Thermax - The tough gets going - Prabhudas Lilladher

We met with management of Thermax (TMX), the key take away are - 1) Run rate of order inflow still healthy (we believe they will end the year with OI of Rs 48bn up 21% YoY) 2) TMX believe can grow order inflow by 8-10% in FY14 even on high base 3) trend of small power plant (2-10MW) picking up due to persistent power shortage 4) Expects double digit margins to be maintained 5) Working towards becoming $2bn company over next 4-5 years. TMX?s ability to bag base orders of ~Rs7-8bn per quarter, increasing market share and strong management pedigree gives us a confidence that it will be able to tide the slowdown and participate in the upturn of the cycle meaningfully and continue to surprise positively in terms of order flow. We believe TMX will continue to benefit from continued power shortage and strong product portfolio. The stock is trading at 18x FY14E earnings. We continue to maintain ?Accumulate? on the stock.

Inflow could grow by 8-10% in FY14: The Company has been maintaining run rate of order inflow of ~Rs12bn per quarter for last 3-4 quarter in this environment. Even in the current quarter the company is confident of maintaining healthy run rate of order inflow. We believe the company is likely to end the current year with order inflow of ~ Rs 48bn up 22% YoY. The company is quite confident of growing order inflow in FY14 by 8-10% even on a higher base. The key sector the company is looking at for order inflow includes steel, cement, Oil& Gas. The optimism is largely coming from visible pipeline of orders and good enquiries levels and expectation of recovery in 2nd half of financial year FY14. The company is also looking at improved traction in the export markets like Middle East, Africa and South East Asia.

TMX believes that, given the increasing demand for Cement and high capacity utilization in most parts of the country, the Cement industry should start placing orders for newer capacities. In the Oil & Gas sector, two major expansion programs in domestic markets (one public sector and one private refinery) are expected to start ordering over the next 12 months. Food processing continues to see expansion and new investments.

Small Power plants catching up: TMX has highlighted few quarters back that a huge demand for power and persistent shortage being faced in many states will compel the revival of small captive power generation( 2-10MW) led by medium power consuming sectors like Tyres, Textiles, Chemicals and Pharma. TMX continue to receive many enquiries for the same; in fact it has already bagged few orders in this area. Given the continued power deficit it expects the market for such plant to keep growing at fast pace.

Working towards being a $2 bn in sales over next 4-5 years: The Company aspires to become a $ 2bn company over next 4-5 years from $ 1bn currently. The journey will largely to driven by increasing application of current product portfolio, increasing export foot print (plans to add $100mn from each of geography like Africa, South East Asia, Middle East and Rest of world). The current export base is ~$200mn, it aspires to reach $600mn in exports. Apart from growing current portfolio the company is working on new product line in area of Air pollution, Water, Energy and defence which will also add significantly to growth in next few years. The Company has set a target for itself that 1/3rd of the revenues should come from new business areas.

Expect double digit margin to be maintained: While company acknowledge the fact that margin are under pressure due to high competition in the market, it is believes double digit margin could be maintained due tight cost control by the management and increased contribution from export markets.

Outlook and valuation: TMX's ability to bag base orders of ~Rs7-8bn per quarter, increasing market share and strong management pedigree gives us a confidence that it will be able to tide the slowdown and participate in the upturn of the cycle meaningfully and continue to surprise positively in terms of order flow. We believe TMX will continue to benefit from continued power shortage and strong product portfolio. The stock is trading at 18x FY14E earnings. We continue to maintain 'Accumulate' on the stock.

Source : Equity Bulls

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