Sell Thermax Limited For Target Rs. 3,968 By Geojit Financial Services Ltd
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Depleting order book remains a concern.
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 in-line revenue growth of 13% YoY in Q1FY25, led by the industrial product (15% YoY) and green solutions (54% YoY).
* However, EBITDA margin declined by 38% YoY to 6.5% owing to one time provisions for industrial infra segment of Rs 73cr due to increased project costs.
* The order inflows were flat, impacted by elections and partly by the slowdown in ethanol based orders. The depleting order book (1.1x TTM revenue) may impact the revenue visibility for the coming quarters.
* The company expects traction in new orders with the order finalisations in sectors like power, steel, chemical, and biofuel.
* We reduce FY25 earnings estimate by 4.4% due absence of large orders and margin pressure.
* Due to expensive valuation and weak order inflow growth, we maintain our SELL rating with a TP of Rs3,968 based on a P/E of 50x on FY26 EPS.
Muted order inflows...
In Q1FY25, total order inflows was flat at Rs 2,569cr, owing to general election and partly by the slowdown in ethanol based orders. Due to the absence of large orders, the order book growth was muted at 2% YoY to Rs10,681cr, which is 1.1x TTM revenue. We expect the depleting order book remains a concern for the revenue visibility for the coming quarters. The order inflow of industrial products, green solutions, and chemicals grew by 6%, 19%, and 36%, respectively, while industrial infra segment witnessed a de-growth of 12% YoY.
Cost overruns impacting project works
TMX has taken one-time provision of Rs.73cr across multiple projects due to cost overruns in the FGD orders, bio CNG due to being unable to stabilise the standard output, floods in Chennai solar projects, and difficulty in getting labour for civil work in the Sulphur recovery plant. The company is looking for prospects of thermal power orders in H2FY25, while the management wishes to bid for only the boiler part, excluding the civil work.
In-line execution...
In Q1FY25, TMX reported a revenue growth of 13% YoY to Rs. 2,184cr, aided by strong execution in the industrial product segment (15% YoY), and Green solutions (54% YoY). However, EBITDA declined by 38bps YoY to 6.5% due to one time provision of Rs73cr across multiple projects. Adj. PAT de-grew by –1 largely on account of higher interest costs by 106% YoY and surge in tax expenses by 65% YoY.
Valuations
The current higher valuation and an incremental increase in debt will impact profitability in the coming quarters. Further, the absence of large orders may impact the execution in the coming quarters. We reduce our FY25 EPS estimate by 4.4%, and maintain our rating to SELL. We value TMX at a P/E of 50x on FY26 EPS, with a TP of Rs 3,968.
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SEBI Registration Number: INH200000345
