Thermax's Q3FY20 results (Neutral) - Order intake outlook muted

Q3FY20 consolidated result highlights

• Adj PAT +24% yoy to Rs850mn: on higher margin & lower tax.
• Revenues declined 2% yoy at Rs14.1bn: on lower order backlog.
• Margins expanded 56bps yoy to 8%: led by lower RM costs. Moreover, margin expansion was led by Chemicals segment where margins picked up sharply by 928bps yoy to 24.7% due to higher share of specialty chemicals. Accordingly, EBITDA growth was at 5% yoy to Rs1.13bn.
• Order intake at Rs16bn (+9% yoy): led by Rs4.3bn FGD order and base order wins. Order backlog declined 16% yoy to Rs54.4bn providing limited revenue visibility (0.9x FY19 revenues).
• Order intake outlook: The current quarter saw slowdown and delay in decision making even in base consumption related sectors (FMCG, F&B, cement, paper etc). Ordering is expected to pick up from FGD (NTPC lot 4 and 5), refinery expansions (Barmer, Gujarat and Panipat refinery expansion), orders from S. East Asian countries and SAARC. Further, cement segment is likely to drive WHRS related orders as companies are looking to reduce their power costs.
• Subsidiary performance: (1) China – all assets have been sold off and balance inventory has been moved to India. (2) Danstoker operations continued to see losses, albeit lower losses expected in FY20E vs FY19 (Rs340mn). However, lower cost base from Poland factories and higher orders likely to drive a turnaround in FY21 (3) Indonesia is making losses as it is yet to scale up with limited orders in pipeline.

New MD being appointed: With the retirement of Mr. Unnikrishnan in Jun-20, Mr Ashish Bhandari will be joining Thermax effective 20^th April 2020 (Jt. MD) and will subsequently be appointed as MD & CEO. Mr. Bhandari is currently Vice President – India & South Asia for Baker Huges (formerly a GE company; integrated oil field services company). 

Impact on financials: Cut FY20E/21E EPS by 6/13% to Rs25.3/32.8

Valuations & view

Thermax continues to focus on its core strength by widening product offering and expanded capacities and increasing its international presence. Concurrently, it is operating on lean cost structure which has enabled it to win orders with healthy margins. However, the lack of broad based capex cycle recovery and sustained competitive intensity is likely to drive muted inflows. Accordingly, we believe valuations at 29x FY21E earnings captures near term earnings momentum (10% CAGR over FY19-21E). Maintain Neutral.