Thermax (THMX.BO, Sell) Visibility on order book is a key concern – lGoldman Sachs,

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Thermax (THMX.BO, Sell)
Visibility on order book is a key concern – lower growth and current premium over Bharat Heavy
Electricals (BHEL) could lead to underperformance
 We reiterate our Sell rating on Thermax based on its weak order book and premium valuations. We lower our
12-month P/E-based target price to Rs504 (from Rs567) based on 13.5X P/E on average FY12E-FY13E EPS
(down from 15.7X earlier as we maintain a 10% discount to our target multiple on BHEL, which we lower to
15X from 17.5X). We make no change to our EPS estimates.
 Strong pick-up in order inflows in FY10 and 1QFY11, driven by an improvement in industrial capex, helped
improve the company’s revenue visibility. Reflecting this, the stock price rose 42% through CY2010, vs. a 17%
rise in the BSE Sensex.
 However, the lack of big-ticket order wins and industry-wide delay in the finalization of key orders in the
power segment over the past two quarters has led to a 43% decline in the stock price vs. a 21% decline in the
BSE Sensex in 2011 ytd.
 This slow order inflow over the past few quarters (a yoy decline for the past 4 quarters) has resulted in low
order book coverage (1.1X FY12E, the lowest in our coverage universe) reducing revenue growth visibility for
the next 12-18 months.
 The less-than-1-year execution cycle on smaller orders in Thermax’s base business implies that it is critical
for the company to maintain a strong order inflow trend in order to ensure revenue visibility.
 Structural concerns surrounding increasing competition for large-size EPC orders together with the near-term
risk of rising interest rates could delay industrial capex investment, a key growth driver for Thermax.
Valuation
 Thermax currently trades at a 12-month forward P/E of 13.3X – a 37% discount to its 5-year average 12-month
forward P/E of 21X. Themax’s current valuation adequately balances the company’s strong execution track
record with the near-term risks from order inflow delays, in our view.
Key upside risks
 (1) Improvement in IPP order inflows, leading to stronger-than-expected order inflows, and (2) stronger
tractions in the environment segment leading to better margins

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