Thermax - Cautious Outlook; visit note; Hold ::Edelweiss PDF link

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Thermax (TMX IN, INR 537, Hold)

We recently met the top management of Thermax (TMX) to understand its industry outlook on both captive power & large utility equipment businesses. Management expects revival across business segments over the next 12-15 months, led by expected cut in interest rates, and better coal and land availability. Overall growth rate could however pick up gradually, it believes. We maintain ‘HOLD’ on TMX with a TP of INR 462.

Heating & cooling up 8-9%; market share intact

TMX’s heating and cooling (H&C) segment, comprising 30% of sales, has grown 8-9% for 9mFY12, driven largely by stable industrial ordering especially from food processing and pharma industries. TMX commands 30% market share in heating, while it has more than 80% market share in the cooling and chillers business, given strong customer references, robust product portfolio and healthy execution track record. Its heating business is likely to gain further momentum; given an expected rate cut going ahead.

Ordering slides owing to intensifying competition

TMX has seen a sharp decline in ordering, given a lull in large power plant orders in the past 6-8 months due to various macro-economic challenges and coal and land availability issues. Boilers segment for 9mFY12 has seen a major slowdown in ordering and has had an average order inflow run rate of INR 5 bn/quarterly on a steady state basis (ex-large plants). This further slowed down to < 1 bn INR in Q3FY12. Management does not expect to attain the normalized run rate of 5 bn INR in the next 2-3 quarters, given expectation of a gradual uptick and higher competition from the likes of BHEL in the ‘heat recovery & steam generation’ and utility segments.

Outlook and valuations: Cautious; maintain ‘HOLD’

While we like TMX’s diversified business model with strong internal check mechanism w.r.t. cash flow & client appraisal system, we believe the gradual uptick in captive & power equipment market and sharp run-up in recent times limit upsides in the stock. We, therefore, maintain ‘HOLD/Sector Performer’ rating on TMX. The stock on a consol basis trades at a P/E of 17.0x & 17.5x its FY12E &FY13E earnings respectively.

Thermax - Cautious Outlook; visit note; Hold