Management Speak: Thermax India (Neutral) - Focus on reducing business volatility

We present key takeaways from our meet with Thermax management.

Enquiries remain robust, limited visibility on large orders: Domestic enquiries remain strong from consumption-related sectors (textiles, food & beverages, alcohol, etc), auto (tyres, auto components), hydrocarbons (refineries), chemicals, cement (largely WHRS, pollution-control related and few capacity addition projects) and steel. However, large orders remained elusive with most orders being mid-sized (

Focus on reducing business volatility: Historically, Thermax has shown a volatile performance due to high dependence on private capex and few sectors and geographies. Management aims to correct this by 1) Entering into newer category of process cooling (1.5-3x market size of absorption cooling) 2) Increasing focus on the commercial (hotels, hospitals, etc) which is contra cyclical to existing b2b business (aims to increase market share to double digits versus <1% currently) 3) Raising focus on rooftop solar, water, etc 4) enhancing business share from South East Asia. Accordingly, Thermax is stepping up investments in these areas.

South East Asia to drive geographical diversification: Management reiterated its view to increase share of South East Asian business, with an aim of making it as large as India over time as this would reduce its dependence on a single market (India). Accordingly, Thermax plans to set up local offices in each country to participate in projects in the region. This would be led by Indonesia wherein it has already set up facility and the company aims to achieve double-digit market share eventually, from 1-3% currently.

Maintain Neutral on expensive valuations: Domestic order intake for Thermax is showing signs of recovery, driven by consumption-related sectors on sustained demand and improving utilizations. Concurrently, Thermax continues to improve on its capabilities by widening its product offerings and expansion into counter cyclical industries. Further, it is widening its presence in international markets and has already set up a plant in Indonesia towards the goal. These steps will aid market share gains and order wins over next few years, in our view. We believe order wins from hydrocarbons, chemicals, sectors, etc, along with international focus will drive 32% earnings CAGR over FY18-20E. However, valuations at 33x FY20E earnings, capture the positives and leave limited room for disappointment, particularly, with the lack of a broad-based capex cycle revival make us Neutral on the stock.