THERMAX Positive execution surprise; encouraging near term outlook :: Edelweiss

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Thermax beats the street with a strong execution growth, leading to a 61% YoY
revenue growth for Q2FY11, while for H1FY11 it was a growth of 54%. This was on
the back of large value executions in the energy segment. New orders for Q2 were
down 32% YoY to INR 14 bn and were up 11% YoY for H1FY11 to INR 34.4 bn, due
to high base last year in Q2. Management sounded positive regarding the new order
inquiries in both energy and environment segment and expect a good ordering over
the next few quarters.
􀂃 Healthy execution drives strong bottom-line
Led by big ticket EPC executions, Thermax surprised positively with a 61% YoY
growth for Q2FY11, which also led to a strong 65% YoY PAT growth. While
EBIDTA margins remained stable at 11.8% (supported by higher other operating
income), lower depreciation and lower tax rate, also contributed to the bottomline
growth.
􀂃 Group level order book at INR 72.8; encouraging order inquiries
Thermax reported a 44% YoY growth in outstanding order book to INR 72.8 bn
as of September, 2010, of which 86% comes from energy segment. While lack of
large ticket orders during Q2FY11 led to a sharp 32% YoY decline to INR 14.1 bn
(group level), of which around 80% is from energy segment and balance from
environment segment. Management sounded positive regarding the near term
ordering outlook and is currently in negotiation stage for certain large EPC
orders. Also, thermax is positive about the ESP (Electrostatic precipitators)
business and is hopeful of bagging business through its JV with SPX in the near
term. Apart from this, management also sounded hopeful about gas based
combined cycle heat recovery steam generation package business for the
medium sized gas plants, given an increased traction in this segment in the next
few years.

􀂃 Outlook and valuation: Strong quarter; maintain ‘BUY’
While the current order book imparts strong near term revenue growth visibility,
we expect Thermax to see a strong new order growth over the next 2-3 quarters
in the energy segment, which could lead to a strong improvement in the book to
bill ratio. We maintain our BUY/SO rating for the stock, which is currently
trading at a PE of 26.5x & 20.6x on a consolidated basis for FY11E & FY12E
earnings, respectively. We maintain our ‘BUY/SO’ recommendation.