Thermax
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs585
Current market price: Rs488
Price target revised to Rs585
Result highlights
- The consolidated revenues of Thermax grew by a whopping 65% year on year (yoy) to Rs856.5 crore in Q4FY2007, sharply ahead of our expectation. The revenue of the energy segment grew by a strong 74% yoy to Rs685.5 crore and that of the environment segment grew by a robust 53.7% yoy to Rs205 crore.
- The company's operating profit margin (OPM) declined by 70 basis points yoy to 12.4% in the quarter. The dip in the margin was due to a rise in the raw material prices and a change in the product mix. On a full year basis, the OPM stood at 12.4% as against 13.1% in Q4FY2006 and we expect the company to maintain the OPM in FY2008. The operating profit grew by 56% to Rs106 crore.
- The energy segment continued its robust performance with a revenue growth of 74% yoy. Although the profit before interest and tax (PBIT) margin for this segment declined by 240 basis points yoy in this quarter, yet we don't see this as a cause for concern. That's because the margin declined more because of a change in the product mix and rupee appreciation. The company has said in its conference call that it has taken adequate measures to tackle the rupee appreciation. The environment segment reported an impressive 53.7% growth in its revenue and a 230-basis-point improvement in the PBIT margin on a year-on-year (y-o-y) basis.
- The consolidated net profit grew by 66% yoy to Rs69.7 crore in Q4FY2007, in line with our expectation.
- The order backlog grew at 79% yoy to Rs3,100 crore. It is equivalent to 1.3x FY2007 consolidated revenues and order inflows during the quarter were up by 38% to Rs894 core. This imparts a very strong visibility to the revenues.
- The company has done a capital expenditure (capex) of Rs80 crore in this year and will further do a capex of around Rs150 crore in FY2008 as it is setting up a factory in Vadodara at a cost of Rs175 crore. So far it has invested Rs50 crore in this factory. The factory will start production in a phased manner. The production from the first phase of the project will commence from July this year and full production would start by March 2008.
- The company has guided for a stable to better OPM in FY2008, which, in our opinion, is indicative of the improving outlook of its business.
- In light of the continued growth traction over the last few quarters, the closure of the loss-making subsidiary ME Engineering and the revised guidance of a 40% top line growth for FY2008, we are revising our FY2008 earnings estimate upwards by 2.4%. We are also revising our one-year price target upwards to Rs585. The Rs50 per share of cash and cash equivalent on the company's books provides a margin of safety to our price target. We maintain a Buy on the stock with a revised price target of Rs585.
SECTOR UPDATE
Banking
Possibility of another CRR hike remains alive
The continued growth momentum, easy liquidity driven by strong foreign inflows and concerns over increase in global commodity prices could prompt the Reserve Bank of India (RBI) to suck out the excess liquidity from the banking system. Expectations are building up that the RBI may be prompted to take a pre-emptive action as the system is again flush with funds and the government is all set to resume spending.
Amidst this developing situation, the comforting factors have been the moderation in inflation (down to 5.27% from 5.44%) and non-food credit growth (lower at 27.1% compared with 30.5% growth in the previous year). However, money supply growth at 20.2% (RBI's FY2008 target being 17%) is the only factor that could prompt the RBI to step in and suck out liquidity from the system to keep the money supply growth in check.