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Headwinds on margins to impact profitability...

Thermax Ltd (TMX) is a leading energy and environment solutions provider. They offer integrated innovative solutions in the areas of heating, cooling, power, water & waste management, air pollution control and chemicals.

* Q3FY22 order book grew by 42% YoY supported by 102% YoY growth in new orders in 9MFY22, which provides visibility for the coming quarters.

* TMX reported revenue growth of 14% YoY during the quarter led by robust execution in Environment (34% YoY) & Chemical segment (40% YoY).

* EBITDA margin declined by 346bps YoY to 7% due to higher commodity prices and an increase in other expenses.

* The company expects margin pressure is likely to sustain as recent FGD orders were booked after 9 months delay and difficulty in price hike due to high competition in chemical business.

* The current premium valuation and headwinds on margins, implying limited room for further upside in the near term. Therefore, we revise our rating to SELL from Accumulate and value TMX at a P/E of 35x on FY24E EPS with a TP of Rs1,700.

Order book provides visibility...

Order inflow during the quarter grew by 57% YoY to Rs2,462cr supported by Rs830cr order of Fuel Gas Desulphurisation (FGD) system from an Indian private power sector company. On the sector front, order inflow from Environment business increased by 560% YoY and chemical business by 60% YoY, while the energy segment de-grew by 10% YoY. The order book grew by 42% YoY to Rs7,389cr which is 1.3x TTM revenue and provides revenue visibility for the coming quarters. The management highlighted that (a) few more FGD orders from private players are underway (b) several 100cr+ size orders from international players are under discussion (c) orders from large steel players like Tata steel & Jsw steel are expected in the next two to three quarters.

Execution picked up...

TMX Q3FY22 consolidated revenue grew by 14.5% YoY to Rs1,615cr aided by better execution in the Environment segment (34% YoY), Chemical segment (40% YoY) and Energy business (9% YoY). The company saw a recovery in cement, steel and sugar which will support top line in the coming quarters. Therefore, we largely maintained our FY22E/FY23E revenue estimate.

Margins impacted...

The EBITDA margin declined by 346bps YoY to 7% on account of higher commodity prices and other expenses. The rise in commodity prices could have some impact on margin and profitability in the near term. The Adj. PAT de-grew by 29% YoY to Rs79.5cr.

Valuations

The current premium valuation and headwinds on margins, implying limited room for further upside in the near term. Therefore, we revise our rating to SELL from Accumulate and value TMX at a P/E of 35x on FY24E EPS with a TP of Rs1,700.

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