Accumulate Thermax; target of Rs 553: PLilladher

Prabhudas Lilladher is bullish on Thermax and has recommended accumulate rating on the stock with a target of Rs 553 in its July 13, 2012 research report.

“Thermax (TMX) expects an improvement in performance of their standard range of products and service portfolio. However, the projects and EPC portfolios continue to have subdued prospects in the short term. Export business supports growth in FY12. The company expects to increase focus on exports and service businesses. We believe that a sound balance sheet, strong management pedigree and ability to bag base business orders worth Rs7-8bn per quarter will help tide the slowdown and participate in the upturn of the cycle meaningfully. Maintain ‘Accumulate’.”

“TMX’s commentary/outlook on smaller businesses like Cooling (strong order carry and export markets), Heating (good traction in industries like food processing, textile, chemical, pharma etc.) and Water (strong traction from industrial and commercial segments and entry in high-end municipal drinking water solutions) continue to be positive for FY13. However, it shared a slightly muted outlook for larger businesses like Power (adverse market conditions leading to slow order finalization) and Boiler & Heater (unfavourable environment for investment leading to subdued capex cycle. However, we expect a revival in captive power plants using solid fuel) and Air pollution (sluggish prospects in its key customer segments of cement, steel and captive power and intense competition). TMX also highlighted increased focus on service business (5% sales in FY12) and export markets (~20% sales in FY12) to counter domestic slowdown. Subsidiaries contributed 12.9% to consolidated sales; however, dragged on profitability with a loss of Rs27.5m. The reason for losses in subsidiaries ranged from cost escalation to increase in competitive intensity in various markets. Start-up expense of TMX and US-based Babcock & Wilcox (B&W) supercritical JV (loss of Rs190m) also impacted profitability to a large extent.”

“The stock is trading at 15.2x FY14E earnings. We believe that though the next few quarters will be weak in terms of earnings and order flow, TMX’s ability to bag base orders of ~Rs7-8bn per quarter gives us confidence that it will be able to tide the slowdown and participate in the upturn of the cycle meaningfully and surprise positively in terms of order flow. We maintain our ‘Accumulate’ rating on the stock,” says Prabhudas Lilladher research report.

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