Don't read too much into Thermax's rally

Stock outperforms BSE capital goods index over past 3 months, leaving behind fundamentals

Even as capital goods stocks find favour with investors, Thermax seems an exception. If 56 per cent of analysts polled on Bloomberg were sellers on Thermax two years ago, 74 per cent suggest disposal today. What's more, the 33 per cent rise in Thermax stock this year is not backed up by an improvement in fundamentals. Even the overseas acquisition of a boiler manufacturer, which pumped up the stock by about eight per cent on Thursday, is just a sentiment boost, say analysts, as the acquisition may take time to reflect in the financials. 

There are key reasons analysts aren't positive on Thermax. One, growth has remained elusive or sporadic. Even in the current financial year, revenues for the first nine months have declined 20 per cent over a year ago to Rs 2,499 crore, while net profit has shrunk 11 per cent over a year ago to Rs 161.5 crore. Thermax derives 70 per cent of its revenues from domestic operations, which hinge on spending in sectors such as cement, oil and gas, and power. As these sectors continue to operate below their optimal efficiencies, a brisk improvement in Thermax's financials seems unlikely for now. 

Dwindling order book is the next challenge. Despite 19 per cent growth in order inflows (Rs 1,190 crore) in December quarter, its order book stands at Rs 4,653 crore, down four per cent from a year ago. Although it remains to be seen whether the order spurt sustains, the order book as of now offers less than a year's revenues. In a bid to its protect operating profit margin, Thermax has not gone aggressive in bidding for projects, particularly domestic ones where price war is still raging. A weak order book is a result of this approach. The good part is the growing share of international orders, which have increased from 24 per cent of total order inflows a year ago to 31 per cent. Nonetheless, analysts at Macquarie feel that even if the order book grows six per cent in FY17, it translates into a meagre three per cent revenue growth in FY18. They also point out that, with the Thermax joint venture on power plant equipment running thin on orders, the division may slide into losses in FY18.

Thermax's ability to regain an operating profit margin of nine per cent offers a silver lining. This is noteworthy, as even larger players find this tough. Thermax is also expanding into lines such as small boilers, water treatment products, coal gasifiers, and is enlarging engineering projects and service businesses as well as solar-thermal applications to make good for the loss of orders from traditional businesses. 

However, with the stock at 33 times the company's FY18 estimated net profit, investors would be better off watching the recent strategic moves made in a bid to perk up financials.