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Thermax - Decarbonisation theme augurs well - HDFC Securities

Posted On: 2023-03-17 18:08:39 (Time Zone: IST)


Parikshit D Kandpal, CFA, Institutional Research Analyst, HDFC Securities and Manoj Rawat, Institutional Research Analyst, HDFC Securities.

Thermax has been at the forefront of green technology for more than a decade. TMX ordering from the green portfolio has expanded from 40% in FY10 to 74% in FY22. The lower carbon footprint target around the globe has allowed TMX to position itself globally in clean water, air and energy products and solutions. Over the years, it has streamlined its business segments (synergising via boiler business transfer) and modified the business model (Capex to opex model in solar and biomass), partnered with tech provider (FGD tech imported in 2015 and partnership for Green Hydrogen tech in 2023) and strengthened its supply chain (manufacturing base rejig in Europe and Asia). TMX stands to benefit from the investment in clean energy, sustainability, decarbonisation, normalisation of the international market and government impetus for cleaner air and water. We initiate on TMX with ADD (given the lofty valuation) with a TP of INR 2,433/sh (40x Mar[1]25E EPS).

Base order pipeline robust; large orders slowing down: During FY22, TMX won four large orders each of size more than INR 2.5bn. However, in FY23, TMX is witnessing such large orders drying up with a visible slowdown in domestic refining and petrochemicals and FGDs. The pipeline in smaller-sized orders of less than INR 2.5bn is strong. Export order pipelines that generally are high-value orders are weak on account of the slowdown in the refineries and petrochemical segment and a slowdown in the US affecting the chemical segment. For Q3FY23, TMX reported an order inflow of INR 22bn (-10/+9% YoY/QoQ), which took the 9MFY23 order inflow to INR 65bn (70% of FY22 orders).

Green portfolio driving multiple expansions: The ordering under the green portfolio has expanded from 40% in FY10 to 74% in FY22. Waste-to-heat recovery, FGDs (impetus from the mandate to reduce sulphur dioxide emission) and chemicals in the water treatment drove this increase. As a result of the increased share of green offering, we can see that the PE multiple for the company increased significantly and now trades at 44x (on 12-month forward consensus EPS), more than its +1 SD.

Margins to improve on the back of various factors: High commodity prices and logistics costs in FY22 impacted the EBIT margins, dropping to 7.1% from pre[1]Covid levels of 9%+. However, with the cooling off of input prices, correction in logistics cost, higher revenue recognition for its two FGD projects and the international subsidiaries expecting to be profitable within a year, the EBIT margin on an overall level is expected to be between 8-9% in the medium term.

New technologies monetisation can lead to further PE expansion: TMX has been investing in new technologies and new areas like (1) bio-CNG, (2) solar opex and wind opex, (3) It is looking to add storage technology, (4) coal gasification (it has developed the technology to be used for high ash coal and looking for orders in the INR 2-5bn range), (4) hydrogen (the company has been working on biomass to hydrogen and is looking at another hydrogen-related tech like electrolyser and also looking at carbon capture tech). All these tech initiatives may lead to further PE rerating.

Shares of Thermax Limited was last trading in BSE at Rs. 2310.70 as compared to the previous close of Rs. 2255.70. The total number of shares traded during the day was 7374 in over 1376 trades.

The stock hit an intraday high of Rs. 2328.20 and intraday low of 2253.10. The net turnover during the day was Rs. 16890714.00.


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