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Thermax 3QFY2013 performance highlights and results update

Contributed by Angel Broking

For 3QFY2013, Thermax’s top-line performance was below our estimates with revenue coming in at Rs.1,047cr, down 17.5% yoy. However, the company was still able to maintain double digit margins at 10.7% (flat yoy) on account of 124bp yoy expansion in Energy segment’s EBIT margins to 10.8% (partly due to fall in input cost). But the Environment segment’s margins disappointed, contracting by 291bp yoy to 10.1% (on account of low margin orders in air pollution control and water businesses).

Key highlights: The Energy segment witnessed a sharp decline in revenues by 19.5% yoy to Rs.799cr on account of weak execution (due to revenue deferrals by clients). The Environment segment also witnessed a 13.1% yoy decline in revenues to Rs.263cr. Order inflow for the quarter grew by ~96% yoy to Rs.1,454cr on a consolidated basis aided by a lower base and large EPC order worth Rs.503cr (to set up a captive power plant for a steel plant) won during the quarter. The company’s order book declined by 12% yoy to Rs.5190cr. The Management expects slowdown in ordering from the power sector to continue. However, the company is getting enquiries from cement, real-estate and oil & gas sectors. Although the Management is optimistic of sustaining the order intake, it remains cautious on whether these enquires will result in orders.

Outlook and valuation: Thermax remains one of the most expensive stocks in our coverage universe trading at 19.2x FY2014 EPS estimates. Amid a weakening order inflow and working capital outlook, we expect Thermax’s return ratios to continue to deteriorate. We also expect Thermax- BW JV to weigh on the consolidated profits going forward as its utilization remains muted. Hence, we maintain our Neutral rating on the stock.