>THERMAX: Declining orders are a concern

Action: Medium-term concerns, valuation drives stock downgrade Thermax’s Q3FY12 order inflow fell ~40% y-y, thus driving a 19% y-y decline in its orderbook. Continued deferral of order inflow in the power utility sector and the industrial customers has raised concerns on Thermax’s medium-term revenue visibility. Weak results and dismal management commentary concur with our view of risks to medium-term revenue growth and margins. Despite being strongly managed, we believe it would be difficult for the company to escape from cyclical pressures.


■ The Projects business faces medium-term concerns due to the industrial slowdown and rising competition, despite slowing demand.


■ Slower order inflow and rising competition in the utility space are likely to lead to slower sales growth over FY12-13F, though longer-term order flow will be driven by demand pick-up from process industries.


■ While we had first highlighted slowdown concerns in our Anchor report Assessing earnings risk, the order inflow and margin outlook has worsened further since then, thus driving our earnings cut by 5-15%.


■ Catalysts: Macro factors to drive stock performance
Continued delay in policy reforms, industrial capex, poor order inflows and sustained high levels of commodity prices are key negative catalysts.


■ Valuation: Trading at ~18x FY13F EPS; downgrade to REDUCE
At ~18x FY13F EPS, Thermax is now trading at the upper end of peer group evaluation and its own historical trading band. We continue to value the stock at 14x Sep-13F EPS which is in line with 12-year mean multiple for TMX. With ~10% downside, we downgrade TMX to REDUCE.


To read the full report: THERMAX
RISH TRADER