We cut our FY20-22 earnings estimate by 8-22% and Sep’21E EPS based TP to Rs 855. Note that we forecast FY21 PBT to decline marginally by 2% (PAT growth of 17% driven by tax rate) and see further risk to our FY22 estimates.
According to Thermax’s (TMX) management, the impact of the lockdown due to Covid-19 is likely to be material for Q4FY20 and FY21 earnings. TMX has significant operations in Pune, and even prior to the nationwide lockdown, it had started implementing work from home and other precautionary measures due to early detection of Covid-19 patients in the city. The company has Rs 1.5 bn of material dispatches ready but is unable to deliver due to the lockdown. Also, execution across factories will be impacted henceforth, including international operations. Management remains hopeful that the situation improves after a month in April, but suspects that the recovery may be longer and is preparing for the same to be ready for any challenges that may emerge.
The key strength of TMX is its strong net cash balance sheet. Management indicated that there will be a high focus on cash flow management and even if economic activities resume in April/May, they may not chase the top-line growth initially. It highlighted that even the clients with strong cash positions are looking to preserve cash, and hence, collections may be stretched in the near term. TMX has high fixed costs (~25-30% of sales as per our estimate) compared to its peers with employee cost at 13% of FY19 sales. Thus, the impact of lockdown and subsequent slowdown, if any, can be material to even FY22 earnings. Capex plans put on hold: The company mentioned that unless the global economy recovers, it will be putting all capex plans, except the minor capex related to chemical business, on hold. For a company like TMX, which is a late cycle play, the recovery can be prolonged.
Capex recovery, especially related to infrastructure and consumer discretionary segments, may take time. Food and food processing, textile and pharmaceutical segments should see early recovery. TMX will look to capitalize on the same.
We note that TMX has some challenges in the near term to cope up with, including depleting order book: superior execution over the past 6-7 quarters has led to depletion of the order book (Q3FY20 order book was down 16% y-o-y), especially in the weak ordering environment. Thus, revenue growth momentum was anyways likely to slow down. With order inflows likely to slow down, the risk to revenue run-rate has increased further and high fixed costs pose challenges in downturn. We cut our FY20-22 earnings estimate by 8-22% and Sep’21E EPS based TP to Rs 855. Note that we forecast FY21 PBT to decline marginally by 2% (PAT growth of 17% driven by tax rate) and see further risk to our FY22 estimates. In absence of capex cycle, Thermax has been witnessing continuous erosion in its RoEs, and has been unable to surpass its FY12 peak earnings. Maintain ‘neutral’ given the company’s strong balance sheet and execution capability.