While the order backlog is progressing well, lack of visibility on large orders a negative; ‘Reduce’ retained.
Thermax analyst meet helped us appreciate the management’s relentless pursuit of profitable opportunities across various segments and their willingness to take risks along the way. The 10-year targets of Rs 160 bn topline (implies 7-8% CAGR) and 50:50 domestic: international order mix look pragmatic and not overly ambitious. More creditable are the steps being taken to make the business more resilient to economic cycles by foraying into new areas. Our near-term estimates, target price (Rs 1,065) and rating (Reduce) remain unchanged for now.
Multi-pronged strategy to reduce business volatility: Thermax’s management elaborated a multi-pronged strategy aimed at reducing business volatility. It cited a few initiatives such as (i) planned entry into process chillers (2-3X the market size of absorption chillers), (ii) targeting commercial customers for heating and cooling (<1% market share, runs counter-cyclical to industrial capex), (iii) entry into rooftop solar and water markets, (iv) attempt to increase share of products and services in revenue mix and reduce projects to 50-55% from 65-70% in FY2018/ 19e and (v) overseas expansion of projects business in Southeast Asia.
Unfazed by occasional failures, pursuit of opportunities will continue: Acquisitions done by Thermax have occasionally hit roadblocks. The key ones among them being the impairment taken in Thermax-B&W JV, impairment in Chinese subsidiary and decline in the business of First Energy. However, the company sees positives in
(i) opportunity to acquire TBW assets at a cheap price (automated factory, access to NOx control technologies) and
(ii) increasing oil prices bringing back the attractiveness of First Energy.
Meanwhile, organic growth continues with planned expansion of Dahej resin facility, special attention to engineered rooftop solar solutions, water, FGD and NOx control.
Existing backlog progressing well but no large orders in sight: FY2018 was a good year of order inflows for Thermax due to key large order wins such as the $157mn Dangote order. However, there are no such large orders in sight for FY2019 despite enquiries from some pockets such as cement, steel (JSW Steel, ~Rs 3 bn), refineries (Barmer) and fertilisers.