Thermax: A resilient show but rich valuation

The company’s September quarter results hint at a gradual recovery, albeit in a small-ticket capital expenditure cycle


Graphic: Mint
Graphic: Mint

Through recessionary conditions in India and abroad, capital goods maker Thermax Ltd has put up a brave front.

The company’s September quarter results hint at a gradual recovery, albeit in a small-ticket capital expenditure cycle. Order inflows were up 31% year-on-year at about Rs1,200 crore, getting a leg-up from some large orders in Thailand and the Middle East. Note that the order from Thailand for a captive power unit for a sugar plant holds promise for Thermax, as about 18 more such sugar plants are likely to be tendered in the region over the next two-three years.

Captive power plant orders rose marginally but much of the intake is from consumer-led industries like food processing, dairy and pharmaceuticals. However, demand from heavyweight sectors like cement, steel and power remained dull.

Even revenue-wise, the energy segment declined sharply by about 17% whereas the environment segment fell by 2%, though the latter comprises less than a fifth of the total revenue. On the whole, consolidated revenue contracted by about 13.4%, although analysts had expected worse.

In spite of this, Thermax was able to maintain its operating margin (8.4%) at the year-ago level. The management also said several cost-cutting measures had not only helped the company weather the slowdown but also improve bids and get more competitive in the market. Operating profit fell on the back of weak revenue during the quarter.

Meanwhile, after adjusting for its share of subsidiary earnings, Thermax posted a consolidated profit of Rs78.6 crore—32.9% higher than a year ago.

That said, the company has historically traded at rich valuations compared to its Indian peers. At Rs864, the Thermax stock trades at about 30 times fiscal year 2018 earnings, factoring in management prudence and a strong market presence. The decline in its order book due to faster execution of projects implies that it needs greater traction in order inflows to keep the order book healthy.

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