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Order inflow growth remains weak

Thermax 4QFY24 results beat our estimates, with in-line revenue and higherthan-expected PAT on strong margins. 4Q revenue/EBITDA/PAT grew by 20%/37%/20% YoY. Order inflows stood at INR23b/INR101b in 4Q/FY24 (up 2%/4% YoY), both lower than our estimates. Inflows lacked large-sized orders during the year. Though the working capital cycle is still comfortable, free cash flow was affected by large capex, primarily for TOESL/FEPL. Borrowings jumped 55% YoY to INR12.5b. The company expects the finalization of largesized order inflows over the next few quarters. We raise our estimates by 4%/10% for FY25/26 to factor in better margins. We revise our TP to INR4,180, based on a higher multiple for core business to bake in expected revival in private capex as well as thermal ordering. We maintain our Neutral stance on Thermax as we believe that incremental investments in TOESL/FEPL will weigh on balance sheet strength and near- to medium-term return ratios.

In-line revenue; EBITDA margin surprises positively

Thermax’s revenue grew 20% YoY to INR27.6b, fueled by 23%/17%/72% YoY growth in the Industrial Products/Industrial Infra/Green Solutions segments, while the Chemicals segment declined 8% YoY. Revenue growth was largely in line with our estimates. There was a 170bp YoY/150bp QoQ contraction in gross margin at 43.1%. EBITDA grew 37% YoY to INR2.7b, with a margin of 9.9%, the highest since 3QFY21 (+120bp YoY/+180bp QoQ) and above our estimate of 7.9%. Industrial Products and Green Solutions saw margin expansion, while Industrial Infra and Chemicals margins were largely flat. Interest expenses inched up owing to higher debt for its subsidiaries (FEPL and TOESL). PAT grew by 20% YoY/34% QoQ, aided by a lower effective tax rate (25.2% vs. 27.2%). The board has approved support of INR130m to Thermax Bioenergy Solutions (TBSPL), a subsidiary of the company, either through a loan or equity infusion. For FY24, revenue/EBITDA/adj. PAT grew by 15%/33%/30%, while cash outflow stood at INR6b due to lower OCF and higher capex. Order inflows grew 2% YoY to INR23b, taking the order book to INR101b (+4% YoY).

Segment-wise margin outlook is looking better

For Industrial Products and Chemicals, the focus would be on improving margins further. For Industrial Infra, the company expects to recognize revenues of INR6b from the FGD order, while the Sulphur order would also be executed. This would be margin-dilutive for the company, so margin might be weaker than that of other segments. Green Solutions segment saw nil order wins in 4Q; however, ordering will fructify over the long term as the company scales up its investments.

Ordering pipeline to materialize in coming quarters

Thermax missed out on large order inflows during FY24 due to delays in ordering from sugar, steel and other sectors amid delays in decision-making during elections. Themax witnessed higher enquiry levels from bio-fuel, ethanol and thermal power in 3Q/4QFY24 for large-sized orders, which could materialize in the coming quarters. It would continue to eye opportunities related to bio-CNG, water recyclability, green solutions, industrial cooling, fuel cell, and sustainable aviation fuel, along with larger thermal power projects. The company has maintained its selective stance toward thermal power ordering and would weigh opportunities depending upon the size of the project, margins and payment terms.

Traction seen for some of its newly introduced products

The company had introduced several new products over the last few years to capture energy transition needs of customers, which include offerings from TOESL, FEPL, coal gasification and electric pumps, bio-CNG offerings, thermal HVAC system for MHCV, thermotron, and flexi source boilers among the key ones. The company’s pipeline remains good for thermotron, flexi source boilers, electric heaters, etc. and expects hydrogen, heat pumps, thermal HVAC system to gain traction.

Continuous investments in debt and equity needed for TOESL and FEPL

The company is targeting an equity investment of INR15b in both TOESL and FEPL combined as it plans to scale up the capacity of these subsidiaries. This investment will also result in incremental debt on consolidated books and will weigh on the company’s financials for another few quarters until revenues scale up.

We expect 25% PAT CAGR over FY24-26E

We expect a CAGR of 16%/28%/25% in revenue/EBITDA/PAT over FY24-26. Growth will be driven by: 1) 24% growth in order inflows, 2) a gradual recovery in EBIT margins of the Industrial Product and Chemical divisions to 10.2% and 19.0%, respectively, by FY26E, and 3) control over working capital and NWC (at 17 days).

Valuation and view

The stock is currently trading at 70.5x/56.9x FY25E/FY26E EPS. We revise our estimates to bake in better margin. We roll forward our valuation to Mar’26E and arrive at a revised TP of INR4,180, based on 50x Mar’26E EPS and add value of investments in Green Solutions at 1.5x P/BV. We reiterate our Neutral rating on the stock.

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