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Margin-led earnings miss; order inflows robust

Balance Sheet strength intact

* Revenue was in line with our estimate in 1QFY22, with a miss (15%) on operating profit. EBITDA margin stood at 6%, lower than our estimate of 7%, on account of higher commodity costs, an elevated freight rate, and lower productivity owing to COVID-led disruptions. Owing to a miss on operating profit, adjusted PAT came in 21% below our estimate.

* Order inflows almost tripled to ~INR17b on a low base YoY. However, it stood 13% higher sequentially, with robust orders from Refinery, Cement, and Steel sectors. Order book stood at INR61b (+17% YoY, with a book-to-bill of 1.2x), on the back of strong order inflows and moderate execution.

* TMX has been able to focus on working capital management, despite the execution of FGD orders. As a result, cash balances have further improved sequentially by INR2b (net cash of INR17.5b at the end of FY21).

* We reduce our FY22E/FY23E/FY24E EPS by 6%/4%/5% on account of elevated commodity costs. Sustainability of order inflows in 1QFY22 and ramp up in execution remains a key monitorable for our future outlook. We maintain our Neutral rating with a TP of INR1,215/share, based on 30x Mar’23E EPS.

In line revenue, earnings miss our estimate

* 1QFY22 snapshot: Revenue grew 58% YoY to INR10.5b, in line with our estimate. EBITDA margin stood at 6% v/s our expectation of 7%. EBITDA stood at INR630m, 15% below our expectation. Adjusted PAT stood at INR424m, 21% below our expectation.

* Order inflows were strong at INR17b (+179% YoY). Order book grew 17% YoY to INR61b.

* Segment performance in 1QFY22: a) Energy: Revenue grew 52% YoY to INR7.6b. PBIT margin stood at 3.7%. b) Environment: Revenue increased by 115% YoY to INR1.8b. PBIT margin stood at 1.5%. c) Chemical: Revenue increased 46% YoY to INR1.2b. PBIT margin stood at 17.6%.

Highlights from the management commentary

* The management is unable to affirm if the ordering environment has improved as most orders could be pent up in nature, after the second COVID wave. However, it has been three consecutive quarters where the base business has been strong, with order inflows closer to the higher end of the INR12-15b run-rate.

* Execution of FGD orders adversely affected margin in 1QFY22 in the Environment segment. As other orders ramp up, the mix of FGD revenue will gradually decline. TMX will be completing 50% of FGD orders by the end of FY22 and the remaining by FY23. As on date, ~10% of the FGD orders have been completed.

* Danstoker reported a marginal profit and the same is expected to improve gradually. The Indonesian subsidiary operations reported losses owing to lower execution.

Valuation and view

* We estimate revenue/EBITDA/adjusted PAT CAGR of 16%/24%/28% over FY21- 24E, factoring in improved performance from Danstoker and a low base of FY21, as TMX has seen a disproportionate impact of COVID-19.

* We reduce our FY22E/FY23E/FY24E EPS by 6%/4%/5% on account of elevated commodity costs. Sustainability of order inflows in 1QFY22 and ramp up in execution remains a key monitorable for our future outlook. We maintain our Neutral rating with a TP of INR1,215/share, based on 30x Mar’23E EPS.

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