Mid Cap : Reduce Thermax Ltd For Target Rs.2,178 - Geojit Financial Services Ltd
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Expensive valuation- a near term headwind...
* 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.
* TMX reported a robust revenue growth of 57% YoY during the quarter, led by strong execution in Energy (61% YoY) and Environment (62% YoY), while the Chemical segment grew by 22% YoY
* However, due to higher commodity prices and the execution of legacy FGD order in Environment segment, EBITDA margin fell by 19bps YoY to 5.8%.
* Q1FY23 order book grew by 56% YoY (which is 1.4x TTM revenue), supported by 36% YoY growth in new orders.
* The company expects a gradual recovery in the margin profile due to a favourable mix in the chemical segment and a correction in commodity prices
* TMX is currently trading at a P/E of 56x on a 1 year forward basis, which is well above its 1 year average P/E of 46x, implying limited room for further upside in the near term. Therefore, we revise our rating to REDUCE and value TMX at a P/E of 43x on FY24E EPS with a TP of Rs. 2,178.
Pick up in order inflows...
Order inflow during the quarter grew by 36% YoY to Rs2,309cr, supported by large ticket order finalisation in the hydrocarbon segment, leading to an order book of Rs9,554cr. The domestic order book grew by 70% YoY to Rs.8,081cr, while the export order book grew by 9% YoY to Rs.1,473cr. The company expects orders in the FGD segment to remain low to moderate as government orders is currently witnessing some delays in finalization and Thermax has adopted a cautious stance while bidding for FGD orders.
Robust execution supported top-line...
In Q1FY23, TMX reported a robust consolidated revenue growth of 57% YoY to Rs.1,654cr, aided by strong execution in the Energy segment by 61% YoY to Rs1,227cr and the Environment segment by 62% YoY to Rs292cr, while Chemical segment revenue grew by 22% YoY. The management witnessed an upward trend in petrochemicals as the commodity prices have stabilised, waste heat recovery, paper & pulp industries, food & beverages. We revise our FY23E/FY24E estimate by 12%/15%, respectively, due to the strong order book pipeline and execution pick up .
Margins to improve from H2FY23...
The EBITDA margin declined by 19bps YoY to 5.8% on account of higher commodity prices and execution of legacy FGD order in environment segment. We expect margins to improve in H2FY23 due to a fall in commodity prices and the completion of existing FGD orders (~90% of the work completed). The Adj. PAT during the quarter grew by 39% YoY to Rs59cr
Valuations
TMX is currently trading at a P/E of 56x on a 1 year forward basis which is well above its 1 year average P/E of 46x, implying limited room for further upside in the near term. Therefore, we revise our rating to REDUCE and value TMX at a P/E of 43x on FY24E EPS with a TP of Rs2,178.
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