Investors with a 2-3 year perspective can consider exposure to the stock of power and industrial solutions provider Thermax.

With its strong return ratios, low debt, steady execution of projects and ability to keep up order flows, Thermax is well-poised to benefit from any cyclical revival in industrial capex.

Such a revival, however, may not happen in the near term. Nevertheless, we believe that the 52-per cent fall in the stock price till date in 2011 has sufficiently factored in risks to its business momentum. This may be a good time to accumulate the stock, with additions on any further declines.

At the current market price of Rs 425, the stock trades at 12 times its trailing 12-month earnings and 11 times its expected per share earnings for FY-13. The current valuations are at a 52-week low.

The stock of Thermax has been beaten down over the last two quarters on account of a dip in its order intake and shrinking profit margins. However, the company's strategy appears optimal given the uncertain external environment.

For one, fresh investments in the top sectors from which Thermax bags orders – power, cement and ferrous metals – has been coming in trickles. The company also saw a significant decline in engineering procurement and construction projects that dominated the order book a year ago.

With orders drying up in some of the key sectors, Thermax strategically sought more opportunities in the less affected oil and gas sector, pushing up this segment's share to a third of its order book of Rs 5,770 crore.

Two, it did not lose sight of smaller opportunities coming from sectors such as food processing, chemicals and sewerage waste projects. All these helped add to the order pile. Order inflow for the September quarter was Rs 1,200 crore, 10 per cent lower than a year ago.

The company's current strategy is likely to keep order accretion going for a couple of quarters. An improvement in cement capex (what with prices firming up) and investments in ferrous metals, once mining and mineral policies become clear, may be triggers for order flows post FY-12.

The company's current order book at 1.2 times FY-11 sales may seem low. It is, however, noteworthy that its order book is more tilted towards short-cycle products compared with a year ago. Hence, order-to-revenue conversion can be expected to be faster, which means order book-to-sales ratio need not be high.

Another area of performance that has caused concern in the markets is the shrinking margins. EBITDA margins at 10.9 per cent for the September quarter is 100 basis points lower than a year ago.

However, this level is about the same as the June quarter, suggesting that they may be stabilising at the current levels given that the company is not also keen to settle for low-margin orders. The only risk to margins could be further steel price hikes, as a result of domestic iron ore shortage.

For the quarter ending September 2011, sales expanded 23 per cent over a year ago while profits surged 14 per cent as a result of larger orders of last year that are under execution. Investors may have to gear up for slower growth for the rest of the fiscal.

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