Thermax One Pager

Thermax One Pager

After a long slump in the private capex cycle that lasted a decade, the private sector investment trend is starting to look up. Thermax
is one of the best plays on capital goods on the back of an upcoming capex cycle. Thermax manufactures products such as Boilers,
Chillers, Process heating & cooling, air pollution equipment, wastewater treatment solutions that cater to diverse sets of industries
such as Metals, Pharma, F&B, Oil & Gas, Cement, Chemicals, etc. We expect the upcoming capex cycle to benefit Thermax due to
rising capex intensity across industries, which is driven by factors such as rising free cashflows of companies, PLI schemes driven capex,
faster govt approvals, lower debt/equity ratio of India Inc among others.
Some noteworthy points to mention:
• Since FY12, when the last capex cycle ended, Thermax revenue has remained rangebound for the entire decade, hovering around

Rs 5000-5500cr annually
• During this period, EBITDA margin also shrunk from 10% to 7%, which resulted in the bottom line declining by half
• However, the company has always been net-cash (debt-free) and so it used all its OCF generated to expand its capabilities, expand

capacities and pivot away from thermal power plant vertical. Between FY12-22, Gross Block doubled to Rs2,400cr
• ROCE dropped from 34% in FY11 (peak of the last Capex cycle) to 8% in FY21 due to under-utilized capacities sitting on the B/S

These are classic signs of a sector/company that is bottoming out after a decade-long struggle. As we speak private sector has already
announced capex plans of ~Rs 5trn and another Rs 2trn from PSUs. Commentary from the management since the past three quarters
has been encouraging. Oderbook inflows have also improved meaningfully in 2HFY22, driving our bullish outlook from here. If this
expectation of the management actually pans out, we starting at a classic business upcycle over the next few years, which will drive
higher revenue growth momentum along with mean reversion of ROCE. As of FY22, the outstanding OB is Rs 8,800cr. We expect OB
inflows to improve over the next few years. Over FY22-25e, revenue can grow at 21% CAGR. EBITDA margin has bottomed out at 6.9%
(lowest since FY03) in 4QFY22. We expect EBITDA margin to improve to 9% by FY25e. ROCE should improve from 8% to 17%.

On valuation front, the stock has always traded at premium multiples for the quality of the business and its management. Over FY03-
22, TTM PE has ranged between 7.5x (FY09) and 85x (FY15). Average multiple has been around 36x during this period. On CMP, the
stock is currently trading at 32x FY25 PE. Given the potential to grow over this decade, we believe the stock can trade at a peak PE of
40x, giving us an upside potential of 25% over the next two years. This is a defensive stock with a steady compounding potential of
12-15% annually over the medium term.

Blue-Sky Scenario
In the past capex up-cycle (2003-12), Thermax touched a peak asset turn of 7x based on robust order inflows and speedy execution.
Taking a similar scenario, if Thermax can touch 6x asset turns this time as well, it can clock peak revenue of Rs 16,000 cr, 9% EBITDA,
Rs 1080cr PAT and 26% ROCE. At 40x PE, the stock can trade at Rs 40,000cr mcap, giving us 65% upside. But in our view, this is an
absolute Blue-Sky scenario from an FY25 perspective. Realistically speaking, this is possible for them to do it in 5-6years. We would
rather stick to a steady 12-15% return potential assumption.

Financials Valuations

Particulars FY21 FY22 FY23e FY24e FY25e Particulars FY21 FY22 FY23e FY24e FY25e
Revenue 7479 9076 10772 O/s Shares (cr) 11.9 11.9 11.9
% Change YoY 4791 6128 22% 21% 19% CMP (Rs) 11.9 11.9 1981 1981 1981
Gross Profit (%) 46.15% Mcap (Rs Cr)
EBITDA -17% 28% 45.25% 45.65% 993 EV (Rs Cr) 1981 1981 23574 23574 23574
% Change YoY 560 761 31% P/E (x) 22925 22806 22519
EBITDA (%) 47.02% 43.13% 33% 36% 9.22% P/B(x) 23574 23574
PAT 745 EV/EBITDA (x) 57 42 32
EPS 355 422 7.49% 8.38% 66 EV/Sales (x) 21952 22976 6.2 5.6 4.9
% Change YoY 412 566 31% Mcap/Sales (x) 41 30 23
NW -11% 19% 37 50 4778 OCF (Rs cr) 114 75 3.1 2.5 2.1
Net debt/(Cash) 32% 37% -1055 OCF/EBITDA (%) 3.2 2.6 2.2
ROCE (%) 7.41% 6.88% 17% FCF (cr) 7.3 6.8 373 475 641
ROE (%) 3795 4220 24% FCF Yield (%) 67% 62% 65%
ROIC (%) 207 314 -649 -768 16% CCC (Days) 62 55 173 279 491
11% 14% 1% 1% 2%
18 28 11% 15% 4.6 3.7 -5 -2
11% 13% 0
-1% 52% 4.9 3.8

3251 3486 769 324

-1622 -598 217% 77%

7% 8% 686 236

7% 8% 3% 1%

6% 9% -18 -9