Thermax's Q2FY19 results (Neutral) - Another quarter of weak margins
Q2FY19 result highlights
- Consol. adj PAT +30% yoy to Rs745m: on strong revenue growth which was offset by loss in JVs & associates (Rs3mn loss vs Rs6mn loss in Q2FY18), and muted margins in both standalone & subsidiaries.
- Revenues grew 38% yoy at Rs14.27bn: led by pick up in execution of orders in hand in both standalone as also subs. TBW JV (49% stake acquired) saw Rs200mn revenues in the quarter.
- Margins fell 150bps yoy to 7.7%: due to execution of orders with lower margins (strong competitive intensity) as also headwinds from depreciating rupee and high commodity prices. Moreover, costs for certain orders yet to billed restricted margins. Hence, EBITDA growth was restricted at 16% yoy to Rs1.1bn.
- Consol order intake at Rs13.44bn (-4% yoy): due to lower order finalisations on liquidity crunch and muted private capex. Backlog at Rs64.1bn (+21.1% yoy; 1.1x FY19E revs).
- Order intake outlook: While enquiry levels sustain, order finalisations have slowed down, particularly from the private sector and expected to remain muted ahead of the impending elections. Base orders are sustaining from chemicals and consumption related sectors.
Conf call highlights: (1) Order intake to likely be flattish in FY19 on weak finalisations (liquidity crunch and forthcoming elections in the domestic market) as also sustained competitive intensity, (2) Dahej facility is ramping up gradually with capacity utilization at 60% which is expected to peak by 4Q19 (3) Sri City facility has begun trial production of absorption chillers, with revenues from 3Q19 (4) Boilers from Indonesian plant were well received in the market and are supported by a strong order book, (5) Thermax is not looking to increase payout given the huge cash on books and will look to grow via inorganic or organic route.
Key positives: Strong execution
Key negatives: Weak margin profile
Impact on financials: No change - FY19E / FY20E EPS at Rs26.7 / Rs32.6
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 order wins. However, lack of broad based capex cycle and competitive intensity is likely to drive muted growth in inflows. Accordingly, we believe valuations at 32x FY20E earnings captures near term earnings momentum (29% CAGR over FY18-20E). Maintain Neutral.
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.
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