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Thermax Ltd: Disappointing quarter - Views on News from Equitymaster

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Thermax Ltd: Disappointing quarter
Nov 12, 2012

Thermax has announced its second quarter results for 2012-2013 (2QFY13). During 2QFY13, both topline and bottomline declined by 8.5% YoY and 10.4% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales declined by 8.5% YoY during quarter ended September 2012. The fall has come in on the back of about 9.8% YoY decline in the energy segment and 7.1% YoY decline in the environmental segment.
  • Operating profits decline by 13.3% YoY during 2QFY13. In line with that, operating margins decline by 60 bps to 10.2% in 2QFY13.
  • Net profits decline 10.4% YoY due to muted performance at the operating level and rise in interest expenses.
  • The consolidated order back log of the company stood at Rs 49.8 bn during 2QFY13. Order intake for the current quarter stood at Rs 13.2 bn.

Standalone performance snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Income from operations 13,036 11,924 -8.5% 23,479 21,759 -7.3%
Expenditure 11,631 10,706 -8.0% 20,939 19,479 -7.0%
Operating profit (EBDITA) 1,405 1,218 -13.3% 2,540 2,280 -10.2%
Operating profit margin (%) 10.8% 10.2%   10.8% 10.5%  
Other income 208 274 31.6% 355 362 1.9%
Interest 11 34 212.5% 15 72 385.6%
Depreciation 117 139 18.4% 226 271 19.7%
Profit before tax 1,485 1,318 -11.2% 2,654 2,299 -13.4%
Tax 468 407 -12.9% 839 717 -14.5%
Profit after tax/(loss) 1,017 911 -10.4% 1,816 1,583 -12.8%
Net profit margin (%) 7.8% 7.6%   7.7% 7.3%  
No. of shares         119.2  
Basic & Diluted earnings per share (Rs)*         13.3  
P/E ratio (x)*         18.4  
* On a 12-month trailing basis

What has driven performance in 2QFY13?
  • Revenues declined 8.5% YoY during 2QFY13. This was mainly due to a 9.8% YoY decline in revenues from the energy segment. Revenues from the energy segment declined due to lower carry forward orders and execution issues in the project business. During the quarter, the company won one major EPC power order of Rs 2.8 bn from a leading Government of India enterprise in North East. It also received one captive power order from a cement company. However, no order from oil & gas sector was received during the quarter.

    Segment-wise performance (Standalone)
      2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Energy
    Revenue (Rs m) 10,356 9,345 -9.8% 18,372 16,997 -7.5%
    % share 77.8% 77.3%   76.6% 76.7%  
    PBIT margin 11.5% 9.9%   10.8% 10.3%  
    Environment
    Revenue (Rs m) 2,962 2,751 -7.1% 5,615 5,163 -8.0%
    % share 22.2% 22.7%   23.4% 23.3%  
    PBIT margin 10.2% 9.6%   11.1% 9.9%  
    Total
    Revenue (Rs m)* 13,318 12,096 -9.2% 23,987 22,160 -7.6%
    PBIT margin 11.2% 9.8%   10.9% 10.2%  
    *Excluding other activities and inter-segment adjustments

  • Operating profits declined 13.3% YoY during the quarter. In line with that, operating margins of the company declined by 60 bps to 10.2% in 2QFY13. Despite a decline in margins on a y-o-y basis, management was able to hold on to the double digit mark due to stringent cost control measures.

  • Net profits declined 10.4% YoY during the quarter due to muted performance at the operating level and increase in interest expenses.

What to expect?
At the current price of Rs 587, the stock is trading at a multiple of 18.4 times its trailing twelve month earnings. While the overall ordering environment is under pressure, the company is able to manage a stable run rate of Rs 10-12bn of order inflows per quarter. For a double digit revenue growth to fructify in FY14, management opined that the order book should grow by 10-12% for the full year. This may turn out to be difficult task as absence of EPC orders, which are typically large in size, can hurt the order inflow growth.

It may be noted that the stock has already appreciated by 20% since our initial recommendation in February 2012. Our revised price target now stands at Rs 665. This does not leave much upside from current levels. As such, we recommend a SELL on the stock and advice investors to book their profits.

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