Goldman Sachs, -- Sell Thermax (THMX.BO) Return Potential: (4%)

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Sell
Thermax (THMX.BO)
Return Potential:  (4%)   Equity Research
Risk–reward unfavorable amid slow order inflow; downgrade to Sell
Source of opportunity
We downgrade Thermax to Sell from Neutral as slow order inflow over the
last few quarters (yoy decline for past 4 quarters) has resulted in low order
book coverage (1.1X FY12, lowest in our coverage) reducing revenue
growth visibility for the next 12-18 months. We believe the slowing capex
cycle (due to both structural and cyclical issues) could likely slow the order
inflow and revenue growth trajectory for Thermax further. This coupled
with rich valuations (16.5X 12-m fwd P/E vs. BHEL (Rs 1909, Buy) trading at
14.2X) leaves limited room for any upside on the stock, in our view.
Catalyst
Continued pressure on quarterly order inflows and slowing yoy revenue
growth trajectory.
Valuation
We expect EPS CAGR of 10% between FY11-13E vs. 30% in FY06-11 as
weak order book coverage is coupled with a lack of visibility on order
inflows, hence resulting in muted revenue growth for the company. As a
result, we take down FY12-14E revenue estimates by up to 12% and
consequently lower EPS by 4-18%. Our revised 12m TP of Rs 567 (from Rs
712 earlier) is based on 15.7X P/E (at a 10% discount to the target multiple
for BHEL).
Thermax trades at demanding valuations - 12-m fwd P/E of 16.5X which is
at a 19% premium to BHEL (larger order book coverage, further in
indigenization of forthcoming technology) vs. 5-yr historical discount of
5%. Given this unfavorable risk-reward we downgrade the stock to Sell.
Key risks
(1) Sooner than expected pick up in capex cycle, (2) lower interest rates.
 
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Coverage View:  Neutral