| Thermax Limited | ||||||
| 'CRISIL AA+/Stable/CRISIL A1+' assigned to bank debt | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||||
| Detailed Rationale |
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CRISIL has assigned its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities of Thermax Limited (Thermax). |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Thermax and its subsidiaries. This is because most of its subsidiaries are in similar lines of business as Thermax. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Diverse product portfolio and geographic presence, supporting revenues Thermax has a diverse product portfolio comprising boilers, waste-heat recovery systems, cogeneration plants, and absorption chillers in the energy business, and water-treatment plants, air-pollution-control equipment, and water treatment chemicals in the environment business. The company is a leading player in several of its product segments, such as vapour absorption chillers, low- and medium-capacity boilers, and electrostatic precipitators. The company also caters to clients in diverse end user industries including power, steel, cement, oil and gas, textiles, food processing and chemicals. Besides, Thermax has also been steadily increasing its global footprint with about 30-35% of the revenues coming from overseas markets. CRISIL believes that Thermax's diverse product profile and geographic presence strengthens its overall market position in the capital goods industry, resulting in a healthy business risk profile. The company's revenue has registered a compounded annual growth rate of ~11% between fiscals 2017-20, However, revenue growth is estimated to have dropped to low single digit in fiscal 2020, due to continuing sluggish economic growth, and the outbreak of coronavirus-19 (COVID-19) in the last quarter. In keeping with the conservative nature of its management, Thermax has been choosy in bidding for orders, which are less risky from counterparty point of view, offer above average profitability, and would not lead to receivables build-up risk. The company though still has a sizeable order book of over Rs.3700 crores, which should hold it in good stead, as and when the pressures exacerbated by the COVID-19 outbreak ease out, and economic growth improves. * Prudent working capital management Thermax's working capital requirements are efficiently managed reflected in its low net working capital cycle of 50-70 days for past three years ended March 31, 2020, owing to prudent collection policies and inventory management. Despite having exposure to large turnkey projects, debtors have remained at less than 120 days in the past 4 fiscals due to tight control on collections and careful bidding for projects with only strong counterparties. This leads to low dependence on working capital debt as well. In keeping with the nature of its business, the company also receives sizeable advances from its clients, which minimises the need to add on material working capital debt. * Robust financial risk profile Thermax has a robust financial risk profile marked by net debt free balance sheet and large networth of over Rs. 3,500 crore estimated as of March 31, 2020. The company has maintained a comfortable capital structure with the ratio of total outside liabilities (TOL)/ Tangible Net Worth (TNW) remaining at less than 1.25 times over the last four fiscals. Its debt protection metrics are also solid, on account of low debt (less than Rs. 200 crore estimated on March 31, 2020) and healthy cash generating ability. Going forward, the company's capex plans are also modest at less than Rs 100-150 crore per annum which will be met through internal accruals. Hence, CRISIL believes that Thermax will maintain its strong financial risk profile, supported by healthy operating cash flows (though a dip is expected in fiscal 2021 due to the outbreak of Covid-19), and prudent funding of its capex. Weaknesses: * Exposure to cyclical vagaries of end user industries The engineering and capital goods industry is highly vulnerable to economic cycles. Consequently, Thermax has also witnessed periodic slowdowns in revenue growth due to deferment and delays in capex by customers. As a result the company's annual turnover has also remained range-bound between Rs 4500-6000 crore over the last 4-5 fiscals. Further, a weak demand environment and investment climate has led to a slump in orders in fiscal 2020, from many of the end user industries as companies have increasingly shelved expansion plans. As a result, Thermax's unexecuted order book has declined to Rs 3,700 Cr as of December 31, 2019; as against an average of about Rs 4,400 Cr seen in the past 4 to 5 years. While the existing order book provides good visibility on revenues over the near to medium term; new order acquisitions are expected to remain muted given the weak demand outlook for many of the end user industries. Besides, shut down of the manufacturing operations across India since the last week of March 2020 owing to the COVID-19 outbreak, will also have a bearing on the order execution in the near term. * Modest operating profitability due to intense competition in the industry Thermax is exposed to intense competition, and hence, faces pricing pressures, in business segments such as low-capacity boilers and packaged-water treatment plants. Operating margins have hence largely remained at 8-10% levels in the past 3 years (over 12% in fiscal 2017) Besides, Thermax's operating margins are moderately vulnerable to fluctuations in input prices. The company has taken several measures to reduce input costs, such as centralised purchasing of raw materials and components for all divisions as well as global sourcing, back to back placement of orders for components and prudent hedging of its forex exposure. Nevertheless, CRISIL believes that Thermax will continue to be impacted by increases in input prices, as input costs constitute around 60% of its costs. |
| Liquidity Superior |
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Thermax enjoys superior liquidity driven by expected cash accruals of over Rs.250 crore per annum in fiscal 2021 (expected at over Rs.300 crore annually thereafter), and cash and cash equivalents of over Rs. 1000 crore currently; these should more than suffice meet capex requirements of around Rs. 100-150 crore per annum, besides incremental working capital needs. It also has access to fund based limits of Rs. 310 crore, utilized to the tune of 42% on an average over the 9 months ended February 29, 2020. Besides, Thermax also has no long term debt on its balance sheet. |
| Outlook: Stable |
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CRISIL believes that while COVID-19 outbreak and sluggish economic growth would crimp near term business performance of Thermax, its established business position as a turnkey solutions provider in the boiler, chiller, heater and captive power plant segments and sizeable order book, will drive its performance over the medium term. Besides, the company's demonstrated ability to maintain a strong balance sheet, and superior liquidity is expected to help it tide over the difficult business environment, in the near term; a gradual strengthening of financial risk profile is expected over the medium term. |
| Rating Sensitivity factors |
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Upward factors * Increased diversity of revenues in terms of products, customers and segments, supported by steady increase in order book size * Healthy double digit growth in revenues with improvement in operating profitability to over 10-12% on sustained basis * Sustenance of strong financial risk profile with TOL/TNW at less than 1 time and superior liquidity position Downward factors * Decline in market share also impacting business performance; operating profitability reducing to under 4-5% in a normal business scenario * Major debt funded capex or acquisition leading to significant moderation in credit metrics; for instance TOL/TNW deteriorating to over 1.6-1.8 times. * Material reduction of liquid surplus, due to high dividend payout, share buy-back or capital reduction. |
| About the Company |
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Pune-based Thermax was incorporated in 1966 as Wanson India Pvt Ltd, and went public in February 1995. It had begun with the manufacture packaged boilers, but has subsequently diversified its product portfolio, which now includes packaged and custom-made large boilers, cogeneration equipment, air-pollution-control equipment, water- and waste-treatment plants and chemicals, and absorption chillers. Thermax has traditionally focussed on turnkey projects for large boiler systems, water- and effluent-treatment plants, air-pollution-control systems, and co-generation plants. It also pioneered the vapour-absorption cooling plants segment in India. |
| Key Financial Indicators (Consolidated) | ||||||||||||||||||||||||
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| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||
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