Stock Review: Thermax

A strong performance for the quarter and year ended March 2011 fails to reveal the challenges ahead for Thermax. Its order book is thin, valuations high, margins are eroding and incremental orders are hard to come by considering rising interest rates. The future of Thermax lies in its entry into the super critical business and leveraging the foreign acquisitions.

Thermax, one of the leading engineering solution providers to the energy and environment sectors, posted an impressive YoY growth for FY11. Backed by a strong growth in its energy segment, which constitutes about 77% of its total revenues, the company clocked more than 53% growth in its standalone topline for the year while net profits rose by more than 49%.

However, rising commodity prices have dented operating margins by nearly a 100 basis point for the year. For the March 2011 quarter, the company shrugged off the slowdown in order intake and posted a 45% jump in revenues and a 27% growth in profit due to strong execution.

The stock currently trades at a price-earning multiple (P/E) of about 18.4, which is a little higher to its closest competitor BHEL. However, BHEL boasts of a very strong order book and reasonable revenue visibility in the near term.

The consolidated order book of Thermax as of end March 2011 stood at . 6,446 crore which is just about 1.2 times its consolidated revenues for the year. While cement and steel are the major sectors contributing to order inflows, orders from the government have slowed down considerably with several Jawaharlal Nehru National Urban Renewal Mission projects facing delay in finalisation. The company's supercritical boiler business, in collaboration with Babcock & Wilcox of US is in progress to set up the plant by September 2012 for which it can start booking orders from first half of FY12. This could be a great revenue booster for the company. Moreover, the company's acquisition of European boiler manufacturer, Danstoker and its subsidiary Omnical Kessel is expected to en-able the company leverage the ongoing energy movement in Europe and thus expand its greenproduct portfolio by tapping new markets globally.