>THERMAX LIMITED (TATA SECURITIES)

Strong bounce back in order inflows; current valuations stretched
Armed with a robust order book, Thermax started FY11 with a sharp bounce back in growth during 1QFY11. Revenues grew by 45%, while PAT grew by 42% during the quarter. More pertinently, the standalone order backlog increased to Rs63bn (96% growth YoY), with an across-the-board improvement in order inflows.

An improvement in the macro environment and a pick-up in the capex cycle enhances the visibility in order flows for the company’s base boiler and captive power divisions. This apart, the new technological tie-ups in the power and environment space is expected to result in strong order accretion in FY11. Despite the increased visibility for growth, valuation has got stretched on account of the sharp run-up in the stock’s price. Thermax currently trades at 22x, a premium to the large cap companies in the capital goods space. Hence, we downgrade the stock from Buy to Hold.

Key highlights
Across-the-board improvement in order accretion: Order inflows during the quarter improved significantly with a 70% growth to Rs17bn. All the divisions of the company witnessed a growth in order flows. In the captive power segment, Thermax won large orders of Rs5.8bn for a 72 MW combined cycle gas based power plant. Even after excluding this large ticket order, the order flows remained strong. The closing order backlog at a standalone level stood at Rs63bn, a growth of 96% YoY. The key industries contributing to the order backlog include power, refineries, ferrous metals, paper, cement and mining.

Update on JVs: Thermax has started negotiations with state governments for acquiring land for the boiler plant under the JV with B&W. The company expects the process to be completed well in time to bid for the NTPC tender for 800 MW supercritical sets. The manufacturing plant is expected to commence operation by Feb-Mar11. The team under the JV with SPX has been formed and has already generated order enquiries worth Rs5bn. The order accretion in this venture is expected to commence in 3QFY11.

To read the full report: THERMAX LIMITED