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Brokerage Recommendations

Thursday, July 05, 2012

Religare calls a ‘Buy’ on Thermax
CMP: Rs. 504    Target Rs. 575

Company profile: TMX provides solutions in the energy and environment space.

The energy business contributes ~80% to revenues, whereas the environment business contributes ~20%. Further, 20% of revenues are from products and 80% of revenues are from projects. The company’s market share for chillers is 90%, 35-38% for boilers and heaters, 8% for water and waste water, 35% for chemicals, and ~60% for air treatment divisions.

Key takeaways from TMX’s FY12 annual report are: (1) working capital in FY12 continued to be higher than the historical trend on weakness in order inflows and increase in receivable days, 2) profitability for the group was impacted by losses in subsidiaries even as Danstroker grew ahead of expectations and 3) annual report commentary emphasises on scale-up in exports (26%/22% of consol./standalone sales) and services (12%/5% of consol./standalone sales) to counter the slowdown in the domestic Power business. In our opinion, order inflows/earnings are unlikely to surprise positively in H1FY13E, however valuations are likely to follow business confidence indices. Maintain BUY.

Increase in working capital: Working capital in FY12 continued to remain higher than the historical trend on weakness in order inflows and increase in receivable days. Receivable days were at 84, in line with the highest levels in the past 10 years.

Projects business expected to remain weak: The management expects the power business to continue to be weak in FY13E and FY14E as order inflows are likely to be weak in H1FY13E; however, the commentary on the Boiler and Heater business is relatively positive on account of expected revival of captive power plants. To counter the decline in power projects business, the company has increased focus on the power services business, but the scale is fairly small.

Subsidiaries impacted by cost over-runs, competition: The main subsidiaries which reported a loss in FY12 were: 1) Thermax Instrumentation – construction arm of the power division – loss of Rs 104 mn on cost over-runs, 2) Thermax Zhejiang- absorption chillers in China – loss of Rs 70mn on high competition, 3) Thermax B&W – a JV for supercritical boilers – pre-operative expenses. However, Danstroker grew ahead of expectations in a challenging environment in Europe.

K R Choksey calls a ‘Buy’ on Jain Irrigation
CMP: Rs. 87    Target Rs. 125

Jain Irrigation (JI) is India’s largest player in micro irrigation with a market share of 55% and 35% in drip and sprinkler irrigation respectively. Globally it ranks second to Israel’s netafim.  Additionally JI is a leading player in PVC pipes (15% market share), PE pipes (30% market-share), PVC sheets, Onion & Vegetable Dehydration and Fruit processing. We are positive on the current business strategy of the company to focus on strengthening balance sheet over the next 12 to 18 months.

MIS–Growth from ventures into newer territories: In India MIS provides immediate potential of 64Mha out of 69Mha net irrigated area while by 2030 the extent of MIS coverage could reach 69.5 million hectares.  MIS has been growing at 32% CAGR over FY08-12.  Considering delay in subsidies in stronghold markets of JI, newer markets domestically as well as exports markets are being tapped by the company to provide next leg of growth. We expect MIS to register 17% CAGR in standalone net revenues over FY12-14.

Focus on strengthening balance sheet: JI’s plan to set up a NBFC to substitute delays in state subsidies is a step taken in right direction. We believe the move will help the company to bring down its receivables. Subsequently, lower requirement of capex is likely generate positive cash flows from FY13 onwards.

Other verticals to contribute towards growth: During these testing times of change in business model in MIS, we expect other verticals like PVC pipes, Dehydrated onions (17%CAGR), Fruit processing (16%CAGR) and PVC sheets (16%CAGR) to contribute meaningfully towards revenue and profitability. Investment Rationale: Micro Irrigation – Strong foothold for growth: Leader in the industry Jain Irrigation Systems (JI) is India’s largest player in micro irrigation sector with a market share of 55% and 35% in drip and sprinkler irrigation respectively. Increasing pressure of population and a decreasing per capita availability of cultivable land, there is a need to enhance yields which can be done through micro irrigation.

Valuation & View: We have valued JI at Rs 125, based on an P/E multiple of 15x over its FY14E earnings of Rs 8.4 to account for the possible risks emanating from the investments in the proposed NBFC, possible equity dilution and a lower level of growth than historically what it has achieved in the MIS business.

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