>THERMAX INDIA (HSBC)

Strong order inflows: Thermax 3Q10 revenues were below estimates; however, the company announced strong order inflows improving future revenue visibility. The pickup in the manufacturing capex, especially for captive power projects, has resulted in higher than expected order inflow of INR15.5bn (up 79% yoy). Revenue declined by 6% yoy given lower execution which was impacted due to lower order backlog in FY09 and poor order inflow in 2HFY09. This resulted in lower net profit of INR565m (vs HSBCe INR666m, 15% lower).

Upgrade to N(V): Strong backlog and improved outlook

■ 3QFY10 results a mixed bag; lower execution but strong order inflows (up 79% yoy) provide visibility for FY11-12 estimates
■ Robust order book leads to increase in our earning estimates by c6% for FY11-12e. Raise TP to INR645 (earlier INR400)
■ Upgrade to Neutral (V) from Underweight (V) given the improved outlook


Positive outlook: The higher than expected order inflows during the last two quarters (INR39.1bn) has resulted in 37% yoy growth in order backlog, and increased the book-to bill to 1.6x FY10e revenue (vs c1.0x at the start of 2Q10). This strong order backlog will drive future revenue growth for FY11-12e, we believe. We expect the growth driver for future order inflow will be a) power sector orders for captive power plant and utility boilers and b) water and waste treatment from municipal bodies. In terms of the long term, Thermax’s graduation to supercritical projects through joint ventures will be quite positive, in our view.

Change in estimates and valuation: We reduce our FY10 estimate by 1% to incorporate lower than expected 3Q result. However, due to higher than expected order backlog (up 37% yoy), we increase our FY11 and FY12 earnings estimates by c6%, resulting in a 25% profit CAGR for FY10-12e (vs 20% earlier).We now use a target multiple of 18x FY12e (vs earlier 13.6x FY11e), c10% discount to our BHEL multiple. The increase in PE multiple is primarily due to the increase in relative valuation for BHEL and other peers in the sector. Based on this, our new target price is INR645 (earlier INR400), providing c3% upside from current levels, including expected dividends. Hence, we upgrade our rating to N(V) from UW(V). Our increase in target price is due to increase in estimates, rollover to FY12e multiple and higher target multiple due to increase in overall sector valuation. Though positive on the longer term, we are neutral primarily due to valuation, as the current stock price provides limited upside.

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