Muted growth in order book a major concern for Thermax

Slower execution of the existing order book and muted order inflows are the key concerns for almost all companies operating in the capital goods industry, let alone Thermax. The company disappointed investors with an 11.6% decline in its top line and about 13% fall in operating profit before interest depreciation and tax over the previous fiscal.


The company's operating margin of 10.8% was encouraging - it contracted by just about 20 basis points over the past year due to tight cost control - but the concern for analysts and investors is the muted growth in the order book that weakens the company's earnings visibility over the near term. Large project orders have become hard to come by as industrial investments have taken a backseat. Thermax's order book at the end of FY13 was at 4,878 crore, registering almost a flat growth over FY12, which gives it revenue visibility of just about a year, assuming its FY13 topline of 4,691 crore. Thermax is targeting higher export orders to make up for the limited large project orders in the domestic market. But slower order intake will continue to be a thorny issue for the company, at least in the near term.



Interestingly, notwithstanding concerns over order inflows, Thermax's stock continues to be one of the better performing in the capital goods space on the exchanges, commanding a relatively higher premium over its peers. At 12-month trailing P/E of close to 20, Thermax commands a fairly high premium over its mammoth competitor Bhel whose 12-month trailing P/E has tapered from high double digits to less than eight over the past couple of years. But given the persistent slowdown in the industrial sector, analysts fear it may become increasingly difficult for companies such as Thermax and Bhel to maintain their operating margins and return ratios.Analysts believe Thermax could see stretched working capital requirements if the macro-economic conditions fail to improve.

There are also concerns about the company's new super-critical plant's revenue visibility given the scarcity of orders, and analysts fear the company may incur losses of over 100 crore owing to fixed costs and interest on the plant.

This leaves little room for an uptick in the company's share price in the near term even though Thermax remains one of the strong contenders to benefit from the turnaround in the industrial economy.