Thermax's Q4FY18 results (Neutral) - Revenue miss, Order backlog provides visibility

Q4FY18 result highlights

• Consol. adj PAT fell 36% yoy to Rs757m: due to lower revenues & margins. Moreover, subsidiaries & JVs recorded Rs351mn loss in the quarter.
• Revenues fell 5% yoy at Rs14.4bn: due to 4.5% yoy drop in standalone revenues as also decline in subsidiary revenues. Rs2bn revenues were deffered (executed in 1Q) due to e-way bill introduction.
• Margin fell 183bps yoy to 9.6%: due to rise in commodity prices and loss in Danstoker and China subsidiary. EBITDA fell 20% yoy to Rs1.4bn.
• Consol order intake at Rs16bn (+53% yoy): led by an order win of Rs5.03bn for co-generation plants for a fertilizer company. FY18 intake was up 45% yoy to Rs64bn. Backlog at Rs56.9b (+43% yoy; 1.3x FY18 revs).
• Weak execution impacts FY18 PAT: FY18 revenues fell 3% yoy to Rs44.6b due to weak opening backlog, GST related disruptions, etc. OPM declined 183bps yoy to 9.6% on negative operating leverage and higher commodity prices. Hence, EBITDA fell 12.5% yoy to Rs4bn. The higher JV losses resulted in a 28% PAT decline to Rs2.3bn.
• To acquire balance 49% stake in TBW JV: Thermax would be buying balance 49% stake in its TBW JV from B&W. This would give Thermax access to mfg facilities (mfg of critical, super critical boilers) as also access to technology (notably NOX emissions related technology).

Conf call highlights: (1) Danstoker loss is related to penetrating the Poland market, while the China loss of Rs177mn is for taking upfront provisions for ongoing litigations (2) Expect margins to revive going forward; targeting double digit margin, but headwinds in form of higher RM & competition (3) Dahej facility to reach rated capacity by Sep/Oct-18 (4) Sri city facility (absorption coolers) to commence in Q2FY19 end (5) Order intake is picking up from consumption based segments, while green shoots are visible in areas such as cement, steel, etc. However, power segment is muted.

Impact on financials: FY19/20E EPS cut by 14% /9% to Rs26.7/ Rs33.7

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 32% earnings CAGR over FY18-20E. However, valuations are expensive at 34x FY20E earnings, with lack of a broad based capex cycle revival. Maintain Neutral.