Thermax shares gained more than 1 percent on May 24 after March quarter profit and revenue beat analyst estimates, despite fall in margin.
The engineering solution company reported a healthy 67.6 percent year-on-year growth in profit at Rs 126.9 crore and 43.7 percent jump in revenue at Rs 2,073.7 crore for the quarter ended March 2019.
At the operating level, earnings before interest, tax, depreciation and amortisation (EBITDA) increased 23.6 percent to Rs 170.8 crore, but margin contracted to 8.2 percent against 9.6 percent YoY, owing to losses in Danstoker due to the execution of low margin orders and flat profitability in power business.
The stock was quoting at Rs 1005.30, up Rs 14.60, or 1.47 percent on the BSE, at 13:21 hours IST. It gained 5 percent in the last five trading sessions.
Numbers barring margin beat analyst estimates. CNBC-TV18 poll estimates for revenue was Rs 1,680 crore and profit was at Rs 116 crore for the quarter.
Order inflow declined 28 percent YoY to Rs 1,160 crore on account of the absence of large-ticket order finalisation. Thermax expects order inflow to improve in FY20, given the rising demand for standard products from industries like cement, food processing, light engineering and auto, as well as FGD ordering from the power sector.
Brokerages turned mixed in their opinion after March quarter earnings and expect 3-20 percent potential upside in stock price.
Brokerage: Prabhudas Lilladher | Rating: Accumulate | Target: Rs 1,147 | Return: 16%
The domestic market is expected to see tendering from Q2/Q3 FY20 onwards. Sectors which are expected to witness ordering are cement, water recycling, chemical, textile, agro pharma etc. The company is positive on FGD and is L1 in a couple of large orders, which are expected to be received in FY20.
On the international front, Thermax sounded positive due to an expected increase in demand in US, Indonesia and the Middle East.
The execution of low margin order by Danstoker may continue in Q1FY20, however, the impact would be negligible in FY20.
The brokerage expects Thermax to report sales/PAT CAGR of 7/15 percent over the next two years (FY19-21E). The stock is currently trading at 29.7x/25.9x FY20E/21E.
They maintained accumulate rating on the stock with a revised target price of Rs 1,147 (30x FY21E).
Brokerage: Motilal Oswal | Rating: Buy | Target: Rs 1,190 | Return: 20%
The brokerage cut estimates for FY20/21 by 14/8 percent to factor in weaker-than-expected margins and lower orders.
They maintained a buy rating with a target price of Rs 1,190 (30x FY21E EPS).
Brokerage: ICICI Securities | Rating: Buy | Target: Rs 1,170 | Return: 18%
With an 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 percent in FY19-21.
Consequently, with expected margin recovery in medium term and normalisation of tax rate, PAT is expected to grow at a CAGR of 21.6 percent over FY19-21.
The brokerage continues to maintain a buy rating with a revised target price of Rs 1,170/share.
Brokerage: Kotak | Rating: Add | Target: Rs 1,110 | Return: 12%
Thermax is close to resolving cost issues in overseas subsidiaries in Europe and China. It has started gaining traction in SE Asia (similar in size to the Indian market) and is cementing its position in Africa.
Consumption-oriented sectors have started growing base ordering and start of new businesses (FGD) would add to growth fillip before the uptick in large orders becomes secular.
The brokerage increased FY2021 estimate by 5 percent and increase fair value to Rs 1,110 (from Rs 990); upgrade to add from reduce after the recent underperformance.
Brokerage: Phillip Capital | Rating: Neutral | Target: Rs 1,020 | Return: 3%
Our arguments are equally split, said the brokerage. "We believe that company's margins have bottomed in FY19 as it exits loss-making projects/subsidiaries."
Its weak commentary on domestic order inflows in the near term could change fast as Thermax is no longer a late cycle play, said Phillip Capital.
"However, on the negative side, we believe that Thermax' internationalisation strategy is yet to play out and historically its strategy outside India has not fared well. Also, we have little confidence in organic growth in margins, at least in FY20."
Earnings growth of 14 percent CAGR FY19-22E versus 5 percent in FY16-19 is adequately captured in current valuations - 33x/29x PE FY20/21E. The brokerage expects consensus to cut its estimates in the same quantum as our earnings cut 6/10 percent for FY20/21.
They retained a neutral rating. Target price Rs 1,020 (earlier Rs 1,000) is based on 30x PE FY21E.
Brokerage: Antique Stock Broking | Rating: Hold | Target: Rs 1,050 | Return: 6%
The company was cautious around the domestic ordering environment in the near term in the backdrop of the ensuing election as enquiries were slow to convert to orders.
This is already reflected in slower order intake reported by the group. The company continues to see a strong uptick in execution with 44 percent YoY revenue growth led by the energy segment during the quarter with good contribution from large and base orders.
With significant capex broadly over, the company is looking at an uptick in the business along with improving profitability. It has already seen selective green shoots.
However, given the near-term challenges, including macro challenges, the brokerage continues to remain neutral on the stock and maintain hold rating with a target price of INR 1,050, based on 25x its FY21E earnings.
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