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Healthy growth, stable outlook

Thermax has delivered a healthy 29% YoY revenue growth to Rs14.7bn during Q2FY22 led by growth in environment and energy segments. As economic recovery gathered pace, order intake for the quarter grew 67% YoY to Rs18.6bn with orderbook of Rs65bn (1.2x TTM sales). The company has taken various strategic technology collaborations in waste-to-energy, fuel cell and solar film segments. We have adopted SoTP-based valuation given different growth, margin and return outlook of the segments. We maintain HOLD rating on the stock with revised target price of Rs1,464 (previously: Rs1,431)

* Healthy execution, stable outlook: Environment segment registered strong revenue growth of 101% YoY to Rs3.1bn, energy segment grew 19% YoY to Rs10.5bn and chemical segment grew 12% YoY to Rs1.2bn. Execution in chemical segment was impacted by lower utilisation and logistical bottlenecks in terms of container availability. Current orderbook of Rs65bn (1.2x TTM sales) provides good visibility. Execution in international business continues to remain impacted; however, order inflow outlook remains healthy.

* Cost pressures and logistical challenges impact margins: Overall EBIDTA margin stood at 7.5% in Q2FY22 due to 460bps and 1,500bps dip in YoY margins in environment and chemical segments, respectively, due to high commodity cost and shortage of supplies. Freight cost for the company more than doubled impacting the margins in the export dominant chemical segment.

* Demand from core sectors and short cycle orders to support growth: Demand from core sectors like steel, refinery and petrochemical is likely to be healthy. The company is also focusing on short cycle low-ticket sized orders and services which will enable it tackle any near-term delay in order finalisation efficiently. Drive towards improvement in collections and margins may continue supporting the cashflow.

* Maintain HOLD, rich valuation and cost pressures: The company is currently trading at a rich valuation of 58.7x FY22E and 42x FY23E earnings. Strategic growth initiatives in new growth segments would potentially open up new long-term opportunities. Given varied growth, margin and return trajectory of the three segments, we have used SoTP valuation methodology. Due to strong growth prospects, high returns and margins under chemicals, which is at lower utilisation currently, we assign 65x FY23E core multiple, environment at 45x and energy at 30x multiple. We maintain HOLD rating on the stock with revised SoTP-based target price of Rs1,464 implying 40x FY23E earnings.

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