Stock Market Result Update on Thermax for 2QFY2012

Stock Market Result Update on Thermax for 2QFY2012 with an Neutral recommendation. 

Thermax announced its 2QFY2012 results, which were ahead of our and street expectations. The company positively surprised on the top-line front, growing by 19.4% yoy `1,303cr, which was higher than our estimate of `1,168cr. Led by strong top line, EBITDA and PAT also reported decent growth of 9.3% and 13.6%, respectively. Future of the company is directly linked to the recovery of industrial capex which is showing no visible signs of improvement leading to stiff headwinds on the business front. Hence, we maintain Neutral on the stock.

Strong execution drives revenue and profit: For 2QFY2012, Thermax reported revenue growth of 19.4% yoy to `1,303cr (`1,092cr), driven by strong execution. EBITDA margin witnessed a contraction of 100bp yoy to 10.8%, which was in-line with our estimate of 11.1%. The margin decline can mainly be attributed to higher raw-material prices, which rose by ~190bp yoy to 70% as a proportion to sales, and higher execution of low-margin EPC projects. However, strong revenue growth resulted in decent PAT growth of 13.6% yoy to `101.7cr (`89.5cr), against our estimates and street estimates of flat growth.

Outlook and valuation: At the CMP, the stock trades at very attractive valuations of 12.6x and 11.7x FY2012E and FY2013E earnings, respectively (well below its historic average of 19.0x one-year forward earnings). The stock has corrected sharply by ~28% in the last three months, factoring in the negatives surmounting the sector. A weakened business environment would lead to lower order inflows, poor earnings growth and a stretched working capital cycle going ahead – reversal of the company’s key strengths. Hence, we reduce our target P/E multiple from 16.0x to 12.0x to factor in the same, thus arriving at a fair price of `437. We maintain our Neutral view on the stock.