Wednesday, July 29, 2009


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