Thermax's Q3FY19 results (Neutral) - Muted quarter; order intake outlook weak
Q3FY19 result highlights
- Consol. adj PAT +17% yoy to Rs684m: on strong revenue growth which was offset by muted margins and losses in subsidiaries.
- Reported PAT +28% yoy to Rs750 on Rs875mn goodwill impairment related to Thermax Netherlands BV, which has been offset by Rs941mn deferred tax asset related to TBWES. (see page 3).
- Slump sale of boiler & heater division: from the standalone entity to its TBW subsidiary will drive synergies and cost optimisation and has hence reversed the TBW impairment of Rs1bn (done in 4Q17).
- Revenues grew 29% yoy at Rs14.36bn: on a low base led by pick up in execution of orders in hand and ramp up of new capacities as also consolidation of TBW (49% stake acquired).
- Margins fell 108bps yoy to 7.5%: due to execution of orders with lower margins (strong competitive intensity), consolidation of TBW, and Rs170mn loss at Danstoker as also inability to pass on higher RM costs and rupee volatility. Moreover, capacity expansions led to decreasing negative operational leverage. Hence, EBITDA growth was restricted at 12.4% yoy to Rs1.1bn.
- Consol order intake at Rs14.8bn (+5% yoy): largely led by base orders. Backlog at Rs64.8bn (+16.5% yoy; 1.2x FY19E revs).
- Order intake outlook: Mgmt believes order intake will be driven by base consumption related sectors, while large order wins are elusive 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. On the other hand, Thermax will selectively participate in the second round of NTPC’s FGD orders. Accordingly, mgmt. is hopeful of improving intake in FY20E.
Key positives: Strong execution
Key negatives: Weak margin profile, sustained losses at Danstoker
Impact on financials: No change - FY19E/20E 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 recovery and competitive intensity is likely to drive muted growth in inflows. Accordingly, we believe valuations at 32.5x FY20E earnings captures near term earnings
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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