Recommendation: Buy (again!!)
CMP = Rs 375 (at the time of this recommendation)
Price target: Rs 602
Key points:
- Thermax has announced its largest order win valued at Rs 820 crore (that is 31% of its current backlog) for the supply of a coal fired boiler to a captive cogeneration plant of a refinery. The boiler is expected to generate 390 megawatt of electricity. It would manufacture the coal fired boiler under the technology license with Babcock & Wilcox. The current order may be executed jointly by Thermax and Babcock in order to enable the indigenisation of the technology.
- Of late, the biggest area of concern for Thermax has been the slowdown in its order inflow, as is evident from the Q4FY2008 order backlog of Rs 2,637 crore vis-à-vis the order book of Rs 3,100 crore in Q4FY2007. The latest order may provide some respite as far as the concerns over a slowdown in the order inflow are concerned. We expect a gradual pick-up in the company's order inflow in future as clients are expected to finalize the pending orders.
- Though the visibility of the company's revenues has increased with the latest order win, the rising input cost continues to pose a risk to its operating profit margin and to its earnings as a result. The concerns are valid. However, Thermax carries 70-75% of its order backlog on a fixed price basis for which it ties up raw material supplies as soon as a contract is won. The stock price of Thermax has been under pressure lately because of concerns over its slowing order inflow and rising raw material cost that could adversely affect its earnings.
- At the current market price, this stock is valued at 12.2x and 10x FY2009E and FY2010E earnings.
- I continue to recommend a Buy call on this stock with a price target of Rs 602.
