Thermax - Tempered by global macro challenges - ICICI Securities

Thermax has successfully withstood global cycles before on the strengths of its focus on cashflow, uncompromising terms of trade and steering clear of risks. Post the global economic meltdown, the company had strategically looked at opportunities for global expansion. It had its share of successes and failures; however, the management was always prudent to change gears in the face of changing adversities. European restructuring process is expected to yield dividends while Chinese operations have been wound off and Indonesian expansion is continuing. Though near-term challenges persist, we believe Thermax has a strong balance sheet and financial discipline to sail through. Factoring-in the challenging outlook, we cut our earnings by 10.8% and 4% for FY21E and FY22E respectively. Maintain HOLD with a revised target price of Rs740 (previously Rs772).

- Challenging near-term outlook: Order intake was down 2.4% YoY to Rs55bn in FY20, supported by Rs9bn of FGD orders. Current orderbook at Rs52.4bn (0.9x TTM sales) is spread across the sectors; however, the global demand slowdown will adversely impact overall growth in the near to medium term.

- Subsidiary stress continues: Indonesia losses have reduced while Danstoker performance was hit due to the pandemic. Europe has witnessed relatively better revival in terms of order intake vs the other geographies. Given the overall environment, we believe the timeline for breakeven in Indonesia operations is likely to get delayed.

- Strong balance sheet: Cash from operations stood at Rs3.3bn and free cashflow was Rs3.9bn during FY20. Company currently has cash and current investment of Rs12.9bn, which can shield it during these turbulent times.

- Expect traction from small and medium sized orders in FY21: Large orders from sectors like steel, cement and fertilisers will be scarce in the near to medium term. However, some green shoots are visible in the FGD segment from the private sector and Lot-6 FGD orders from NTPC. Oil&Gas outlook is healthy with orders from HPCL Barmer refinery likely to be finalised by subcontractors including L&T and Tata Projects. Other opportunities are in the food processing and pharma API sectors.

- Maintain HOLD: Dependence on private sector capex puts Thermax on the backfoot vs peers. Hence, we maintain our HOLD rating on the stock with a revised target price of Rs740 (previously Rs772). Given the depressed earnings of FY21E due to Covid, we value the stock at a P/E multiple of 30x on FY22E earnings.

Shares of THERMAX LTD. was last trading in BSE at Rs.742.2 as compared to the previous close of Rs. 745.4. The total number of shares traded during the day was 1464 in over 347 trades.

The stock hit an intraday high of Rs. 748 and intraday low of 735.05. The net turnover during the day was Rs. 1089642.

Source : Equity Bulls

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