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Strong cashflow, strategic growth initiatives

Thermax has reported better-than-expected execution and margins supporting strong earnings growth in Q4FY21. Despite headwinds, order intake was healthy at Rs15bn led by cement, steel and refinery segments. Cashflow continues to remain strong resulting in healthy net cash of Rs17bn. The company has taken various strategic technology collaborations in waste-to-energy, fuel cell and solar film segments.

Factoring in healthy cashflow offsetting margin stress, we marginally raise our FY22E and FY23E earnings by 1% and 2%, respectively. We have adopted SoTP-based valuation given different growth, margin and return outlook of the segments. We maintain HOLD rating on the stock with a target price of Rs1,506 (previously: Rs1,184).

* Stable execution, healthy growth outlook:

Environment segment registered strong revenue growth of 51% YoY to Rs3bn, energy segment grew 12% YoY to Rs12bn and chemical segment grew 24% YoY to Rs1.2bn resulting in 19% YoY revenue growth to Rs15.7bn. Order intake grew 57% YoY to Rs15bn in Q4FY21. Current orderbook at Rs52.2bn (1.1x TTM sales) implies improved visibility. Due to the second wave of covid, near-term outlook is uncertain; however, investment outlook is healthy in medium to long term.

* Overseas subsidiaries’ performance stress continues:

Order intake is gradually recovering from the overseas market; however, performance had been below par during Q4FY21.

* Demand from core sectors and short cycle orders will support growth:

Demand from core sectors like cement, steel and refinery has been healthy in Q4FY21. The company is also focusing on short cycle low-ticket sized orders and services which will enable it tackle any near-term lull in demand efficiently. Drive towards improvement in collections and margins may continue supporting the cashflow.

* Maintain HOLD despite high valuation:

The company is currently trading at a rich valuation of 47x FY22E and 38x FY23E earnings. We believe strong cashflow from operations, due to reduction in working capital, has given further fillip to re-rating. Strategic growth initiatives in new growth segments will open up new long-term opportunities. Given varied growth, margin and return trajectory of the three segments, we have shifted our valuation approach to SoTP. Due to strong growth prospects, high returns and margins under chemicals which is at lower utilisation currently we assign 60x FY23E core multiple, environment at 45x and energy at 30x multiple. We maintain HOLD rating on the stock with a revised SoTP-based target of Rs1,506 implying 40x FY23E earnings.

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