Thermax
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs355
Price target revised to Rs425
Result highlights
- The consolidated revenues of Thermax grew by 23.0% year on year (yoy) to Rs520.2 crore in Q2FY2007, in line with our expectation. The energy segment grew by a robust 20.9% yoy to Rs433.4 crore whereas the environment segment grew by 17.8% yoy to Rs118.7 crore.
- The company's operating profit margin grew by 240 basis points yoy and 350 basis points sequentially to 13.9% in the quarter, way above our expectation. The margin growth was attributed to the strong order booking, lower material cost and a shift in the product mix towards the high-margin energy segment. Consequently, the operating profit grew by 48.5% yoy to Rs72.1 crore, again ahead of our expectation.
- The energy segment continued its robust performance with a revenue growth of 20.9% yoy to Rs433.4 crore and a 430-basis-point expansion in the profit before interest and tax (PBIT) margin to 15.0%. The environment segment too bounced back with a 17.8% year-on-year growth in the revenues to Rs118.7 crore. The margins bounced back in this quarter after remaining subdued in Q1FY2007. The PBIT margin improved by 330 basis points sequentially.
- The net profit grew by 76.4% yoy to Rs53.7 crore in Q2FY2007, ahead of our expectation. The robust margin expansion, higher other income and lower effective tax rate are attributable to the jump in the net profit.
- The order backlog maintained its growth momentum during the quarter, recording a strong growth of 11.5% sequentially and of 142% yoy to Rs2,973 crore. The order backlog is equivalent to 1.8x FY2006 consolidated revenues, imparting a very strong visibility to the revenues.
- Another development during the quarter was that ME Engineering, UK, its loss making wholly-owned subsidiary was referred to the administrator in the UK as its performance was mediocre and it continued to make losses. Due to this event Thermax has provided for Rs23.1 crore as extraordinary expenses in the stand-alone financials. However, the net impact of the above provisions in the consolidated accounts was Rs2.0 crore only. The positive of this event is that in H2FY2007 the performance of ME Engineering won't be a drag on the company's results.
- In light of the continued growth traction over the last few quarters, the blow-out H1FY2007 performance, expected margin expansion in H2FY2007 and reiterated guidance of 30% growth in the top line, we are revising our FY2007 and FY2008 earnings upwards by 22.8% and 17.8% respectively. We are also revising our one-year price target upwards to Rs425 (an upside of 19.6%) discounting its FY2008 earnings per share (EPS) by 18.9x. The Rs34 per share of cash and cash equivalent on the company's books provides amargin of safety to our price target. We maintain a BUY on the stock with a revised price target of Rs425.
SECTOR UPDATE
Pharmaceuticals
R&D tax sops in pharma policy
In a recent conference of the Indian pharma companies organised by Assocham, the minister for chemicals and fertilisers, Ram Vilas Paswan, hinted at certain growth boosters for the Indian pharma industry in the forthcoming new drug policy. The boosters are likely to include fiscal benefits on research and development (R&D) spending and higher public healthcare allocation. The new drug policy is expected to be released by the end of November 2006. According to Mr Paswan, the drug policy has been devised to not only boost the growth of the sector but also benefit the common people in India.
On behalf of the government, Mr Paswan has made a commitment to take the healthcare spending from 0.9% to 2-3% of the gross domestic product (GDP) in the next five years and help the industry grow from $12 billion to $20-25 billion in the same period. That translates into a compounded annual growth rate (CAGR) of 14% and seems reasonable considering the global growth rate of 7-8%.
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