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Revenue in line; order inflows key to future outlook

* TMX’s 3QFY21 revenue was in line with our estimate, with higher beat on operating profit owing to favorable revenue mix and higher volume. Margin beat was across segments, with higher margin in the Energy segment due to partial execution of a high margin international order.

* Order inflows declined 3% YoY in 3QFY21, with order pipeline slightly higher as compared to the same period last year. Recovery was seen across sectors like Cement, Steel, Distilleries, F&B, and Pharmaceuticals. In 9MFY21, order inflows stood at INR32.9b, down 28% YoY.

* Order book stood at INR52.1b (down 4% YoY) with book-to-bill of 1.1x. Weak ordering environment, coupled with order book depletion, is a significant risk to our FY22-23E revenue estimate. On account of a higher margin assumption, we increase our FY22E/FY23E EPS estimate by 3%/10%. Maintain Neutral with a TP of INR1,100/share, based on 28x Mar’23E EPS.

Favorable revenue mix aids operating profit

* Revenue stood at INR14.1b, flat YoY and in line with our estimate. Gross margin was higher at 46.7% (+230bp YoY), owing to better mix. EBITDA stood at INR1.5b, up 30% YoY (34% above our expectation). EBITDA margin stood at 10.5% (+250bp YoY). An exceptional item of INR200m was due to impairment of goodwill in Thermax Netherlands. PBT stood at INR1.4b (+34% YoY). The effective tax rate stood at 26.2% (v/s 19.4% YoY). Adjusted PAT stood at INR1b, up 23% YoY.

*  Segment performance: a) Energy: Revenue stood at INR10.6b, down 5% YoY. EBIT margin stood at 9.1% (+330bp YoY). b) Environment: Revenue stood at INR2.5b, up 28% YoY. EBIT margin stood at 7.1% (+190bp YoY). c) Chemicals: Revenue stood at INR1.1b, down 5% YoY. EBIT margin stood at 26.1% (+140bp YoY).

Highlights from the management commentary

* TMX has taken a write-off in its European subsidiary (Danstoker). The management aims to break-even in Danstoker and its Indonesian subsidiary in FY22.

* The overall margin increase was on a favorable revenue mix and higher volumes sold across segments.

* The impact of FGD orders will be visible in revenue and margin of the Environment segment from here on. Margin for these orders are below the average margin for this segment.

* Around 90% of the order book is fixed price contracts. Around 30% of orders are less than INR50m of the total order book.

Valuation and view

* We estimate revenue/EBITDA/adjusted PAT CAGR of 15%/30%/33% over FY21- 23E, factoring in improved performance from Danstoker as well as a low base of FY21, as TMX has seen a disproportionate impact of COVID-19. Weak ordering environment, coupled with order book depletion, is a significant risk to our FY22-23E revenue estimate. On account of higher margin assumption, we increase our FY22E/FY23E EPS estimate by 3%/10%. Maintain Neutral with a target price of INR1,100/share, based on 28x Mar’23E EPS.

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