Thermax Ltd reported a fall of 28.93% in top line sales revenues for the Sep-20 quarter at Rs 1,141.20 crore. While the sales did dip sharply in the Jun-20 quarter due to factory activity getting disrupted across the board, the business has bounced back sharply in Sep-20. However, the sales still need to recover another 50% to get back to pre-COVID levels.

 

Net profits for the Sep-20 quarter were higher by 21.56% at Rs 31.24 crore due to better cost management despite lower absorption of fixed costs. The company consciously went on a cost control drive to maintain margins. As a result, Net profit margins or NPM expanded marginally to 2.74% in the Sep-20 quarter from 1.60% in the Sep-19 quarter.

 

As per ICICI Securities, strong outperformance in the chemical segment and turnaround of overseas subsidiaries offset weak execution in energy and environment divisions. Focus on improving collections and control over working capital resulted in strong operating cashflow of Rs 4.1 billion in H1 FY21. However, the outlook on European subsidiary Danstoker continues to be challenging while the Indonesian entity is likely to perform relatively better. We expect chemical segment margins to normalise and overall execution in other segments to be tepid in the near to medium term. Factoring-in the same, we cut FY21E earnings by 7.6% while we raise FY22E earnings by 5% implying pick-up in execution. Given rich valuation, near-term growth stress and muted ordering activity, we maintain HOLD on the stock with a revised target price of Rs 780 (earlier: Rs 740).

 

- Muted execution, challenging near-term outlook: Energy segment revenues declined 34% YoY to Rs 8.9 billion while environment segment fell 13.5% YoY to Rs 1.6 billion. Chemical segment revenues however grew 3.6% YoY to Rs 1.1 billion resulting in overall revenue decline of 29% YoY. Overall order intake was down 35.3% YoY at Rs 11.1 billion for Q2 FY21. Current orderbook at Rs 51.9 billion (1x TTM sales) implies growth headwinds given higher execution cycle of ~Rs 9 billion worth of FGD orders. However, the company recently won a medium-sized order of Rs 3.2 billion from Assam Bio Refinery Private Limited (ABRPL), which will support medium to long term growth.

 

- Overseas subsidiaries turnaround: Danstoker and Indonesian subsidiary were profitable in Q2 FY21. Indonesian subsidiary order pipeline has improved while the outlook on Danstoker continues to be challenging. Thermax has taken impairment of Rs 67 million towards winding up of Omnical business.

 

- Expect traction from small and medium sized orders in FY21E: Green shoots are visible in terms of waste to energy conversion, waste heat recovery for cement plants, chemicals and food processing. FGD orders are likely to be finalised by the end of FY21E or Q1FY22E.

 

- Prudent management of cost and optimisation of resources: Company is focused towards cost reduction and optimisation given the stress in terms of growth. It has given VRS to 45 employees and provided Rs 100 million towards the same.