Thermax Ltd - Q2FY21 Result Update - YES Securities

Our view: We cut our earnings estimates for FY21E/FY22E by 13%/8% respectively, factoring lower order booking, gradual pick up in energy business and challenges pertaining to large ticket order timelines. Thermax's (TMX) Chemical business remains in sweet spot & hence we believe it could achieve sales of ~Rs10bn in medium term by increasing its market share from 2% as demand from exports especially North America remains strong. Specialty resins (~USD1bn market globally) offers huge growth potential for TMX, it can grow to Rs5bn with 20-25% sustainable margin. Pricing sanity has returned in case of FGD orderings & we see order finalization of Rs150bn over next 12-months, where TMX might receive order inflow of ~Rs12-15bn. Thermax has once again managed the downturn relatively well with promising cash flow generation via strong control over working capital. We retain BUY with TP of Rs865 at 28x Sept'22 earnings.

- Decent ordering prospects; timeline remains crucial: TMX is banking on, i) Select large enquiries in the metals and steel segment, ii) Several small-sized enquiries from pharma/chemicals, iii) Chemicals segment led by specialty resin, iv) Increasing acceptance of its green offerings from utilities & v) Emission control or recycle equipment for industrial wastes. Share of short cycle orders is increasing as products and services constitute ~50% of order inflows since past 2 years which will eventually help in mitigating risks of large orders.

- Gradual recovery for Energy business: Muted enquiries from the core sectors during H1FY21 resulted 31% yoy drop in order inflow. There are some areas which can drive growth such as, i) Waste heat recovery projects due to improved payback with lower interest rates b) Sustainability and water consumption regulations will increase demand for dry cooling solutions c) Food processing, pharma and chemical industries are witnessing green shoots. Overall, the outlook for H2FY21 for the segment continues to be challenging.

TMX received order from a cement major for supply of cement waste heat recovery boilers at its various plants across India. It bagged the first international order for outsourced utility delivery services. Thermax Onsite Energy Solutions Limited (TOESL) recorded a strong quarter with first multi utility order. Breakthrough order received in energy efficiency services by the Power (Operation and Maintenance) business from a cement major for boiler capacity enhancement. Dangote order worth Rs10bn would be replenished by few smaller orders in FY21.

- Chemical business in sweet spot: Chemicals business had remained resilient even in the current environment with change in product mix towards higher share of specialty chemicals. Thermax has already established itself in the export markets and expects to see continued strength in this business. Favorable mix, soft RM prices & reduction in SGA expenses aided in highest ever EBIT margins of 30% in Q2FY21. This business offerings primarily, revolves around Ion Exchange Resins, Water and Fuel Treatment, Chemicals, Oil Field Chemicals & Construction Chemicals.

Phase II commissioning for cation production at Dahej (Gujarat) completed in September 2020 and first batch has released by the Company. It has received orders for, i) Specialty resins from a key account in the US, ii) Customer in Saudi Arabia for mono ethylene glycol process application, iii) Steel and refinery conglomerates for water treatment chemicals, iv) Repair and retrofitting contracts received from industries, government sector and heritage edifices & v) Innovative product Maxtreat Sprayshot; a single component repair mortar developed under construction chemicals

Environment: Long term outlook for this segment remains positive led by strong order backlog and increased enforcement of emission norms and regulatory discharge norms to drive more inflows. FGD ordering potential is very large which TMX can aim for, however FGD project tendering is getting delayed due to re-budgeting from customer side & ban on Chinese participation into tendering activities. Execution on 2 major FGD orders which were received in FY20 got impacted in H1FY21 due to Covid related issues. Mgmt. expects it to improve in H2FY21.

- Thermax launched 'atoM', a completely modularized and ultra-compact sewage recycle system to treat sewage water efficiently in confined spaces such as basements. It is targeted for commercial and residential segments & available in 10 KLD, 20 KLD, 30 KLD and 50 KLD capacities along with TMX's care connect service program. TMX bagged first export order for Flue Gas Desulphurization unit from a customer in Saudi Arabia & first of a kind order to supply air pollution equipment for lignin fired boiler and alumina calcination

- Performance of subsidiaries: Danstoker has remained profitable during Q2FY21 as well. Going ahead, management's focus would be on improving the order book and revenues for Danstoker while maintaining profitability. However, its current order pipeline looks weak, hence would be challenging to sustain profitability. Utilization levels of Indonesian operations have also improved qoq. Order backlog has improved yoy. TMX has few orders in pipeline & looking stronger over longer term.

- Focus on digitalization: TMX is in putting into digitalization efforts on two fronts. From customer perspective, TMX would continue focus on i) remote commissioning and monitoring, ii) Asset maintenance for outsourced utility delivery services & iii) CRM. To improve internal efficiency, TMX has also initiated few steps like opex project management app, control over 3rd party expenses & process automation.

- Robust OCF generation in difficult times: Delivered promising cash flow from operations (Rs4bn in H1FY21 vs 0.75bn in H1FY20) in a challenging environment on the account of reduction in account receivables. TMX continues to keep focus on cash collection.

Key highlights from Q2FY21 Consolidated results:

- Order inflow was 35% lower yoy to Rs11.1bn due to unprecedented slowdown in industrial activity globally, mainly on account of the COVID-19 pandemic. However, as expected inflow momentum has picked up qoq basis with growth 83% over Q1FY21. While the majority enquiries continue to be from food, pharma and chemicals; there are signs of broad revival in other sectors. It received First export order for Flue Gas Desulphurisation unit from a customer in Saudi Arabia

- In November, Thermax Group concluded a major order worth Rs3.2bn to set up a captive Combined Heat and Power (CHP) plant on an EPC basis for Assam Bio Refinery Private Limited (ABRPL), a public private joint venture company. ARR PT, will develop India's first biorefinery to produce cellulosic ethanol from bamboo biomass.

- Order inflow breakup (Rs11.14bn)

- Energy: Rs8.5bn, down 13% yoy

- Environment: Rs1.6bn, down 76% yoy

- Chemical: Rs1.1bn, up 2% yoy

- Order backlog stands at Rs51.9bn, down 2.7% yoy & flat qoq.

- Energy: Rs34.9bn, down 15% yoy

- Environment: Rs16.1bn, up 42% yoy

- Chemical: Rs850mn, up 18% yoy

- Sales declined 29% yoy to Rs11.4bn (-2% vs our est.) as Energy/Environment segments have reported decline of 34%/13.5% yoy while chemical segments sales grew 3.6% yoy.

- Gross margins contracted by ~80bps yoy to 44.7%

- EBITDA margin came in at 7% (+145bps vs our est.), down 110bps yoy

- Chemical segment reported highest ever EBIT margin of 30.5%.

- Absolute EBITDA dropped by 39% yoy to Rs793mn (+23.5% vs our est)

- Adjusted PAT was at Rs559mn, up 117.5% yoy due to lower tax outgo (+32% vs our est)

- Exceptional items worth Rs246.5mn were on the account of i) Voluntary Retirement Scheme, ii) Provision for closure of German subsidiary claims (Rs125mn).

https://ysil.in/docs/default-source/research/instieq/thermax-q2fy21.pdf

Shares of THERMAX LTD. was last trading in BSE at Rs.790 as compared to the previous close of Rs. 754.4. The total number of shares traded during the day was 3166 in over 552 trades.

The stock hit an intraday high of Rs. 794.9 and intraday low of 740. The net turnover during the day was Rs. 2464974.

Source : Equity Bulls

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