Hold Thermax; target of Rs 505: Emkay

Emkay Global Financial Services has recommended hold rating on Thermax with a target of Rs 505 in its October 31, 2012 research report.

“Thermax met expectations at operating level. Its revenues declined 9% yoy to Rs11.9 bn on back of declining order backlog and lower revenue booking on key large orders. EBITDA declined by margins fell 60 bps yoy to 10.2% - led by rising employee costs and negative impact of operating leverage. Led by decline in revenues and EBITDA margins, EBITDA fell by 13% yoy to Rs1.2 bn – in line with estimates. Other income increased sharply by 32% yoy to Rs274 mn – led by write back of provision. Hence net profit was ahead estimates at Rs911 mn (-10% yoy).”

“Thermax delivered on key monitorable despite unfavourable business environment. It secured order inflows worth Rs13.4 bn (net of cancellations of Rs0.6 bn) (+4% yoy and - 5% qoq) – achieved 53% of FY13E target. Order inflows was led by Power (33%) followed by EPC (21%), ferrous metals (25%), cement (9%), sugar (7%) and others (5%). Hence order book was stable sequentially at Rs49.8 bn (-1% qoq) – break-up as Energy Rs38.8 bn (78%) and Environment (22%). We have largely retained our standalone earnings of Rs29.1 for FY13E and Rs30.7 for FY14E. However, we have cut our consolidated earnings to factor losses in subsidiaries – YTD loss incurred Rs184 mn. We have revised FY13E earnings estimates by -9% to Rs27.5 and FY14E earnings by -5% to Rs31.6.”

“Although Thermax has been able to sustain order inflow momentum and has indicated confidence in sustaining the same (key re-rating trigger), we believe that concerns on operating margins and subsidiaries performance are likely to outweigh any positive news flows on order inflows. Further, Thermax’ investments in the super-critical venture remains a concern as it could impact group profits, bringing downside to earnings forecasts. Hence we retain our hold rating on the stock – despite free cash flow yield of +7%. We value Thermax at 16X FY14E consolidated earnings (due to relatively clean balance sheet) with revised price target of Rs505 (no premium to market multiple),” says Emkay Global Financial Services research report.

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