Thermaxt: Solid Q2 results – PAT up 65% YoY :: Citi

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Thermax (THMX.BO)
Alert: Solid Q2 results – PAT up 65% YoY
 Q2 PAT was up 65%YoY; 31% ahead of estimates — Profit growth was driven by
strong revenue growth (up 61% YoY; 31% ahead of CIRA expectations). Margins
remained largely flat. Tax rates at 32% were lower than our assumptions of 34%.
 Strong revenue growth across divisions … — Energy segment revenues grew by
72%YoY and Environment segment revenues grew by 51%.
 … but margins declined in environment segment — Margins declined by 118bps
in energy segment and remained largely flat in environment segment.
 OB up 44% YoY; 5% QoQ — Thermax orderbook was at Rs73bn, up 44% YoY and
5% sequentially.


Valuation
Our Rs787 target price is based on PE of 22x Sept11E. We believe that 1) the
structural change in the business, 2) the broader economic revival; 3) the strong
outlook (compared to a year ago) should drive a re-rating. Our target multiple is 1)
at a premium to Thermax's historical avg. PE (16x), given the strong outlook 2) at
a discount to BHEL (23x) despite Thermax's superior earnings outlook and RoE
(EPS CAGR of 37% vs 22% for BHEL, RoEs of 32-34% vs BHEL RoE's of 29-31%);
given BHEL's larger size and market share. 3) the target multiple is also at a
discount to ABB (24x) given ABB's superior earnings outlook (39% CAGR).
Risks
We rate Thermax shares Medium Risk. We believe this is appropriate given that
Thermax's business model is dependent on private sector capex. Key upside risks
to our target price include higher-than-expected order inflow, further pick-up in
private-sector capex and faster execution. Key downside risks that could impede
the stock from reaching our target price include a slow down in private sector
capex and slower-than-expected power capacity addition in India.