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Moderation in high value orders...

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 Q3FY23 revenue witnessed a strong growth of 27% YoY, led by superior execution in the Energy (27% YoY), Environment (29% YoY), while Chemical segments registered a muted growth.

 Stabilisation in input price and freight costs led to 86bps YoY improvement in EBITDA margin to 7.9% during the quarter.

* The 9MFY23 order book grew by 33% YoY, however, order inflows declined by 10% YoY during the quarter.

* TMX expects moderation in top-line due to absence of large orders in the backlog. TMX sees traction in base orders (Rs300cr to Rs1,000cr) from sectors like steel, sugar, ethanol and distilleries.

*  The Govt’s thrust over infra development and expectation of a pick up in private capex auger well for TMX. However, the premium valuation and moderation in high value orders remains a concern in the near term. We therefore, assign SELL rating and value TMX at a P/E of 28x on FY25E EPS with a TP of Rs. 1,806.

Order book grew by 33% YoY in 9MFY23...

The order book grew by 46% YoY to Rs. 9,859cr, which is 1.3x TTM revenue, provides visibility for the coming quarters. The growth was largely driven by the new orders received in Energy segment of Rs. 4,811cr (25% YoY) 9MFY23. The export order inflow grew by 21.6% to Rs 1671cr in 9MFY23. The management highlighted company could witness moderation in revenue due to absence of high value orders in the order book which could be offset by multiple short cycle order in the range of Rs300cr to Rs1000cr traction in orders from Cement, fertiliser, sugar/distillery, metals and refinery & petrochemicals

Execution picked up...

In Q3FY23, TMX reported a healthy revenue growth of 27% YoY to Rs. 2,049cr, aided by strong execution in the Energy segment (27% YoY to Rs. 1,480cr), the Environment segment (29% YoY to Rs. 438cr), while the Chemical segment witnessed a muted revenue growth of 5% YoY to Rs. 164cr. The management expects execution to sustain at the current level. We maintain our FY23E revenue estimate while increasing the FY24/FY25 revenue estimate by 3%/8% respectively, due to the strong order book pipeline and pick up in execution

Stabilisation in input prices supported margins ...

The gross margin during the quarter improved by 22bps YoY (QoQ 350bps YoY) to 44.1%, supported by stabilisation in input costs, while EBITDA margin improved by 86bps YoY (QoQ 109bps YoY) to 7.9%. We expect margins to improve in coming quarters due to the softening of commodity prices. The Adj. PAT during the quarter grew by 59% YoY to Rs. 126cr.

Valuations

We expect execution to pick up in the coming quarters due to a healthy order book, softening commodity prices, and easing supply chain issues. However, the current expensive valuation and expectation of moderation in high value orders remains a concern. We therefore, assign SELL rating with a TP of Rs. 1,806 based on a P/E of 28x on FY25E EPS.

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