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Challenging quarter

Thermax (TMX)’s 3QFY25 results came in below our estimates, impacted by lowerthan-expected revenue booking and cost overruns. Revenue grew by 8% YoY, whereas PAT declined by 19% YoY as EBITDA margin contracted to 7.5%. Margins were impacted by cost overruns in FGD projects in Industrial Infra, floods in Chennai impacting Green Solutions segment margins, and increased costs incurred for expanding the scope of work in Chemicals. Order inflows declined by 8% YoY, mainly led by a sharp decline in domestic order inflows due to delays in enquiry finalizations across base industries. TMX expects a revival in inflows and execution in 4QFY25 and expects enquiry finalization in FY26 for large sectors. We cut our estimates by 9%/13%/13% for FY25/FY26/FY27 to factor in weak inflows, execution and margins. We maintain Sell with a TP of INR3,350, based on core business valuation at 42x Mar’27E EPS and the addition of subsidiary valuations.

Results impacted by execution issues and cost overruns

? TMX reported muted revenue of INR25.1b (+8% YoY) (MOFSL est. INR28.2b), led by 6%/3%/53%/19% YoY growth in the Industrial Products/Industrial Infra/ Green Solutions/Chemical segments. Company could not book revenues worth INR5b Gross margin contracted ~40bp YoY/60bp QoQ to 44.2%, owing to an adverse mix in the Industrial Infra and Chemical segments. This, coupled with operating de-leverage, led to an EBITDA margin contraction of ~60bp YoY to 7.5%, while EBITDA at INR1.9b grew by a mere 1% YoY, far below our estimates. With a weak operational performance and lower other income (down 46% YoY), adj. PAT declined 19% YoY to INR1.1b, 34% below our estimates. Order inflows declined 8% YoY to INR23b, while the order book stood at INR113.8b, up 6% YoY. For 9MFY25, the company reported revenue/EBITDA/adj. PAT growth of 11%/16%/7%.Except Industrial Products, segmental performance was weak

? Industrial Products reported 6% YoY revenue growth, while order inflows grew 40% YoY. PBIT margin saw a 130bp YoY expansion to 11.3%. Industrial Infra revenue grew 3% YoY to INR11.3b, while orders declined 46% on delays in order finalization and non-participation in government projects. PBIT margin at 0.1% declined 340bp YoY on account of losses in FGD projects where company had to take a hit of INR160m for FGD project as well as incremental costs associated with bio-CNG project. Green Solutions clocked 53% revenue growth, while orders declined 51% YoY. PBIT margin declined 130bp YoY to 9.5% as profitability was impacted by floods in Chennai. For Chemicals, revenue grew 19% YoY with order inflow growth of 10% YoY. Margins at 13.8% saw a ~680bp YoY contraction as a certain highmargin delivery spilled over to 4QFY25.

Base order inflows remain weak

Base order inflows for TMX remained weak at INR23b, with domestic inflows down by 24% YoY, while export inflows surged, particularly in Industrial Product segment. The enquiry pipeline from user industries such as steel, metals and mining, refineries, ethanol and distilleries continued to get pushed, and TMX is hopeful of order finalizations during 4QFY25 to FY26. Within the Industrial Product segment, the company is targeting projects across heating solutions, cooling solutions, air pollution control and water, and within this, the heating solutions vertical is currently growing at a slower pace. Within Industrial Infra, the company is selective in choosing projects but would not completely shy away from large projects as it would help to cover up fixed costs. Within Green Solutions, it continues to focus on growing both TOESL and FEPL, albeit at a slower pace. The company also expects inflows to improve in the Chemicals segment.

New initiatives witnessing slower traction than initial expectations

New initiatives that the company had taken in the last few years are taking some time to meet initial expectations. TOESL is doing well, while FEPL performance was impacted by flooding in Tamil Nadu and may continue to witness losses in FY26 too. TMX intends to grow its FEPL portfolio to 1GW, but at a slower pace now. It plans to invest another INR5b over the next 2-3 years. The company also sees a potentially good opportunity for heat pumps, while coal gasification-related projects are dependent on the government.

Financial outlook

We expect a CAGR of 12%/19%/16% in revenue/EBITDA/PAT over FY24-27. Growth will be driven by: 1) 17% CAGR in order inflows, 2) a gradual recovery in EBIT margins of the Industrial Product and Chemical divisions to 10.5% and 17.0%, respectively, by FY27E, and 3) control over working capital and NWC (at 17 days).

Valuation and view

The stock is currently trading at 59x/49x/41x FY25E/FY26E/FY27E EPS. We maintain Sell with a TP of INR3,350 based on 42x Mar’27 EPS and with value of investments in subsidiaries.

Key risks and concerns

Slowdown in order inflows, a sharp rise in commodity prices, slower-than-expected revival in private sector capex, and increased competition are the key risks to our estimates

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