Edelweiss on Thermax

Edelweiss maintains `Buy’ recommendation on Thermax. Thermax has announced a joint venture with Babcock and Wilcox (B&W) for manufacturing super critical boilers. While Thermax’s share in the JV will be 51% that of B&W will be 49%. The plant’s annual capacity is planned at 3 GW and is slated to commence operations by end-FY12. The debt:equity ratio for the JV is estimated at 1x, implying an investment of Rs 175 crore in the project by Thermax over the next two years. While the working capital requirement in this business is likely to be higher and margins lower in initial years, which in turn is likely to lead to lower return ratios in the future, the growth that can accrue from this diversification may negate the downward profile of return ratios in future years. Edelweiss expects the JV to turn profitable in FY13E, contributing Rs 29.2 crore to the consolidated bottomline. At the current estimate, the stock is trading at a P/E of 21.9x and 17.2x for FY11E and FY12E respectively. Further upsides are likely from higher growth in cash flows beyond FY12 driven by the diversification in the utility business.