” he observes. Thermax is moving up the value chain with its in-house capability of up to 300 MW and the recently formed joint venture with Babcock & Wilcox (B&W) for super critical and 300+ MW boilers.

With cash in hand of Rs 800 crore and an order book of close to Rs 5,200 crore (end-December 2009), Thermax, experts believe, is poised for strong growth. Specifically, they point out, the company is adding to its expertise in the power equipment space. A likely pick-up in capital expenditure by industry should bring more orders for Thermax. The engineering firm recently bagged a Rs 580-crore order for a gas-based plant. That, say experts, highlights how Thermax is ramping up the EPC business in terms of size, scope and the client base.

The joint venture with B&W for manufacturing and supplying both sub- (above 300MW) and super-critical boilers will help Thermax compete with the likes of Bhel, L&T, Gammon India, BGR Energy as well as Korean and Chinese international players. “Considering that B&W has a strong track record of its technology, the JV is likely to have a decent market share,” observes brokerage IDFC SSKI.

Thermax has the majority 51% stake in the joint venture, with B&W holding the rest. The JV will set up a 3000MW- capacity plant, which is to be operational in 18-24 months. Observes IDFC SSKI, “While the JV for super-critical boilers is a step in the right direction, we believe the JV is unlikely to drive earnings over the next two years.”

The capital expenditure for the plant is estimated to be Rs 700 crore, of which the equity component is likely to be Rs 350 crore. Thermax will fund its equity of Rs 175 crore through internal accruals as it has cash of Rs 625 crore after accounting for Rs 175 crore to be paid for a US litigation settlement.

According to Kotak Institutional Equities Research, Thermax may receive about two- three orders for entry-level utility plants up to 300 MW over 2011-12. For the core energy business, excluding utility and large captive power plant orders, orders are expected to come in at a modest 10% compounded annual growth rate over 2011-2013.

However, analysts are somewhat apprehensive that Thermax's operating margins in the energy segment could contract as the company takes on large-sized boilers and EPC contracts. “Margins for large-sized contracts could be as much as 200 bps lower than small-sized orders,” says Kotak Institutional Equities Research. The energy segment contributes about 80% to the company's revenues, with the remaining 20% coming from the environment business. Holding the 80% ratio for the energy segment will be challenge, says Unnikrishnan.

That apart, maintaining the current margins, when raw material prices increase, will be another challenge for the company this year.

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