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Friday, March 09, 2012

Prabhudas Lilladher calls a ‘Buy’ on Thermax
CMP: Rs. 508     Target: Rs. 553

We hosted the management of Thermax. Following are the key takeaways of the meeting:Base business orders to grow, large orders taking time: Thermax reiterated its ability to win base business orders of at least Rs5-6bn per quarter and hence, does not expect the order flow to be below the Q3FY12 levels (Rs5.9bn). The peak base business order flow was Rs10.5bn in FY08. The current capacities can take base business orders up to Rs14bn per quarter. However, with very few enquiries for large and captive power plants, the order flow is likely to be muted for the next two quarters due to the given current issues like coal availability and higher cost of funds. The company expects the recovery to happen by H2FY13. Sectors like Cement, Steel and Oil & Gas (refineries) are likely to lead the recovery apart from sectors like Food processing, Hotels and Hospitals which are already investing. Power sector is likely to take time to recover.

Margins  can  be  maintained  if  recovery  happens  in  the  next  two  quarters: Given the reduced order carry, sales are likely to de-grow by 8-10% next year.

However, efforts are being made to curtail the fall. Though business like Chemical, Water, Absorption chiller, Services O&M, Standard boilers etc. are likely to show growth, large business segments like EPC and Boiler & Heating are likely to de-grow, leading to over all de-growth. Thermax will try and maintain margins at ~11% range despite lower turnover by various levers it has in the employee cost (Rs500m in variable pay and Rs350m in variable man power). However, if the recovery does not happen by H2FY13, then it will have to start taking orders even with lower margin to cover fixed cost.

Super critical JV update: The JV for super critical boilers with Babcock & Wilcox is on track and is likely to be commissioned by September 2012. However, with no enquiries in the pipeline, it is unlikely that the JV will have an order at the time of commissioning. The burn out for JV assuming no revenues in FY13 or FY14 (due to lack of orders) could be ~Rs 1bn (Thermax share 51%). Some of the losses could possibly be offset if the JV were to get some international orders from its partner Babcock and Wilcox. The management did not sound too worried as the company’s share of losses in the JV is not large compared to the net worth.

Valuation and Outlook: The stock is trading at 17.8x FY13E earnings. We believe that though the next few quarters will be weak in terms of earnings and order flow, Thermax’s ability to bag base orders of ~Rs5-6bn per quarter gives us a confidence that it will be able to tide the slowdown and participate in the upturn of the cycle meaningfully and surprise positively in terms of order flow. Expectation of rate cut aiding recovery of capex cycle will also help support multiples. We maintain our ‘Accumulate’ rating on the stock.

Anand Rathi calls a ‘Buy’ on TTK Prestige
CMP: Rs. 2884     Target: Rs. 3647

TTK Prestige, India’s largest kitchen appliances company, has deep penetration into rural and urban markets (30,000 retailers and 340 exclusive stores), strong brand recall, product innovation, increasing capacity and focus on high-growth segments. These factors, in our view, should lead to 36% earnings CAGR over FY11-14e. We initiate coverage with a Buy and price target of Rs 3,647.

Strong brand with a solid distribution network: TTK leads in the domestic kitchen appliances market and has built a strong brand via high ad-spend (~7% of net sales). It plans to further expand its network of over 30,000 retailers. It also operates Prestige Smart Kitchen, a chain of exclusive franchisee stores, which contributed ~15% to FY11 revenues.

Pressure cooker–the forte: In FY11, TTK notched ~Rs 3.2bn in sales of pressure cookers. Over FY07-11, sales registered 18% CAGR, higher than the market growth rate (~10%). TTK leads in pressure cookers and enjoys ~40% share in the organized category. We expect its strong brand, rising demand, product launches and increasing number of LPG connections to result in 22% CAGR in revenue over FY11-14.

Diversifying risks through other products: The company has scaled up its kitchen appliances; cookware and gas stove businesses by leveraging its strong brand. These businesses brought in ~56% of revenue in FY11. Due to rising demand, we expect revenues in these segments to grow to Rs 13bn in FY14 from Rs 4.5bn in FY11.

Capex to fuel growth: TTK is raising its capacity for pressure cookers to 8m units and for cookware to 12m units. Capex of Rs 2.3bn is targeted to cover growth for the next 5 years and reduce dependence on foreign supply.

Valuation. At our DCF-based price target of Rs 3,647, the stock trades at 26x FY13e earnings and 2.7x EV/sales.


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