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MOSL: THERMAX (Downgrade to Neutral)-Weak ordering outlook to slowdown execution momentum

THERMAX: Weak ordering outlook to slowdown execution momentum 

(TMX IN, Mkt Cap USD1.8b, CMP INR1094, TP INR1145, 5% Upside, Downgrade to Neutral)

 

  • Operating performance ahead of expectations: 1QFY20 sales grew 35% YoY to INR13.9b. EBIDTA increased 43% YoY to INR991m, as margin improved 40bp YoY to 7.1%. Adj. PAT grew 28% YoY to INR628m, ahead of our estimate of INR535m.
  • Energy segment performance supports margin improvement: Operating margin improved 40bp to 7.1%, supported by margin improvement in the energy segment. Margins in the Energy segment improved 90bp YoY to 6.0%. However, margins in the Environment and Chemical segment were under pressure. Environment margins slipped 100bp YoY to 2.1% and Chemical margins declined 50bp YoY to 11.7%.
  • Order inflow declines sharply, but outlook for standard business stable: Order inflow declined 26% YoY to INR12.2b due to absence of large-ticket order finalization. Order book is down 18% YoY to INR52.5b. TMX expects order inflow in FY20 to be supported by base orders, given the rising demand for standard products from industries like cement, food processing, light engineering and auto, as well as FGD ordering from the power sector. With ordering activity yet to show meaningful sign of pick-up, we expect revenue growth momentum to slow down over next few quarters.
  • Downgrade to Neutral: Over past 5 quarters, Thermax has demonstrated its strong execution capability with robust revenue growth. However, the margins continue to elude which reflects the competitive intensity amidst weak ordering environment, in our view. Going forward, ordering environment may continue to remain weak and depleting order book may lead to slowdown in revenue growth momentum. The stock trades at FY21E PE of 29x, adequately pricing in its execution capability, in our view. We downgrade the stock to Neutral with TP of INR1,145 (30x FY21E EPS).
Underlying
Thermax Ltd.

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.

Provider
Motilal Oswal
Motilal Oswal

​Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance. 

Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.

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