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Cautiously optimistic…

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

Q2FY23 Results: Thermax reported decent Q2FY23 results.

* Consolidated revenue at | 2075.3 crore, up 41.7% YoY, on better execution

* EBITDA came in at | 140.6 crore, up 27.8% YoY, with margins at 6.8% impacted by commodity inflation and higher freight cost

* Adjusted PAT came in at | 109.1 crore, grew by 24.2% YoY

* Order inflows for Q2FY23 were decent at | 2015 crore, up 9% 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 on the stock but change our rating from BUY to HOLD as we are cautiously optimistic on the stock

Target Price and Valuation: We value Thermax at | 2540 i.e. 45x on average on FY24E & FY25E EPS.

Key triggers for future price performance:

* We expect revenue, EBITDA to grow at CAGR of ~17.4%, 25.1%, respectively, in FY22-25E 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 | 2355

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