Following our meeting with Thermax’s CEO on 11 November 2008, we expect weak order intake in F2H09 despite strong momentum in F1H09 (orders up by 101% y-o-y).
Given global meltdown of commodity prices, we expect significant project cancellations / pushouts from the metals sector and continuing weakness in the cement sector due to slowdown in construction activity.
Also, our expectations of two order wins in FY09 from entry into utility boiler space will likely get delayed due to difficult financing environment for Independent Power Producers (IPPs).
We now expect weak order growth of 9.3% y-o-y for F2H09 and 12.4% y-o-y for FY10. The industrial capex cycle is slowing and we believe Thermax’s high exposure to private sector capex makes it more vulnerable.
Thermax’s exposure to metals, cement, textiles and chemicals is high (~65-70% of sales). Given worsening fundamentals in these sectors and factoring in a weak F1H09 (sales growth of 5% y-o-y), we lower our sales estimates by 4.6% for FY09 and 13.6% for FY10.
While our EPS for FY09 remains at INR23.58, our FY10 EPS is cut by 14.5%. We are also lowering our capex assumptions for FY2010 and FY2011 by ~INR 1.7b as we expect future boiler capacity additions to be postponed.
We are downgrading Thermax to HOLD from Buy on slowing industrial capex cycle, weak order intake, slowing execution, and lack of near-term catalysts for the stock.
Thermax trades at 9.5x our FY10 EPS, versus Indian capital goods peers, trading at 12.73x(ex TMX).
Our new DCF based target price is Rs297, which implies a P/E multiple of 10.1x our FY10 EPS of Rs29.43.
We believe that Thermax is well positioned to ride the current slowdown due to its strong balance sheet (zero debt) with low cash conversion cycle, high asset turnover and solid RoE metrics. BHEL remains our preferred stock in the capital goods space due to high revenue visibility, improving margin profile and low exposure to private sector capex.