Thermax Shares Hit A 52-Week High As Rally After Q2 Results Continues
Here's what brokerages made of Thermax's Q2 FY22 results:
Shares of Thermax Ltd. hit a 52-week high as the stock continues to surge after the electricity generation and pollution-control equipment maker saw its earnings jump and order inflows recover in the second quarter.
Key Q2 Highlights (Consolidated, QoQ)
Revenue up 39.6% to Rs 1,469.3 crore.
Ebitda up 74.5% to Rs 110 crore.
Adjusted profit after tax up 107.4% to Rs 87.9 crore.
Ebitda margin up 150 basis points to 7.5%.
Order inflows were at Rs 1,860 crore (up 67% year-on-year) from sectors such as refineries, chemicals, among others.
The stock rose as much as 15.4% to Rs 1,879.8 apiece on Tuesday. Its trading volume was five times the average for this time of the day. It ended 10.6% higher at Rs 1,801 apiece.
Thermax was the best performer among peers and has now climbed 30% so far in four sessions after results. Of the 28 analysts tracking the company, seven each recommend a ‘buy’ and a ‘hold’, while 14 suggest a 'sell', according to Bloomberg data. The average of 12-month consensus price targets implies a downside of 18%.
Here's what brokerages made of Thermax's Q2 FY22 results:
Edelweiss
Maintains 'reduce', but raises target price to Rs 1,090 from Rs 970, still implying a potential downside of 28.4%.
Thermax reported a decent pickup in execution — better than consensus — while Ebitda fared in line. The key highlight is the jump in new orders to a seven-year high for H1 with broad-based demand commentary.
Profitability and cash flow remain key with rising orders. Watch out for cost-cash for Thermax and clarity on long-term scalability, which remains key to its re-rating.
Building in better intake, return/cash flow scale-up will be challenging given global competition.
Greater order throughput will lead to an upgrade in our/consensus FY23E growth; however margins/cash flow remains critical given rising exports mix.
Also, with Thermax getting into significant diversification (conventional and new areas), the number of variables seem to be far more. Domestic capex clearly seems to be getting better, which should expand TAM (total addressable market) for Thermax, lending near-mid-term earnings comfort.
ICICI Direct
Maintains 'buy' with a target price of Rs 1,800, implying a potential upside of 18%.
Thermax reported decent Q2FY22 results amid disruptions.
Remains long-term positive. Strong balance sheet, prudent working capital management, recent technological tie-ups, are expected to support growth.
Recent broad-based recovery in order inflows, strong order enquiry pipeline across industrial sectors likely to ensure decent order inflows for FY22.
Dolat Analysis
Maintains 'sell' with a target price of Rs 1,378, implying a potential downside of 10%.
Thermax continued its healthy ordering momentum, primarily led by a recovery in base orders and finalisation of deferred orders. Tender pipeline continues to remain firm.
Environment segment margins were impacted by higher execution from flue gas de-sulphurisation orders, which has very low profitability. Chemical segment margins were impacted by higher raw material prices and freight costs. Thermax expects margin sustaining in 18-22% range by price hikes, higher proportion of specialty chemicals and improving utilisation.
The stock is priced to perfection, even as we optimistically factor in 26% EPS CAGR over FY21-FY24.
Goldman Sachs
Reiterates ‘sell’ with a target price of Rs 1,200, implying 22% downside potential.
Results came in ahead of expectations. Execution of lower margin flue gas de-sulphurisation orders and turning break even for the Indonesian subsidiary still being some time away could keep margins under pressure in the near term.
While order inflow was strong this quarter, large order finalisation will be key to drive backlog higher from current levels in its view.
Overall, while the set-up for a favourable growth environment for Thermax is underway, a few challenges remain — such as margins to remain under pressure driven by high commodity prices and prevailing competition; meaningful contribution from newer growth areas is still some time away given newer opportunities are still at an exploratory stage; and overseas operations may take some time to normalise given the impact of the pandemic.
Its earnings estimates reflect the benefit of faster earnings growth in the next two years, driven by robust order inflow and pickup in order execution. However, as the stock is still currently expensive, risk-reward looks unfavourable.
The current valuation is running well ahead of fundamentals and pricing in the potential benefit of businesses which are unlikely to contribute to earnings for at least the next 24 months, as discussions on newer opportunities are still at an exploratory stage and lower margins will likely limit near term earnings potential.
Thinks the return on equity witnessed by Thermax in the previous upcycle will not be repeated as opportunity size (within its existing energy business vertical majorly focused on conventional power) has diminished and competition has only increased.
Citi
Maintains ‘sell’ , but raises target price to Rs 1,344 from Rs 1,147, still implying a downside of 13.4%.
Thermax reported an operationally in-line quarter. While it remains a well-run company with focus on cash flows, valuations remain rich.
Thermax continues to see the impact of higher commodity cost and freight cost headwinds. Further, attrition is also seeing a spike, per management, and needs to be monitored.
As Indonesia and rest of Southeast Asia come out of the pandemic impact, the pipeline will start looking better. The Indonesian business inquiry pipeline is significant, but conversion needs to be seen. Danstoker operations have not turned profitable yet.
Prabhudas Lilladher
Maintains ‘accumulate’ , raises target price to Rs 1,633 from Rs 1,559, implying a potential upside of 6.7%.
During the quarter, Thermax received its first order to set up a bio-CNG plant, based on rice straw as a feedstock. Management indicated strong demand scenario across the sector, thereby providing healthy order inflows visibility.
Well placed to capitalise on reviving economic activities in the long run given its strong balance sheet, prudent working capital management and steady order inflows with strong tender pipeline.
Credit Suisse
Upgrades to ‘outperform’ from ‘neutral’, raises target price to Rs 1,800 from Rs 1,300, implying a potential upside of 17.4%.
Strong traction in earnings. Thermax shared very positive commentary on the domestic demand environment, suggesting that the cycle has moved in a higher gear and is seeing strength across segments.
A diversified basket (including EPC and detailed engineering problem solving) around heat transfer based on different feedstocks and environment is a strength.
Thermax's participation in the cycle can be relatively lower compared to ABB/Siemens, but can still drive strong earnings traction.
Major risk remains a lack of consistent track record of pickup in export/overseas orders despite capacity investments and a risk to margins related to delays, large flue gas de-sulphurisation contracts.