Reduce Thermax Ltd for the Target Rs. 3,952 By Prabhudas Lilladher Ltd
Legacy overhang clouds Q1, order momentum key focus
We revised our EPS estimates by -13.3%/-2.6% for FY27E/FY28E factoring in lower margin amid the impact of legacy government EPC project losses in Industrial Infra, shipment delays in Industrial Products and higher input cost. Thermax (TMX IN) reported a weak performance, with revenue growing 9.4% YoY and EBITDA margin contracted 518bps YoY to 2.9% impacted by cost overrun on a legacy government EPC project (INR 910mn), delayed dispatches (INR3bn) of industrial products due to the Middle East conflict, commodity cost inflation (INR 100mn). While the Industrial Products segment continued to witness healthy underlying demand across heating, cooling, water treatment and air pollution control solutions, margins remained under pressure owing to adverse commodity movements and shipment deferments, although recovery expected from Q3FY27. The Industrial Infrastructure segment remained affected by legacy government EPC projects; however, management reiterated that the remaining exposure has reduced to less than ~5% of the order book and is expected to be substantially completed over the next few quarters. The Chemicals business continued to recover with improving volumes and management expects ~20% growth in FY27, supported by normalization in customer demand despite near-term raw material volatility. Meanwhile, Green Solutions remained loss-making due to losses in FEPL and Bio-CNG operations; however, management expects FEPL to onboard a strategic partner while Bio-CNG performance obligations are likely to conclude over the next few quarters, reducing execution and profitability risks. We maintain our rating to ‘Reduce’ valuing the core business (ex. Green Solutions) at a PE of 40x Mar’28E (39x Mar’28E earlier) arriving at a revised SoTP-derived TP of INR3,952 (INR3,969 earlier).
Execution challenges and supply chain disruptions amid Middle East conflict impacting profitability will remain a key monitorable in the short term. However, in the long term, TMX is well placed to gain from increasing thrust on energy transition & decarbonization led by its
1) sustainable green industrial solutions in bioenergy, heating & cooling, chemicals and water
2) technical expertise
3) prudent working capital management
4) emerging opportunities for cooling and heating solutions from data centre. The stock is currently trading at a PE of 74.2x/56.5x on FY27/28E.
Cost overrun impacted overall profitability: Consol. Revenue increased by 9.4% YoY to INR23bn (Ex. Package Scheme of Incentive of INR24.7mn) (Ple: INR24.2bn). EBITDA decreased by 61% YoY to ~INR662mn (PLe: INR2bn). EBITDA margin contracted by 554bps YoY to 2.9% due to lower gross margin (-226bps YoY) and cost overrun of INR910mn in one of the Industrial infra project. Adj. PBT decreased by 74.5% YoY to INR397mn (PLe: INR1.7bn). Adj. PAT decreased by 78.7% YoY to INR240mn (Ple: INR1.2bn) due to higher effective tax rate (- 1993bps YoY to 48.3%). Order inflow increased by 2%YoY to INR28bn. Order book stands at INR140.5bn (1.3x TTM revenue)
Segmental Overview:
Revenue growth was driven by Industrial Products (+11.4% YoY to INR10.6bn) and Green Solutions (+3% YoY to INR2.4bn), Chemicals (+32.5% YoY to Rs2.3bn) and Industrial Infra (+3.8% YoY to INR8bn). Industrial Products margin came in at 6.1% (vs 8.3% in Q1FY26); Industrial Infra margin came in at -8.7% (vs 10.7% in Q1FY26); Green Solutions margin contracted to -6.9% (vs -2.2% in Q1FY26); Chemicals margin expanded to 11.2% (vs 9.3% in Q1FY26)
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SEBI Registration number is INH000000933
