Given demand challenges, FY20/21e EPS down 1/7%; TP revised to `1,089
Against the backdrop of a challenging demand environment, near-term order intake growth for Thermax will remain under stress. However, the company caters to a diverse subset of segments in terms of both business verticals and geographies, and this is expected to stand it in good stead. Management is not pulling back on any of its expansion plans and is confident of achieving its medium to long term targets in South-East Asia and from capacity expansions in chemicals and vapour absorption segments. Given the near-term demand challenges, we trim our earnings estimates by 1% and 7% for FY20e and FY21e respectively. Maintain Add with a revised target price of Rs 1,089 (previously Rs 1,177).
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High base effect to catch up in H2FY20e execution: Powered by Rs 7.3 bn of revenue contribution from the Dangote project in Nigeria, FY19 growth was strong at 33%. During H1FY20, the remaining ~Rs 2.7 bn worth of work from Dangote is expected to be booked, and this will support growth. However, we believe, overall growth will shrink during H2FY20e.
Loss at overseas subsidiaries to reduce: Shifting of production to the low-cost Poland facility and focus on high-margin products and services will help improve margins of the company’s European subsidiary, Danstoker.
Maintain Add: Focus on overseas markets, services, control over fixed overheads, investment in high-margin chemicals segment and Indonesian plant will stabilise the company’s performance in the long term.