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In line earnings, order inflows key to future outlook

Balance Sheet strengthens further

* Revenue was 15% below our estimate in 4QFY21, with lower miss (6%) on operating profit. This is largely attributable to higher operating leverage and margin uptick. While margin across segments moderated sequentially, it stood higher YoY (barring the Environment segment), owing to improved execution in the Energy segment, higher mix of Specialty Resin in the Chemical segment, and ongoing cost controls.

* Order inflows grew 57% YoY to INR15b in 4QFY21 after declining for four consecutive quarters. Recovery was seen across sectors like Cement, Metals, and Refineries. Order inflows fell 13% YoY to INR47.8b in FY21. Sustainability of 4QFY21 order inflow run-rate remains a key monitorable for our future outlook.

* Focus on working capital management led to higher CFO at INR7.7b in FY21 (v/s INR3.3b in FY20), with net cash position improving to INR17.5b (v/s INR10.6b in FY20).

* Order book stood at INR52.3b (flat YoY), with book-to-bill of 1.1x. Weak ordering environment, owing to the second COVID wave, and order book depletion is a significant risk to our FY22-23E revenue estimate. On account of a higher cash balance, we increase our FY22E/FY23E EPS estimate by 5% each due to increase in other income. We maintain our Neutral rating with a TP of INR1,335/share, based on 32x Mar’23E EPS.

Revenue disappoints on a low base; order book flat YoY

* 4QFY21 snapshot: Revenue stood at INR15.7b, up 19% YoY, but 15% below our estimate. EBITDA doubled YoY to INR1.4b on higher operating leverage (below our estimate by 6%). Employee costs stood flat YoY, while other expenses increased 7% YoY. EBITDA margin stood at 8.9% (higher YoY, but lower QoQ). Adjusted PAT came in at INR1.1b, in line with our estimate. Order inflow rose 57% YoY to INR15b (after declining in the preceding three quarters).

* FY21 snapshot: Revenue fell 16% YoY to INR47.9b. EBITDA declined 13% YoY to INR3.6b, while EBITDA margin stood at 7.4%. PBT fell 12% YoY to INR3.3b. The effective tax rate stood at 24.5% (v/s 43.3% in FY20). Adjusted PAT increased 17% YoY to INR2.5b. Order inflows declined 13% YoY to INR47.8b. The order book stood at INR52.3b (flat YoY).

* CFO stood at INR7.7b (v/s INR3.3b in FY20). Its net cash position further improved to INR17.5b (v/s INR10.6b in FY20).

* Segment performance in 4QFY21: a) Energy: Revenue grew 12% YoY to INR11.8b. EBIT margin stood at 9.3% (v/s 3.1% YoY). b) Environment: Revenue grew 52% YoY to INR3b. EBIT margin stood at 6.6% (-160bp YoY). c) Chemical: Revenue rose 24% YoY to INR1.2b. EBIT margin was flat YoY at 18.5%.

Highlights from the management commentary

* The outlook for FY22 will depend on TMX’s ability to execute, owing to challenges posed by the on-going second COVID wave. It will be a challenging 1QFY22 due to lower efficiency and execution across projects.

* Cement, Metal, and Refinery constituted ~40% of order intake in 4QFY21. Waste heat is a big opportunity in Steel and Cement. Waste heat recovery (WHR) in Cement has now been adopted by most major domestic plants. However, many industries in Southeast Asia and Middle East are yet to adopt WHR, which poses a good opportunity for TMX.

* TMX was impacted by ~INR100m owing to commodity price inflation in 4QFY21 (largely due to Steel, Aluminum, and Chemical raw materials). The management expects some impact in 1QFY22 too.  The company has augmented capacity for Specialty resin. Coupled with water resins, these products have a higher margin within the entire Chemical segment product portfolio.

* TMX is keen on technological M&A in the Chemical business, but is yet to come across a good candidate as yet. On the international side, it is looking across two geographies for M&A, which will increase the market access for the company across those geographies.

Valuation and view

We estimate revenue/EBITDA/adjusted PAT CAGR of 18%/32%/38% over FY21-23E, factoring in improved performance from Danstoker and a low base of FY21, as TMX has seen a disproportionate impact of COVID-19. Weak ordering environment, owing to the second COVID wave, and order book depletion, poses a significant risk to our FY22-23E revenue estimate. On account of a higher cash balance, we increase our FY22E/FY23E EPS estimate by 5% each due to increase in other income. We maintain our Neutral rating with a TP of INR1,335/share, based on 32x Mar’23E EPS.

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