Thermax, a market leader in small and medium sized industrial boilers, is among one of the few companies in the world that provides total integrated solutions in the areas of heating, cooling, power, water and waste management, air pollution controls and chemicals.
Though the company is currently facing the brunt of slowdown and likely to witness near-term challenges, the outlook seems to be considerably improving FY2011 onwards.
Structural growth drivers
The power deficit has been a constant and continued scenario within the economy, with peak load deficit touching a high of 16.6% in FY2008. Given the current demand-supply dynamics, we believe that the power deficit is here to stay for a foreseeable future, which would structurally be a long-term positive driving growth for the captive power players.
Besides, with existence of heavy cross subsidies in the sector, the captive route is turning out to be an economical option too for the industrial users.
Outlook and valuation
Traditionally Thermax has been trading in a wide forward P/E band range of 3-38x. During April 2001-March 2004, the stock traded at an average P/E of a mere 6x. This was the phase when the company was coming out of operational setbacks suffered in FY2001 (the year when company suffered losses) and was in the midst of scaling up its operations.
We expect Thermax to face near-term challenges with macro economic slowdown bound to adversely impact its FY2010E Earnings. However, we estimate a strong bounce back from FY2011 on the back of rebound in the domestic economy along with pick up in the industrial capex driving order momentum for the company.
Besides, the company’s entry into the utility boilers space would impart a greater revenue visibility reducing high cyclicality associated with its earnings. We believe that the company’s success in the utility boilers segment could be a key growth driver and aid re-rating of the stock in the future.
At the current price of Rs455, the stock is quoting at 20.6x and 15.1x FY2010E and FY2011E EPS, respectively. Against the backdrop of economic revival, foray into utility boilers, healthy balance sheet and strong management team, we assign a Target P/E multiple of 17x to Thermax.
We Initiate Coverage on the stock, with an ACCUMULATE recommendation and Target Price of Rs512.