Thermax’s Q2FY16 numbers came below consensus with sales (down 9% YoY) and PAT (down 25% YoY) coming 13% and 25% lower than estimates, respectively. While consumption led business(packaged boilers & heaters) growth is expected to sustain, we believe decline in large boilers (utility grade) business poses a formidable challenge to FY16-17E earnings given the current scenario — sub-par utilisation & demand in cement, metals, and tepid demand & high competition in low volume utilities market.
We cut FY16E and FY17E earnings 20% and 25%, respectively, as we trim our intake assumptions due to weaker captive market and sub-par utilisation of new super-critical boilers JV.
While we view Thermax as the best play on industrial boilers & heaters segment, we believe overhang of a weak utilities market coupled with medium-term challenges for larger captives will pose a serious growth challenge over
the next 12-15 months, impacting near-term earnings.
Management does not envisage recovery in utilities market in the near term and estimates recovery only after 1.5-2.0 years.
Also, recovery in larger captive, which is driven by metal sector, is not in sight over the next 2.0-2.5 years, which coupled with sub-par utilisation levels in cement will pose a serious challenge to current captive power market growth.