Markets
Robust order outlook, margin revival to aid Thermax’s earnings
Summary
hermax’s order trajectory has been healthy. As of 30 June, the order book for the quarter stood at ₹10,505 crore, up 10% year-on-year.Shares of Thermax Ltd closed 3.4% higher on Wednesday. The energy and environment solutions provider reported a 38% year-on-year growth in consolidated Ebitda to ₹132 crore for the quarter ending June (Q1FY24), below analysts’ estimates.
Jefferies India believes margin improvement will continue in the coming quarters, too. Thermax’s order trajectory has been healthy. As of 30 June, the order book for the quarter stood at ₹10,505 crore, up 10% year-on-year. Order inflows increased by 11% to ₹2,567 crore. Last quarter, Thermax concluded a major order of ₹271.5 crore from India’s biggest private sector oil refinery.
In the Q1 earnings call, the management said it has bagged multiple boiler orders from the steel and distillery segment. Order book from the industrial infra and chemical segments were marginally lower in Q1 due to slower execution. However, enquiries for orders from food, chemical and distillery remain strong. There are signs of improvement in cement segment as well. On the other hand, international orders were relatively subdued, but the order pipeline is healthy and the management is hopeful of an improvement going ahead.
“The management commentary this time on orders and profitability outlook was better than last quarter. Small-sized orders momentum is likely to sustain which bodes well for the company’s FY24 order book trajectory because large orders in the pipeline could take some more quarters to materialize," said Parikshit Kandpal, vice president, institutional research, HDFC Securities.
To be sure, Thermax’s reported net profit was flattish year-on-year in Q1 at almost ₹60 crore, adversely impacted by an exceptional item of provision related to litigation.
Note that Thermax’s shares have rallied by 32% so far in 2023. The increased expectations of capital expenditure (capex) revival have led to a sharp up-move in a slew of capital goods stocks including Thermax. The stock trades at 42 times estima-ted earnings for FY25, show Bloomberg data.
Particularly for Thermax, there are favourable factors for margin revival such as lower commodity costs, diminishing legacy orders and increased scope for improvement in operating leverage.
“Lower commodity prices, impr-oving supply chain and operating leverage should drive margin impr-ovement. Fixed costs were 10% of sales for Thermax in 2008 and 19% in FY22, showing scope for leverage gains," said a recent Jefferies report.
On the flipside, if the India capex story does not play out as per expectations, it is a potential risk and so is the Thermax management disappointing on capital allocation.
