Professional Documents
Culture Documents
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
M.B.A. PROGRAMME
Affiliated to Gujarat Technological University
Ahmadabad
April 2011
2
PREFACE
3
Acknowledgement
AJ AY VAGHE LA ( 43)
4
DECLARATION
Pl ac e: V ad od ar a (Sign atur e)
Dat e: Aj ay vagh el a
Krun al p ar ek h
5
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 .
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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
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Objectives
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
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
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CHAPTER 1
9
INTRODUCTION
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.
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:
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
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.
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.
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).
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 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 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.
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 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.
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
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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).
Earnings Model
P/E Approach
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
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.
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 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
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.
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 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:
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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.
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
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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.
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Competitive Analysis of Stocks
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.
2 - Create a spreadsheet
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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.
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.
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.
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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.
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.
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.
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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.
Several inputs are required to estimate the value of an equity using the DDM.
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.
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.
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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.
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CHAPTER 2
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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.
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.
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$10.5 billion was
received as FDI and the rest as portfolio.
Rupee stays stable in the third consecutive month of the fiscal. Despite
intervention from the central bank Rupee traded at a high if Rs 39.27asagainst the
USD. In the initial trading sessions Rupee was seen to trade strong before
weakening in the concluding trading sessions. It averagedatRs39.37toa$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 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".
Textile Machinery
Machine Tools
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.
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.
Textile Machinery
40
Machine Tools
41
Chapter 4
42
4.1.1 About the industry
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 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.
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
Anu Aga
Raghunath A Mashelkar
Valentin Von Massow
Director
Tapan Mitra
Pheroz Pudumjee
Jairam Varadaraj
Location
1. Corporate
Pune
Maharashtra 411003
45
2. Plant location
Pune
Maharashtra 411019
Pune
Maharashtra 411019`
Raigad
Maharashtra 410206
Vadodara
Gujarat 391775
Mundra
Gujarat 370421
3. Registered office
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
47
4.1.2 World market
This step-down subsidiary is the front-end value chain for the company's cooling and
chemical businesses in the USA.
Thermax Hong Kong Limited (THKL) was formed in December 2003 as part of the
strategy to enter the Chinese absorption cooling market.
Thermax (Zhejiang) Cooling & Heating Engineering Company Ltd. that began
commercial operations in September 2010 completed its first full year of operations.
During the year, the company has invested USD 25,000 in the share capital of this
subsidiary to meet operational expenses.
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
The company has entered into a joint venture with SPX Netherlands BV, a wholly-
owned subsidiary of SPX Corporation, USA
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).
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.
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.
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.
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%.
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.
Energy Business
Year Income (Rs. cr) Growth %YoY Exports (Rs. cr) Growth %YoY
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.
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.
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 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.
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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.
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.
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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.
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
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
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.
57
Environment Business
Year Income (Rs. cr) Growth %YoY Exports (Rs. cr) Growth %YoY
2010-09 751 29 82 28
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 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.
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.
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.
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.
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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
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.
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.
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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 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 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
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water and waste treatment divisions with the chemical division, this business is
expected to grow significantly in 2010-11.
1. Business Area
Boiler
large boiler
boilers for power utilities
packaged boiler
Heaters
Fired heater
thermal oil heater
Absorption cooling
Chemicals
Water treatment
Power generation
2. Products
Boilers
waste heat recovery system
waste heat recovery boiler
Lean gas fired boilers
Waste gas boilers
heat recovery system generation
energen
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large industrial boiler
oil-gas
solid fuel
spent wash
Packaged boiler
coil boilers
shell boiler
bi-drum
thermosyphon
Heaters
Fired heaters
Thermal oil heaters
Steam accessories
Condensate recovery system
Steams traps
Prefabricated modules
Presure redusion station
Valve
Chemicals
Performance chemicals
Speciality industrial applications
Ion exchange resins
Oil field chemicals
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Water and waste management
Water treatment
Effluent treatment and recycling
Sewage treatment and recycling
Incinerator
Dust controller
Bag filters
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4.1.6 Ratio analysis
1 Operating Ratio
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.
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2. Profit before Interest and Tax Margin
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.
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3. Gross Profit Margin
Conclusion:-
Above chart explains the gross profit margin. It is fluctuated yearly because of
the change in the manufacturing cost.
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4. Net Profit Margin
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.
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5. Adjusted Net Profit 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.
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6. Return on Capital Employed
Conclusion:-
71
7. Return on Net Worth
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.
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8. Current Ratio
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.
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9. Earning Retention Ratio
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.
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10. Dividend Payout Ratio Net Profit
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.
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11. Operating Profit per Share (Rs)
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
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.
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13. Total Assets Turnover Ratio
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.
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14. Earnings per Share
Conclusion:-
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15. Book Value
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.
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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
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Analysis of WACC
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.
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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.
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Annexure
84
Profit loss account
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
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Bibliography
News
Capitoline database
Books referred:
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