Thermax management’s upbeat outlook does not reflect in the stock


The stock of capital goods company Thermax Ltd surged to a new 52-week high of Rs2,174.80 intraday on the NSE on 2 February. The increased outlay for capital expenditure announced in the Union Budget on 1 February had a rub-off effect on the stock. But that optimism soon fizzled out. Currently, trading at Rs1,831 on the NSE, shares of the company have slid 17% from their recent high.

Its Q3FY22 results announced on 4 February, were a miss as operating performance disappointed. Analysts point out that the company’s consolidated revenue of Rs1,610 crore, although up 14.5% year-on-year, lagged consensus estimates by 1.8%.

Since then, the stock is down 9%.

This is despite the management’s upbeat outlook. In a post-earnings conference call, the Thermax management said, it is confident of strong order intake as the capex scenario continues to improve. According to them, the company’s base business is strong amid rising enquiry levels. Also, there is strong traction from the steel sector as two big companies have announced expansion plans and there will be orders from them in the next few quarters.

“Although the company remained upbeat about the growth prospects, we believe that margin headwinds persist in the near term amid rising commodity costs. Profitability in the chemical segment also remains muted as prices continue to increase,” analysts at Nirmal Bang Institutional Equities Ltd said in a report on 7 February.

It should be noted that for FY22, the company expects margins to be in the range of 7-7.5%. However, in the longer term, it aims to touch 15-17% margins.

Another problem is the stock’s valuation multiple. Analysts at JM Financial Institutional Equities Ltd expect Thermax to clock in 23% compounded annual growth rate (CAGR) in sales and 38% CAGR in EPS over FY21-24, but that is based on an optimistic scenario that margins will fully recover by FY24. EPS is short for earnings per share. Against this backdrop, the stock’s FY23 price-to-earnings multiple of 52 times, is rich, said the JM Financial report, dated 9 February.

It should be noted that stock market sentiment in the last few trading sessions has been volatile. So that may have also weighed on the stock’s poor performance.



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