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.