>THERMAX: Q1FY2013 results

Recommendation: Hold
Price target: Rs482
Current market price: Rs481

Price target revised to Rs482

Result highlights

• Results below expectations: Thermax Q1FY2013 results were below our expectations due to revenue sluggishness as well as a marked-to-market (MTM) foreign exchange (forex) loss of Rs12.4 crore for the quarter (as compared with a Rs0.15-crore forex gain in the previous year). The order inflow for the quarter picked up on a sequential basis (up 56%) to Rs1,258 crore (though the same was down 13% on a yearly basis). The company has also reported a loss of Rs15 crore in its various subsidiaries and joint ventures. 
• Top line fell by 6%: Thermax? Q1FY2013 net income from the operations showed a fall of 6% year on year (YoY) to Rs983 crore, which is in line with our expectation. This was on account of a decline in the revenues seen across segments, with the energy and environment segments declining by 5% and 8% respectively on a yearly basis. The company had been reporting sluggishness in the order inflow for the past few quarters which translated into a revenue slowdown in this quarter. However, the company booked higher export revenues in this quarter at Rs222 crore (up 10% YoY).
• Margin pressure led by forex loss: A 40% year-on-year (Y-o-Y) rise in the other expenses (led by the forex loss) resulted in a lower margin of 9.8% vs 10.9% reported in Q1FY2013. Overall, the operating profit fell by 15%. This was the lowest quarterly margin reported in the last 20 quarters. 
• Net profit fell by 16%: In spite of a higher other income, the higher than expected interest and depreciation costs dragged down the net profit, which fell by 16% YoY to Rs71 crore and was lower than our expectation of Rs74 crore. 
• Group order inflow improves QoQ: The company?s current order backlog at the group level stands muted at Rs5,042 crore (down 26% YoY) owing to a lack of any large-ticket order. The order inflow during the quarter picked up on a sequential basis at Rs1,412 crore (up 54% QoQ), led by a pick-up in international orders. For Q1, the company recorded export order intake of Rs324 crore, contributing 26% to the total order intake driven by an engineering, procurement and construction (EPC) order for 38MW captive power plant worth around Rs150 crore ($26.5 million). 
• Stand-alone order book position: To the stand-alone order inflow of Rs1,258 crore, the energy segment contributed Rs949 crore and the environment segment Rs309 crore, showing a decline of 15% and 6% respectively. The major sectors likely to contribute to the order inflow in the coming quarters are cement, chemicals, water treatment and fertilisers while the demand from the steel and power sectors is expected to lag in the near term. Thermax foresees an unclear demand environment in the domestic market in the near term. Therefore, the management is looking to expand the overseas operations in the emerging markets like China, South-East Asia and Africa. 
• Estimates maintained: In view of a poor order inflow in FY2012, we had sharply downgraded our estimates for FY2013 and FY2014. The sequential pick-up in the order inflow makes us maintain our estimates now. Overall, we are expecting the company to post a muted compounded annual growth rate (CAGR) of 0.4% in the profit over FY2012-14. We also feel that the company could aggressively bid for projects in the coming times to keep its order book ringing in spite of rising competition. This would adversely affect its margins leading to margin pressure in the coming quarters. 
• Price target revised to Rs482: The growth in the company?s order book remains highly dependent on the momentum in the capital expenditure (capex) cycle of India, making the company highly susceptible to the swings in investment sentiments. The investment in its power equipment venture has started to post losses (for revenue expenses and working capital) as the venture has failed to win any orders. This venture involving Rs850 crore of capex would remain a drag on the company?s resources unless the company wins some major orders in the near term. The company had earlier indicated that the annual running cost of this plant could run as high as Rs100 crore. Marred by poor order inflow and tough business environment, the stock has languished in the last one and a half years. At the current market price, the stock trades at 14.6x and 14.0x its FY2013 and FY2014 estimated earnings respectively. On an improvement in the order inflow in this quarter, we are revising our target multiple to 14x (the past 12 months? average) from 13x earlier. Accordingly, we have revised our price target to Rs482. In view of the limited upside potential, we maintain our Hold rating on the stock. The key positive triggers in the stock remain the winning of big-ticket power equipment and export orders. Also, a pick-up in the capex activities would augur well for the company. 
  
  

RISH TRADER