Thermax – are the green shoots in the price?

Quarter at a glance

The company’s GST-adjusted revenues for the quarter grew 18%, driven by energy and chemicals segment as the environment division remained subdued.

Margins were hit by temporary losses in its overseas subsidiary Danstoker and losses in China. Couple of domestic divisions too recorded poor margins due to rising commodity prices on orders that faced execution delays. In a buyers’ market, the company found it difficult to pass on the higher costs.

Still, the company is hopeful of better margins in the final quarter of FY18. It is eyeing close to double-digit margin in FY19.

Order inflow – cannot be ignored

In the December quarter, the company reported 19% increase in order inflow at Rs 1413 crore, lifting order backlog by 27 percent to Rs 5556 crore (1.2X FY18P revenue).

The growth in the topline (as it is sitting on a healthy order book) should give the benefit of operating leverage. With orders improving, passing on higher input prices might be easier especially since a majority of its clients are repeat customers. The company does not expect the Indian currency to strengthen further, which is positive for margins.

Where are the green shoots?

The company is witnessing green shoots in all areas of infrastructure besides power.

Thermax now has a global presence and hence it is looking to participate in the global investment revival. The company expects some revival in investment activity globally as for years there has been lack of investment in the developed world.

So while in the previous upcycle (2003-08) it was more a domestic company that rode the cyclical upturn, in the coming upcycle it expects to reap benefits of its global presence.

The management feels that given the 1:1 co-relation between economic growth and energy consumption, the captive power market will thrive if the economy continues to grow.

Thermax is also optimistic about the steel industry where it sees the government’s target for increasing capacity from 130 mn mt to 300 mn mt as a medium term opportunity.

It is also positive on the cement space as most companies are now opting for waste heat recovery power plants as it makes genuine business sense.

In India, the biggest emitter of greenhouse gases is the thermal power sector. The ministry of environment, forest and climate change (MoEFCC) has decided to impose strict norms for emissions of particulate matter (PM), sulphur dioxide, nitrogen oxides, mercury and reduced water usage by coal-fuelled thermal power plants. While the deadline has been extended from the earlier timeframe of 2017, this remains a fairly large opportunity as all thermal power plants will have to adhere to this norm by December 2022.

Orders are also expected from the second phase of Bharat Stage 6 related refinery quality improvement programs.

In the first nine months of the fiscal, Thermax has received orders majorly from international geographies as also from sectors in India, the dominant ones being oil, refinery and petrochemicals; cement, consumer space (food processing, alcohol, beverages etc.) and heavy chemicals.

Capacity in place – waiting for the momentum

The company has the requisite capacity to capitalise on any revival. Thermax has invested in three additional manufacturing facilities that will start contributing to incremental revenue.

The facility in Indonesia would be the manufacturing hub for the ASEAN region and should start contributing from the final quarter of the current fiscal. The market potential is around $400 mn and the company aims to garner 14-15% market share.

The specialty resins plant in Gujarat (at Dahej) will also be ready for commercial production this year. The company plans to ramp up capacity in this highly remunerative specialised resins, where the revenue potential can go up to Rs 800 crore.

Work has already started at Sri City (Andhra Pradesh) for setting up a manufacturing plant for vapour absorption chillers. This will be a state-of-the-art facility, highly automated and would require much less manpower. This should contribute in the second half of FY19.

In the past one year, the stock has risen by 36% and is now valued at 36X FY19P earnings. Only if the green shoots translate into robust ordering can a further re-rating take place. Hence buy on dips. For existing shareholders, waiting for the momentum may be worthwhile.

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