EUR 120.00 For Business Accounts Only

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).