Global brokerage house Jefferies has upgraded the energy firm Thermax on the back of rising revenue, better margins and the upcoming opportunities in waste-to-heat recovery. The brokerage now has a 'buy' call on the firm from 'underperform' previously with a target price of ₹2,575 per share, indicating a 42 percent upside.
“Thermax management is pursuing an agenda to become a leader for India in clean water, clear air, and clean energy offerings,” the research house stated in a recent note.
As per Jefferies, Thermax is well placed for transition to an energy solutions provider.
"Waste-to-heat involves using equipment to reuse heat energy that would otherwise be disposed of or released into the atmosphere. It would potentially reduce the cost of power. With 50-60 million tonnes of incremental cement capacity likely to be set up in the next 2-3 years, 250-300 MW is the potential of this market," the brokerage house explained.
It further added that this implies an opportunity of ₹2,500-3,000 crore in cement alone, with Thermax being one of the major players, apart from Hitachi, in India. Steel capex will further add to this opportunity and be reflected in the order flow.
The firm's 26 percent YoY growth in the order book in the first half of FY22 gives revenue visibility. Recently, the firm bagged orders worth ₹545.6 crore from a PSU in the power sector company to set up flue gas desulphurisation systems for their two units of 500 MW capacity each in Uttar Pradesh, it announced in a BSE filing.
As per the brokerage, if the capex cycle recovers, Thermax should continue to grow at least in line with the market in the next 3-5 years. Capex outlook should improve in the near future backed by infrastructure spending, production-linked incentives, and data centers.
The brokerage further pointed out that the firm is also looking for tie-ups in the hydrogen value chain to be an incremental growth area ahead.
However, higher competition in the waste-to-heat segment and no focus on capital allocation are key downside risks, according to Jefferies.
Reacting to the note, the share price of Thermax jumped around 3 percent to its day's high of ₹2,064 crore before paring some losses on the back of the weak overall market sentiment. The stock has risen 71 percent in the last 1 year.
In the December quarter, the company posted a 4.5 percent decline in its net profit at ₹79.4 crore versus ₹83.2 crore in the year-ago quarter. The decline in profit came on the back of rise in commodity and freight prices. Meanwhile, its revenue rose 14.5 percent to ₹1,614.73 crore in Q3FY22 as compared to ₹1,410.59 crore in Q3FY21.
During the quarter, the order book for the firm was rallied 57 percent YoY to ₹2,462 crore. Among verticals, sales growth in the energy business came in at 15.3 percent while the same for the environment and chemicals business jumped 34 percent and 40 percent YoY, respectively.
