Report
Bhoomika Nair

Thermax's Q1FY20 results (Neutral) - Weak capex cycle providing limited visibility

Q1FY20 consolidated result highlights

  • Adj PAT +28% yoy to Rs628mn: on strong revenue growth but was offset by lower other income.
  • Revenues grew 35% yoy at Rs13.93bn: led by pick up in execution of few orders in hand.
  • Margins expanded 42bps yoy to 7.1%: due to low base in 1QFY19 and execution of orders with higher margins. However, margin improvement was restricted due to intensive competition, consolidation of TBW and inability to pass on higher RM costs. Accordingly, EBITDA growth was at 43% yoy to Rs991mn.
  • Order intake muted at Rs12.2bn (-26% yoy): due to lack of large orders, slowdown in private capex, delays in order finalisations etc  Accordingly, 1QFY20 backlog declined 18% yoy to Rs52.5bn providing limited revenue visibility (0.88x FY19 revenues).
  • Order intake outlook weak: Mgmt expects intake to be driven by base consumption related sectors (textiles, food, pharma, etc), while large order wins are elusive (no large orders in pipeline) given limited capex in sectors like steel, power, fertilizer etc.  Hydrocarbon related ordering will likely pick up in 2HFY20, with cement seeing capex related to WHRS. Thermax won a FGD order of Rs4.7bn in 2QFY20 from NTPC and is L1 in one more order. Accordingly, it expects to see some improvement in order intake in 2QFY20. 
  • Ramp up in new plants: (1) Indonesian factory has reached EBITDA breakeven on back of healthy order book of Rs900mn and ordering momentum from Thailand, Philippines, Vietnam, Indonesia etc. (2) Dahej plant which faced major challenges initially has now stabilized and reached 70% utilisation resulting in breakeven at operational level. (3) Absorption chiller plant in Sri City is expected to benefit from positive operating leverage after the closure of China operations (Rs80mn provision) and reach breakeven soon.

Impact on financials: No change in FY20E/21E EPS – Rs31.3/37.7

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. However, 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 (18% CAGR over FY19-21E). Maintain Neutral.

Underlying
Thermax Ltd.

Thermax is engaged in the manufacture and development of a range of products and solutions in heating, cooling and power generation. In addition, Co. is engaged in the provision of water treatment, waste management and air pollution controlling services and the manufacture of related fuel and water chemicals. Co., through its subsidiaries, is engaged in the manufacture and sale of industrial boilers suitable for various fuels, CFBC boilers for power plants; painting equipment; measuring, checking and pressure instruments; process control and regulating instruments; and provision of lease, hire purchase, bill discounting and other finance related services.

Provider
IDFC Securities
IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions,  both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement  amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

Analysts
Bhoomika Nair

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