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Capex Boom for Thermax Ltd

December 10, 2007

Deutshce Bank has initiated coverage on Thermax with a Buy rating. Thermax is a direct play on India’s strong industrial capex boom and increasing investments in the water & environment domains. This global energy and environment engineering company as positioned to ride the booming Indian energy and infra sector with a wide array of power, environment and water-treatment solutions. A strong order book of USD 800mn as on Sep 30, 2007, re-emphasizes the company’s strong earnings growth potential (+37% CAGR) over FY07-10.

The company’s turnover has grown at a CAGR of 42% while its bottom line has tripled over the past three years. We see revenue CAGR of 33% (FY0-FY10E) with key contribution from the strong industrial capex cycle across industries and increasing investments in the water and environment domains in India and abroad.

Rapid urbanization has led to rising sewage generation, creating robust demand for sewage-treatment plants. Thermax’s presence in chemicals makes it a complete solution provider. We expect revenue 40% CAGR (FY07-10) in the segmental business with chemicals (resins) contributing significantly starting in FY09.

Expect longer-term upside potential from large project wins and accelerated focus on water & environment to lead to a 37% earnings CAGR (FY07-10E) with 55%+ ROCE. On this basis, Deutsche Analyst assigns a PEG multiple of 0.9x, yielding a target PE multiple of 33x. On FY09E consolidated EPS of INR 33, and arrive at a target price of INR 1,080.

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