Thermax: Buy

Investments with a one-two year perspective can be considered in the stock of Thermax, a leading energy and environment engineering solutions provider. A strong business outlook on the back of capex across user industries, a robust order book, and good growth across segments underscore our recommendation.

At current market price, the stock trades at about 23 times it FY09 expected per share earnings. Though the stock has appreciated considerably over the last two months, fresh exposures can be considered in light of strong medium-term earnings prospects.

Specialising in energy conservation systems and captive power projects, Thermax is likely to profit from the growing importance for energy management among its user industries. This apart, given the nationwide shortage of power, it is also likely to benefit from the increasing demand for captive power solutions.

Revenues could get a further fillip with the addition of the two new manufacturing facilities, being put up in Gujarat and China. These facilities are expected to become fully operational by March 2008. The company has recorded impressive earnings growth for the quarter-ended June 2007, with a twofold expansion in profits and revenues.

On a consolidated basis, revenues doubled to about Rs 724 crore, driven by 115 per cent growth in revenues of the energy segment (about 86 per cent of total revenues). The environment segment, on the other hand, grew by about 56 per cent.

On the operational front, rise in raw material cost, rupee appreciation and intake of small orders led to a marginal decline in margins. However, the management has guided that margins could stabilise.

The group's current order backlog of Rs 3,057 crore adds further visibility to its revenues. In this context, the management's expectations of a 40 per cent growth in revenues and an expected ramp up in the momentum for order inflows appear achievable.

However, a dramatic change in the oil price outlook, further appreciation of the rupee, and any unexpected slowdown in the economy remain primary risks to our recommendation.