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Summary
of Contents
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STOCK UPDATE
Thermax
Cluster: Emerging
Star
Recommendation: Buy
Price target: Rs425
Current
market price: Rs355
Price
target revised to Rs425
Result
highlights
-
The
consolidated revenues of Thermax grew by 23.0% year on year
(yoy) to Rs520.2 crore in Q2FY2007, in line with our
expectation. The energy segment grew by a robust 20.9% yoy
to Rs433.4 crore whereas the environment segment grew by
17.8% yoy to Rs118.7 crore.
-
The
company's operating profit margin grew by 240 basis points
yoy and 350 basis points sequentially to 13.9% in the
quarter, way above our expectation. The margin growth was
attributed to the strong order booking, lower material cost
and a shift in the product mix towards the high-margin
energy segment. Consequently, the operating profit grew by
48.5% yoy to Rs72.1 crore, again ahead of our
expectation.
-
The
energy segment continued its robust performance with a
revenue growth of 20.9% yoy to Rs433.4 crore and a
430-basis-point expansion in the profit before interest and
tax (PBIT) margin to 15.0%. The environment segment too
bounced back with a 17.8% year-on-year growth in the
revenues to Rs118.7 crore. The margins bounced back in this
quarter after remaining subdued in Q1FY2007. The PBIT margin
improved by 330 basis points sequentially.
-
The net
profit grew by 76.4% yoy to Rs53.7 crore in Q2FY2007, ahead
of our expectation. The robust margin expansion, higher
other income and lower effective tax rate are attributable
to the jump in the net profit.
-
The
order backlog maintained its growth momentum during the
quarter, recording a strong growth of 11.5% sequentially and
of 142% yoy to Rs2,973 crore. The order backlog is
equivalent to 1.8x FY2006 consolidated revenues, imparting a
very strong visibility to the revenues.
-
Another
development during the quarter was that ME Engineering, UK,
its loss making wholly-owned subsidiary was referred to the
administrator in the UK as its performance was mediocre and
it continued to make losses. Due to this event Thermax has
provided for Rs23.1 crore as extraordinary expenses in the
stand-alone financials. However, the net impact of the above
provisions in the consolidated accounts was Rs2.0 crore
only. The positive of this event is that in H2FY2007 the
performance of ME Engineering won't be a drag on the
company's results.
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In light
of the continued growth traction over the last few quarters,
the blow-out H1FY2007 performance, expected margin expansion
in H2FY2007 and reiterated guidance of 30% growth in the top
line, we are revising our FY2007 and FY2008 earnings upwards
by 22.8% and 17.8% respectively. We are also revising our
one-year price target upwards to Rs425 (an upside of 19.6%)
discounting its FY2008 earnings per share (EPS) by 18.9x.
The Rs34 per share of cash and cash equivalent on the
company's books provides a margin of safety to our price
target. We maintain a BUY on the stock with a revised price
target of Rs425.
SECTOR UPDATE
Pharmaceuticals
R&D
tax sops in pharma policy
In a recent conference of the Indian pharma
companies organised by Assocham, the minister for chemicals
and fertilisers, Ram Vilas Paswan, hinted at certain growth
boosters for the Indian pharma industry in the forthcoming new
drug policy. The boosters are likely to include fiscal
benefits on research and development (R&D) spending and
higher public healthcare allocation. The new drug policy is
expected to be released by the end of November 2006. According
to Mr Paswan, the drug policy has been devised to not only
boost the growth of the sector but also benefit the common
people in India.
On behalf of
the government, Mr Paswan has made a commitment to take the
healthcare spending from 0.9% to 2-3% of the gross domestic
product (GDP) in the next five years and help the industry
grow from $12 billion to $20-25 billion in the same period.
That translates into a compounded annual growth rate (CAGR) of
14% and seems reasonable considering the global growth rate of
7-8%. | |
