Thermax's Q4FY19 results (Neutral) - Order wins elusive; uptick to be gradual

Q4FY19 consolidated result highlights

• Adj PAT +70% yoy to Rs1.29bn: on strong revenue growth which was offset by muted margins and losses in subsidiaries. Reported PAT +68% yoy to Rs1.27bn on Rs20mn impairment related to Thermax (Zhejiang) Cooling & Heating Engg (TZL).
• Revenues grew 44% yoy at Rs20.7bn: 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 (51% stake acquired).
• Margins fell 134bps yoy to 8.2%: due to execution of orders with lower margins (strong competitive intensity), consolidation of TBW, Rs190mn loss at Danstoker as also inability to pass on higher RM costs and rupee volatility. Moreover, capacity expansions led to negative operational leverage. Hence, EBITDA growth was restricted at 24% yoy to Rs1.71bn.
• Order intake muted at Rs11.6bn (-28% yoy): due to delays in order finalisations related to elections. Similarly, FY19 intake too was weak at Rs56.3bn (-12% yoy). Accordingly, FY19 backlog declined 6% yoy to Rs53.7bn providing limited revenue visibility (0.9x FY19 revenues).
• FY19 sees revenue uptick (+34% yoy): to Rs59.7bn led by uptick in execution of orders won in FY18. However, margins declined 132bps yoy to 7.7% on execution of low margin orders and losses in subsidiaries. Hence, EBITDA +14% yoy to Rs4.6bn. Higher other inc (+29% yoy) boosted adj. PAT growth at 38% yoy to Rs3.2bn.
• Order intake outlook: 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 will selectively participate in NTPC’s FGD orders (likely wins of Rs10bn). Accordingly, it expects to see some improvement in order intake in FY20. 

Impact on financials: Cut our FY20E/21E EPS by 4/10% to at Rs31/Rs38

Valuations & view

Overall, FY19 has been a strong year in a weak environment led by uptick in execution of large order wins in FY18. 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 (we expect a gradual recovery) and competitive intensity is likely to drive muted inflows (lack of visibility of large order wins). Accordingly, we believe valuations at 26x FY21E earnings captures near term earnings momentum (18% CAGR over FY19-21E). Maintain Neutral.​