Thermax Shares Hit A Record As Jefferies Upgrades To ‘Buy’

Shares of Thermax Ltd. jumped to a record high after Jefferies upgraded the electricity generation equipment maker citing a recovery in revenue, capex, better margin and an opportunity in waste-to-heat recovery.

“Thermax management is pursuing an agenda to become a leader for India in clean water, clear air, and clean energy offerings,” the research house said in a Jan. 5 note. “The company is also looking for tie-ups in the hydrogen value chain to be an incremental growth area ahead. Capital allocation is top of mind with overseas investments being done judiciously and focusing on clean energy in India.”

Jefferies upgraded Thermax to ‘buy' from ‘underperform' and set a price target at Rs 2,575 apiece—implying a potential upside of 42%.

Recently, Thermax has bagged orders worth Rs 545.6 crore from an Indian power public sector company to set up flue gas desulphurisation systems for their two units of 500 MW capacity each in Uttar Pradesh.

The company's stock gained as much as 6% to Rs 1,948.7 apiece around noon on Thursday. Of the 27 analysts tracking Thermax, nine have a ‘buy' rating, seven suggest a ‘hold' and 11 recommend a ‘sell', according to Bloomberg data. The overall consensus 12-month price target implies a downside of 20.1%. The stock's trading volume was nearly three times the 30-day average volume for this time of the day.

Why Jefferies is bullish on Thermax

• Thermax well placed for transition to 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 two-three years, 250-300 MW is the potential of this market. This implies an opportunity of Rs 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.

• A 26% year-on-year order book growth in the first half of FY22 gives revenue visibility.

• If the capex cycle recovers, Thermax should continue to grow at least in line with the market in the next three-five years. Capex outlook should improve backed by infrastructure spend, production-linked incentive, and data centres.

Downside Risks

• Higher competition in waste-to-heat segment.

• No focus on capital allocation going ahead.