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A
COMPREHENSIVE PROJECT REPORT
ON
“FUNDAMENTAL ANALYSIS OF THERMAX”
Submitted to
C.K SHAH VIJAPURWALA INSTITUTE OF MANAGEMENT
IN PARTIAL FULFILLMENT OF THE
REQUIREMENT OF THE AWARD FOR THE DEGREEE OF
MASTER OF BUSINESS ADMINISTRATION
Under
Gujarat Technological University
UNDER THE GUIDANCE OF
Faculty Guide
Ms. Neelu Nakra
Submitted By
Ajay Vaghela (097050592043)
Krunal Parekh (097050592054)

M.B.A. – SEMESTER IV

C K SHAH Vijapurwala Institute of Management

M.B.A. PROGRAMME
Affiliated to Gujarat Technological University
Ahmadabad
April 2011

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PREFACE

Gujarat Technical University, keeping in mind the nature and requirement of


this particular course – MBA, has not only introduced a subject like practical studies
but also has kept widening its scope to enable the students to cope with the
dynamism involved. From an overview of the unit in the first year to summer project
of the different departments and in a focused comprehensive project in any of the
major field that research on any particular topic in the second year.

Finance, Human Resource and Marketing are the specialisation areas to


choose from; and from amongst the three, we have selected Finance for our
specialisation, keeping in mind the ever increasing need of effective marketing
managers in the era of stiff competition and scope for creativity and innovation
available.

Today the engineering industries are rapidly increasing. It was a great


opportunity do to our research on fundamental analysis of engineering Industries.

T hroug h our r es earc h we c ou ld k n ow h ow t h e m an ag em en t


th eori es ar e ap pli ed in pr ac tic al bus in es s , h ow r eall y an al ys is ar e
d evel op ed an d intr oduc ed in m ark et and wh at ar e th e hurd les th at c om e
in th e way of th eir s uc c es s .

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Acknowledgement

Firs t and f or em os t we would l ik e to ac k n owl ed g e our


ins titut e-C.K SHAH VIJ APURW AL A INST IT UT E OF M ANAGEM ENT
(CKSVIM )-f or provi din g us an opp ort unit y t o wor k on ―Fund am ent a l
An al ys is ‖.

A s tud y of s uc h a s u bj ec t wou ld n ot h ave b een p os s ibl e wit h ou t


th e h elp of a l ar g e nu mb er of peopl e. T o enlis t th em all wou ld b e
dis prop orti on at e with r el ati on t o t his pr oj ec t. H owever th er e ar e a f e w
p eopl e wh o we would li k e t o T hank f or b ei ng an int egr al p art of our
s tud y pr oc es s .

For our pr ac tic al work, we woul d lik e t o expr es s our gr at itud e t o


M s.Neelu Nakra f or s up p orti ng us at eac h and ever y ph as e.

O n a p ers on al n ot e we woul d lik e t o th ank t o our f rien ds wh o


h elp ed us in wh at ever p os s ibl e ways durin g pr oj ec t an d in c omp l eti on
of our r ep ort and als o enc our ag ed us durin g d if f ic ult tim es t o c arr y on
with our work.

L as t but n ot th e l eas t we woul d lik e t o th an k our F am ili es f or


s tand ing b y us . W e would li k e t o th ank Alm ight y f or pr ovidin g us th e
c onf id enc e t o f ac e an d overc om e th e h urdl es . W e wis h t o expr es s our
gr atitud e t o all of th em.

AJ AY VAGHE LA ( 43)

KRUNAL PAREK H (54)

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DECLARATION

W e, AJAY VAGHEL A & K RUNAL PAREKH, h er eb y d ec l ar e th at


th e r ep ort f or ―C om pr eh ens i ve Pr oj ec t‖ entitl ed “ FUNDAM ENT AL
ANALY SIS OF T HERM AX” is a res ult of our own work and ou r
ind ebt edn es s t o an ot h er work p ublic ati ons ,r ef er enc e,if an y, h ave b een
dul y ac k n owl edg ed.

Pl ac e: V ad od ar a (Sign atur e)

Dat e: Aj ay vagh el a

Krun al p ar ek h

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Executive Summary

This project report is about equity research that starts with the introduction of
stocks, stock market, stock valuation, and factor affecting stock valuation, valuation
methods, about value and valuation techniques which are explained in detail in
Chapter 1 Macro Economic Factors affecting Indian Economy are explained in
Chapter 2 Industry analysis which contains introduction to industry, five force
analysis, risk in industry are covered in chapter 3,Chapter 4, are parts of company
analysis which includes Ratio analysis, WACC method calculation of Thermax .

Report ends with conclusion, recommendation, limitation, learning and


bibliography.

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INDEX
Ch Nos Particular Page Nos
Chapter 1: Introduction 9
1.1 About stocks 10
1.2 About stock market 12
1.3 Stock Valuation 13
1.4 Factors that affect stock Valuation 14
1.5 Stock Valuation methods 15
1.6 About Value 17
1.7 Valuation Techniques 18
Chapter 2: Macro Economic Factors affecting Indian Economy 30
Chapter 3: Industry Analysis 35
3.1 Introduction 36
3.2 Five force Analysis 38

Chapter 4: Company Analysis of THERMAX 42


4.1.1 About the Industry 43
4.1.2 World market 48
4.1.3 Indian market 49
4.1.4 Growth of the industry 50
4.1.5 Product profile (Majour product) 63
4.1.6 Ratio Analysis 66
4.1.7 Weighted Average Cost Of Capital (wacc) Analysis 81
Conclusion 83
Annexure 84
Bibliography 87

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Objectives

 To learn how to do Equity Research.

 Doing analysis of the company on the basis of secondary data.

 Projecting their future on the basis of financial data and determining the
reasons for their good or bad performance in the market and also to
estimate its future market value.

 To determine whether the company stocks are worth buying or not and also
what would be the probable market price if certain factor changes .

Operating Method

Below given steps are followed in their chronological order:

 Selection of Economy for investment


 Selection of Sector
 Selection of Company
 collecting historical data
 Estimation of share prices using DCF in various possible circumstances.

Data required for Study


 Company details
 Financial data
 Director’s and Auditor’s report
 Current news about the company and sector

Scope of Work
 Study was done on the basis of data
available on net.
 Visit of the company was not feasible
 Newspapers, magazines and stock market scenario were also taken into
 Consideration

Study based on literature


 From available books, internet, newspapers.
 Basic Concepts
 Analysis Method

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CHAPTER 1

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INTRODUCTION

1.1 About stocks

What Are Stocks?

In finance, a stock represents a share in the ownership of an incorporated company. In


industrial societies wealth used in production is owned in the aggregate mostly by
corporations rather than by individuals because of the huge investments required. This
trend began in 17th-century England when merchants formed JOINT-STOCK

COMPANIES, pooling capital to be used jointly in trading and manufacturing.


Participants then received dividends, shares of the common PROFIT proportionate to
their original investments.

The Definition of a Stock:

Plain and simple, stock is a share in the ownership of a company. Stock represents a
claim on the company's assets and earnings. As you acquire more stock, the ownership
stake in the company becomes greater. Whether you say shares, equity, or stock, it all
means the same thing.

The wealth of individuals includes claims against, or investments in, corporations. These
are called securities, the two most common being bonds and stocks. Corporate bonds
are evidences of corporate debt to the bondholder. Stocks are evidences of ownership, or
equity. Investors buy stock in the hope that it will yield income from dividends and
appreciate, or grow, in value.

Different Types Of Stocks :


There are two main types of stocks:
1. Common stock

2. Preferred stock

Common stock:

When people talk about stocks they are usually referring to this type. In fact, the
majority of stock is issued is in this form. Common shares represent ownership in a
company and a claim (dividends) on a portion of profits. Investors get one vote per share
to elect the board members, who oversee the major decisions made by management.

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Over the long term, common stock, by means of capital growth, yields higher
returns than almost every other investment. This higher return comes at a cost since
common stocks entail the most risk. If a company goes bankrupt and liquidates, the
common shareholders will not receive money until the creditors, bondholders and
preferred shareholders are paid.

Preferred Stock:

Preferred stock represents some degree of ownership in a company but usually


doesn't come with the same voting rights. (This may vary depending on the company.)
With preferred shares, investors are usually guaranteed a fixed dividend forever. This is
different than common stock, which has variable dividends that are never guaranteed.
Another advantage is that in the event of liquidation, preferred shareholders are paid off
before the common shareholder (but still after debt holders). Preferred stock may a lso be
callable, meaning that the company has the option to purchase the shares from
shareholders at anytime for any reason (usually for a premium).

Some people consider preferred stock to be more like debt than equity. A good
way to think of these kinds of shares is to see them as being in between bonds and
common shares.

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1.2 About Stock Market

Why invest in the stock market?

It is risky to invest in stock market as returns are not sure. Also it is difficult to say
with surety whether they will make a profit or loss but the average investor buys stock
hoping that the stock's price will rise, so the shares can be sold at a profit. They take the
risk of the price falling because they hope to make more money in the market, than they
can with safe investments such as bank CD's or government bonds.

What Stock Market Returns to Expect?

Stock market returns rely solely on what types of investments you choose. The
riskier the investments, the more you can gain or lose in any year. However, if you are
investing for a long time horizon, then more risk will almost surely mean higher returns.
Also note that this assumes you invest in a diversified portfolio (i.e. not just one stock).
There is no hard and fast rule as to exactly what to expect when you invest. And
because the amount of risk you take in the investments can also not be measured
accurately, it is even harder to know what type of returns to expect.

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1.3 Stock Valuation

Stock valuation can be considered as a tool for picking out stocks that will bring
you good returns. Imagine buying a car without knowing its value, or investing thousands
of dollars in property with no potential. sounds scary? Yet, this is exactly what it amounts
to if you put money into deals without assessing the value.

Intelligent investment needs a lot of effort. If you want to invest in stocks, the first
thing to look out for is its valuation. Valuation of a stock means the price or 'actual' value
it holds. If you are doing stock valuation then you need not study the stock chart every
time or worry about the trend in the market or the interest rates of the stocks. Never
invest in stocks without knowing the value, because that is like going up a blind alley
where you have no idea what you will end up with.

Investment in stocks without valuation is like risking the money deliberately. While
the fluctuations in the stock market cannot be avoided, with the accurate valuation of a
stock, you can minimize the risk factor. It will ensure that you not shoot in the dark, and
make sensible investments. Use the valuation of stocks to serve as a guide for buying
and selling stocks.

Instead of pouring the hard earned money into stocks without valuation, it is better
to be patient and carry out a thorough research to determine the worth of stocks before
buying. You do not have to be a math genius or a stock market guru either. All you need
is basic mathematical skill, and the perseverance to look for all the valuation
information available.

You cannot make the most of valuation if you do not understand or


appreciate its importance in the stock market. Spending a large amount in buying shares
base don what others say may well result in losses. Neither should you buy based on
media hype, as this may mislead you, and you may end up losing every penny you
invested. Owning stocks of a company in the form of shares can be a very good wealth-
building tool for you as it grants you claim on everything that the company owns. Hence,
assessing the value of the company, the profit it is generating and how beneficial it can
prove to you is a worthwhile enterprise. Valuation can prove to be especially beneficial for
middleclass investors, as they have limited resources to overcome losses occurred in
stock market.

Therefore, valuation can be considered the key factor in buying stocks. Just as
one assesses the value of anything one buys on the basis of a specified standard, stocks
too need to be valued to determine whether the investment will bring you returns or not .
Be aware, there are companies in the stock market that are making huge profits, but their
stocks are of no value. Hence, spending time on carrying out the own research will help
you pick up the right stock for the portfolio.

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1.4 Factors that Affect Stock Valuation

 Overall market:

Often quoted is "all boats float up or down with the rise and fall of the tide", but the stock
market is not pulled up or down by the moon (at least I don't think so). When the market
is going up, 2 out of 3 stocks are rising. When the market is going down, 3 out of 4 are
taking with it.

 Industry :

There are market sectors, such as financial services and health care, that
traditionally do well. One year it may be coal (yes, in 1964), another year Technology
(most of 1990’s), or gold (2002).

 Companies within an industry:

When many companies within an industry are doing well, they tend to pull the rest of the
companies in the industry up with them. When they are failing, they tend to pull related
companies down with them.

 News visibility:

When a company is in the news with new, leading-edge products, its stock price will
generally rise. But watch out for a quick reversal on ANY bad news.

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1.5 Stock valuation Methods

There are several methods used to value companies and their stocks. They
attempt to give an estimate of their fair value, by using fundamental economic criteria.
This theoretical valuation has to be perfected with market criteria, as the final purpose is
to determine potential market prices.

Fundamental Analysis (fair value - intrinsic value based)

Fundamental analysis is seeking the reason for the price change or for its
prediction. It is a logical method. Fundamental Analysis uses the financial statements of
the company to investigate the value of the company with regard to its potential growth in
earnings. It starts with abroad analysis of the economy: economy growth, inflation,
unemployment, money supply and the level and direction of interest rates.

By considering the indicators that affect the economy, financial analysts can then
forecast future levels of GDP. These forecasts are used as a basis for projecting
the future sales and earnings of the companies within these industries.
Fundamentalists then select the common stock with favorable sectors of the
economy. This method of forecasting is called top- down approach. The other
approach financial analyst use is the bottom- top approach, which starts with sales
and earnings projections for companies in different sectors of the economy in
which they are. The analysts look for certain characteristics of the companies as
basis for selection as low sales- to -price- earning ratio, low P/E ratio, or small or
mid cap stocks.

The procedure to do fundamental analysis is first select the country or economy


for investment. Then select the sector on the basis of certain factors like most
upcoming, current market scenario, future potential, government support,
demand, past performance, etc. Then select the company on the basis as told
above. In bottom-up approach sales is forecasted on the basis of current new,
past of the company, certain triggers which can affect its sales or profit margin.
Then other calculations are done on the sales basis or are budgeted and net profit
is arrived. Finally the discounted cash flow statement is made to arrive at target
price. Finally the ratios are calculated which tell about valuation of the company
like ROE, EPS, P/E, etc.

The most theoretically sound stock valuation method is called discounted cash
flow (DCF) method, involving discounting the profits (dividends, earnings, or
cash flow) the stock will bring to the stockholder in the foreseeable future, and a

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final value on disposition. The discount rate normally has to include a risk
premium which is commonly based on the capital asset pricing model.

Arguments against Fundamental Analysis:

Those who do not use fundamental analysis have two major arguments against it.
The first is that they believe that this type of investing is based on exactly the kind of
information that all major participants in publicly traded markets already know, so
therefore it can provide no real advantage. If you cannot get a leg up by doing all of this
fundamental work understanding the business, why bother? These condos that much of
the fundamental information is "fuzzy" or "squishy," meaning hat it is often up to the
person looking at it to interpret its significance. Although gifted individuals can succeed,
this group reasons, the average person would be better served by not paying attention to
this kind of information. Also it is difficult to quantify the qualitative factors that may affect
a business.

Technical Analysis (Market based)

Technical analysis is not at all concerned about the fundamental factors of the
company and the economic environment. Instead, it focuses on the company’s
historical stock price movements and the trading volume of the stock. From the
information technical analyst will predict future stock price of the stock. The
technician focuses on shorter time horizon then fundamental analyst.
Most large broking firms rely on technical analysis for their selection of the stock.
As doing fundamental analysis of each and every firm would be difficult and
tedious as it is time consuming and complex brokers rely mostly on technical
details as they are easy to get and understand as compared to fundamental
analysis.

The methods used for technical analysis are Line charts, Bar charts, Point and
Figure charts, Candle stick charts. The Market indicators are Dow theory which focuses
on primary, secondary and tertiary price movements. Volume and new Highs and Lows
are also used for indications. In the trend method daily moving average, 200 day average
and 52 weeks high- low. 52 week high is considered resistance and 52 week low is
considered support. If the company moves below support it is dangerous and if above
resistance level means moving towards new highs.

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Arguments against Technical Analysis.

Technical analysis assumes that certain chart formations can indicate market
psychology about either an individual stock or the market as a whole at key
points. Much of the faith in technical analysis hinges on anecdotal experience, not
any kind of long-term statistical evidence, unlike certain quantitative and
fundamental methodologies that have been shown in many instances to be pretty
predictive. Critics of technical analysis feel that it is basically as useful as reading
tea leaves.

1.6 About Value?

 In general, the value of an asset is the price that a willing and able buyer pays to a
willing and able seller
 Note that if either the buyer or seller is not both willing and able, then an offer
does not establish the value of the asset
 Several Kinds of ―Value‖

 There are several types of value, of which we are concerned with four:
 Book Value - The carrying value on the balance sheet of the firm’s equity
(Total Assets less Total Liabilities)
 Tangible Book Value - Book value minus intangible assets (goodwill,
patents, etc)
 Market Value - The price of an asset as determined in a competitive
marketplace
 Intrinsic Value - The present value of the expected future cash flows
discounted at the decision maker’s required rate of return

Determinants of Intrinsic Value

There are two primary determinants of the intrinsic value of an asset to an


individual:

 The size and timing of the expected future cash flows.


 The individual’s required rate of return (this is determined by a number of
other factors such as risk/return preferences, returns on competing
investments, expected inflation, etc.)

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 Note that the intrinsic value of an asset can be, and often is, different for each
individual (that’s what makes markets work).

1.7 Valuation Techniques

Some companies do not pay dividends, or the dividends are unpredictable.

In these cases we have several other possible valuation models:

 Earnings Model

 Free Cash Flow Model

 P/E Approach

 Price to Sales (P/S)

The Earnings Model

 The earnings model separates a company’s earnings (EPS) into two


components:

 Current earnings, which are assumed to be repeated forever with no


growth and 100% payout.

 Growth of earnings which derives from future investments.

 If the current earnings are a perpetuity with 100% payout, then they are worth:

VCE is the value of the stock if the company does not grow, but if it does grow in the
future its value must be higher than VCE so this represents the minimum value
(assuming profitable growth).

If the company grows beyond their current EPS by reinvesting a portion of their
earnings, then the value of these growth opportunities is the present value of the
additional earnings in future years.

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The P/E Approach

The most common way to value a company is to use its earnings. Earnings,
also called net income or net profit, is the money that is left over after a company pays
all of its bills. To allow for apples-to-apples comparisons, most people who look at
earnings measure them according to earnings per share (EPS).It divides market price
per share (MPS).

P/E = MPS
EPS

Is the P/E the Holy Grail?


There is a large population of individual investors who stop their entire analysis of
a company after they figure out the trailing P/E ratio. With no regard to any other form of
valuation, this group of unfolds investors blindly plunge ahead armed with this one ratio,
purposefully ignoring the vagaries of equity analysis. Popularized by Ben Graham (who
used a number of other techniques as well as low P/E to isolate value), the P/E has
been oversimplified by those who only look at this number. Such investors look for "low
P/E" stocks. These are companies that have a very low price relative to their trailing
earnings.

Also called a "multiple", the P/E is most often used in comparison with the current
rate of growth in earnings per share. The Foolish assumption is that for a growth
company, in a fairly valued situation the price/earnings ratio is about equal to the rate of
EPS growth.

Are Low P/E Stocks Really a Bargain?

With the advent of computerized screening of stock databases, low P/E stocks
that have been mispriced have become more and more rare. When Ben Graham
formulated many of his principles for investing, one had to search manually through
pages of stock able in order to ferret out companies that had extremely low P/Es.
Today, all you have to do is punch a few buttons on an online database and you have a
list as long as the arm.

This screening has added efficiency to the market. When you see a low P/E
stock these days, more often than not it deserves to have a low P/E because of its
questionable future prospects. As intelligent investors value companies based on future
prospects and not past performance, stocks with low P/Es often have dark clouds
looming in the months ahead. This is not to say that you cannot still find some great low
P/E stocks that for some reason the market has simple overlooked -- you still can and it
happens all the time. Rather, you need to confirm the value in these companies

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by applying some other valuation techniques.

The PEG and YPEG

The most common Foolish applications of the P/E are the P/E and growth ratio
(PEG) and the year-ahead P/E and growth ratio (YPEG). Rather than reinvent the
wheel, as there is a wonderful series of articles already written on these very subjects in
Folded, I will simply direct the attention to them and talk about them very briefly. The full
article on the PEG and YPEG, titled

"The fool ratio‖

While the PEG is most often used for growth companies, the YPEG is best suited
for valuing larger, more-established ones. The YPEG uses the same assumptions as
the PEG but looks at different numbers. As most earnings estimate
servicesprovideestimated5-year growth rates, these are simply taken as an indication of
the fair multiple for a company's stock going forward. As always, one must view the
PEG and YPEG in the context of other measures of value and not consider them as
magic money machines.

Multiples

Although the PEG and YPEG are helpful, they both operate on the
assumption that the P/E should equal the EPS rate of growth. Unfortunately, in the
real world, this is not always the case. Thus, many simply look at estimated earnings
and estimate what fair multiple someone might pay for the stock. For example, if
XYZ Corp. has historically traded at about 10 times earnings and is currently down to
7 times earnings because it missed estimates one quarter, it would be
reasonable to buy the stock with the expectation that it will return to its historic 10
times multiple if the missed quarter was only a short-term anomaly.

THE P/E IS hands down the most popular ratio among investors. It has its
limitations (as we'll see in a minute), but it's also easy to calculate and understand. If
you want to know what the market is paying for a company's earnings at any given
moment, check its P/E.

The biggest weakness with either type of P/E is that companies sometimes
"manage" their earnings number the company reported to the Security and
Exchange Commission. Its disadvantage is that those earnings will almost certainly
change or better or worse — in the future. By using an estimate of future earnings, a
forward P/E takes expected growth into account. And though the estimate may turn
out to be wrong, it at least helps investors anticipate the future the same way the
market does when it prices a stock.

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Pure hypothetical: Suppose you have two stocks with accounting wizardry to
make them look better than they really are. A wily chief financial officer can fool with
a company's tax assumptions during a given quarter and add several percentage
points of earnings growth.

It's also true that quality of earnings estimates can vary widely
depending on the company and the Wall Street analysts that follow it. The bottom
line is that despite its popularity, the P/E ratio should be viewed as a guide, not the
gospel.

 As a rule of thumb, or simplified model, analysts often assume that a stock is


worth some ―justified‖ P/E ratio times the firm’s expected earnings.

 This justified P/E may be based on the industry average P/E, the company’s
own historical P/E, or some other P/E that the analyst feels is justified.

 To calculate the value of the stock, we merely multiply its next years’ earnings
by this justified P/E

The PEG approach

The PEG approach is a simple valuation tool, popularized by Peter Lynch and
The Motley Fool among many others. Here is how Lynch puts it in One upon Wall
Street: "The p/e ratio of any company that's fairly priced will equal its growth rate." In
other words,

P/E=G

 Where P/E is the stock's P/E ratio and G is its earnings growth rate.

Oe way people misuse PEG and get themselves into trouble is by taking
earnings from two successive years off of an annual report, and using them to
calculate the earnings growth rate:

That's dangerous! Each year's earnings is a highly refined number, potentially


including significant non-recurring items. That means the change between these two
numbers can be very different from what you really want, namely, a conservative
estimate for earnings growth that can be sustained over the next five years or more.

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The P/S Approach

The trouble with the P/E ratio is that earnings is a complicated "bottom line"
number, sometimes reflecting non-recurring events; so many people look at sales
revenue as a more reliable indicator of a company's size and growth. The
Price/Sales ratio, also called the "PSR", is a company's stock price divided by its
annual sales per share.

Since P/S = P/E x (profit margin), you can find any of these quantities if you
know the other two

One common way people abuse the Price/Sales ratio is by assuming that a
PSR of 1.0 is right for all companies, and then hunting for "bargains" selling at a PSR
of 0.5 or less. That simply doesn't work in general, since different industries have
widely different profit margins, ranging from 2% for many discount retailers to 20% or
more for some software companies; so a P/S of 1.0 would be on the pricey side for
the retailer, but extremely cheap for the software company.

A second problem with the PSR is that sales, unlike earnings, contain no
information about a company's debt. It's easy to find lots of companies with no profits
and huge debt selling at a PSR of 0.1 or less. Some of these are on the verge of
bankruptcy; definitely not "bargains".

Use of psr while not quite as useful as the P/E ratio and the P/B ratio as a
valuation measure, the price-to-sales ratio (P/S) comes in quite handy when
evaluating unprofitable companies, which do not have

P/S Ratio = Market cap (shares outstanding * market price per share)/Total sales

Total sales can be found at the top of the income statement. Some companies
will list total sales (also called revenues) on the first line, while others will list
revenues from different business segments first and then add them to get total sales.
Some companies will use "net sales" instead of total sales, which is arrived at
by subtracting cash discounts, goods returned for credit, and other allowances. It is
fine to use net sales in calculating the P/S ratio.

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The Positives of P/S

1. Unlike the P/E and P/B ratios, the P/S ratio doesn't involve accounting estimates
that can be used by the company to inflate, or even deflate, earnings. That said,
companies can still manipulate sales, so we must look carefully at how a company
records its revenues.

2. For cyclical companies and turnarounds, we cannot use the P/E ratio when
earnings are negative. But as long as the company is not headed for bankruptcy, we
can use the P/S ratio to track what the market is willing to pay for its sales. If the
company's P/S ratio is much lower than others in its industry, it may indicate a value
opportunity. For young companies yet to make a profit, we often look for high sales
growth, which we hope will translate into net earnings and, ultimately, free cash flow.
The P/S ratio tells us how much the market is paying for sales and gives some
indication of value.

3. Some investors consider a relatively low P/S ratio with a rising stock price (high
relative strength) to be a good basis to invest in growth stocks that have suffered a
temporary setback.

4. As with P/E and P/B, the P/S ratio can help compare a stable company's current
value to its past valuations. Websites such as MSN Money will display the price
ratios for the past 10 years (after you enter in the ticker for the company you're
interested in click "financial results" in the left-hand column, then "key ratios," then
"10-year summary"). If the current P/S ratio is less than the 10-year average, it may
indicate a value.

Flaws of P/S Ratio

1. Just as the P/E ratio should be considered with earnings growth and the P/B ratio
with return on equity, the P/S ratio should be considered in tandem with net margin
(also called net profit margin, its net income divided by total sales). Both Wal-Mart
(NYSE: WMT) and Microsoft (NASDAQ: MSFT) are fine companies with very strong
competitive advantages, but a comparison of their P/S ratios alone tells us very little.
Wal-Mart has a P/S ratio of 0.66, compared to Microsoft's 7.12. Earlier, I said that a
P/S ratio under 1.0 generally has been used as a value benchmark, which would
suggest that Wal-Mart is undervalued and Microsoft is considerably overvalued. Yet
check on the if net margins explains this discrepancy: Microsoft's net margin is

23
30.8%, and Wal-Mart's is just 3.6%. Microsoft's greater profitability is reflected in its
price, which accounts for its higher P/S ratio.

2. A company can book sales for which it has not yet provided the goods or
services, or before a customer is obligated to pay. This is called channel stuffing and
leads to inflated sales and earnings, and consequently, lower P/Sand P/E ratios. In
August 2004, the Securities and Exchange Commission settled a case against
Bristol-Myers Squibb (NYSE: BMY) for improperly recognizing revenues and channel
stuffing. To make sure this is not happening, look at the receivables on the balance
sheet. If they are increasing a lot faster than sales, it is likely that some revenues are
not being collected. Another warning would be declining cash flows from operations
on the cash flow statement even as net earnings rise.

3. Generally a company with higher debt will have a lower P/S ratio, because some
of those sales, when converted to cash, have to go toward debt interest and paying
down debt -- not to equity holders. When comparing companies with significantly
different debt loads, it's best to compare enterprise value-to-sales (enterprise
value = market capitalization + debt - cash). For an example, look at theme-park
operator Six Flags (NYSE: PKS), which has a P/S ratio that seems to be in value
territory at 0.64. However, Six Flags is carrying $2.31 billion in debt and just $116
million in cash.

Its market cap is $685 million, but its enterprise value is $2.88 billion. The EV/S ratio
is 2.67, which does not indicate a value for a company that is not currently making a
profit, and one that is not expected to do so next year either.

4. A company that earns commissions on total sales may book total sales on its
income statement instead of commissions, thereby drastically lowering the P/S ratio.
This is perfectly legitimate, but it distorts the P/S ratio. Consider online travel
company Priceline.com (NASDAQ: PCLN). Its total trailing 12 months revenue is
recorded on the income statement as $954 million, but the revenue flowing to the
company is recorded as $253 million, with the difference reported as cost of goods
sold. The current P/S ratio is shown on all financial websites as 0.96, generally
indicating an undervalued company, but based on the actual commissions received
by the company, the P/S ratio would be 3.64.

24
Competitive Analysis of Stocks

By far the most important way to value any company is to compare it to


others. By using competitive analysis, you can put to use all of the ratios above and
compare them to one another so that you can get a much more complete picture of
the stock valuation of the company you are researching. To start a competitive
analysis, follow these steps:

1 - Find a list of comparable companies

A comparable company is any company that is similar to the company you are
valuing To find a quick list of comparable companies you can search most financial
sites by industry and get a list of all stocks that are included in that industry. I
usually use Yahoo Finance. This is the easiest way to find comparable companies,
however it is not a very comprehensive list and many companies are so unique that
they do not have identical competitors. If this is the case; you need to use the
imagination. Find companies that provide similar goods or services, or that have
similar business models. Even if the companies don't do the same thing, if there
growth and outlook is similar, the stocks will often be valued similar, and you can
therefore compare them to each other.

Once you've compiled as comprehensive list of companies as possible, it's


time to create the spreadsheet table for analysis.

2 - Create a spreadsheet

Create a spreadsheet to organize the competitive stock analysis. List the


comparable companies down the left side of the spreadsheet and the ratios
and values you are computing along the top / columns. Suggested columns
include Company Name, Ticker, Price, Fully Diluted Shares, Market Cap, Total Debt,
Enterprise Value, LTM Sales, LTM EBITDA, LTM Net Income, LTM EPS, This Year
Calendar EPS (estimated), Next Year Calendar EPS (estimated), 3 - 5 Yr Growth
Rate (estimated), LTM P/E, This Year P/E, Next Year P/E, PEG Ratio, Price / Sales,
EV / Sales, EV /EBITDA ratio and anything else you see fit to add. For examples of
how each value is included, refer to the stock valuation section. If you'd like to use
our Excel spreadsheet template, please click here to download.

25
3 - Gather the data

Now it's time to fill the spreadsheet in by gathering all of the financial data for
each of the comparable companies. You can find the information from several
sources, but if you want to do the most accurate job, then you should look for
numbers directly from the companies and then adjust them theself if necessary. At
first it will seem a little confusing, but once you've looked at a few dozen companies
you'll begin to understand more and more about what their numbers and ratios
mean. To start, go to each company's website and look for their investor section.
They usually have quarterly and annual financial statements, as well as press
releases, recorded conference calls and webcasts, and sometimes they'll even have
product updates and more. Read as much information as you can. If you can't find
much historical information on the company's website, visit any finance site for more
info (I like Yahoo Finance for information and BigCharts.com for charting). Begin
filling in the columns of the spreadsheet with the information you are gathering.

To get the estimated fields (like future EPS and EPS growth) you’ll have to
create estimates by doing the own stock research. When you've finished doing that,
you'll be ready to compute the ratios.

4 - Compute the ratios

Computing the stock valuation ratios can be tricky, so make sure that you
double check each figures to see that it makes sense. The example comparable
stock analysis spreadsheet we've compiled has many of the ratios computed for you.

5 - Look for Outliers and Adjust the Ratios

Now look closely at all of the stock valuation ratios you've computed. Do any
of them stand out? You should look for any outliers and then try to adjust them so
that they are comparable to the other companies. When you find a number that
doesn't make sense or seems too high or low there is always a reason behind it. It
could be that earnings are negative, that the company's asset structure is different,
or that the figures you're using to compute it are wrong. Even if you can't adjust or
correct the valuation ratios it is just as important to understand why they are
different. Now that the spreadsheet is complete, it's time to compare the
companies' stock valuations.

26
6 - Compare the Companies

Look at each stock valuation ratio and compare it to the other companies.
Then, look at all of the ratios for each company and compare all of them to the other
companies. Study the differences and valuations long and hard. Go away and then
come back to them in a few days when you have fresh eyes. Begin to form an
opinion as to which company offers the best value and growth prospects. Begin to
think about whether the company you are investigating is worth buying, or if you
should perhaps wait until its valuation becomes more attractive.

7 - Account for Differences.

Explain each difference between the companies to theself. If one company


has higher growth, then it likely has a higher valuation. Use the PEG ratio to
determine which company's growth is price more attractively. Look at the company's
overall market cap to determine its liquidity and size. Larger companies are often
priced at a premium because of the strong historical growth record and stability,
while smaller companies often get a premium because they can grow faster than
large companies. Companies that are barely profitable or going through the early
stages of restructuring often have depressed earnings and therefore their P/Es
sometimes look astronomically high. In summary, each ratio is high or low for some
reason. Find that reason and you will learn one more thing about the company you
wish to value.

8 - Decision.

The final step is to make the decision as to whether or not the stock you
valued is worth buying. To do that, you'll want to take this competitive stock
valuation into account, but you'll also want to do the own investment research and
make sure that the stock fits the investment philosophy, strategy and style. Once
you've read the other sections of this website, you should be able to make the
decision. If you are still unsatisfied and feel like you need to do more, there are tons
of investment books and magazines that will help you make decisions and find new
investments.

About Dividend Discount Model

The dividend discount model can be a worthwhile tool for equity valuation.
Financial theory states that the value of a stock is the worth all of the future cash flows
expected to be generated by the firm discounted by an appropriate risk-adjusted rate.
We can use dividends as a measure of the cash flows returned to the shareholder.

27
There are several dividend discount models (DDMs), and this article will address
two of the more basic forms of the DDM -- the stable model and the two-stage model.

Inputs into the DDM

Several inputs are required to estimate the value of an equity using the DDM.

 DPS (1) = Dividends expected to be received in one year.


 Ks = the required rate of return for the investment. The required rate of return

 can be estimated using the following formula:


Risk-free rate + (Market risk premium) * Beta

The rate on t-bills can be used to determine the risk-free rate. The market risk
premium is the expected return of the market in excess of the risk-free rate. Beta can
be thought of as the sensitivity of the stock compared with the market.

Capital Asset Pricing Model:

The CAPM developed by William F Sharpe, John Lintner and Jan Mossin
establishes a linear relationship between the required rate of return and beta of a
security.

Assumptions:

 Investors are risk-averse and use the expected rate of return and
standard deviation of return as appropriate measures of risk and return for
their security.
 Investors make their investment decisions based on a single period horizon
that is the next immediate time period.
 Transaction cost in financial cost is low enough to ignore and assets can be
bought and sold in any unit desired.
 Taxes do not affect the choice of buying assets.
 All individuals assume that they can buy assets at the going market price.

The CAPM is represented mathematically by

28
Where,
Kj = Expected or required rate of return on security j
Bj = Systematic risk of security j
Rf = Risk free rate of return
Km = Return on market portfolio.

CAPM shows how trade-offs between risk and return are determined in
financial market. The expected rate of return is the return from an asset that
investors anticipate or to expect to earn over some future period.

The required rate of return for a security is minimum expected rate of return
needed to induce an investor to purchase it. As investors are risk averse, they will
expect a risk premium to compensate them for the risk they take in investing in a
risky asset. It is assumed that investing in a number of securities known as portfolio
can diversify unsystematic or unique risk of a security.

Therefore investors receives risk premium only for systematic risk denoted by
beta. Beta shows how much a security is sensitive to the market. If the risk of the
asset is greater than the market risk, that is beta exceeds one, the investor assigns a
higher risk premium to asset than to market. If a security’s beta is more is more than
one it means that security is aggressive and if a security’s beta is less than one it
means that security is defensive.

Limitations of Capital asset pricing model:

 The model makes unrealistic assumptions:


 Transactions cost in financial market are not low enough so that it can be
Ignored.
 Taxes affect the buying of an asset. There will be low tax on capital gain than
taxes on dividend income.
 Risk consider by each individual will be different.
 Beta is calculated on historical data. How much data should we use to
estimate beta? The farther we go back in time, the higher the statistical
precision of the estimate, but bigger the possibility of introducing some old
data bias.

29
CHAPTER 2

30
Macro economics factor affecting Indian Economy

Overall Economy:
The first advance estimates released by the CSO on the country’s GDP reveals
near 9% growth in the current fiscal. The growth rate is estimated to touch 8.30% in
2009-10. Industry is estimated to grow at 9.8% in FY10. This comprises manufacturing
to 9.4% currently. Share of the manufacturing sector remains stable at 15.5% and is
unchanged compared to the share a year before.

Industrial Growth:
 Industrial growth reduces to 9.7% in December 2009-10 compared to high
growth in the same month of the previous fiscal. During the month this slowdown
was witnessed in all the three sectors, mining, manufacturing and electricity that
posted 3.8%, 8.4% and 3.0% respectively in December 2009-10 compared with
9.1%, 14.5% and 6.1% respectively in the corresponding month of previous
year.

 The lacklustre performance was also seen in the use-based classification. Basic
, intermediate and capital goods sectors slowed in the month of this fiscal.
Consumer goods too were seen to decelerate, on account of slowdown in non-
durables category. Growth in the durables sector has however picked up by a
margin.

 During the April-December period of 2009-10, growth of the main driver of


industrial growth, manufacturing sector, remains low as compared to the growth
of the previous year, In the first three quarters of 2009-10 growth in the basic
and intermediate goods was lower than the growth registered in the
corresponding period of 2010-09, while that of capital goods remained ahead.

 Growth in consumer goods decelerated to 5.8% in the nine -month period of


2009-10 compared to 9.9% in the corresponding period of the previous year.
During the period the consumer durables still continues to post negative growth.

 In December 2010 all the industry sectors have posted a positive growth except
for wool, leather, non-metallic products, and metal products. During the period
we found only production of metal products decline.

31
Core Infrastructure Industries
In the ninth month of the year the six-core infrastructure industries witnessed a
slippage in growth numbers, a low growth rate of 4.0% as against the 9% previously.
Growth remained subdued even during three quarters of the year; it stood at 5.7% as
against the 8.9% a year ago. In December 2010 the growth rate of finished steel,
cement and powered was almost half of that of the previous year and slipped even
below that in the case of petroleum refinery. Crude petroleum turned negative; however
growth of coal continues to post a higher growth since August 2009.

Inflation Trends
Speedy rise in the price index has been curbed below 4%, however the
Inflationary pressures remain. Monetary instruments and partly the high base effect in
last year also aided to reduce inflation numbers. Ban on the exports of some of the food
items too were responsible in bringing down inflation.

There has been a slight bounce back in the inflation numbers. Inflation went up
again from an average of 13.51% in November 2009, to 14.97% in December 2009 and
now nearing to an average of 16.22% in January 2010. Weekly numbers show this
gradual rise in inflation, began in the last week of November 2010. The rise in the
overall index has been mainly due to increase in the fuel, oil and lubricants (co al
mining) and manufacturing products (food products and transport equipments ).

Monetary Indicators
Money supply has picked up (percentage change is from March 2009 to the
December 2009). The increase in M3 is much more than what has been targeted (17 -
17.5%) for the current fiscal. FY10 when calculated in Y-o-Y terms. Government and
commercial borrowings in December this fiscal suffers from a slowdown, 0.3% and
9.8% respectively from 3.2% and 14.0% recorded in the corresponding month of
previous fiscal. While the net foreign exchange assets of the banks continue to rise
ahead (21.4%) of the previous year’s increase of 16.7%.The growth in net non -
monetary liabilities remained at a low 2.3% against 20.6% in the previous year.
Investments in the government and other approved securities picked up sharply by
16.8% compared to 3.6 % in the corresponding period a year ago. High interest rates
led to a slowdown in the total credit off take, a rise of 11.4% in December 08-09 as
against 17.4% in FY10. The increase was seen only in the non-food credit.

32
Stock Market Trends

In February 2010 Indian stock market indices have taken a dip. Sensex was
witnessed to melt by 10.1 percentage points and Nifty by 13.5 percentage points.
Sensex dropped from above 20k points to near 18K points. During the period we saw
overseas investments being taken away from Indian as well as global markets
due to the fear over US recession, which will not see recovery soon. Domestic
institutional investors too pulled back from the Indian Market and moreover IPO
fever diverted most investments. Volatility in the Indian stock market will remain in the
near-term; however the long-term outlook curve looks positive.

Fiscal Trends

Gross tax collected in the end of third quarter (cumulativ e) of FY10 rose by
27.0% to Rs 389345 cores. Percentage of taxes from the direct sources crosses 50%
compared to about 45 % previously. Corporation tax mops Rs 12869 8 cores in
December 2009; its growth continues to chase the high growth rate of 55% achieved in
the previous fiscal.

There has been speed-up in the income tax collected since July 2009 it
increased by 42.7 percent, in December 2009 against 27.0 percent recorded in the
previous year. Taxes from the indirect sources have shown a gradual decline
accounting for remaining half of the total tax collected. Customs and Excise collection
have slowed to 16.9% and 5.1% in the ninth month of this financial
yearasagainst32.9%and6.8%respectivelyin the corresponding month of previous year.
Government total spend is running steady, 69.7% of the targeted for FY09 spent in the
first nine months and so has been the case of receipts, 74.9%.

Foreign Trade

Merchandise exports have slowed to 21.7 % (in US dollar terms) during the first
three quarters of 2009-10 compared to 21.9 % in the corresponding period of previous
year. In December 2009 our cumulative exports for the three quarters stand at USD
111049 million and imports have increased by 25.9% to USD 168871 million, widening
trade deficits to USD 57821 million. In Rupee terms the numbers show an acute
slowdown in exports.

Detailed numbers available up to September 2009 show Indian exports speed-


up in value (USD) terms seen in commodities such as Rice and Spices among the
Agricultural and allied products, Iron ore in ores and minerals category, and Gems and
Jewelry in the case of manufactured products. Growth in markets for Indian exports
namely UK, USA, UAE and China suffered a slowdown and export growth to Singapore
turned negative. Three markets that emerged strongly were Belgium, Netherlands and
Hong Kong.

On the other hand India’s imports accelerated by 27.7%, the commodities of


high value mainly contributing to the increase are edible oil, pulses, iron and steel,

33
pearls, precious and semiprecious stones, gold and silver, coal coke and briquettes.
Growth in imports from main partners has slowed. It has been seen that imports from
Belgium and Netherlands are on the rise proving to be potential trading partners.

Capital Inflows
India’s total foreign investments inflated to US$ 48.9 billion in December 2009-
10 with about US$ 33.3 billion coming from portfolio sources and the rest US$15.3
billion as foreign direct investments. During the same period of previous year total
foreign investments stood at US $15.7 billion of which 67% about US$10.5 billion was
received as FDI and the rest as portfolio.

Foreign Exchange Reserves


Present foreign exchange reserves are enough to cover rou ghly 18 months of
imports, but such high reserves comes with a cost that it incurs. Forex reserves
increased by a margin in a month’s time when reserves in December 2010 were
compared with that of the previous months. India’s foreign exchange reserves touched
USD 275.9 billion in December 2009, where USD 266.7 billion (96%) comes as foreign
currency assets and the rest from Gold, SDR and reserve tranche position in IMF.

Trends in the Exchange Rates

 Rupee stays stable in the third consecutive month of the fiscal. Despite
intervention from the central bank Rupee traded at a high if Rs 39.27asagainst the
USD. In the initial trading sessions Rupee was seen to trade strong before
weakening in the concluding trading sessions. It averagedatRs39.37toa$in
January 2010.

 However during the month Rupee stays firm in its battle against Euro. It remained
volatile throughout the trading sessions of December 2009 and show infirmness
towards the last few sessions.

34
CHAPTER 3

35
Industry analysis
3.1 Introduction

Capital Goods Definition, Classification and Selection

Capital Goods has been defined for the purpose of this study as any "product/
equipment of high value, durable (economic asset life 3 years), u sed as plant and
machinery for agricultural, industrial and commercial (transportation etc.) Purpose in
production/ service delivery process".

Here "use-based" classification to segment Capital Goods is adopted. From the


list of classified segments, and have shortlisted five mos t representative segments
based on-market size of the segment and its user industry, and IIP weight age of the
segment. The five representative segments identified are as follows:

 Textile Machinery

 Machine Tools

 Electrical and Power Equipment which includes Boilers, Turbines, Diesel


Engines, Transformers, Switchgear, Motors and Generators

 Earthmoving and Construction Equipment

 Process Plant Equipment which includes Pressure Vessels, Cooling


Towers, Furnaces and Heat Exchangers

Competitiveness Analysis of Indian Capital Goods sector

The study of the performance of the Capital Goods sector reveals that its
fortunes are inextricably linked with that of the overall Indian industry. High degree of
correlation between the performances of the two sectors is further accentuated by high
elasticity of Capital Goods industry to changes in industry growth.

The Capital Goods value added contributes a fairly constant proportion (9 -12
percent) of the total manufacturing value added, thus establishing that manufacturing
as the key end-user sector of Capital Goods drives the performance of the latter.

Another key determinant of the demand for Capital Goods is the gross
investment undertaken in the economy. The apparent consumption of Capital Goods
constitutes a constant share (17-21 percent) of the total Gross Domestic Investment in

36
the country. On the supply side the output of Capital Goods is determined by
investments in Capital Goods sector and capacity utilization.

The investments in the Capital Goods sector have declined with the decline in
the relative profitability of the Capital Goods sector with respect to other sectors.
The export performance corroborates the inward focus of Capital Goods industry as
less than one-tenth of its sales is directed to exports. Except for few segments within
the Capital Goods sector, almost all of them have single digit exports as percentage of
sales figures.

37
3.2 Five Force Analysis

38
Cyclicality
Heavy engineering industry is an intermediate industry and its demand depends
on a variety of end-user industries such as power, mining, oil and gas, consumer
goods, automotive and the general manufacturing sector. A diverse mix of industries in
the end-user segment results in low volatility in revenues in a normal business
cycle. But, beginning of a widespread economic slowdown leads to cancellation of
investments on capital goods across the industries. Thus, a slowdown adversely
impacts the heavy engineering industry much before it affects other sectors. On the
other hand, the heavy engineering industry is among the last to benefit from an upturn
since capacity creation occurs after end-user industries fully utilize their own capacities
and feel positive about the long-term demand scenario.

3.3 Risk in Capital goods industry

Product innovation is a subtle process, frequently leading to shift s in the


competitiveness of firms. Developing products in an environment undergoing
technological change is given to frequent failure, even in well-established and
sophisticated organizations. In order to tackle competitiveness and to deal with
innovate on uncertainty, firms develop diverse innovation processes. Two mode s of
innovation are suggested in recent literature:

1) Science, Technology and Innovation (STI) mode, which is based on the


production and use of codified scientific and technical knowledge; and

2) Doing, Using and Interacting (DUI) mode, which relies on informal processes of
learning and experience-based know-how. In this paper we analyze product innovation
at firm level. We perform an exploratory analysis in four leading equipment and
machinery producers from the Aveiro region, in Portugal.

Doing so, we explore the main features of the capital goods’ industry with
implications for innovation, and analyze the dominant uncertainties associat ed to
the innovation process and modes of innovation. Key findings include the complete
absence of DUI mode in the cases studied, and even a low learning characteristic in
one company. The paper concludes by considering the implications for firms’
competitiveness and for innovation policy.

39
Business Environment Competitiveness Issues
Labour in the Indian Capital Goods sector is highly cost competitive, even
after discounting a comparatively low labour productivity. The labour cost efficiency
(which captures the cost and productivity aspects of labour) for Indian Capital Goods
sector is 1.32 times that of China’s and 1.38 times that of Taiwan’s. Among the
reference set of countries only Korea (whose labour cost efficiency is 1.31 times that of
India’s) outscores India on this count. But since the labour factor proportion is low
(approximately 7 to 21 per cent) in the total factor usage, this does not translate into a
significant relative advantage. Inflexible labour policies have also eroded this advantage
partly.

The raw materials used are largely domestic in origin. With the dis mantling of
various price controls on key inputs, Indian Capital Goods manufacturers now
procure raw materials at market prices, which move in line with international prices.
The raw material price indices have risen faster than the machinery pri ce index. It is
difficult for the Indian Capital Goods manufacturers to pass on the rise in prices to the
customers, thereby impacting their profitability. However the rising cost of raw materials
has prodded only a few Indian manufacturers to resort to va lue engineering techniques
for efficient raw material usage and cost reduction. The quality of raw materials is also
not up to the international standards in terms of dimensional tolerances and
metallurgical properties, and this, in turn, affects the quality of the final product.

Exportable Capital Goods and Destinations


There is a huge potential market even outside India and to leverage the
strengths of the Capital Goods sector and work on the opportunities available, the
Indian Capital Goods Sector needs to focus on those products that show potential.In
addition to this, these products have to be targeted at selected promising market ,hence
the chances of success. The basket of exportable products is shown below:

Exportable products from capital goods basket

Textile Machinery

 Textile Yarn Machinery


 Weaving, felt manufacturing machinery etc
 Sewing Machinery & Parts
 Auxiliary textile machinery and parts etc

40
Machine Tools

 Metal working lathes


 Parts of metal working machine-tools
 Metal Forming Machine Tools

Electrical and Power Equipment


 Piston engines including diesel engines
 High Voltage Electrical Machinery
 Electrical Transformers
 Electrical Power Equipment other than Transformers
 Steam Turbines
 Parts of Internal Combustion Engines
 Steam Boilers
 Parts of rotating electric plant

Earthmoving and Construction Equipment


 Earthmoving and Boring Machines

Process Plant Equipment


 Commercial refrigerating equipment
 Gas generator, air liquefier
 Centrifuges

Other Machinery and Equipment


 Cultivating Machinery
 Centrifugal Pumps
 Metal Rolling Mills
 Parts of Pump and Liquid Elevators
 Parts of air pumps, fans,etc

In general, the favorable export destinations (defined as high value


importing and having growth rates higher than world average growth rates) for the
above Capital Goods include European Union, USA, North America, ASEAN
and China. Similarly, with certain exceptions, the potential destinations (defined as
currently low value importing and having growth rates higher than world average
growth rates) for these Capital Goods include Middle East, CIS, South America and
Eastern Europe. Surprisingly Japan does not figure high on the potential exportable
destinations; this is understandable given the closed nature of Japanese Capital
Goods market.

41
Chapter 4

42
4.1.1 About the industry

Thermax is a leading company engaged in the manufacture of capital goods


mainly in the areas of energy and environment. It also undertakes turnkey projects in
the areas of waste heat management, pollution control and captive power plants up
to 100MW. The company has a strong technology base. Over the years, what
started as a boiler manufacturing and equipment fabrication firm, has diversified into
air conditioning, refrigeration, waste heat recovery, pollution control and turnkey
project contractor. Recently the company has tied up with Allied Signals of USA for
sourcing micro turbine technology.

Company Profile

Thermax Limited (Thermax) came to business in 30th June of the year 1980,
headquartered in Pune, India, Thermax provides sustainable solutions in Energy and
Environment by the way of standard products in the 6 areas of business, such as
Boilers and Heaters, Absorption Cooling, Water and Waste Solutions, Chemicals for
Energy and Environment applications, Power and Cogeneration systems and Air
Pollution and Purification.

Thermal's international operations are spread over South East Asia, Middle
East, Africa, Russia, UK and the US. Tulsi Fine Chemical Industries Private Ltd and
Kailas Castings Private Ltd were merged with the company with effective from 1st
July of the year 1982. As at 1st July 1989, Thermax became a deemed public
company. In the year 1991, T. K. Steel Industries Ltd was merged with the company.
During the year 1994, the company's status was changed from deemed public
company public company.

The process heat division came out with a new boiler design in the year 1995,
an oil fired smoke boiler, shell Max and Cambia, a boiler specially designed to burn
agro fuels like rice and groundnut husk, saw dust, coffee waste etc. also in the same
year of 1995, a Memorandum of Understanding (MoU) was signed with Bharat Shell
for thermic fluid, therma, for heat transfer system.

The process heat projects division received an order from PT South Pacific
Viscose, an Indonesian Company for supply of 3 boilers of 22.5 tonnes per hour of
steam. Energy System Division of the company was born in the year 1996 by the

43
way of merger of two division, one in the energy area and the other in heat recovery
area to pool the expertise with a view to addressing the heat recovery business and
also in the same year launched fine circulation fluidised bed combustion boiler. The
MoU was signed with Bharat Shell and the Process Heat Division of the company.

During the year 1997, the company had received the AD-Merkblatt
certification for the entire manufacturing unit at Chinch wad. An electronic network
called Thermnet linking all establishments of the company in the country was
introduced during the year same year of 1997 and also Thermax had entered into a
joint venture with Fuji Electric Company of Japan. The Company had introduced five
new products in the standard packaged boiler range during the year 1998 and also
launched a wide range of products incorporating Kawasaki modular technology in
our Vapour Absorption Division.

Thermax Co-gen Limited became a subsidiary of the company in the year


1999. During the same year 1999, the company had developed a more advanced
process called PDP II. During the year 2000, Thermax had acquired ME
Engineering, a UK-based company belonging to the Beel Industrial Boilers Plc
group. The Company has signed an exclusive distribution agreement for South Asian
markets with US company Purafil Inc to market their dry gas scrubbers popularly
known as chemical filters.

Thermax had signed a memorandum of understanding with the Society of


Applied Microwave Electronics Engineering and Research for commercialisation of
the latter's microwave disinfections system for treating pathological bio-medical
waste generated by hospitals and research institutes. The Company had set up
wholly owned subsidiary company in the US, namely Thermax Inc and another one
in Detroit, USA in the year 2001. Thermax had acquired 50% of stake in Energy
Performance Service (Thailand), a subsidiary of Energy Performance Service of
Canada. The Company and Cummins Diesel Sales and Services had entered into a
strategic alliance to provide attractive energy solutions to various industry segments.
With the investment of US $ 200,000, the company had incorporated a wholly owned
overseas (WOS) subsidiary in Brazil during the year 2003.

Thermax had bagged an order for Captive Power Plant in the year 2004.
During the year 2004-05, the company's chemical plant at Paudh, near Mumbai had
received the OHSAS 18001:1999 certification from BVQI. COFEX 2005 honoured
with special award for Thermax's contribution to the HVAC industry. Thermax had
inked a technical know-how transfer and license agreement with Balcke-Drr,
Germany in October of the year 2009 for dry and wet electrostatic precipitators
(ESPs), air pollution control equipment for power, industrial and utility segments up
to 300 MW.

As at February 2010, the company had signed a technical transfer license


agreement with US-based Babcock & Wilcox Power Generation Group (B&W) to

44
engineer, manufacture and sell sub critical B&W radiant utility boilers in India. As of
May 2010, the company had inked a protocol of agreement for an export order, for
supply of heat recovery steam generator (HRSG). Thermax had received an order
from a major refinery in July of the year 2010, to supply pulverised coal fired boilers
for their captive cogeneration plant valued at approximately Rs. 8.2 billion and also in
August of the same year 2010, received an order of Rs. 4.15 billion, from a leading
steel making company in August pf the year 2010, for setting up a captive power
plant for their upcoming blast furnace complex on an EPC basis.

Thermax is planning to set up a new Rs. 5-billion manufacturing plant for large
boilers of capacity 100 mw to 800 mw for power plants. In the first phase, the
company will have a capacity to produce sub-critical boilers with total capacity of
1,500 mw per annum, which would entail an investment of Rs. 3 billion. In the next
phase the company will scale up the capacity of the boilers of equivalent to 3,000
mw with an additional investment of Rs. 2 billion.

Board of Directors

Chairperson Meher Pudumjee

Managing Director M S Unnikrishnan

Anu Aga
Raghunath A Mashelkar
Valentin Von Massow
Director
Tapan Mitra
Pheroz Pudumjee
Jairam Varadaraj

Company Secretary Sunil Lalai

Location

1. Corporate

Thermax House , 14 Mumbai-Pune Road , Wakdewadi

Pune

Maharashtra 411003

45
2. Plant location

a) D 1 Block MIDC Industrial Area , Chinch wad ,

Pune

Maharashtra 411019

b) D-13 MIDC Industrial Area , R D Aga Road Chinch wad ,

Pune

Maharashtra 411019`

c) Paudh Works At Paudh , Post Mazgaon Tal Khalapur ,

Raigad

Maharashtra 410206

d) Plot No 21/1-2-3 , GIDC Manjusar Taluka-Savli ,

Vadodara

Gujarat 391775

e) Survey No 169 , Village Dhrub ,

Mundra

Gujarat 370421

3. Registered office

D-13 MIDC Industrial Area , R D Aga Road Chinch wad ,

Pune

Maharashtra 411019

46
4. Sales office

Dhanraj Mahal 2nd Floor , Chatrapati Shivaji Maharaj Chk , Gateway of India

Mumbai

Maharashtra 400039

Bankers

Bank of Baroda

Canara Bank

Citibank N A

Corporation Bank

HSBC

ICICI Bank Ltd

State Bank of India

Union Bank of India

47
4.1.2 World market

1. Thermax Inc., USA

This step-down subsidiary is the front-end value chain for the company's cooling and
chemical businesses in the USA.

2. Thermax Europe Ltd., UK.

The year witnessed a significant slowdown in business activities in all European


economies due to credit crunch.

3. Thermax Hong Kong Limited, Hong Kong

Thermax Hong Kong Limited (THKL) was formed in December 2003 as part of the
strategy to enter the Chinese absorption cooling market.

4. Thermax (Zhejiang) Cooling & Heating Engineering Co. Ltd., China

Thermax (Zhejiang) Cooling & Heating Engineering Company Ltd. that began
commercial operations in September 2010 completed its first full year of operations.

5. Thermax International Ltd., Mauritius

During the year, the company has invested USD 25,000 in the share capital of this
subsidiary to meet operational expenses.

6. Thermax do Brazil – Energia e Equipamentos Ltda., Brazil

During the fiscal year the subsidiary earned an income of BRL 0.12 million (USD
0.07million) and made a profit after tax of BRL 0.04 million (USD 0.02 million).

48
4.1.3 Indian market

1. Thermax SPX Energy Technologies Ltd.

The company has entered into a joint venture with SPX Netherlands BV, a wholly-
owned subsidiary of SPX Corporation, USA

2. Thermax Engineering Construction Co. Ltd.

Thermax Engineering Construction Co. Ltd. (TECC) undertakes and executes


engineering construction projects mainly for the Boiler and Heater (B&H) business
unit of the company.

3. Thermax Instrumentation Limited

Thermax Instrumentation Limited (TIL) focuses its operations on installation and


commissioning of power and cogeneration plants including civil construction.

4. Thermax Sustainable Energy Solutions Limited

With the looming threat of climate change and the need to reduce carbon emission,
Thermax Sustainable Energy Solutions Limited (TSES) is entering into businesses
related to clean development mechanism (CDM).

5. Thermax Onsite Energy Solutions Limited

Thermax Onsite Energy Solutions Limited (TOESL) was incorporated in September


2009.This subsidiary, focusing on the area of green energy from biomass and other
alternate sources, plans to develop utility delivery business to customer on unit-
consumption basis

49
4.1.4 Growth of the industry

Economies, worldwide, are recovering from the severe downturn of 2010 that
continued into 2009. Many countries are showing signs of small but positive growth
due to domestic consumption and a marginal improvement in international trade. The
recovery is uneven and the business environment for sustained growth is fragile.
Much of the economic rebound is due to the strong fiscal stimulus provided by the
governments of both developed and developing countries.

In developed economies, increasing unemployment, rising inflation and


tightening credit conditions have resulted in subdued consumer and investment
demand. Government plans to withdraw the financial stimulus to control the
ballooning fiscal deficit are met with concerns about economic recovery losing
momentum. In the next couple of years, at least ,the developed economies are not
expected to provide a strong impetus to global growth.

Displaying remarkable resilience in 2009-10, India continued to be the second


fastest growing economy in the world. With the support of capital goods and
consumer durables sectors, the Index of Industrial Production (IIP) growth for FY10
is far higher, at 10.4%as compared to 2.8% in 2010-09. Despite the negative impact
of the agricultural sector, the continued momentum in services and manufacturing
sectors coupled with strong fundamentals and broad based recovery, have ensured
a higher GDP growth rate.

The Union Budget 2010-11 indicates a positive outlook for the Indian
economy in the near term. The economic agenda emphasizes inclusive growth and
development of infrastructure in both urban and rural areas. Rs. 1,73,552 crore has
been allotted for infrastructure expansion, which accounts for over 46% of the total
allocation. Budgetary allotment to power, road transport, shipping, urban
infrastructure and railways will provide the much needed growth trajectory for the
manufacturing and infrastructure related sectors.

In the recent past, averaging 4000 - 6000 MW a year, India has fallen short in
adding to its power generation capacity. However, the coming five year plans
promise to be different, with a dramatic improvement in capacity addition.
Supercritical technology has just begun to make headway in India, with the
government approving a proposal for induction of this technology. This is a major
stride for India in developing cleaner, high-capacity and more efficient power
generation capabilities and a boost for companies that provide supercritical
technology.

While constructively engaging with the international community at the


Copenhagen conference on climate change, India has pursued a strong domestic

50
agenda for addressing the issue. The National Solar Mission with an enabling policy
framework has been created with the objective of generating 20,000 MW of solar
power by 2022. This is expected to be achieved by creating favorable conditions for
solar manufacturing capability, indigenous production and market leadership.

A proposal to establish a National Clean Energy Fund for funding research


and innovative projects in clean energy technologies and a 61% increased budget
outlay for new and renewable energy sector, provide the much needed support to
companies in related fields. Overall, the energy and environment sectors are poised
to ride the wave of positive growth in the coming years.

Review of Operations

During the fiscal year 2009-10, the company witnessed a decline in revenues,
due to the lower order book of the previous years. It generated a total income of Rs.
3235.2crore, with profit after tax at Rs. 141.4 crore. Exports, including deemed
exports, represented 20.3% of the total income. With the economic situation
recovering, the order book of the company has improved and stands at Rs. 5381
crore on March 31, 2010.

The company's energy business comprising Boiler & Heater, Power, and
Cooling &Heating contributed to 75.6% of its income while the environment business
comprising Air Pollution Control, Chemicals along with Water and Wastewater
Solutions generated 24.4%.

Industrial growth, particularly in the capital goods sector remained subdued in


the year 2010-09, affecting the order book and carry forward of several
manufacturing companies. Due to economic uncertainty, financial closure of most
projects were delayed and orders were either put on hold or were postponed till the
situation improved.

In 2009-10, with the improvement in the global economic scenario, many of


the project son hold were awarded, but with strict delivery schedules and lower
budgets. The innovation oriented projects initiated last fiscal have been progressing
well, with contributions from heating and cooling products supporting the company's
business.

Thermax Innovation Council, established last year and chaired by Dr. R. A.


Mashelkar is providing guidance in nurturing an innovation ecosystem within the
company's business divisions.

51
During the year, the company positioned itself for robust growth in the Indian
power sector. It formed two joint venture partnerships with global majors in the areas
of energy and environment that are expected to support the growth in power.
Thermax also made it sentry in the utility space of independent power plants (IPP) by
winning a project order.

With the country's dependence on coal fired power plants for electricity
generation, reduction of carbon footprint remains a daunting challenge. For reducing
emissions and to counter the shortage of fossil fuels, energy efficiency has become
very relevant in power generation. It is envisaged that in the twelfth five year plan
about 60% of the 100,000 MW capacity addition and about 90% of 102,000 MW in
the thirteenth plan would be based on supercritical technology.

Supercritical technology, with its ability to operate at increasingly higher


temperatures and pressures is aiding the improvements in energy efficiency in
thermal power stations worldwide. This technology offers much higher efficiencies of
40-42% braising the temperature and pressure of steam in the boiler, thereby
obtaining more energy output from the same coal input.

This shift to supercritical technology is a specific mitigation exercise of the


Government as part of its climate change agenda.

With huge investments anticipated in the sectors of energy and environment,


these partnerships will help in supporting the government's objectives of efficient
technology introductions and establishment of indigenized production capabilities.
These sustainable models will help arrest environmental degradation and counter
the negative effects of climate change.

Energy Segment Analysis

In 2009-10,the company's energy business income stood at 75.6% of the total


income.

Energy Business

Year Income (Rs. cr) Growth %YoY Exports (Rs. cr) Growth %YoY

2009-10 2620 53 614 90

2010-09 2513 -4 830 35

2009-10 2407 -4 542 -35

52
The energy segment saw a decline in total income due to a lower order book
of the previous years for the domestic and export projects. With the reduction in
economic uncertainty and financial closure happening on many projects, the
company has secured a number of prestigious domestic and export orders this year.
The new joint venture partnerships Thermax formed in 2009-10 will help it to make
appositive contribution in this area. In March 2010, the company signed a joint
venture agreement with its technology partner Babcock and Wilcox of USA for
supercritical boilers over 600 MW and for subcritical boilers above 300 MW. The new
joint venture cements the business relationship that Thermax and Babcock & Wilcox
have had over the last 20years.

Similarly, in August 2009, the company formed a new joint venture, Thermax
SPX Energy Technologies Limited with US based SPX Technologies to supply
equipment and services for the Indian power sector. This partnership will provide
power plant accessories and balance of plant equipment for power plants above the
300 MW range.

In the area of green energy, Thermax has begun an initiative through a public
private partnership for a 250 kW solar thermal project at Shive village in
Maharashtra. This project is expected to establish a replicable model for clean and
decentralized power generation and cold storage through solar energy. Funded by
the Government of India’s Department of Science & Technology, the project will be
designed and developed byThermax.

The company incorporated a wholly owned subsidiary for utility delivery


business to capture a sizeable share of revenue-side spending of customer by
supplying steam, heat or chilled water on a unit basis. The new business would look
after installation of equipment and peripherals at customer site, ensure operation &
maintenance, organize required inputs like fuel, manpower and consumables, and
supply end-utility products to its customers.

The new manufacturing facility of the company at Savli, Baroda completed


one year of its operations with a marked increase in productivity. To meet the
objective of making this a world class facility, the staff and workers are being
rigorously trained. New systems are also being introduced for process and
productivity improvements. At Chinch wad, Pune, continuing with its operational
excellence initiatives, Thermax is building consistency and productivity in its
manufacturing processes with the support of an internationally renowned expert in
lean manufacturing strategy and implementation.

The service businesses of all divisions contributed substantially to the


revenues of the company through retrofit and revamp, spares sales and operation
and maintenance of captive power plants.

53
Boiler & Heater

The Boiler & Heater group of the company saw a revenue decline for the
second yearn succession due to lower order booking of the previous years. Business
from captive power plants provided opportunities towards the end of the first quarter
and grew at a fairly robust pace throughout the year. Cement, sugar, oil & gas and
power sectors saw a surge in investment which substantially benefited the group in
order booking.

The Boiler & Heater business commissioned supplementary fired heat


recovery steam generators (HRSGs) for an integrated solar combined cycle power
plant in Algeria. It also obtained a large contract for supplying four circulating
fluidized bed combustion (CFBC)boilers for captive power generation in a cement
plant in Uttar Pradesh. Using coal and washery rejects as fuel, these power boilers
would each generate 250 TPH of steam for captive power generation.

With the commercial availability of natural gas, the business division was also
able to secure a repeat order for heat recovery steam generators (HRSGs). The
global increase in sugar prices also facilitated the order inflows for bagasse fired
boilers from both India and South East Asia.

The company's first waste-to-energy boiler installation designed for partial


firing of fuel derived from refuse, is in an advanced stage of completion and awaiting
commencement of trial operations. Our efforts in the distillery sector to incinerate
spent wash as a fuel is progressing at a slower pace as the two units in operation
are understabilisation.

The division also supported the company's Power division by bagging an


order for the largest CFBC boilers with reheat, for an independent power producer
(IPP). Exports showed signs of improvement with orders from Egypt and South East
Asia. Several oil & gas fired units were commissioned during the year particularly in
the gas fields of Abu Dhabi and refinery and petrochemical complexes in Saudi
Arabia. The division's major highlight of the year was the complete modularization of
a flue gas cooler for a refinery in the Middle East. The boiler and heater facility at
Savli in Baroda has seen its first full year of operations and productivity is showing
significant improvement.

The year closed with an order book in excess of Rs. 1400 crore. It also saw
the inauguration of the group's new office aptly christened 'Energy House'. A
substantial increase in revenue is expected for the year 2010-11, signaling growth
opportunities.

54
Power

Continuing with the previous year's growth trend, the company's power
business commissioned eight plants constituting 10 units and totaling 212.5 MW this
year. Repeat turnkey power project orders from the cement sector, among others,
have resulted in a healthy order book. The division has bagged, orders of a record
capacity of 629 MW in the financial year 2009-10, ably supported by repeat turnkey
power project orders from the cement sector. The division's first overseas turnkey
power project for a large paper plant in Philippines was handed over after successful
commissioning and stabilization. This has resulted in a couple of captive power plant
orders for a leading cement company in Southeast Asia and a sugar refinery project
in the Middle East.

The division achieved a breakthrough in larger capacity projects in IPP range


with an order from a power producing company in South India. This is likely to be the
largest CFBCboiler based IPP to be commissioned in the country during the 11th
plan period.

During the last financial year, the division reorganized itself, creating full
fledged business units to address various segments of power plants. It successfully
concluded process improvement exercise for each function through an external
consultant and a core internal team. The Division's focus on safety was
acknowledged with an award by a large corporate customer.

With a record orders-in-hand, the outlook for the division for the year ahead is
positive. The orders are fairly spread across various sectors and across geographies
with a mix of green energy based plants, mainly in waste heat recovery. The division
is making conscious efforts to achieve a balanced presence across private and
public sector projects, apart from a mix of fuels and traditional power plants. This
strategy is likely to be catalyzed by the revival of conventional cement and steel
sectors, in addition to the public sector's infrastructure spending.

For its growth, Thermax plans to be a significant player in the IPP range and
utility power market of unit size up to 300 MW and multiples. The division is in the
process of offering the solution of power generation from waste heat recovery in
cement sector with selective equity participation.

Cooling

The cooling business witnessed a 10% reduction in revenues during the year,
with exports contributing 42% of the total income. This was due to the sluggish
market conditions in the first half of the year resulting in a lower order inflow. The
rupee appreciation also accounted for reduction in total income for exports.

55
This year, the cooling business successfully developed and commissioned an
absorption heat pump for a few automobile majors, that will reduce their heating fuel
bill by 30-40%, significantly reducing carbon emissions. The division also
commissioned India's single largest capacity vapor absorption chiller of 3000 TR. It
developed two new products– a new machine supplied to a pharmaceutical unit that
simultaneously provides chilled and hot water without any additional heat source;
and a unique absorption system using water heated by solar energy. This high
efficiency machine, which has been tested, will reduce the cost of solar collection
devices, making solar cooling viable.

A European OEM in power generation has selected the company's absorption


systems for recovery of waste heat and conversion to cooling. The division's
manufacturing shop received an award for Right First Time at the National
convention of Quality Circles held in Bangalore this year.

This year, to counter the challenge of peaking of order inflow in the latter part
of the year, specific lean manufacturing techniques were used. Appreciation of the
Rupee against major currencies of our export markets is likely to put pressure on
price realization in 2010-11.

Heating

Heating business recorded a decline of 9% in total income as compared to


last year, with exports accounting for 26% of its business. The decline is mainly on
account of many projects being put on hold and lack of prospects from overseas
markets. With volatile fuel oil prices in the first half of the fiscal, there were also no
fuel shift opportunities, which account for a sizeable share of its business.

To address the change in the Indian Boiler Regulation (IBR) Act, the business
division responded with two new products – one suitable for liquid and gaseous fuel
and the other for solid fuels. These products will help small users shift to lower
operating cost options, providing good business opportunities for the business
division. They would be introduced in the overseas markets as well as for the hotel
and hospitality segments. Coil products grew in volumes by over 10% during the
year due to increased demand from the hotels planned for the upcoming
Commonwealth games.

Bi-drum boilers serving the fuel shift and small cogeneration markets doubled
its growth over the last year in the domestic market. The division is poised to capture
emerging opportunities for this product line in overseas markets, concerned about
energy costs.

56
Under the company's operational excellence program, the division initiated
mass customization and engineering automation to reduce cost and eliminate waste.
It also kick-started a manufacturing excellence program targeted to double the output
in the next two years time frame from the current manufacturing facility at Pune.

The outlook for the next year looks good with a vibrant domestic market and
markets like Middle East, South East Asia showing recovery where the business unit
has a good presence. The division expects markets like Africa, SAARC to continue
with the upswing in the current year. Latin America, the new market entered in the
last year appears promising. Food processing, chemical, drugs & pharmaceuticals,
hospitality and healthcare segments would continue to yield a major share of the
business from both domestic as well as overseas markets. The business unit will
continue its innovative efforts with new products to reduce energy costs.
Solar Growth Unit

The recently established Solar business of Thermax, integrated with steam


boilers and vapor absorption systems, successfully completed six demonstration
projects in FY 2009-10across its application segments – laundry, cooking and
cooling. A first-of- its-kind installation of 70 solar concentrators generating process
cooling has been completed at major auto facility near Pune and it will be
commissioned shortly.

The parabolic concentrator acquired by the business in FY 2010 has been


engineered and necessary design improvements have been introduced to suit
domestic markets for cooling and heating applications. Continuous monitoring of
operational data is helping in designing better systems for our customers.

The division would focus on replicating its installations in select market


segments. It would also extend its application range with existing and newer
products.

With the new projects, the company is positioning itself as a solar product
manufacturer and as an integrated renewable energy solution provider of cooling
and heating solutions. By targeting hotels, auto and garment segments and
educational institutes, the new business would help increase the renewable portfolio
of Thermax's offering to customers.

Environment Segment Analysis

In 2009-10, the company's environment business income stood at 24.4% of


the total income. Though income improved marginally, exports grew by a healthy
40% due to certain export orders.

57
Environment Business

Year Income (Rs. cr) Growth %YoY Exports (Rs. cr) Growth %YoY

2009-10 584 26 64 -18

2010-09 751 29 82 28

2009-10 778 4 115 40

The environment segment witnessed growth this year as several domestic


and international customers opted for environmental products and solutions in the air
pollution control and water and waste treatment areas.

In 2010-11, the industrial sector is expected to continue to do well, with the


continuing emphasis on power projects and stricter norms for the use of water.
Projects for municipalities under JNNURM will get significant funding as quite a few
detailed project reports have been cleared by the government authorities. All over
the country, regulation standards, particularly through pollution control boards, are
becoming stringent and pressure is being brought on companies to recycle treated
effluents.

Chemical business continued its export growth with the domestic market also
providing the required support. Production has commenced at the state-of-the-art
paper chemicals manufacturing plant of 12,000 tons per annum (TPA), which was
set up after a technology tie up with Georgia Pacific Chemicals of USA. The
partnership with General Electric of Usutu distribute reverse osmosis (RO)
membranes has commenced successfully, and the products made available in all the
areas allocated to the company.

The service businesses of the environment segment contributed to the growth


of the company in a year of recovery and will continue to focus on enhancing
efficiency from existing facilities of the customers.
Environ (Air Pollution Control)

The air pollution control business registered 11% lower turnover during the
year. Its business came from segments like captive power, steel, sponge iron, and
aluminum in domestic markets. To compensate for the slowdown in the domestic
cement sector, it focused on select industries in international markets.

The division's international business obtained orders from its focus sectors
during the year. This includes the largest ever order of electrostatic precipitators
(ESPs) for project as part of the Egyptian pollution abatement programmed, won

58
through international bidding under World Bank guidelines. This division has also
signed a contract with a Brazilian multinational for the design, engineering and
construction of ten ESPs in the Middle East. These orders would provide the
company a firm entry in the export market of pollution control equipment and related
services.

The company's technology tie-up with Balcke-Drr GmbH, now part of SPX
Corporation, USA, for large ESPs has helped the company address new applications
and international markets. It obtained an order in the aluminum sector which includes
supplying fume treatment centers for Greenfield alumina projects in Madhya Pradesh
and Orissa.

Continuing with its operational excellence programmed through process


improvements, the division implemented quality management systems under ISO
9001:2010 and was awarded theISO certification by Lloyds. This will help in
delivering consistent quality products and providing high customer satisfaction.
For 2010-11, though there is pressure on costs due to volatile steel prices, foreign
exchange rates and higher inflation, the division is confident of countering these
challenges. With the increased number of power plants coming up in the next few
years, the outlook for the division is positive.

Chemical

The chemical business continued to perform better than the previous year
with a 13%increase in the turnover and exports contributing a significant 38% of
business volume. The division continued its focus on specialty resins. This has been
achieved, competing against global market leaders in the Middle East, CIS and
North American markets.

Commodity chemical prices, forming a key part of the material cost of this
division, saw an increase in the latter part of the year together with crude oil prices.
The division could successfully assimilate this by moving up the value chain and
ensuring margin continuity.

The division increased its market share in its performance product group
(PPG), making it the largest in the domestic market. Business has increased in the
infrastructure and related industries as well as the dealer segment. This business
competes with some of the best known global companies, who already operate in
India. It has also increased its exports to the Middle East and South East Asia.

The division received a major order for oil field chemicals from a petroleum
company. This is a three year contract won against international bidding to supply
the required chemicals in the oil fields in Andhra Pradesh.

59
The business has stabilized its presence in the paper industry after its launch
in2009-10. These chemicals help the industry produce better grade paper using
lower quality material. The paper industry is now moving towards more eco-friendly
technologies for which alkaline and neutral sizing products are being offered. Exports
of paper chemicals have also begun.

In 2010-11 the division is expected to continue to maintain its strong presence


in its business lines in the domestic market and increase its focus in the overseas
markets. New technologies are being evaluated which will bring the knowhow for
superior products to the Indian customer and will also bring in green chemistry, thus
enhancing value.

Water & Waste Solutions

The Water and Waste Solutions division has seen a remarkable increase in its
presence in the domestic market. It could more than double its order booking and
also show a 20%increase in its turnover, while maintaining healthy margins.

The year started with a stagnant market and increased competition. With
better cost control and productivity, coupled with enhanced project management
skills, customers to larger extent have chosen to repose their faith in this division.

The newly created municipal vertical has started with a good order booking,
riding on the back of government investment in various JNNURM schemes. The
industrial vertical has enhanced its strengths and increased its presence in power
plants that are coming up. The standard products group (SPG) which sells through
dealers, has improved its offerings and enhanced its presence across the country.

In India, there is enormous water shortage coupled with deteriorating water


quality. Many industrial units are experiencing water shortage, which might affect the
production capabilities. Deteriorating water quality has started severely affecting
areas, especially in parts of Andhra Pradesh, Punjab, Rajasthan and Madhya
Pradesh. The division has introduced a rugged model of RO equipment for village
drinking water supply. It is executing some prestigious sewage treatment plants in
several states of the country, which when completed will enhance the quality of life.
A major project for augmenting the capacity of a sewage treatment plant to 136
million liters per day (MLD) was completed in Chandigarh during the year.

Water & waste solutions business with its municipal vertical obtained several
orders awarded through the JNNURM schemes. In a major order secured, the
division will provide 10 sewage treatment plants as part of a project for constructing
an underground network for collecting and treating sewage for a municipal
corporation in Maharashtra.

60
In the previous year, the division has acquired advanced know-how from
Germany for waste water treatment and had also entered into partnership with
General Electric of US for membrane bio reactor technology. In 2010-11,
operationalisation of this technology is expected to provide sustained benefits to the
business.

Services

Boiler & Heater

The Boiler & Heater service continued its steady growth with repeat boiler up
gradation orders from both domestic and the overseas markets. It made a major
advance by manufacturing a reformer package on a build-to-print basis with residual
engineering.

There was an increase in revenue from pure service offerings. Repeat orders
in condition assessment / residual life assessment teams made significant gains in
the Middle East and South East Asia markets. In spite of commoditization, the
spares business showed growth.

The service business outlook is positive for 2010-11, considering its current
order book position and the customer's requirements of service and spares.

Power

The Power division's service business has been steadily maintaining its pace
of growth. The group successfully stabilized an 80 MW power plant, based on
pulverized fuel boilers, for a mining major in Rajasthan and achieved an annual plant
load factor (PLF) in excess of 97%. To provide better value to the customer, a
software application, Enterprise Asset Management (EAM) was successfully
implemented.

A new petroleum refinery in central India entrusted the operation and


maintenance (O&M) of their 99 MW cogeneration plant to the division for three year
tenure. The power plant is slated for start up in August 2010. The group continues to
tap the power plant management business from the growing list of EPC projects.

The group also mobilized its first O&M services team in the overseas market
for paper mill cogeneration plant in the Philippines. It plans to add more overseas
assignments after this first successful experience.

61
For 2010-11, the division plans to target the utility sector for O&M business,
with the experience gained in pulverized fuel fired boiler based power plants. It also
seeks to meet the demand for O&M support of power plants built by other
manufacturers, which require support for stabilization and efficient operation.

Cooling & Heating

Cooling & Heating service business increased its total income, its growth
driven by spares, O&M along with professional services like energy audit, facility
energy management services, branded heating service products and steam
accessories.

The business offered energy efficiency solutions in steam generation and


distribution to one of the largest edible oil manufacturers in Africa. It also made an
entry in the oil& gas segment for energy audit in export markets. The division
launched new products like high capacity condensate transfer pump with zero
moving parts and de-aerators for special applications.

Based on the expertise of offering green steam generation and O&M


capability, the energy rental business line was established at two locations in India.
Additionally, memorandum of understanding was signed with a US based company
to evaluate and launch solutions in fuel savings and emission reduction for the
benefit of users of packaged boilers heaters. Based on successful pilot studies, the
new technology will be introduced in the coming months. The division will continue to
add new services and customized solutions in the areas of energy efficiency to
develop its business.

Chemical & Water

The service business of Chemicals & Water manages the O&M of over 45
water utilities across India – for textile, chemical, automobile, thermal and municipal
water and wastewater treatment facilities. In the context of JNNURM projects and
several corporate customers outsourcing fixed cost O&M contracts with their orders,
the group provides value added service from pretreatment of raw water to effluent
treatment. Thermax has developed the capability to provide customized service with
high standards of plant performance, operational efficiency, safety and adherence to
statutory norms.

The O&M of water facilities has introduced green practices – like water
recycling and zero liquid discharge – that could become mandatory requirements in
future. They help customers by refurbishing and upgrading plants when it is a more
viable option than putting up a new plant. Integrating the solutions available from the

62
water and waste treatment divisions with the chemical division, this business is
expected to grow significantly in 2010-11.

4.1.5 Product Profile (Major Products)

1. Business Area

 Boiler
large boiler
boilers for power utilities
packaged boiler

 Heaters
Fired heater
thermal oil heater

 Absorption cooling

 Chemicals

 Water treatment

 Waste water treatment and recycling

 Power generation

 Air pollution control

2. Products

 Boilers
waste heat recovery system
waste heat recovery boiler
Lean gas fired boilers
Waste gas boilers
heat recovery system generation
energen

 Municipal waster boiler

63
 large industrial boiler
oil-gas
solid fuel
spent wash

 hot water generation

 Packaged boiler
coil boilers
shell boiler
bi-drum
thermosyphon

 Solar based heating

 Heaters
Fired heaters
Thermal oil heaters

 Steam accessories
Condensate recovery system
Steams traps
Prefabricated modules
Presure redusion station
Valve

 Vapour Absorption systems


Heat pumps
Vapour absorption chillers
Solar based cooling

 EPC power plants


Power plants
Balance of plants
Operations and plants

 Chemicals
Performance chemicals
Speciality industrial applications
Ion exchange resins
Oil field chemicals

64
 Water and waste management
Water treatment
Effluent treatment and recycling
Sewage treatment and recycling
Incinerator

 Dust controller

 Bag filters

 Electro static precipitators

65
4.1.6 Ratio analysis

1 Operating Ratio

YEAR Operating Profit


2009-10 13.2
2010-09 13.63
2009-10 12.5
2006-07 15.93
2005-06 11.12

Operating Profit
18
16
14
12
10
8 Operating Profit
6
4
2
0
2009-10 2008-09 2007-08 2006-07 2005-06

 Conclusion:-

Above chart explains the operating profit margin. We can see that profit
margin increased yearly. It indicates that income increased and expenses decreased
yearly. In 2006-07 company has highest profit within 5 years.

66
2. Profit before Interest and Tax Margin

YEAR Profit Before Interest And Tax Margin


2009-10 12.01
2010-09 12.41
2009-10 11.62
2006-07 14.59
2005-06 9.47

Profit Before Interest And Tax


Margin
16
14
12
10
8
6 Profit Before Interest
4 And Tax Margin
2
0

 Conclusion:-

Above chart explains the Profit before interest and taxes. We can see that
profit margin increased yearly. It shows the profitability of the company.

67
3. Gross Profit Margin

YEAR Gross Profit Margin


2009-10 14.35
2010-09 15.71
2009-10 11.81
2006-07 14.89
2005-06 9.8

Gross Profit Margin


16
14
12
10
8
6 Gross Profit Margin
4
2
0

 Conclusion:-

Above chart explains the gross profit margin. It is fluctuated yearly because of
the change in the manufacturing cost.

68
4. Net Profit Margin

YEAR Net Profit Margin


2009-10 8.12
2010-09 8.8
2009-10 8.69
2006-07 9.09
2005-06 4.46

Net Profit Margin


10
9
8
7
6
5
4 Net Profit Margin
3
2
1
0

 Conclusion:-

Above chart explains the operating profit margin. This indicates the profit after
calculating all expenses like selling and distribution, administration expenses, etc.
Net profit first increase then decrease because of increasing marketing and
administration expenses.

69
5. Adjusted Net Profit Margin

YEAR Adjusted Net Profit Margin


2009-10 8.46
2010-09 9.72
2009-10 8.69
2006-07 9.09
2005-06 4.46

Adjusted Net Profit Margin


10
8
6
4 Adjusted Net Profit
2 Margin

 Conclusion:-

Above chart shows adjusted net profit. It shows the profitability of the
company. It shows the profit after depreciation. It increased in 2006-07 and 2010-09
and it’s decreased in 2009-10 and 2009-10 because of increase in depreciation.

70
6. Return on Capital Employed

YEAR Return On Capital Employed


2009-10 42.41
2010-09 54.84
2009-10 58.02
2006-07 54.56
2005-06 38.6

Return On Capital Employed


60
50
40
30 Return On Capital
Employed
20
10
0
2009-10 2008-09 2007-08 2006-07 2005-06

 Conclusion:-

Above chart shows the return on capital employed. Capital employed


shows the equity shareholders value. More return increased the profitability of
the firm.

71
7. Return on Net Worth

YEAR Return On Net Worth


2009-10 25.75
2010-09 32.42
2009-10 38.14
2006-07 29.86
2005-06 13.46

Return On Net Worth


40
35
30
25
20
15
Return On Net Worth
10
5
0

 Conclusion:-

Above chart shows the return on net worth. Here net worth shows
equity shareholders value and reserves and surplus. More profit gives more
profitability to on the net worth.

72
8. Current Ratio

YEAR Current Ratio


2009-10 0.87
2010-09 0.82
2009-10 0.85
2006-07 1.23
2005-06 1.08

Current Ratio
1.4
1.2
1
0.8
0.6 Current Ratio

0.4
0.2
0
2009-10 2008-09 2007-08 2006-07 2005-06

 Conclusion:-

We can see that the current ratio of the company is decreased continuously
from 2009-10, 2010-09 and 2009-10. Here we can see that current assets are lower
than the current liabilities. So, liquidity of the company is lower.

73
9. Earning Retention Ratio

YEAR Earning Retention Ratio


2009-10 58.42
2010-09 60.27
2009-10 58.85
2006-07 81.8
2005-06 73.14

Earning Retention Ratio


90
80
70
60
50
40 Earning Retention
30 Ratio
20
10
0

 Conclusion:-

Retention ratio shows the retention earnings over net profit. Some portion of
net profit should be retained by company for future purpose. It is decreased yearly
because retention earning increased and also profit increased. So, more cash is
used in retained earnings.

74
10. Dividend Payout Ratio Net Profit

YEAR Dividend Payout Ratio Net Profit


2009-10 43.33
2010-09 43.89
2009-10 39.72
2006-07 24.26
2005-06 49.12

Dividend Payout Ratio Net


Profit
50
40
30
20 Dividend Payout
10 Ratio Net Profit
0

 Conclusion:-

This ratio shows the dividend paid by company on the basis of net profit.
Dividend pay ratio is good in Thermax. It gives good dividend to their shareholders.
Dividend depends on net profit. High profit gives high dividend.

75
11. Operating Profit per Share (Rs)

YEAR Operating Profit Per Share (Rs)


2009-10 16.58
2010-09 23.8
2009-10 33.33
2006-07 41.39
2005-06 28.58

Operating Profit Per Share (Rs)


45
40
35
30
25
20 Operating Profit Per
15 Share (Rs)
10
5
0

 Conclusion:-

Above chart shows the operating profit per share. It shows the operating profit
divided by no. of outstanding equity shares. Here, this ratio is decreased because of
low operating profit margin.

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12. Fixed Assets Turnover Ratio

YEAR Fixed Assets Turnover Ratio


2009-10 12.66
2010-09 13.41
2009-10 7.78
2006-07 5.29
2005-06 4.59

Fixed Assets Turnover Ratio


14
12
10
8
6
Fixed Assets
4
2 Turnover Ratio
0

 Conclusion:-

This ratio shows the Fixed Assets Turnover Ratio. Its calculated as fixed
Assets divided by turnover of the company. Fixed assets increased yearly. It shows
more profitability of the company. Company has to utilized the fixed assets so they
can earn more profit on the fixed assets.

77
13. Total Assets Turnover Ratio

YEAR Total Assets Turnover Ratio


2009-10 3.15
2010-09 3.62
2009-10 4.38
2006-07 3.28
2005-06 2.98

Total Assets Turnover Ratio


5

3
Total Assets Turnover
2 Ratio

0
2009-10 2008-09 2007-08 2006-07 2005-06

 Conclusion:-

This ratio shows the total assets turnover ratio. It’s calculated as total Assets
divided by turnover of the company. Total assets decreased in 2009-10 and 2010-09
because of the increased in turnover and decreased in current assets and fixed
assets.

78
14. Earnings per Share

YEAR Earnings Per Share


2009-10 10.27
2010-09 15.76
2009-10 23.56
2006-07 24.11
2005-06 11.87

Earnings Per Share


25
20
15
Earnings Per Share
10
5
0
2009-10 2008-09 2007-08 2006-07 2005-06

 Conclusion:-

This ratio measures the earning available to an equity shareholder on a per


share basis. This is to measure the profitability of the firm on per equity share basis.
EPS ratio decreased yearly, it indicates the earning power of Thermax is decreased
because of decreased in earning of the company.

79
15. Book Value

YEAR Book Value


2009-10 40.16
2010-09 48.61
2009-10 61.78
2006-07 80.73
2005-06 88.19

Book Value
90
80
70
60
50
40 Book Value
30
20
10
0
2009-10 2008-09 2007-08 2006-07 2005-06

 Conclusion:-

Above chart shows the book value per shares. Book value includes equity and
reserves. It measures the book value on no. of equity shares. It shows the
profitability of Thermax on book value. It is decreased yearly; it indicates that
reserves decreased yearly. It’s not good for the company.

80
4.1.7 Weighted Average Cost Of Capital (wacc) Analysis

Formula of WACC

Year WACC%
2005-06 22.72%
2006-07 17.08%
2007-08 9.68%
2008-09 14.20%
2009-10 14.20%

WACC%
25.00%

20.00%

15.00%

10.00% WACC%

5.00%

0.00%
2005-06 2006-07 2007-08 2008-09 2009-10

81
 Analysis of WACC

In 2005-06 the company was at growing stage so that the equity


share price higher than the other years while in 2008-09 & 2009-2010 the
company at stable stage

So, the equity price of the both the share are equal in the last
year and the share can get the dividend on equity share at all the years are
same.

82
CONLUSION

After coming out cool and mild climates of college and university, it was the period
for us toi understand corporate management and it’s working patterns. Over period
we faced lot of difficulties in work and as our learn from good and bad experience
sooner or later, this has proven true for us.

From the above study, it can be concluded that Thermax Company is one of the
leading company in engineering industry. It has good market share in the market.
Presence of major competitors of Thermax like L & T, it also growing in the market. It
also creates somehow monopoly in the market. Thermax has good profitability in the
market.

At last we conclude that the future of the company very bright and they will be able to
capture international market.

83
Annexure

84
Profit loss account

Profit loss account


Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06
Income
Operating income 3,062.03 3,095.57 3,177.10 2,080.37 1,495.99
Expenses
Material consumed 2,038.16 1,987.26 2,205.27 1,380.85 983.51
Manufacturing expenses 69.15 60.55 47.57 49.71 40.8
Personnel expenses 292.71 254.64 241.06 191.14 130.92
Selling expenses 95.5 88.57 67.23 68.19 51.28
Adminstrative expenses 225.94 211.35 218.77 106.83 91.95
Expenses capitalised - - - - -
Cost of sales 2,721.46 2,602.37 2,779.90 1,796.72 1,298.46
Operating profit 340.57 493.2 397.2 283.65 197.53
Other recurring income 105.47 63.77 51.88 52.87 21.19
Adjusted PBDIT 446.04 556.97 449.08 336.52 218.72
Financial expenses 11.38 10.12 6.56 7.43 5.33
Depreciation 40.42 32.11 21.8 18.76 15.21
Other write offs - - 0.1 0.1 0.51
Adjusted PBT 394.24 514.74 420.62 310.23 197.67
Tax charges 135.64 131.91 149.6 102.74 69.28
Adjusted PAT 258.6 382.83 271.02 207.49 128.39
Nonrecurring items -117.16 -99.65 7.81 -20.79 -4.9
Other non cash adjustments - 4.12 1.95 1.1 0.39
Reported net profit 141.44 287.3 280.78 187.8 123.88
Earnings before appropriation 689.44 646.5 503.75 324.41 204.55
Equity dividend 59.58 59.58 95.33 71.49 40.51
Preference dividend - - - - 0.92
Dividend tax 9.9 10.12 16.2 10.95 12.5
Retained earnings 619.96 576.8 392.22 241.97 150.62

85
Balance sheet

Balance sheet
Mar '
Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 06
Sources of funds
Owner's fund
Equity share capital 23.83 23.83 23.83 23.83 23.83
Share application money - - - - -
Preference share capital - - - - -
Reserves & surplus 1,026.96 938.06 712.31 555.36 454.76
Loan funds
Secured loans - - - - -
Unsecured loans - - - - -
Total 1,050.79 961.89 736.14 579.19 478.59
Uses of funds
Fixed assets
Gross block 688.44 602.89 419.3 279.4 243.24
Less : revaluation reserve - - - - -
Less : accumulated depreciation 194.59 162.98 140.7 121.52 110
Net block 493.85 439.91 278.6 157.88 133.24
Capital work-in-progress 13.84 21.05 56.25 22.23 4.91
Investments 378.16 196.84 579.74 598 420.7
Net current assets
Current assets, loans & advances 2,252.81 1,630.48 1,016.70 928.14 543.13
Less : current liabilities & provisions 2,087.87 1,326.39 1,195.15 1,127.16 623.59
Total net current assets 164.94 304.09 -178.45 -199.02 -80.46
Miscellaneous expenses not written - - - 0.1 0.2
Total 1,050.79 961.89 736.14 579.19 478.59
Notes:
Book value of unquoted investments 88.64 74.07 64.02 33.89 32.01
Market value of quoted investments 10.7 22.72 111.93 573.82 393.94
Contingent liabilities 227.72 221.38 184.2 227.93 99.01
Number of equity sharesoutstanding
(Lacs) 1191.56 1191.56 1191.56 1191.56 1191.6

86
Bibliography

Company website: Thermax


Equity Research.in - Equity Research WWW Database www.google.com
www.valuenotes.com
www.bseindia.com
www.nseindia.com
www.icicidirect.com
www.geojit.com
www.moneycontrol.com
www.sify.com
www.crisil.com/research/research-global-equity-research.htm
www.gov.in
http://www.crisil.com
http://www.securities.com/
http://www.sp.advisorinsight.com
http://www2.standardandpoors.com for research methodology
http://news.indiamart.com/capital-goods-news.html
http://www.domain-b.com/industry/engineering/index.html for industry

News

Capitoline database

Books referred:

1. Financial Management by Prasana Chandra


2. Financial management by I.M Pandey

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