Thermax's Q2FY20 results (Neutral) - Visibility remains weak

Q2FY20 consolidated result highlights

• Adj PAT -66% yoy to Rs257mn: on lower other income & higher tax.
• Revenues grew 12% yoy at Rs16.06bn: led by pick up in execution of orders in hand and ramp up in capacity for products.
• Margins expanded 41bps yoy to 9.1%: led by low base in 2QFY19, positive operating leverage and execution of high margin orders. However, margin improvement was restricted due to intensive competition and higher other expenses (accounting change to include freight costs). Accordingly, EBITDA growth was at 18% yoy to Rs1.3bn.
• Order intake picks up at Rs17.2bn (+28% yoy): led by Rs4.7bn FGD order and base order wins in domestic market while international intake was quite muted. Accordingly, backlog declined 17% yoy to Rs53.3bn providing limited revenue visibility (0.9x FY19 revenues).
• Order intake outlook weak: Mgmt expects intake to be driven by base consumption related sectors (FMCG, F&B, cement, paper etc), while large order wins are elusive (no large orders in pipeline) given limited capex in sectors like steel, power, fertilizer etc. However, there are 3 refinery expansion projects ongoing and can drive some order wins for Thermax. Thermax expects FGD ordering from NTPC to continue and expects to win another order in 2HFY20.
• Subsidiary performance: (1) China – on track for closure with assets sold off (provision of Rs80mn in 1HFY20) with a small team to fulfil warranty liabilities (2) Danstoker operations have turned around but posted loss due to employee severance package. On annual basis will be profitable at PAT level (3) Indonesia: losses reduced from Rs82mn in 1HFY19 to Rs36mn in 1HFY20, expected to break even in 4QFY20.

Impact on financials: FY20E EPS cut by 14% to Rs27 (higher tax); FY21 EPS at Rs37.7

Valuations & view

Thermax continues to focus on its core strength by widening product offering and expanded capacities. Further it has widened its presence in international markets by setting up a plant in Indonesia. We believe these steps will aid order wins. Concurrently, it is operating on lean structure which has enabled it to win orders with healthy margins. However, lack of broad based capex cycle recovery and sustained competitive intensity is likely to drive muted inflows. Accordingly, we believe valuations at 28x FY21E earnings captures near term earnings momentum (18% CAGR over FY19-21E). Maintain Neutral.