Thermax - Strong performance but not without worries:: Kotak Sec

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Thermax (TMX)
Industrials
Strong performance but not without worries. 2Q results highlight: (1) Strong
revenue growth likely on execution pick-up of large orders and favorable base effect,
(2) in-line EBITDA margins but supported by operating leverage and large operational
other income; contribution margin declines sharply by 500 bps, (3) strong growth in
both segments but the energy segment margin decline (170 bps) is a worry and (4)
order activity is just about keeping pace—stronger inflows are necessary to maintain
visibility.


Strong revenue growth ahead of estimates; margins worry as contribution margin decline 500 bps
Thermax reported very strong revenues of Rs10.9 bn, up 60% yoy and significantly ahead (18.5%)
of our estimates likely led by a pick-up in execution of certain large orders and also aided by low
base effect (revenues had recorded a 15% yoy decline in 1HFY10). EBITDA margin at 11.8% was
broadly in line with our estimate. However, contribution margin recorded a sharp (500 bps) yoy
decline. Margins for the quarter were likely supported by operating leverage (on the back of
strong revenue growth) and high operational other income (of Rs438 mn versus Rs125 mn in
2QFY10, Rs110 mn in 1QFY11). Thermax reported a net PAT of Rs895 mn, up 65% yoy from
Rs541 mn in 2QFY10 and 27% ahead of our estimate of Rs703 mn.
Both segments record strong revenue growth but decline in energy segment margins a worry
Both the energy as well as environment segment recorded very strong yoy revenue growth of 71%
and 51% yoy, respectively. However, the 160 bps yoy (100 bps qoq) decline in energy segment
EBIT margins is a worry. The margin decline was potentially led by higher raw material costs as well
as slightly lower margins on execution in large projects. The environment segment reported EBIT
margin of 12.4%, marginally down by 40 bps on yoy basis.
Order activity just about keeps pace; would require stronger order booking to maintain visibility
The reported order backlog of Rs66 bn at end-2QFY11 (up 43.4% yoy) implies order inflows of
about Rs13 bn in 2QFY11, down about 35% on a yoy basis. However, we note that 2QFY10 order
inflows included a single large order worth Rs10 bn (Meenakshi order). For 1HFY11 order inflows
were at about Rs31 bn, relatively flat versus last year. We believe that Thermax would require
much stronger order inflows to maintain growth visibility given the strong scale-up in revenues.