Back to 2018 levels but at 60% higher price: Thermax has clearly shown strong improvement over the past few quarters with strong order booking and good operational performance. Looking at trailing 12m sales, Ebitda margin and current order backlog, the company is back to December 2018 levels. However, the stock is costlier by a whopping 60%. Even looking at 12m forward consensus EPS, it is at a very similar level (up 8% since December 2018) so we believe the bulk of this outperformance could be attributed to multiple expansion which is driven by lower cost of equity and higher long- term growth outlook. We believe Thermax needs to continue its operational outperformance to justify the current valuation. Potential hurdles on this path include increasing raw material and employee costs, competitive intensity for large projects (including but not limited to FGD projects), and efficient allocation of capital.
Q2’FY22 performance: Revenue was up 29% y-o-y, in line with expectations, which is a slight moderation after significant improvement in Q1 (up 58% y-o-y). Revenue grew 19% y-o-y in Energy driven by better execution, 101% in Environment and 12% in Chemical.
Ebitda margin expanded 50bp y-o-y to 7.5% with strong margins in the Energy segment but a decline in the Environment and Chemical margin due to raw material inflation and mix impact. Order inflows increased 67% y-o-y to 18.6 billion, and TMX ended Q2’FY22 with solid order backlog, up 26% y-o-y. Investment view: Order prospects are improving across sectors over the past few quarters, but high competitive intensity in large projects, higher raw material costs, and wage inflation lower confidence about margin improvement prospects. Chemicals business growth looks promising with increased production capacity. Subsidiary performance continues to be volatile with continued impairment of investments. Further, TMX faces long-term risks in the fossil-based captive power business from energy transition. Maintain reduce: We cut our FY22e-24e earnings estimates, adjusting for H1’FY22 performance and outlook commentary. Our estimates changes, valuation rollover from June 2021 to December 2021 and new cost of equity, result in an increased DCF-based fair value target price at1,150 (was Rs 1,040).