Thermax, an engineering major producing equipment for sectors like energy and environment, surprised analysts by posting better-than-expected growth in sales. Margins, however, remained under pressure. Analysts believe the same to continue due to the deteriorating macroeconomic scenario and the company’s efforts to boost sagging order inflows with aggressive bidding. Consequently, the stock’s underperformance over the broader markets in recent months is also likely to continue. Since its results on May 3, the company’s stock has fallen five per cent, as against a flat Sensex.
ROBUST TOPLINE, BUT MARGINS DISAPPOINT
At Rs 1,771 crore in the March quarter, the company reported a 45 per cent y-o-y jump in sales despite a higher base in the year-ago period. The performance was aided by better execution of a strong order book and robust growth of 58 per cent in the energy segment (79 per cent of total sales).
However, the environment business disappointed significantly, with a mere 10 per cent rise in revenue unlike the robust growth seen over past few quarters. Margins continued to be under pressure across business segments. Operating profit margin and adjusted net profit margin fell 100 basis points each to 11 per cent and 7 per cent, respectively, thanks to the rising input costs and increased competition amid lower awarding activity by clients and higher share of low-margin projects business.
| COST PRESSURES | |||
| In Rs crore | Q4FY11 | FY11 | FY12E |
| Net Sales | 1,771 | 4,883 | 5,852 |
| % chg (y-o-y) | 45.0 | 53.0 | 20.0 |
| Operating profit | 195 | 566 | 645 |
| % chg (y-o-y) | 33.0 | 48.0 | 14.0 |
| Adjusted net profit | 127 | 382 | 489 |
| % chg (y-o-y) | 27.0 | 49.0 | 28.0 |
| Standalone figures E: Estimates Source: Company, Analysts' Reports | |||
THE ROAD AHEAD
Outlook is worrying as the company does not see margins improving and order book growing at a robust pace. An unabated rise in interest rates and input costs for past few quarters is expected to slow down overall economic activity and, in turn, order inflows.
Execution challenges faced by power generation firms are a risk to the company as it derives 80 per cent of order inflows from the energy segment. With slowing order inflows, order book grew just 8 per cent to Rs 6,446 crore. Revenue visibility (order book to sales ratio) also tapered off to 1.3 times from 1.9 times in 2009-10. At the current levels of Rs 606.65, the stock trades at a PE of 15 times the estimated 2012-13 earnings.