Emkay Global Financial Services is bullish on Thermax and has recommended buy rating on the stock with a target of Rs 735 in its July 25, 2011 research report.
“Thermax reported strong standalone performance in Q1FY12 despite high base effect of Q1FY11 – ahead estimates. Revenues grew by 32% yoy to Rs10.4 bn – led by both segments Energy (up 32% yoy to Rs8.0 bn) and Environment (up 19% yoy to Rs2.6 bn). However, operating margins declined 130 bps yoy to 10.9% (Vs estimate of 11.7%) – attributed to high contribution of low margin business. Consequently, operating profit growth was lower at 19% yoy to Rs1.1 bn – though above estimates. Led by strong revenue growth, net profits grew by 21% yoy to Rs799 mn, ahead estimates.”
“Led by a robust opening order backlog, Energy segment posted strong revenue growth at 32% yoy to Rs8.0 bn – ahead estimates. However, EBIT margins declined 110 bps yoy to 10.1% – owing to high revenue contribution from low margin EPC orders (segment revenue contribution up from 30% in Q1FY11 to 39% in Q1FY12). After a subdued Q4FY11, Environment segment grew by a healthy 19% yoy to Rs2.6 bn – in line with estimates. Segment EBIT margins declined marginally by 30 bps yoy to 11.8%. Thermax posted sharp improvement in consolidated performance – attributed to turnaround of key subsidiaries (except for Thermax (Zhejiang) Cooling & Heating Engineering Co. Ltd., China). Thermax’s subsidiaries posted net profit of Rs39 mn – versus Rs6 mn in Q1FY11 and Rs7 mn loss in FY11. Consequently, consolidated revenue grew by 49% yoy to Rs12.4 bn while net profits grew by 28% yoy to Rs856 mn.”
“We believe Thermax has low probability of negative earning surprises and has demonstrated sustained order inflow momentum – addressing the twin principle investor concerns in the engineering and capital goods (ECG) sector. Further, Thermax is amongst the few ECG companies with +40% ROCE and +27% ROE and healthy operating cash flow generation (about Rs6.0 bn pa). It is trading attractively at 15.7X FY12E and 14.1X FY13E earnings. We retain BUY recommendation with a price target of Rs 735,” says Emkay Global Financial Services research report.
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