Capital goods maker Thermax Ltd appears to have turned cautious on order flow prospects for the next couple of quarters. In the analysts call after announcing the September quarter results, its management stated that while there are enquiries flowing in for new orders, there is slackness in concluding them and in advance payments. Even government orders that were the only hope in the last few quarters are likely to be on hold due to the forthcoming general election in the country. Order flows dropped by 4% from the year-ago quarter.

As if all this is not enough, the liquidity crunch following the Infrastructure Leasing and Financial Services Ltd’s fiasco will affect order flows for a few quarters. At the end of the day, order flows are integral to earnings growth and valuations; given the dim outlook, earnings estimates are likely to come down. Thermax’s stock price of 983 discounts the estimated FY20 earnings by about 27 times, a tad lower than the five-year average of 30 times.

Another area of weakness in the quarter’s performance was its profitability. Ebitda (earnings before interest, tax, depreciation and amortization) margin fell by 150 basis points year-on-year to 7.7%, which was way below the 9.1% forecast by analysts. Even the higher operating leverage on the back of a 38% year-on-year jump in revenue did not save the day, as rising commodity prices and employee costs weighed on margins.

Further, according to a report by Emkay Global Financial Services Ltd, overseas subsidiaries in Europe and China reported losses and impacted consolidated performance.

In the final analysis, the net profit at 74 crore, which was 31% higher year-on-year, was in line with forecasts on the Street. Other income and revenue growth trickled down to profit growth.

Apart from Thermax’s strong execution in translating the order book to revenue in a timely manner, its strong balance sheet and lean working capital cycle of 40 days should support the existing valuation.

For the near term, the firm’s 6,400 crore order book—which is 1.3 times its trailing annual revenue—also provides a buffer, given the lull that is likely for the next two quarters at least.

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