Thermax: Hold

Existing investors can continue to hold the Thermax stock, considering the company’s strong track record in the execution of projects and its ability to keep up order flows.

Despite the slowdown in the economy and a drying up of orders from large utilities, the company has managed to keep orders tricking in from other segments.

This improvement in order inflows in the first two quarters after a lull in the second half of 2011-12, coupled with the proxy play on the power sector (given the reform measures), has helped the stock. It has moved up by 51 per cent since the beginning of the year.

However, investors need not consider fresh exposures at this juncture. At the current market price of Rs 595, the stock trades at about 19.1 times its estimated earnings for FY14, in line with historical averages, leaving not much scope for upside.

Business

Thermax provides engineering solutions in the energy and environment space. Its business includes boilers and solutions in the areas of heating, cooling, chemicals, power generation, air pollution control and water treatment.

It has a market share of about 35 per cent in boilers, heaters and chemicals. The major industries served include power, steel, cement, and oil and gas.

It derives about three-fourths of its revenues from the energy segment and the rest from the environmental segment.

Prospects

The company’s order inflows, that had dwindled to about Rs 600-800 crore in the third and fourth quarters of last year, have bounced back in the first half of this year.

This is despite a tough economic environment. The first and second quarters saw order inflows of Rs 1,258 crore and Rs 1,162 crore respectively.

Thermax is confident of maintaining this run rate in the next two quarters as well. This implies that the company will end this year with a 10-15 per cent rise in order inflows over last year.

At a time when large utility orders are few and far between, Thermax expects to achieve this growth through a higher proportion of EPC (Engineering, Procurement and Construction) orders.

The company also expects acute power shortages and the cheaper price of captive power to drive its order inflows over the medium term.

Thermax has picked two orders amounting to 80 and 90 MW in the captive power segment in the first half of the year.

Earlier this month, the company bagged a Rs 503-crore order from a public sector company for setting up a captive power plant for its new steel plant in Central India. It has about 25 per cent market share in this segment.

While the management does not expect much from the ferrous metals sector, it has indicated a pick up in enquiries from the cement, food and textile sectors.

It has also had brisk enquires on the absorption chilling front from States such as Andhra Pradesh and Tamil Nadu.

A shortage of power in these States prompts industries to convert their electrical chilling to absorption chilling.

Besides, in the near term, expansion plans from refineries such as Reliance Industries and Kochi Refineries could help order inflows from the oil and gas sector.

Financials

For the quarter ended Sep 2012, Thermax’s net sales dropped by 8 per cent year-on-year to Rs 1,181 crore while net profit fell by 10.5 per cent to Rs 91 crore. Operating margins came in a 10.2 per cent vis-à-vis 10.8 per cent in the same quarter last year.

As at the end of the second quarter, the company’s order book stands at Rs 4,412 crore.

This works out to about 0.83 times its trailing 12 month sales. Though this is low, a tilt towards orders with short lead times means that order to revenue conversion would be faster.

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