Thermax's Q1FY19 results (Neutral) - Margins disappoint, Order intake critical

Q1FY19 result highlights

• Consol. adj PAT +21% yoy to Rs490m: on higher revenues and profit in JVs & associates (Rs3mn profit vs Rs67mn loss in Q1FY18), partly offset by muted margins in both standalone and subsidiaries.
• Revenues grew 19% yoy at Rs10.35bn: led by 19% yoy rise in standalone revenues (normalised execution after disruption of Rs2bn deferred sales due to e-way bill in 4QFY18) as also 17% yoy growth in subsidiary revenues.
• Margins fell 158bp yoy to 6.7%: due to muted margins in standalone (higher input costs). Further, Danstoker saw Rs41mn loss (vs Rs41mn profit in Q1FY18), higher costs in Thermax Europe, as well as high base in TECC. Hence, EBITDA fell 4% yoy to Rs693mn.
• Consol order intake at Rs16.5bn (-13.9% yoy): due to a high base. Overall order intake was robust led by domestic order wins of Rs2.79bn for a captive cogeneration power plant from a fertiliser company and Rs3.4bn order for a specially designed boiler from a steel manufacturer. Backlog at Rs64.2b (+29.9% yoy; 1.2x FY19E revs).
• Order intake outlook: Enquiries have been high in cement (WHRS, pollution control), chemicals, consumption related sectors (food, pharma, etc), and emission norms for power plants. Most enquiries are for small and medium sized orders. Intake from steel, fertilizers industries has largely been completed and going forward large sized orders are likely to be muted as companies become cautious on large projects ahead of impending elections.

Conf call highlights: (1) Targeting double digit margin for FY19, but headwinds of higher RM & competition (2) TBW JV to be consolidated from 2Q219 onwards (no rev; Rs50-60mn fixed costs) (3) Dahej facility utilization rises to 50%; to reach rated capacity by Q3FY19 (4) Sri city facility (absorption coolers) to commence by end Aug/early Sep (5) Order intake to likely be flattish in FY19 as limited large order visibility, (6) For FGD orders will focus on small orders with low receivable risks, NTPC terms of agreement were stringent with adverse payment cycle.

Impact on financials: FY19 EPS at Rs26.7; 3.5% cut to FY20 EPS to Rs32.5

Valuations & view

Thermax continues to focus on its core strength in products 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 market share gains & order wins over the next few years. The order wins are likely from hydrocarbons, chemicals, etc with the international focus is likely to drive a 29% earnings CAGR over FY18-20E. However, valuations are expensive at 34x FY20E earnings, with lack of a broad based capex cycle revival. Maintain Neutral.