Published on 17/10/2020 11:14:01 AM | Source: Motilal Oswal Financial Services Ltd

Neutral Thermax Ltd For Target Rs.710 - Motilal Oswal

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Order inflows decline sharply; Outlook remains hazy

* Thermax’s (TMX) 1QFY21 performance was severely impacted by the COVID19 pandemic with revenue down 52% YoY (missed est. by 15%). Chemicals segment bucked the trend with lower revenue decline and higher profits.

* Order inflows plunged 50% YoY owing to the slowdown in Industrial activity and the prevailing uncertainty. Though sectors like Pharmaceuticals, FMCG and Chemicals showed higher inquiries, the overall ordering environment is expected to remain weak in FY21.

* Order book stood at INR52.1b (down 1% YoY) with book-to-bill of 1x. Weak ordering environment coupled with order book depletion is a significant risk to revenue estimates for FY22-23E.

* We have cut our FY21/FY22E EPS estimates by 8%/6% due to lower order inflow assumptions. Maintain Neutral with TP of INR710 (prior: INR757) based on 22x Mar’22E EPS.


Execution disappoints; Chemical segment bucks the trend

* Revenues were down 52% YoY to INR6.6b (15% below est.). EBITDA loss stood at INR114m (lower than est. loss of INR376m). PBT loss stood at INR225m (lower than est. loss of INR456m). Adj. PAT loss at INR153m was lower than our est. loss of INR341m.

* Order book was down 1% YoY to INR52.1b. Book-to-bill stood at 1x. Order inflows plunged 50% YoY to INR6.1b.

* Segment performance: (a) Energy revenue (75% of overall revenue) declined 57% YoY to INR5b. EBIT margin stood at -5.3%. (b) Environmental revenue (12% of overall revenue) declined 43% YoY to INR839m. EBIT margin stood at - 12.6%. (c) Chemical revenue (13% of overall revenue) dropped 14% YoY to INR843m. EBIT margin stood at 20.5% (up 880bp YoY). Favorable raw material (RM) cost and higher exports led to margin expansion.


Management commentary highlights

* TMX has rationalized employee costs. This benefit should reflect in 2QFY21. TMX had slight benefit of the same in 1QFY21.

* Danstoker was profitable in 1QFY21 owing to cost rationalization measures.

* TMX delayed some deliveries since customer plants were under shutdown. In some cases, material was ready. However, shipping it out was not possible due to logistical difficulties at Chennai port.

* ~INR1b of Dangote order is pending to be delivered and billed, which is expected to happen by 1QFY22.


Valuation and view

* We have cut our FY21/FY22E EPS estimates by 8%/6% on account of lower order inflow assumption. We estimate revenue/EBITDA/adj. PAT CAGR of 2%/11%/31% over FY20-22E, factoring in improved performance from Danstoker, tax rate rationalization, as well as the low base of FY20 as TMX has seen disproportionate impact of COVID-19. Based on 22x Mar’22E EPS, we have arrived at TP of INR710 (prior: INR757). Maintain Neutral.


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