We build in order inflow in line with management commentary and expect Thermax to deliver revenue CAGR of 11% and earnings CAGR of 16.1% during FY19-21E. Delay in FGD and refinery related orders could dent inflows which in turn couldimpact topline growth. Hence, we assume caution and maintain ‘HOLD’ rating onThermax for a target price of Rs. 1129, 29x FY21E earnings. Key upside risk to our call is lower than expected operating margins and order inflows.
PAT miss on lower EBITDA margin and fall in other income Thermax Ltd (TMX) reported robust revenue growth of 35% YoY, however PAT missed our expectations due to lower than expected EBIDTA margins and decrease in other income. Order inflow during 1QFY20 was a major disappointment with -27% YoY fall which was due to postponement of orders (due to elections) and weak investment sentiments in both domestic and international markets. Capacity utilization in most sectors is below optimal level, most companies are deferring capex plans. Going forward, management expects tendering to pick-up from 2Q/3Q FY20 onwards, mainly short cycle orders. Sectors which are expected to witness ordering are Cement, Steel, Water recycling, Chemical, Textile, Agro Pharma etc. The company received 1 FGD order in 1QFY20 and is L1 in couple of large orders which are expected to be received in FY20. On the international front, TMX sounded cautious due to weak investment sentiments and financial crunch. We expect TMX to report sales/PAT CAGR of 7%/15% over next two years (FY19-21E). The stock is currently trading at 32.6x/28.3x FY20E/21E. We maintain our Accumulate rating on the stock with TP of Rs1147 (30x FY21E).
Maintain Hold with revised PT of Rs. 1195: We have finetuned our earnings estimates for FY2020-FY2021 factoring increased interest, depreciation and lower treasury income. We have built in muted revenue growth for FY2020 considering weak order backlog and lower order intake visibility. The revenues and net earnings to deliver a weak CAGR of 7% and 11% over FY2019- FY2021E. While the stock is trading at a steep valuation of 30x FY2021 net earnings which leaves limited scope for upside. Hence we maintain Hold rating on the stock with a revised PT of Rs. 1,195.
We build in order inflows in line with management commentary and expect Thermaxto deliver revenue CAGR of 12% and earning CAGR of 16.7% during FY19-21E.Delay in FGD and refinery related orders could dent inflows which in turn couldimpact topline growth. Hence, we assume caution and maintain ‘HOLD’ rating on Thermax for a target price of Rs. 1102, 28x FY21E earnings. Key upside risk to ourcall is better than expected operating margins and downside risk is order inflows.
The company is positive on FGD and is L1 in couple of large orders which are expected to be received in FY20. On the international front, TMX sounded positive due to expected increase in demand in USA, Indonesia and Middle East. The execution of low margin order by Danstoker may continue in Q1FY20, however impact would be negligible in FY20. We expect TMX to report sales/PAT CAGR of 7%/15% over next two years (FY19-21E). The stock is currently trading at 29.7x/25.9x FY20E/21E. We maintain our Accumulate rating on the stock with revised TP of Rs1147 (30x FY21E).
With expected uptick in domestic order inflows and recovery in international order inflows through geographic diversification, order backlog is expected to improve further. Thermax may continue growth momentum on revenue front with expected CAGR of 10.3% in FY19-21E. Consequently, with expected margin recovery in medium term and normalization of tax rate, PAT is expected to grow at a CAGR of 21.6% over FY19-21E. We continue to maintain our BUY rating with a revised target price of Rs 1170/share.
Consolidated order inflow in 4QFY19 was down 28% YoY at Rs11.6bn while order backlog fell 6% YoY and 17% QoQ to Rs53.7bn. For FY20, Thermax expects a marginal rise in order inflow led by FGDs (Rs10bn inflow), scale up in South East Asia and standard product orders from domestic market. On a high base of FY19, Thermax expects single-digit growth in FY20 with an aim to improve margin. We have cut our earnings estimates by 2%/6% for FY20/FY21, respectively, and retained Accumulate rating on Thermax with a revised target price of Rs1,040 (from Rs1,070 earlier) based on 27x FY21E earnings.