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Thermax (TMX)
Industrials
Upgrade to BUY on core business traction; inflows reassuring. We upgrade the
stock to BUY based on strong core business traction and order inflow outlook which
support near-term growth estimates. Other highlights include (1) the company expects
to maintain margins and aims to maintain a balance between its EPC and products
businesses, (2) reports strong progress on B&W JV with a land deal signed and
management team in place and (3) scales up business in power sector with potential
build up in SPX JV.
Maintains inflow growth guidance; products lead 2QFY11 inflows indicating traction in core
business
Crompton has reported order inflows of about Rs13 bn in 2QFY11 (Rs10.5 bn energy and Rs2.5
bn environment) and Rs30 bn for 1HFY11 – relatively flat on a yoy basis. The management
continues to be confident of order inflows and maintained its guidance of a double digit order
inflow growth in FY2011E. Order inflows from the products segment overtook the EPC segment
inflows in the quarter. We believe this is positive as it reflects that the core business is very strong
and the company is not over-dependant on large orders.
Energy and environment segments to record strong growth—margins likely to sustain
The management expects strong growth in both the energy (led by power and steel sectors) as
well as environment (led by water) segments. The management expects to maintain margins
despite the increase in raw material cost in 2QFY11. The management agrees that margins in large
EPC orders are lower (led by higher proportion of purchased goods) than equipment orders, but a
balance between EPC and products segment revenues would help maintain margins at current
levels.
Other highlights (1) strong progress on B&W JV with land deal signed and a management team in
place; unperturbed by Reliance and Lanco orders and (2) scales up business in power sector with
potential business build up in SPX JV (key products: ESP, Regenerative air pre-heater).
Upgrade to BUY on core business traction and expected strong inflows and revenues
We have revised our earnings estimates to Rs31.5 and Rs42.3 from Rs29.5 and Rs39.7 for
FY2011E and FY2012E based on higher inflow estimates for the energy and environment
segments and slightly higher margin assumptions. We upgrade our rating to BUY (from ADD) with
a revised target price of Rs965 (from Rs865) based on (1) strong 2Q performance in 2Q; including
strong order inflows and outlook, (2) strong expansion of business opportunity, (3) extremely
strong balance sheet, negative working capital, among the strongest corporate governance and
(4) among the best positioned to benefit from growing capex environment.
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