Thermax: Retain REDUCE, TP of Rs550:: Kotak Sec,

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Thermax: Retain REDUCE, TP of Rs550 with marginal change in estimates
We have marginally changed estimates to earnings of Rs33 and Rs35 from Rs33.5 and Rs37
earlier based on assumption of flattish order inflows versus 10% growth earlier. Stock trades
at 14X FY2013E (versus target multiple of 16X) and 3.7X FY2012E P/B. There has been
evidence of stronger competition in (1) small IPPs (Cethar Vessels winning large orders in
that category), (2) other components such as waste heat recovery boilers etc. (Tecpro
Systems won orders from large cement companies), (3) supercritical opportunity where even
L&T has not won any incremental third party order in last one year and (4) early signs of
weakness in margins that is not fully priced-in (we build in only 50 bps decline). We revise
our target price on the company to Rs550 (from Rs650/share) based on revision in estimates
and change in valuation to 16X FY2013E EPS (previously 17.5X FY2013E EPS). We would
look for more valuation or business comfort before turning positive.

Key risks
Key risks to our estimates include—(1) lower-than-expected order inflows in a weak capex
investment cycle, (2) slower-than-expected execution of large orders, (3) margin and
working capital pressure as execution of large-sized orders ramp-up, and (4) delay in setting
up supercritical JV facility and winning large utility orders.
1QFY12 Results: Revenues outperform though sedate ordering, declining margins
worry