Thermax - In a sweet spot - Standar Chartered Securities

OUTPERFORM, TMX IN, CMP INR 607, Price Target INR 750

- IER has raised its FY14E and FY15E EPS for Thermax (TMX) by 31.5% and 30.8%, respectively, to incorporate the large INR 17bn order win, lower losses at its supercritical JV and beneficial market trends.

- Contrary to market perception, IER checks suggest that the large INR 17bn order is not margin-dilutive and could lead to consensus earnings upgrade.

- IER believes this order is a game changer for TMX and opens up an estimated c.USD 3.5bn global opportunity over the next 3-5 years

- IER has upgraded its rating on TMX to Outperform from Underperform. It expects a strong18% EPS CAGR during FY13-15 and value the stock at 20x FY14E EPS to arrive at its new PT of INR 750 (INR 330 earlier).

IER has built in margin surprises and upgrade its earnings estimates: Contrary to market perception, IER checks suggest that TMX's INR 17bn order is not margin-dilutive. Its checks suggest that even though Thyssen Krupp was the lowest bidder in the initial rounds, TMX won the order. Also, the price of this order works out to INR 3.8mn/TPH versus standard costing of INR 3-3.2mn/TPH. It now assume order win of 660MW/year and reduce its loss estimate for its supercritical JV. Hence, IER lifts FY14E/15E EPS by 31.5%/30.8%.

Petcoke combustion order is a game changer: This order can provide TMX a strong reference in CFB boilers for petcoke combustion. Globally, refineries produce c.75mtpa of fuel grade petcoke (source: Petcoke Consulting LLC). LER estimates that the trend of using petcoke for power generation presents a c.USD 3.5bn opportunity over the next 3-5 years for TMX.

Order momentum can sustain amid beneficial industry trends: The impetus of clients to gain from fuel arbitrage and the market shift towards emerging markets is beneficial for TMX. Moreover, the competition in the Indian market has waned with the expiry of BHEL's CFB technology license and with some other competitors under financial stress. IER estimate FY14E/15E orders of INR 76bn/INR 78bn.

Upgrade to OP with PT of INR 750: Given the potential for positive surprises on margins and order inflow, we upgrade TMX to OP. IER expects 18% EPS CAGR during FY13-15 versus 2% during FY08-13. IER value the stock at a one-year forward PER of 20x, which is at a 15% premium to its five-year average of 17.5x. Its PT of INR 750 implies 25% upside. Key risks are aggressive bidding by competitors, delay in supercritical order wins and steep decline in industrial capex.

Source : Equity Bulls

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