Thermax (2QFY15) : Expensive valuations limit upside. Maintain NEUTRAL :: HDFC Securities

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Expensive valuations limit upside
Thermax’s 2QFY15 PAT of Rs 860mn was ahead of
our estimate, driven by higher than expected other
income. Operationally, results were in line. Order
inflow of Rs 10.8bn (+42% YoY) was also in line with
our estimate. Standalone order backlog declined
5.5% YoY to Rs 50bn.
After 10 quarters of decline, revenues grew 14% YoY
in Q2, aided by execution of order from Reliance
industries. However, domestic order inflows are yet
to pick up in a meaningful way and management
expects improved traction only from FY16 onwards.
At 24x FY16E EPS, a sharp recovery in prospects
followed by sustained growth thereafter is already
built in. We increase our TP to Rs 951/sh (from 871),
as we roll forward to Mar-16. Retain NEUTRAL.
Positives like strong balance sheet, 14%+ RoE (even
in down cycle) and solid execution track record are
negated by the high valuation.
 Other income of Rs 232mn was aided by interest on tax
refund of Rs 80mn and forex gain of Rs 55mn. EBITDA
margin (10.3%, +129bps YoY) and revenue growth
(+14% YoY) were broadly in line with estimates.
 Standalone order inflow was Rs 10.8bn (+42% YoY,
+65% QoQ). Consolidated order inflow for the quarter
was Rs 16bn, aided by an international order of Rs
3.4bn for the TBW JV. Export orders contributed 52%
to standalone inflows for 2QFY15. We model
standalone order inflow of Rs 58/70/84bn in
FY15/FY16/17E.
 Management mentioned that domestic order inflow
has shown no signs of pickup as yet. The company
expects a revival in inflows only in FY16. Competitive
intensity is high but stable across business segments.
Power generation capex outlook remains weak.
 We like the company’s strong balance sheet and solid
execution track record, however high valuation (24x
FY16E EPS) caps upside. Retain NEUTRAL with a Mar-
16 TP of Rs 951/sh based on 20x FY17E EPS.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3009609