Buy Thermax- Strong 3Q but moderating expectations : Credit Suisse

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Thermax--------------------------------------------------------------------------Maintain OUTPERFORM
Strong 3Q but moderating expectations to reflect weaker power sector ordering


● December quarter numbers were strong with over 66% growth in
sales and 77% growth in PAT. Management, however, highlighted
that rising interest rates and inflation are concerns, and that lead
time between enquiry and order finalisations are extending. We
lower our order inflow estimates; revise our EPS estimates by
+3% to -16%.
● As far as the current industrial ordering environment is concerned,
management echoed a positive tone, suggesting that steel,
cement, food processing sectors were strong in terms of order
activity while hospitals/retail malls were weak.
● On subcritical power projects, management highlighted that a
potential contract is still under negotiation. On the supercritical
front, management expects to get pre-qualified for NTPC (9X800
MW) tender, although it is unclear if it would bid for the project.
● Thermax is still in a formative stage of becoming a relevant power
plant equipment player, and given its low base and strong balance
sheet, we remain positive on the stock. We maintain our
OUTPERFORM and reduce target price to Rs810 (from Rs940).
Positive on industrial capex
Management highlighted that steel , cement , food processing sectors
remain strong in terms of order activity. Thermax won two orders from
UltraTech cement and one from Bhushan Steel recently. Segments
that are weak include hospital and retail. For subcritical projects,
management highlighted some delays in finalisation of projects.
Management was of the view that rising interest rates could impact
project finalisations/financial closures for smaller-size IPP projects.
Progress on supercritical bids
Management highlighted that it intends to get pre-qualified for the
NTPC 9X800MW tender (1H CY11). Management clarified that the
street’s concerns about Thermax not bidding for the contract due to
issues with certain liability clauses in the tenders are not correct. The
lack of enthusiasm from management in bidding may be considered
negative by investors hoping for a win in supercritical projects this
year (although we do not value the supercritical business currently);
however, management highlighted that it would be studying all the
contractual risks before going  ahead for price bid submission
(Assuming they get qualified – which they should , in our view).
Management highlighted that the company’s manufacturing facility for
supercritical projects would  commence only from September 2012
(machinery has been ordered) and given 9-12 months’ lead time
required for commencement of manufacturing of pressure parts,
management is of the view that  the company would be a serious
bidder for supercritical projects only by September 2011.
Demand for small-size captive power to continue
While the pace of commissioning of power capacities is expected to
increase over the next few years, there was a general concern that
demand for captive power plants might decrease. Management,
however, highlighted that in certain industries, such as cement,
reliability of power is essential for continuity of process; hence, captive
power becomes important. Even in the steel sector, conversion of
waste gases into power will continue to be a key requirement. (size of
such plants are small ~2, 5 MW each).

Expect modest growth in order inflows for FY11
Management highlighted that its prior  view of double-digit growth in
order inflows in FY11 was dependant on order wins from the LPP
(large power plant) segment. Management, however, is of the view
that one of the potential wins this year in the LPP segment is still
under negotiation and in the absence of clarity on the timing of the
order win, we are taking a more conservative view on FY11 inflows.
We revise down our FY11-13E order inflows by 21-23%. Also, we
revise down our target price, based on DCF (assuming WACC of
13.5%, terminal growth rate of 5%, terminal year revenue growth of
15% and terminal year EBITDA margin of 11% and terminal year:
March 2015) to Rs810 (from Rs940). Thermax remains our only
OUTPERFORM-rated stock in the power generation sector