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Strong order inflows cushion weak margins

About the stock: Thermax Ltd (Thermax) offers integrated solutions in the areas of energy and environment – heating, cooling, power, water & waste management, air pollution control and chemicals.

? It operates in three key segments energy (~70.7% of FY22 revenue), environment segment (~20.6%) and chemicals segment (~8.7%)

? Focus to increase product & services share (~50% in FY22) vs. projects

Q1FY23 Results: Thermax reported mixed Q1FY23 results.

* Consolidated revenue at | 1654.5 crore, up 57.2% YoY, on better execution

* EBITDA came in at | 96 crore, up 52.2% YoY, with margins at 5.8% impacted by higher commodity prices and freight cost.

* Adjusted PAT came in at | 58.9 crore, up 39% YoY

* Order inflows for Q1FY23 were strong at | 2310 crore, up ~36% YoY

What should investors do? Strong balance sheet, prudent working capital management, recent technological tie-ups, are expected to support growth. 

* We remain long term positive and retain our BUY rating on the stock.

Target Price and Valuation: We value Thermax at | 2405 i.e. 45x on FY24E EPS

Key triggers for future price performance:

* We expect revenue, EBITDA to grow at CAGR of ~29%, 42%, respectively, in FY22-24E amid margins gradually returning to normal levels

* Recent broad based recovery in order inflows, strong order enquiry pipeline across industrial sectors likely to ensure decent order inflows, going forward

* Controlled net working capital (NWC), strong balance sheet

Alternate Stock Idea: We also like Larsen & Toubro in our coverage.

* Focus on asset monetisation to further strengthen the balance sheet and improve return ratios. Strong b/s, controlled working capital and strong cash generation

* BUY with a target price of | 2175

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