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In-line operating performance; order inflows robust

Balance sheet strength intact

* Thermax (TMX)’s revenue and operating profit were in line with our estimates in 2QFY22. While revenues were robust, higher freight rates and slower ramp-up at the new chemical facility led to some loss of revenue in the Chemical segment. Higher other income and lower tax rates led to adj. PAT coming in 12% above our estimate.

* Order inflows stood at INR18.6b, up 67% YoY on a low base. Overall, 1HFY22 order inflows stood at ~INR36b (up 24% v/s 1HFY20 levels), indicating some revival in ordering activity. While ordering activity was broad-based across segments, inquiries from the Refinery, Metals, and Cement sectors were robust. The management expects ordering activity to be upbeat over the next 6–8 months considering the project pipeline.

* However, commodity cost inflation is expected to persist in the near future. TMX saw an impact of INR150–200m in 2QFY22 on account of commodity cost inflation, with the impact in 3QFY22 expected to be at a similar or higher level. TMX has been able to focus on working capital management despite executing fuel gas desulfurization (FGD) orders. As a result, cash balances (incl. investments) stood at ~INR22b (v/s ~INR18b at end-FY21).

* We maintain our earnings estimate on in-line performance. The sustainability of order inflows in 2QFY22 and execution ramp-up remain key monitorables for our future outlook. Commodity cost inflation remains a key near-term risk. We maintain our Neutral rating, with TP of INR1,385/share on 30x Mar’24E EPS.

In-line performance; order book healthy

* 2QFY22 snapshot: Revenue stood at INR14.7b, up 29% YoY and in line with our estimate. The two-year revenue CAGR stood at -4%. The gross margin was stable YoY at 45%. Strong operating leverage led to a ~39% YoY increase in EBITDA to INR1.1b (in line with our estimate). The EBITDA margin stood at 7.5% (+50bp YoY). Other income stood at INR368m (above our est. of INR275m). PBT stood at INR1.1b (9% above our est). Adj. PAT stood at INR879m, up 72% YoY and 12% above our estimate.

* The order book stood at INR65.2b (+26% YoY, with book-to-bill of 1.2x) on the back of strong order inflows and in-line execution.

* Segment performance in 2QFY22: a) Energy: Revenue grew 19% YoY to INR10.6b. The two-year revenue CAGR stood at -11%. PBIT margins came in at 8% (+360bp YoY). b) Environment: Revenue increased 101% YoY to INR3.1b. The two-year revenue CAGR stood at +32%. PBIT margins came in at 2% (-470bp YoY). c) Chemical: Revenue increased 12% YoY to INR1.3b. The two-year revenue CAGR stood at +8%. PBIT margins came in at 15.5%.

Highlights from management commentary

* In Cement and Metal, most of the orders are towards waste heat recovery (WHR). Also, in the case of clients opting for greenfield capex, the orders received are mainly for Boilers (Steel segment) and WHR (Cement segment). The average ticket size of the orders is INR0.8–1.5b.

* In the Refinery end market, the ticket sizes of orders highly vary, with some inquiries for INR5b and above while some for INR1b and below.

* The Chemical and FGD businesses performed below expectations. In the Channel business, it has done well for three consecutive quarters, which has led the management to believe the current demand scenario is robust.

* While the European subsidiaries are not losing any money, their profitability is below expectations. While there is no improvement in the Indonesian subsidiary’s operations, the positive development is that lockdowns have ended and the ordering pipeline is very healthy.

Valuation and view

We maintain our earnings estimate owing to in-line performance. The sustainability of order inflows in 2QFY22 and ramp-up in execution remain key monitorables for our future outlook. Commodity cost inflation remains a key risk over the near term. We maintain our Neutral rating, with TP of INR1,385/share on 30x Mar’24E EPS.

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