During Q3FY09, Thermax’s standalone revenues dropped 6% y-o-y to Rs7,951 million, as the energy segment de-grew 10% y-o-y to Rs6,238 million.

The environment segment, however, reported a 14% y-o-y growth to Rs1,853 million during the quarter. EBITDA margins for Q3FY09 remained flat at 12.2% vs. 12.4% for Q3FY08. For 9MFY09, both revenues and EBITDA margins were flat.

We believe that Thermax would clock revenues of Rs31,728 million during FY09E, a 6% de-growth from FY08; in contrast, revenues are estimated to grow at 21% y-o-y to Rs38,265 million during FY10E.

EBITDA margins are expected to remain flat, at 12.3%, during the next two years. We expect profit after tax to fall 6% in FY09E to Rs2,747 million, and grow 17% in FY10E to Rs3,226mn.

We expect this trend on account of incremental revenues that the company is expected to generate from the recent Rs16 billion EPC orders. This translates into an EPS of Rs23.1 for FY09E and Rs27.1 for FY10E.

Order backlog

Thermax’s consolidated order backlog, as on 31 December 2008, stands at Rs41.03 billion. In Q3FY09, after order cancellations of about Rs1,600 million, the company had net order inflows of Rs8,630 million.

We believe that there could be order delays as most of the company’s orders and revenues are dependent on corporate / industry spends.

We expect FY10 revenues to be 1.0x the closing order book for FY09.

Valuation

At the current market price of Rs159, Thermax trades at 5.9x our estimated FY10 EPS of Rs27.1.

We are downgrading our recommendation on the stock from Buy to NEUTRAL with a target price of Rs170.

The downgrade stems from lower growth estimates and the expected utilization of Rs3,700 million for incremental working capital requirements, thus making it RoE dilutive.

We expect the RoE to decline from the present 43% to around 32% for the next two fiscals, leading to a contraction in the P/E.