Thermax: Buy



A strong pace of execution in projects from steel and cement industries, comfortable order book, entry into utility power equipment and almost nil debt are all positives for energy and environment solutions provider Thermax.

Investors with a 2-3 year perspective can consider buying the company's stock in a phased manner, linked to market dips.

At the current market price of Rs 604, Thermax trades at 15 times its estimated per share earnings for FY-12.

Thermax has traditionally commanded premium valuations even over larger players, due to a diversified business profile and comfortable cash status.

However, fears of lower order inflows have resulted in the stock losing over a third of its value from its November 2010 highs. Valuations now appear more reasonable.

Aided by speedy execution in its Engineering Procurement and Construction (EPC), the company's sales grew 67 per cent in the December quarter over a year ago. Profits jumped 77 per cent to Rs 100 crore in the above period. Thermax's current order book of Rs 7,200 crore (27 per cent higher than last year) provides sufficient earnings visibility for 24-30 months.

Unlike a year ago, when the company witnessed slower execution as a result of order deferment by clients, the company now states that all its projects are on track.

Although 85 per cent of the orders are from the energy sector, the order book does not have any large utility orders. As its super-critical boiler plant – a joint venture with Babcock & Wilcox – is expected only by September 2012, the company has indicated that it will start bidding only from the beginning of FY-12.

While the company may not compete for bulk orders from NTPC, it is in discussions with private utilities for similar orders. Hence, fresh order inflows may continue to be moderate for a couple of more quarters, for want of large orders.

This said, Thermax has been actively participating in projects in the renewable energy and water treatment segments. It has progressed well in its solar thermal (different from solar photovoltaic), biomass and more recently geothermal energy ventures.

It has been discrete in its choice and has so far been predominantly handling projects funded by the Union Government. We see this segment contributing to the profit margins, although it is not significant in terms of volumes.

For the quarter ending December, Thermax's operating profit margins stayed flat at 11.8 per cent at a time when most players are seeing pressure on margins as a result of input cost hikes. Key inputs such as specialty steel used in boilers have been tied up in entirety for its order backlog even as conventional steel requirements remain open.

However, as the latter would be about 15-18 per cent of its order backlog, the company appears to have mitigated risks of margin pressure.



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