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Thermax (THMX.BO)
Challenging Macro, Downgrade to Hold/Low Risk
Strong quarter, challenging outlook – Thermax reported Q3FY11 PAT of Rs1bn-
up 77% YoY, 16% ahead of CIRA est. However, consolidated order inflows are
down 20% YoY and 12% QoQ. Management commentary suggests that clients are
becoming more cautious, and are re-calibrating their investment decisions in the
face of rising costs and interest rates. While industrial capex still seems strong (in
cement, steel, oil-based industries), clients are delaying decision making.
Where are the risks? – 1) Order inflows - FY11E order inflow to be flat YoY –
Rising input costs and interest rates affect project viability and may push back
investments by developers. While Thermax mentioned that Q4FY11 inflows will be
better than Q3FY11, given the adverse macro they may not be able to attain
double-digit growth as earlier expected; 2) Increasing competition – Recent
order wins by the Chinese suppliers (helped by funding from Chinese banks to
developers) underscores the rising competitive intensity in the boiler market.
Why not a Sell? 1) Broad-based business supports growth – Despite our
earnings cut, we still expect Thermax EPS to grow by 15% over FY11-13E and
RoEs of 27%-32%. 2) Clean balance sheet, strong management track record -
Thermax has no debt on its books, and has cash reserves of Rs6.5bn. Thermax’
management has managed downturns well in terms of cost control etc, and
expanded margins by 300bps in FY10 despite a decline in revenues.
We cut estimates, TP, Downgrade stock to Hold- We cut estimates by 12%-
15% over FY12E/13E on the back of lower order inflow assumptions. We now
value Thermax on a PE of 18x Jun-12E (23x earlier) at a 10% disc to BHEL, given
that it has a higher % of short-cycle orders which could be at risk in an adverse
macro. We downgrade Thermax to a Hold/Low Risk. The stock, down 28% from
the recent high, factors in some of these negatives and offers limited upside from
current levels. We may get more constructive at 10%-15% lower levels from here.
Strong Q3FY11 results, but we are worried
Q3FY11 PAT of Rs1bn- up 77%YoY, 16% ahead of CIRA est. – Thermax
reported strong revenue growth of 66% YoY, which was 13% ahead of CIRA
expectations. Margins at 11.8% were in line with our estimates. An effective
tax rate of 32% vs CIRA estimate of 34% also boosted profit growth.
Revenue growth was broad-based – Both the energy and environment
segment reported strong revenue growth. The energy segment revenues
were up 77% YoY and the environment segment revenues grew by 45%
YoY. While the energy segment margins remained flat, they declined by
142bps in the environment segment.
Consolidated order inflows are down 20% YoY and 12% QoQ. The
Consolidated Order book is largely flat over Q2FY11
Update on Order inflows
Thermax acknowledged that the Q3FY11E order inflow run-rate was lower than
expected but mentioned that it was an aberration and the company was
confident that the run-rate in Q4FY11 should be better than Q3FY11. However,
given a toughening environment, the company mentioned that, unless there
was a windfall order, it may not be able to attain double-digit growth as earlier
expected, and would target matching last year’s inflows.
Macro Environment – Cautiously optimistic
Thermax mentioned that the macro environment has turned, and rising inflation
and interest rates are making clients re-calibrate their investment decisions.
While demand for products business remains good – indicating still-strong
industrial capex, Thermax is seeing clients delay decision making: for example,
in its products business, where typical order finalization would happen within
three months, it is now taking six months on an average.
Bidding for Subcritical orders
While Thermax will continue to bid for sub-critical orders, it expects hardening
interest rates to impact viability of smaller IPP projects for developers and those
projects may get delayed. It is already seeing delays in the finalization of some
of these projects. The company believes that its diversified portfolio will help it
to tide over any such shortfalls in order inflows.
International markets looking up
Thermax is seeing a pick-up in inquires in Europe (its Danstoker subsidiary is
seeing a pick-up), South East Asia, Middle East and Africa.
Cement, Steel sectors leading investments
Thermax is seeing a good amount of activity in the cement, steel, and food
processing segments. According to the company, most secondary steel
producers have finalized their capex plans and are giving out orders for the
same. It is also seeing hydrocarbon-based industries undertaking expansion
plans. The company sees slack in the hospitality sector and in spending by
government agencies.
Update on Supercritical JV with Babcock and Wilcox
The plant construction has started. Targeted date of commissioning of the plant
is September 2012. The JV has placed orders for major machinery etc. The JV
has submitted the documents required for pre-qualification for NTPC
(800MWx9) tenders. However, they are still evaluating the commercial
requirements of the tender before deciding whether to finally bid for these
projects. Thermax will also look to bid for private sector IPPs and will start
bidding from Q1FY12.
Rising input costs impact on margins?
According to the management, Thermax takes forward covers for a majority of
raw material costs (especially high-quality steel) as soon as orders are
finalized. For other bought-out items the company takes a cover within 2-3
months. Only conventional items, like normal steel products (HR Coil/ sheets),
are vulnerable to fluctuations. This forms for about ~15-18% of the orderbook. If
the steel prices continue to harden Thermax expects a 50-100bps impact on
margins.
Cutting estimates, TP, Downgrade to Hold/ Low risk
We are cutting Thermax EPS estimates by 12%-15% over FY12-13E on the
back of 1) lower order inflow assumptions of 8% CAGR over FY10-13E vs 19%
earlier and 2) a small cut in margin assumptions given rising input costs.
We downgrade Thermax to a Hold/Low Risk from Buy Low/ Risk earlier due to:
1) Possibility of pain in the business in near term – Rising input costs
and interest rates will put downward pressure on project IRRs which
may push back investments by developers which will impact order
inflows for the sector.
2) Increasing competition – Recent order wins by the Chinese
equipment suppliers (helped by funding extended by Chinese banks to
developers) underscores the rising competitive intensity in the boiler
market.
We now value Thermax on a PE of 18x Jun-12E (23x FY12E earlier), at a
discount to BHEL given that it has a higher % of short-cycle orders which could
be at risk in an adverse macro environment.
We believe the stock price decline of 28% from recent highs factors in some of
these negatives and offers limited upside from current levels. We may get more
constructive on the stock at levels 10%-15% lower than here.
Thermax
Valuation
Our Rs698 target price is based on a P/E of 18x June 12E. While we believe
that a structural change in the company’s business should drive a re-rating of
the PE multiple above the historical average of 16x, we value Thermax on a
discount of 10% to BHEL (20x) given that it has a higher % of short-cycle
orders which could be at risk in an adverse macro environment.
Risks
We rate Thermax shares Low Risk based on our quantitative risk-rating system,
which tracks 260-day historical share price volatility. Key downside risks that
could impede the stock from reaching our target price include a slowdown in
private-sector capex and slower-than-expected power capacity expansion in
India.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Thermax (THMX.BO)
Challenging Macro, Downgrade to Hold/Low Risk
Strong quarter, challenging outlook – Thermax reported Q3FY11 PAT of Rs1bn-
up 77% YoY, 16% ahead of CIRA est. However, consolidated order inflows are
down 20% YoY and 12% QoQ. Management commentary suggests that clients are
becoming more cautious, and are re-calibrating their investment decisions in the
face of rising costs and interest rates. While industrial capex still seems strong (in
cement, steel, oil-based industries), clients are delaying decision making.
Where are the risks? – 1) Order inflows - FY11E order inflow to be flat YoY –
Rising input costs and interest rates affect project viability and may push back
investments by developers. While Thermax mentioned that Q4FY11 inflows will be
better than Q3FY11, given the adverse macro they may not be able to attain
double-digit growth as earlier expected; 2) Increasing competition – Recent
order wins by the Chinese suppliers (helped by funding from Chinese banks to
developers) underscores the rising competitive intensity in the boiler market.
Why not a Sell? 1) Broad-based business supports growth – Despite our
earnings cut, we still expect Thermax EPS to grow by 15% over FY11-13E and
RoEs of 27%-32%. 2) Clean balance sheet, strong management track record -
Thermax has no debt on its books, and has cash reserves of Rs6.5bn. Thermax’
management has managed downturns well in terms of cost control etc, and
expanded margins by 300bps in FY10 despite a decline in revenues.
We cut estimates, TP, Downgrade stock to Hold- We cut estimates by 12%-
15% over FY12E/13E on the back of lower order inflow assumptions. We now
value Thermax on a PE of 18x Jun-12E (23x earlier) at a 10% disc to BHEL, given
that it has a higher % of short-cycle orders which could be at risk in an adverse
macro. We downgrade Thermax to a Hold/Low Risk. The stock, down 28% from
the recent high, factors in some of these negatives and offers limited upside from
current levels. We may get more constructive at 10%-15% lower levels from here.
Strong Q3FY11 results, but we are worried
Q3FY11 PAT of Rs1bn- up 77%YoY, 16% ahead of CIRA est. – Thermax
reported strong revenue growth of 66% YoY, which was 13% ahead of CIRA
expectations. Margins at 11.8% were in line with our estimates. An effective
tax rate of 32% vs CIRA estimate of 34% also boosted profit growth.
Revenue growth was broad-based – Both the energy and environment
segment reported strong revenue growth. The energy segment revenues
were up 77% YoY and the environment segment revenues grew by 45%
YoY. While the energy segment margins remained flat, they declined by
142bps in the environment segment.
Consolidated order inflows are down 20% YoY and 12% QoQ. The
Consolidated Order book is largely flat over Q2FY11
Update on Order inflows
Thermax acknowledged that the Q3FY11E order inflow run-rate was lower than
expected but mentioned that it was an aberration and the company was
confident that the run-rate in Q4FY11 should be better than Q3FY11. However,
given a toughening environment, the company mentioned that, unless there
was a windfall order, it may not be able to attain double-digit growth as earlier
expected, and would target matching last year’s inflows.
Macro Environment – Cautiously optimistic
Thermax mentioned that the macro environment has turned, and rising inflation
and interest rates are making clients re-calibrate their investment decisions.
While demand for products business remains good – indicating still-strong
industrial capex, Thermax is seeing clients delay decision making: for example,
in its products business, where typical order finalization would happen within
three months, it is now taking six months on an average.
Bidding for Subcritical orders
While Thermax will continue to bid for sub-critical orders, it expects hardening
interest rates to impact viability of smaller IPP projects for developers and those
projects may get delayed. It is already seeing delays in the finalization of some
of these projects. The company believes that its diversified portfolio will help it
to tide over any such shortfalls in order inflows.
International markets looking up
Thermax is seeing a pick-up in inquires in Europe (its Danstoker subsidiary is
seeing a pick-up), South East Asia, Middle East and Africa.
Cement, Steel sectors leading investments
Thermax is seeing a good amount of activity in the cement, steel, and food
processing segments. According to the company, most secondary steel
producers have finalized their capex plans and are giving out orders for the
same. It is also seeing hydrocarbon-based industries undertaking expansion
plans. The company sees slack in the hospitality sector and in spending by
government agencies.
Update on Supercritical JV with Babcock and Wilcox
The plant construction has started. Targeted date of commissioning of the plant
is September 2012. The JV has placed orders for major machinery etc. The JV
has submitted the documents required for pre-qualification for NTPC
(800MWx9) tenders. However, they are still evaluating the commercial
requirements of the tender before deciding whether to finally bid for these
projects. Thermax will also look to bid for private sector IPPs and will start
bidding from Q1FY12.
Rising input costs impact on margins?
According to the management, Thermax takes forward covers for a majority of
raw material costs (especially high-quality steel) as soon as orders are
finalized. For other bought-out items the company takes a cover within 2-3
months. Only conventional items, like normal steel products (HR Coil/ sheets),
are vulnerable to fluctuations. This forms for about ~15-18% of the orderbook. If
the steel prices continue to harden Thermax expects a 50-100bps impact on
margins.
Cutting estimates, TP, Downgrade to Hold/ Low risk
We are cutting Thermax EPS estimates by 12%-15% over FY12-13E on the
back of 1) lower order inflow assumptions of 8% CAGR over FY10-13E vs 19%
earlier and 2) a small cut in margin assumptions given rising input costs.
We downgrade Thermax to a Hold/Low Risk from Buy Low/ Risk earlier due to:
1) Possibility of pain in the business in near term – Rising input costs
and interest rates will put downward pressure on project IRRs which
may push back investments by developers which will impact order
inflows for the sector.
2) Increasing competition – Recent order wins by the Chinese
equipment suppliers (helped by funding extended by Chinese banks to
developers) underscores the rising competitive intensity in the boiler
market.
We now value Thermax on a PE of 18x Jun-12E (23x FY12E earlier), at a
discount to BHEL given that it has a higher % of short-cycle orders which could
be at risk in an adverse macro environment.
We believe the stock price decline of 28% from recent highs factors in some of
these negatives and offers limited upside from current levels. We may get more
constructive on the stock at levels 10%-15% lower than here.
Thermax
Valuation
Our Rs698 target price is based on a P/E of 18x June 12E. While we believe
that a structural change in the company’s business should drive a re-rating of
the PE multiple above the historical average of 16x, we value Thermax on a
discount of 10% to BHEL (20x) given that it has a higher % of short-cycle
orders which could be at risk in an adverse macro environment.
Risks
We rate Thermax shares Low Risk based on our quantitative risk-rating system,
which tracks 260-day historical share price volatility. Key downside risks that
could impede the stock from reaching our target price include a slowdown in
private-sector capex and slower-than-expected power capacity expansion in
India.
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