>Thermax (CITI)

Outlook Remains Challenging. Cutting TP to Rs211

# Better than expected results - Standalone PAT up 9% YoY – Revenues declined
by 6%YoY, led by a decline of 9%YoY in the energy segment. Environment
segment grew by 14%YoY. Margins (adjusted for forex loss) have improved by
137bps, driven by cost cutting initiatives. Order book of Rs41bn is up 40%YoY;
however, the pace of order book growth has moderated.

# Pushback in investments to hurt order inflows – Management suggested there
is "substantial resistance" from clients to finalize orders, especially large sized
projects. Some clients have cancelled/slowed execution. According to
Thermax, cement and metals sector capex is expected to slow down while the
power sector will continue to invest, albeit at a lower level than before.

# But there are some positives – 1) While risks to order inflows remain, we
believe increased power sector exposure should help provide some support to
growth. 2) Mgmt has been ahead of the curve and seems geared to handle the
downturn; ~293bps margin improvement for 9MFY09 is commendable, esp.
since it was in the back-drop of rising input costs & no pass through clauses.

# The company has no debt and one of the highest RoEs in the sector.
 Cutting ests by 23%-31% for FY10-11E, TP to Rs211. Maintain Buy – We cut
our rev assumptions to factor in moderating growth trajectory. We cut our TP to
Rs211 (from Rs480) based on 8x FY10E (15x Dec09E earlier). We value
Thermax at 50% discount to BHEL given its lower visibility and earnings
growth. Historically Thermax has traded on par with BHEL, but in recent past,
has been trading at widening discount. We raise our risk rating to Medium from
Low reflecting the difficult environment for private sector capex.

To see full report: Thermax