Reviews

In this edition, we have reviewed Thermax Ltd. and Ugar Sugar Works Ltd. We suggest our reader-investors to HOLD Thermax Ltd. and SELL Ugar Sugar Works Ltd. 

We had recommended Thermax Ltd. in Volume 38, Issue No. 12 dated May 8, 2023— May 21, 2023, under the ‘Analysis’ segment. The recommended price for the stock was ₹2,344.20. We had recommended the stock based on its capital expansion plans, stable margins and a strong order pipeline. Thermax Group, based in Pune, offers a range of products for heating, cooling, water and waste management, and specialty chemicals. The company also designs, builds and commissions large boilers for steam and power generation, turnkey power plants, industrial and municipal wastewater treatment plants, waste heat recovery systems. 

In Q2FY24, Thermax’s consolidated revenue increased by 10.95 per cent at ₹2,302.46 crore as compared to ₹2,075.26 crore in the same quarter the previous year. On a QoQ basis, its revenue increased by 19.12 per cent. The PBIDT excluding other income increased by 54.78 per cent to ₹204.62 crore as compared to ₹132.20 crore in the previous quarter the same year. On a YoY basis, it decreased by 45.59 per cent. The company’s net profit stood at `158.85 crore as compared to `60.34 crore, a QoQ increase of 163.26 per cent, while on a YoY basis, it increased by 45.25 per cent. 

At TTM, the shares of Thermax are trading at a PE of 70.2 times, which is higher than its industry PE of 37.6 times. The company has maintained a healthy three-year average ROE and ROCE of 9.86 per cent and 12.2 per cent, respectively. It has a three-year compounded sales and profit growth of 12 per cent and 29 per cent, respectively. Thermax is investing in FEPL and a new chemical plant, with some minor capex in water and other areas. The company is making rapid progress in the solar-wind hybrid segment and the business of Thermax Onsite Energy Solutions Limited. 

The company expects a reasonable growth in orders for the year, with a higher single-digit increase compared to last year. The order pipeline is looking better, especially in refining and petrochemicals, steel, international projects, and cement. The company’s margins in the industrial products business are expected to be stable going forward. The competitive landscape is becoming more competitive with new players entering the market, particularly in boilers and air pollution control equipment. The first FGD project is expected to be completed soon. Hence, we recommend HOLD. 

We had recommended The Ugar Sugar Works Ltd. in Volume 38, Issue No. 13 dated May 22, 2023— June 4, 2023, under the ‘Low Price’ segment. The recommended price for the stock was ₹105.25. We had recommended the stock based on its strong market position, profitability and growth. Ugar Sugar Works, established in 1939, is the flagship organisation of the Shirgaokar Group of Companies, with annual revenues exceeding ₹600 crore. The company has been involved in the manufacture of white crystal sugar for over 65 years, currently crushing 19,000 TCD of sugarcane daily at its Ugar, Jewargi and Bagalkot plants. 

In Q2FY24, Ugar Sugar Works’ consolidated revenue decreased by 8.32 per cent at ₹265.79 crore as compared to ₹289.90 crore in the same quarter the previous year. On a QoQ basis, its revenue increased by 22.11 per cent. The PBIDT excluding other income decreased by 430.73 per cent to negative ₹20.24 crore as compared to ₹6.12 crore in the previous quarter of the same year. On a YoY basis, it decreased by 694.01 per cent. The company’s net profit stood at negative `33.20 crore as compared to negative earning of ₹9.14 crore, a QoQ decrease of 263.39 per cent, while on a YoY basis, it increased by 146.28 per cent. 

At TTM, the shares of Ugar Sugar Works are trading at a PE of 13.5 times, which is higher than its industry PE of 12 times. The company has maintained a healthy three-year average ROE and ROCE of 47.86 per cent and 16.3 per cent, respectively. It has a three-year compounded sales and profit growth of 27 per cent and 96 per cent, respectively. The company has a debt-to-equity ratio of 1.31 times with an interest coverage ratio of 3.81 times. The Indian sugar industry faces a double-edged sword. While lower sugar output might lead to stable or even rising sugar prices, ethanol production, derived from sugar, is also expected to decline. This could put pressure on ethanol prices, typically used as a biofuel alternative to crude oil. 

However, the recent dip in crude oil prices has triggered speculation of a potential ethanol price cut in India, similar to what already has happened in Brazil. This uncertainty creates a mixed outlook for sugar stocks. If ethanol prices remain stable or rise due to supply constraints, sugar stocks could see a strong rebound. Conversely, if the government decides to cut ethanol prices in line with crude oil, it could dampen the potential gains in sugar stocks. The market awaits a clearer picture of the government’s ethanol pricing strategy to understand the true impact on the sugar industry. Hence, we recommend SELL. 

(Closing price as of February 02, 2024)