Thermax - Margin outperformance lift earnings - ICICI Securities

Thermax reported in-line execution though margins were better than expected, especially in energy and chemicals. Despite headwinds, order intake was healthy at Rs15bn and order pipeline is strong. In view of growth challenges, the company has impaired the goodwill (Rs280mn) on European subsidiary Danstroker. Impetus from government spend as highlighted in the FY22 Budget, large orders from oil& gas, recovery of core industries, etc. are likely to fuel demand for Thermax. Factoring-in the higher growth and margins, we raise our FY22E and FY23E earnings by 55.7% and 17% respectively. Given the shift in growth landscape to propel earnings and return on capital, we upgrade the stock to HOLD from Reduce, with a revised target price of Rs1,184 (earlier: Rs780).

- Stable execution, healthy growth outlook: Environment segment registered strong revenue growth of 28% YoY to Rs2.5bn. However, energy segment declined 5% YoY to Rs10.7bn and chemical segment shrunk 4.7% YoY to Rs1.1bn resulting in flat YoY revenues of Rs14bn. Overall order intake was down 3% YoY at Rs15.7bn for Q3FY21. Current orderbook at Rs52.1bn (1.2x TTM sales) implies improved visibility. Company won a medium-sized order of Rs3.2bn for Assam Bio Refinery Private Limited (ABRPL). Future order pipeline is healthy with expected finalisation of large orders from HPCL Barmer refinery, recovery in core industries, emission control norms, pharma, and food & beverage segments.

- Overseas subsidiaries' performance below expectations: Second wave of lockdown in Europe impacted the performance of Danstroker, which reported loss for the quarter. Order pipeline for the Indonesian subsidiary has improved, but the outlook on Danstroker continues to be challenging. Company had taken net impairment of Rs280mn towards Danstoker.

- Shift in domestic investment landscape to propel earning growth: Against the backdrop of a strong pro-growth Budget and government intent towards infrastructure spend, we expect overall demand to improve. Thermax will be one of the key beneficiaries of demand improvement. Management indicated it will continue to focus on margins and cashflows over growth. Recovery of the domestic economy can fuel earnings growth.

- Upgrade to HOLD: Given the shift in domestic landscape, healthy order pipeline and focus on margins and cashflows, Thermax is likely to witness an uptick in its core RoCE and earnings growth. However, the stock is currently trading at rich valuations of 40x FY22E and 32.7x FY23E earnings; hence we upgrade it to HOLD with a revised target price of Rs1,184 (previously Rs780).

Shares of THERMAX LTD. was last trading in BSE at Rs.1171.15 as compared to the previous close of Rs. 1210.3. The total number of shares traded during the day was 64694 in over 5991 trades.

The stock hit an intraday high of Rs. 1285.3 and intraday low of 1137. The net turnover during the day was Rs. 78596563.

Source : Equity Bulls

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