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Recommendations India

Thermax 3QFY2014 performance highlights and results update

January 24, 2014, Friday, 04:42 GMT | 23:42 EST | 09:12 IST | 11:42 SGT
Contributed by Angel Broking

For 3QFY2014, Thermax reported a 3.1% yoy decline in its top-line to Rs.1,014cr. This was on account of a 4.0% yoy decline in the Energy segment’s revenue to Rs.767cr and 3.4% yoy decline in the Environment segment’s revenue to Rs.254cr. On the operating front, the OPM contracted by 171bp yoy to 9.0%, mainly due to a sharp contraction in the Environment segment’s margins by 776bp yoy to 2.3%, which is primarily due to cost overruns in the Water business. Consequently, the profit declined by 12.5% yoy to Rs.67cr.
Subsidiaries’ performance continues to be a mixed bag: Thermax’s boiler JV continues to post losses (Rs.12cr in 3QFY2014). Considering lack of visibility of large orders from the power sector, especially from private players, the JV will continue to make losses. Thermax has transferred some portion of its Reliance’s Rs.1,700cr refinery order to the JV to utilize the idle facility. The company’sDenmark subsidiary continues to perform well while the Chinese subsidiary is close to cash breakeven. However, Thermax Instrumentation is expected to continue to make losses, ie till execution of some of its difficult projects remains pending. The company may also incur a loss to the tune of Rs.50cr due to Gujrat HC order to shut down its unit at Adani SEZ over environmental concerns.
Order intake and backlog: The company reported a 4% yoy growth in order inflow to Rs.1,514cr, on a consolidated basis, on back of two major orders from the refinery sector. Other sectors such as food processing, chemicals, sugar and metals also contributed to the healthy order inflow. Consequently, the consolidated order backlog is up 28% yoy to Rs.6,645cr, implying an order backlog of 1.5x its trailing 4-quarters revenue. Although the Management does not expect any major power capex, especially from private players, some PSU companies such as NTPC might still finalize orders. The Management expects a revival in the industry’s capex only after the national elections.
Outlook and valuation: Thermax currently trades at 20.5x FY2015 EPS estimates. However, we believe the valuations are a tad expensive, considering that return ratios are expected to remain subdued (amid dearth of large orders). Further, we expect the Thermax-BW JV to continue to weigh on the consolidated profits as its utilization remains muted. Hence, we maintain our Neutral rating on the stock.