>THERMAX (CITI)

Challenging FY10E; Expensive Valuations; Downgrade to Sell

■ Raising target, but downgrading to Sell — We increase our target to Rs414 (from Rs211), based on a P/E of 16x Sept 10E (vs. 8x FY10E earlier) – a 27% discount to BHEL given lower visibility into revenues. Thermax, up ~134% YTD, is at a P/E of 19x FY10E, factoring in a broader economic revival. We believe FY10E could remain challenging and downgrade the stock from Buy to Sell.

■1Q FY10 revenues down 25% yoy; PAT declines 27% yoy, worse than expected — The revenue decline was due to lower order intake in 3Q FY09. Margin improvement, driven by cost-cutting initiatives, was a positive surprise and commendable given the revenue decline. Thermax’s order book at Rs32bn is up 22% yoy and 11.4% qoq – positive as a slowdown in orders was an overhang on the stock.

■ Management expects decline in FY10E revenues, pickup in 2H FY10E — FY10 revenues are likely to decelerate due to lower order intake in FY09. Thermax expects FY10 order inflows to grow marginally on a recovering economy, especially in 2H FY10E. Food processing, agro-based industries, distilleries & cement sectors are picking up, while the metal sector remains subdued.

■ Cutting EPS for FY10E by 16% — We factor in lower revenues given order renegotiations /cancellations, and expect order inflows to pick up meaningfully only in 2H FY10E/1H FY11E, which would lower revenue booking in the current year given the short-cycle nature of orders of its product business.

■ Early beneficiary of recovery, but order inflows have to grow meaningfully — While there has been some pickup in order inflows, we believe it has to pick up strongly for the stock to re-rate from current levels. Also, while 1Q FY10E order book is up YoY, at end-2Q FY10E it could be flat/negative given the high-base effect (adjusted for cancelled orders).

To see full report: THERMAX