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Thermax Stock on Boil with Babcock – Wilcox JV

March 11, 2010

The much anticipated JV for supercritical boilers with Babcock and Wilcox was announced on 10 March 2010. The JV (51:49) intends to set up a new 3 GW per annum boiler manufacturing facility at an investment of Rs7.6 bn. Of this, equity contribution from Thermax is anticipated to be Rs1.75 bn. With sufficient cash reserves (Rs7.2 bn in 2Q), even after the Purolite settlement, Thermax should be able to fund capex through internal resources.

Thermax’s foray into the supercritical space completes the metamorphosis from executing small-sized captive power plants to supercritical utility range of boilers. This foray is designed to ensure Thermax is able to capture: 1) the shift in the mix of orders to supercritical in the twelfth and thirteenth plans, and 2) capture a share of NTPC’s supercritical orders in the future (among the three boiler manufacturers in India).

Numbers may not be able to capture the impact of supercritical orders on earnings (longer execution cycles. However, the impact on order book (and stock price) can be significant, given a single order can be equivalent to the current order backlog (Rs55 bn).

Valuation – Recommendation: Citi expects Thermax to report an EPS of Rs 32 and Rs 40 for FY 11 and FY12 respectively. It has set a Target Price of Rs787 based on PE of 22x Sept11E. Credit Suisse expects Thermax to report an EPS of Rs 28 and Rs 38 for FY 11 and FY 12 with a target price of Rs 760 and an OUTPERFORM rating.

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