Shares of Thermax Ltd. gained as Kotak Institutional Equities said its push beyond the captive power business has receded the risk from energy transition, for now.
The speed of acquisition and moving beyond traditional customers has resulted in a positive view on the stock, Kotak said in a March 21 note. The rush of mid-to-large-sized orders has increased the order backlog by 30%, higher than the peak the company has witnessed in the past, it said.
Tight capacity utilisation backed by a strong backlog boosts the case for Thermax upping its bid margin for future orders.
Kotak raised its target price on the stock by 8% to Rs 2,270, implying an upside of 13.4%.
Shares of power generation equipment maker jumped more than 6% during the day, but pared most of the gains to close 2.7% higher. That compares with nearly a percent decline in the benchmark Nifty 50.
Of the 26 analysts tracking the company, eight maintain a 'buy', seven suggest a 'hold' and eleven recommend a 'sell', according to Bloomberg data.
Expanding Refinery Segment: The company has expanded its presence in the refinery segment via its first sulphur recovery unit order win of $150 million from Numaligarh Refinery Ltd. The order fructifies two years of effort from Thermax and enables it to bid for a high single-digit share of refinery capex versus mid-single digit levels until now.
Bids Beyond Captive Power Business: Thermax is likely to end FY22 with more than Rs 8,000 crore worth of order backlog as it has won deals in three new EPC businesses beyond captive power plants—bio CNG, bio-ethanol, and sulphur recovery unit. The company has outgrown the market in air, water, and flue-gas desulfurisation segments, and its utility as a service offering for green energy has grown manifold over the past few years. Thermax can only continue to outgrow the domestic market from here with its international business, amounting to 17% of its order backlog, yet to fire.
Concerns Receded: Thermax's focus on growing its products and services beyond captive power is "playing out well". With its move away from its traditional business of energy transition, the risk of business continuity recedes, for now. The company has some time to pivot to renewables before the endgame on the pace of refinery capex plays out.
Still, according to Kotak, investors may want to temper expectations of margin returning to double-digit levels. The competition for the company is all-pervasive and the customers are grappling with inflated project costs, Kotak said. Thermax, it said, needs to invest in new capabilities and curbing attrition.
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