>THERMAX (EDELWEISS)

MARKED IMPROVEMENT

Energy segment boosts revenue growth; margins above estimates
Thermax’s (TMX) Q4FY09 results were significantly above our expectations, both on revenue growth and profitability fronts. For the quarter, standalone revenues grew 2.8% Y-o-Y to INR 9.5 bn, driven by higher-than-expected growth in the energy segment. Sequentially, revenues grew 19.3% in Q4FY09, a positive surprise after a 1.1% Q-o-Q dip in Q3FY09. Consolidated revenues declined marginally, by 0.4% Y-o- Y, to INR 10.1 bn in the quarter. For Q4FY09, standalone EBITDA grew 5% Y-o-Y to INR 1.3 bn. Standalone EBITDA margins were up ~30bps Y-o-Y to 14.1%. In Q4FY09, TMX posted a forex loss (included other operating expenses) of ~INR 259 mn, excluding which, EBITDA margins stand at ~16.8%. For the quarter, standalone PAT grew 17.1% Y-o-Y to ~INR 943 mn. While depreciation expenses increased 64.5% Y-o-Y to INR 100 mn, effective tax rate was lower ~1,000bps Y-o-Y at 30.3%. Standalone net margin for the quarter was up 120bps Y-o-Y to 9.9%. Consolidated PAT in the quarter grew 27.3%.

Strong order book; intake likely to pick up post H2FY10
TMX’s consolidated order book (adjusted for renegotiated orders) at FY09 end was at INR 30.8 bn. Order intake during the quarter was ~INR 5.8 bn. The scope of a few of TMX’s projects was revised, leading to contraction in the company’s order book. Amongst major orders that were revised, Brahmani Steel’s order value now stands at INR 3 bn (~INR 4.5 bn earlier) and that of Essar at INR 3.8 bn (INR 8 bn earlier). Management expects order accretion to pick up H2FY10 onwards.

Outlook and valuations
Improved visibility; maintain ‘ACCUMULATE’ We are revising up our estimates for FY10 and FY11 for the company on the back of increase in order accretion assumptions for FY10. In spite of the upwards revision we are still projecting a 7% Y-o-Y decline in order accretion in FY10. We have increased our execution period assumptions for the energy business by 30% from prior estimates. Our standalone revenues for FY10E and FY11E are now higher by 9.6% and 16%, respectively, from prior estimates. On the margins front, we now expect a ~20bps Y-o-Y decline at the EBITDA level to 12.5%, compared to earlier expected decline of ~70bps Y-o-Y. Hence, our standalone EPS estimates are higher by 20.2% and 23.1% for FY10 and FY11 at INR 24.1 and INR 29.3, respectively. Subsidiaries contributed INR 0.25 to consolidated EPS in FY09. We believe, if TMX bags a few large orders in the utility segment in FY10, its order backlog at FY10 end could be substantially higher than expectations, leading to higher-than-expected growth in FY11. The stock is trading at a P/E of 16.2x and 13.3x for FY10E and FY11E, respectively. Ex-cash, the stock is trading at a P/E of 15.3x and 11.7x FY10E and FY11E, respectively. We maintain our ‘ACCUMULATE’ recommendation on the stock.

Segmental performance
Revenues from the energy business grew 5.5% and those from the environment business declined 7.4%, Y-o-Y during the quarter. However, margins in the environment segment improved significantly by 640bps Y-o-Y. Management stated that the rise was a one off phenomenon and not sustainable. Further, the energy segment’s margins declined 170bps
Y-o-Y to 13.9%.

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