Geojit Financial Services has maintained its "Sell" rating on Thermax Limited (TMX), setting a target price of Rs. 3,968, representing a potential downside of 10% from the current market price. The brokerage cites concerns over the company's depleting order book and margin pressure as key reasons for its cautious outlook.
Key Takeaways from the Report:
- Q1FY25 revenue grew 13% YoY, driven by industrial products and green solutions.
- EBITDA margin contracted by 38% YoY due to a one-time provision for cost overruns in the industrial infrastructure segment.
- Order inflows remained flat, impacted by elections and a slowdown in ethanol-based orders.
- The order book stands at 1.1x TTM revenue, raising concerns about future revenue visibility.
- Geojit has reduced its FY25 earnings estimate by 4.4%.
Detailed Analysis:
Thermax, a prominent energy and environment solutions provider, delivered in-line revenue growth in Q1FY25, primarily fueled by strong performance in its industrial products and green solutions segments. However, the company's profitability took a hit as it incurred a Rs. 73 crore provision for cost overruns across various projects, including FGD orders and bio-CNG projects. This resulted in a significant contraction in EBITDA margin.
Another major concern highlighted by the report is the stagnant order inflow during the quarter. This was attributed to factors like general elections and a slowdown in ethanol-based orders. The company's order book, which currently stands at 1.1x trailing twelve months (TTM) revenue, is considered to be at a concerningly low level, potentially impacting revenue visibility in the coming quarters.
Geojit acknowledges that Thermax anticipates a pickup in new orders from sectors like power, steel, chemicals, and biofuels in the coming months. However, the brokerage remains cautious due to the lack of large orders in the current pipeline and the ongoing margin pressure.
Valuation and Outlook:
Geojit's valuation is based on a price-to-earnings (P/E) multiple of 50x applied to the estimated FY26 earnings per share (EPS). The brokerage believes that the current valuation is expensive, considering the challenges facing the company. The report also points out that the increasing debt levels could further impact profitability in the near term.
Potential Risks:
While the report primarily focuses on the downside risks, it's worth noting that a strong recovery in order inflows, particularly large orders, could potentially improve Thermax's outlook. Successful execution of projects and cost control measures could also help alleviate margin pressure.
In conclusion, Geojit's analysis paints a cautious picture for Thermax in the near term. The brokerage's "Sell" recommendation is based on concerns over the depleting order book, margin pressure, and expensive valuation. However, a potential rebound in order inflows and improved project execution could present upside potential in the longer term.
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