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India Equity Research Reports, IPO and Stock News
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Growth concerns
ƒ Strong quarterly numbers while outlook decidedly weak
ƒ Penetrating utility business critical, captive power outlook weak
ƒ Checks indicate very few IPPs are planning sub 300MW projects
ƒ Management expects order pick-up in 2H12, critical for FY13
Strong 4Q; order outlook weak
TMX’s consolidated sales came in at
INR19.6b (up 53.0% y-y), 17% higher
than our estimate, aided by strong growth
in the energy segment. Order intake at
INR12.5b was weak (down 14% y-y) due
to continuing weakness in industrial capex
and the lack of large utility orders.
Standalone EBITDA margin at 9.7% was
lower than we expected, due to a 240bp
increase in RM costs.
Key takeaways from concall
Highlights from the conference call were:
1) delays in order finalisations with a likely
revival in 2HFY12; 2) a higher proportion
of EPC sales in the mix impacted EBITDA margin on a q-q basis, which
was offset by a reduction in staff expenses; 3) no impact yet on captive
power demand from coal shortages; and 4) power orders were at around
400MW in FY11, versus 630MW in FY10.
Low traction from utilities; weak captive power outlook
We raise two key concerns that were not fully addressed by management
on the call. First, we believe the long-term outlook for its bread and butter
captive power business (units of <300MW) is weak, given: 1) rationing of
coal to smaller power plants, 2) preference for larger supercritical sizes
by utilities, and 3) the option to buy power from power exchanges for nonsteel and non-cement industries. Second, TMX’s cautious and gradual
approach to penetrate the utilities business along with intensifying
competition from Cethar Vessels (not listed) and BGR Energy (BGRL IN)
imply that order growth will stay muted in FY12 (we forecast 14.4% y-y
growth). Thermax’s only order win in utilities (2X135MW) was from
Meenakshi Energy (not listed) in 2QFY10. Given the higher proportion of
private-sector IPPs in the pipeline (see Exhibit 9), TMX needs a partner
to supply turbine-generator to offer a complete BTG package to these
relatively inexperienced customers.
Valuation and view
TMX trades at 16x our FY12 EPS estimate vs BHEL (BHEL IN) at 15.4x
and BGR Energy (BGRL IN) at 8.5x. Our TP is based on the average of
1) our P/E based fair value estimate of INR614 on 16.0x FY12E EPS, and
2) DCF-based fair value of INR678 that captures the upside from the
supercritical foray beyond FY12. TMX needs to penetrate the large utility
grade boiler market, which could be key for the stock’s rerating. We
would revisit our view on the stock if the outlook for its end markets
improves and there is traction from its supercritical foray. Key downside
risks to our TP are: greater-than-expected price competition, lower-thanexpected order flow and higher-than-expected rise in raw material costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Growth concerns
ƒ Strong quarterly numbers while outlook decidedly weak
ƒ Penetrating utility business critical, captive power outlook weak
ƒ Checks indicate very few IPPs are planning sub 300MW projects
ƒ Management expects order pick-up in 2H12, critical for FY13
Strong 4Q; order outlook weak
TMX’s consolidated sales came in at
INR19.6b (up 53.0% y-y), 17% higher
than our estimate, aided by strong growth
in the energy segment. Order intake at
INR12.5b was weak (down 14% y-y) due
to continuing weakness in industrial capex
and the lack of large utility orders.
Standalone EBITDA margin at 9.7% was
lower than we expected, due to a 240bp
increase in RM costs.
Key takeaways from concall
Highlights from the conference call were:
1) delays in order finalisations with a likely
revival in 2HFY12; 2) a higher proportion
of EPC sales in the mix impacted EBITDA margin on a q-q basis, which
was offset by a reduction in staff expenses; 3) no impact yet on captive
power demand from coal shortages; and 4) power orders were at around
400MW in FY11, versus 630MW in FY10.
Low traction from utilities; weak captive power outlook
We raise two key concerns that were not fully addressed by management
on the call. First, we believe the long-term outlook for its bread and butter
captive power business (units of <300MW) is weak, given: 1) rationing of
coal to smaller power plants, 2) preference for larger supercritical sizes
by utilities, and 3) the option to buy power from power exchanges for nonsteel and non-cement industries. Second, TMX’s cautious and gradual
approach to penetrate the utilities business along with intensifying
competition from Cethar Vessels (not listed) and BGR Energy (BGRL IN)
imply that order growth will stay muted in FY12 (we forecast 14.4% y-y
growth). Thermax’s only order win in utilities (2X135MW) was from
Meenakshi Energy (not listed) in 2QFY10. Given the higher proportion of
private-sector IPPs in the pipeline (see Exhibit 9), TMX needs a partner
to supply turbine-generator to offer a complete BTG package to these
relatively inexperienced customers.
Valuation and view
TMX trades at 16x our FY12 EPS estimate vs BHEL (BHEL IN) at 15.4x
and BGR Energy (BGRL IN) at 8.5x. Our TP is based on the average of
1) our P/E based fair value estimate of INR614 on 16.0x FY12E EPS, and
2) DCF-based fair value of INR678 that captures the upside from the
supercritical foray beyond FY12. TMX needs to penetrate the large utility
grade boiler market, which could be key for the stock’s rerating. We
would revisit our view on the stock if the outlook for its end markets
improves and there is traction from its supercritical foray. Key downside
risks to our TP are: greater-than-expected price competition, lower-thanexpected order flow and higher-than-expected rise in raw material costs.
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