Sell Thermax - Nirmal Bang

Order Book Contraction Continues

Although the 4QFY12 operational performance of Thermax was marginally above our estimates, the key concern of declining order book has come to the fore. Affected by lower order backlog to execute, the 4QFY12 revenue of Thermax fell 4.5% YoY to Rs16.9bn as energy segment (76% of total revenue) registered 7.3% YoY decline. The top-line is 3.5%/4.3% above our/Bloomberg consensus estimate of Rs16.3bn/Rs16.2bn, respectively. EBITDA/PAT growth was muted at (1%)/2.6% YoY, partly aided by 29% YoY rise in other income. EBITDA/PAT stood 6.3%/6.0% higher than our estimates and 7.2%/11.6% higher than Bloomberg consensus, respectively. However, second consecutive quarter of weak order inflow has led to sharp decline in its earnings visibility, a key concern highlighted by us in the past. For the quarter, consolidated order inflow stood at only Rs9.2bn, registering a 40% YoY decline. As a result, the order backlog has fallen sharply to Rs48.3bn, translating to 25% YoY and 17% QoQ drop. We retain our Sell rating on the stock with a revised target price of Rs378 (from Rs375) based on 12xFY14E EPS as we roll forward our valuation to FY14 financials.

Order intake tapers off: Slow down in capex activities across sectors like power, metals, cement and oil & gas, collectively ~60% of its order book, over past six months led to moderation in order inflow. For two successive quarters, 3QFY12 and 4QFY12, the consolidated order intake stood at only Rs7.4bn and Rs9.2bn, respectively, compared to average quarterly run rate of Rs15-16bn. No EPC contracts for captive power plants, core competency of Thermax, were awarded during the quarter leading to 46% YoY decline in Energy segment orders (Rs6.4bn, 70% of total order intake) while Environment segment order intake fell 3% YoY to Rs2.8bn.

Revenue decline in FY13 a certainty: With a sharp fall in order backlog to Rs48.3bn, lowest since 1QFY10, we expect Thermax to register 11% YoY decline in revenue for FY13. The environment segment portfolio of Thermax is expected to remain steady in FY13 but the management is expecting meaningful recovery in captive power segment only in 2HFY13 (especially in cement and steel industry). Consequently, we retain our order inflow assumption for FY13E of Rs Rs48.7bn, 5% growth over FY12 order intake of Rs46.3bn.

Outlook: We retain our negative view on Thermax based on (a) Company losing its ex-cash negative working capital advantage over peers after its entry in the utility boiler segment, (b) Sharply declining return ratios due to capex of Rs8.2bn in the B&W joint venture, (c) Least likely to win a super critical boiler order due to not being a price warrior, and (d) Steep decline in earnings visibility with order backlog to sales ratio falling to 0.8xFY12 revenue compared to 1.2x at the beginning of FY12.

Source : Equity Bulls

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