IGI Logo

Core performance remains weak

Thermax’s (TMX) 1QFY26 results came in ahead of our estimates owing to incentives received by the company during the quarter. Revenue growth remained weak across all segments, while order inflow improved in single digits. Order prospect pipeline remained strong, particularly from thermal IPP, steel, cement and oil and gas. While we do see positives from the possibility of conversion of enquiry pipeline into largesized inflows, we remain concerned about the low-margin legacy order book of INR7b, which can continue to weigh on margins. Along with this, exposure of exports to the US market pose an overhang on margins of chemical segment. We bake in order inflow and revenue growth of 11%/16% and a PAT CAGR of 17% over FY25-28. With an increase of 3% each in our FY26/27 estimates, we arrive at a revised TP of INR3,450, based on core business valuation at 40x Sep’27E EPS and the addition of subsidiary valuations. Maintain Sell.

Results beat our estimates on income from incentive schemes

EBITDA/PAT were ahead of our estimates mainly due to income from the package scheme of incentives (PSI) from the Maharashtra government. After adjusting this incentive, results were below our estimates. Revenue declined 2% YoY as revenue growth was broadly flat across segments and was impacted by delayed customer clearance and offtake. EBITDA/PAT grew 60.0%/38% YoY mainly due to incentive scheme payout and higher other income. Gross margin expanded ~730bp QoQ and ~700bp YoY to 50.7% and EBITDA margin stood at 10.5%. Order inflow for the quarter stood at INR27.5b, up 7% YoY, and the overall order book stood at INR114b, up 7% YoY.

Segment-wise performance remains weak

Revenue growth was weak across all segments. Industrial Product segment EBIT margin fell 90bp YoY to 8.1% due to lower revenue and fixed cost component. The Industrial Infra segment’s EBIT margin remained strong, expanding 600bp YoY to 8.0% due to income from the PSI (vs. -2.0% in 1QFY25 when TMX had to take a hit of INR450m for a bio-CNG project). The Chemical segment’s EBIT margin was weak at 9.3% due to increased costs on the commissioning of a new plant in Jhagadia and a one-off expense of INR40-50m related to worker settlement and gratuity reversal effects. On the PBT level, Green Solutions’ PBT margin expanded to 5.1% in 1QFY26 vs. 3.3% in 1QFY25.

Industrial Products: Strong outlook

During 1Q, the division witnessed inflow growth of 2% YoY. The key segments of the division, such as water and enviro, are seeing good demand. Cooling segment is also witnessing healthy demand in domestic and exports. Heating is currently a bit soft and will revive over time. With improved demand across key sub-segments, we expect revenue growth and margin trajectory to improve going forward. We bake in 16% revenue CAGR over FY25-28 and 11.5% EBIT margin each for FY26/27/28

Industrial Infra: Selective approach continues

Revenue declined 4% YoY for the quarter. Margin was high at 8% as it included income from the PSI from the Maharashtra government (vs. -2.0% in 1QFY25 when TMX had to take a hit of INR450m for a bio-CNG project). TMX remains selective in industrial infra projects and execution of current FGD projects would not be impacted by recent government directives on FGD projects. However, it will have to see the claim settlement process from CEA. Overall, TMX is eyeing opportunities from independent power producer (IPP) projects, waste-to-energy, and advanced biofuels. We expect 5% revenue CAGR over FY25-28 and 5.0%/5.5%/6.0% EBIT margin for FY26/27/28.

Green Solutions: To benefit from claim settlement

TMX aims to exceed 300 MW of operational capacity in FY26, with another 300-400 MW under construction in FEPL, and even the performance of TOESL is stabilizing. The company expects to benefit from the claim settlement in 2QFY26. We bake in improved revenue and margins for green solutions in our estimates, while PAT will remain impacted by higher interest and depreciation particularly from FEPL.

Chemicals: US tariff risk may weigh on chemicals outlook

The recently imposed US tariffs on select chemical imports could be an overhang on TMX’s chemicals business. The company has an estimated USD15m in planned exports to the US for FY26, with broader exposure including cooling products at around USD30m. The impact on 2Q is expected to be minimal, as goods shipped before 7th Aug’25 are exempt from these tariffs. However, if tariffs continue beyond that, it may impact the future shipments and competitiveness of TMX, particularly in specialty chemicals where Chinese players are already engaging in aggressive pricing. Management maintains a cautious stance, noting that while the US remains an important market, a significant portion of TMX’s chemicals growth is expected to come from other geographies such as Southeast Asia and Latin America, where it has recently added capacities. With management guiding for 12-13% margins in 2Q, the trajectory toward its medium-term target of 16-17% appears dependent on the resolution to tariff-related headwinds and execution in new markets. We expect chemicals segment revenue to clock a CAGR of 9% over FY25-28E, with EBIT margin of 11.5% each for FY26/27/28E.

Strong pipeline yet to reflect in order book

TMX reported 7% YoY growth in order inflows, below expectations due to delays in financial closures, particularly in the ethanol and sugar segments. The inquiry pipeline remains strong across sectors like steel, cement, oil & gas, and thermal power, with management maintaining double-digit growth in inflows for FY26. Industrial Infra is expected to benefit from rising domestic and international IPP activity, while Industrial Products should see recovery in heating and steady traction in water and cooling. Green Solutions is scaling up with 300-400 MW under execution, though Tamil Nadu delays impacted 1QFY26. Risks persist in Chemicals due to weak exports and tariff concerns. While refining and petrochemical orders are cyclical in nature and are expected to finalize only in 4QFY26, global client qualification efforts are progressing well for TMX, supporting a pickup in inflows from 2QFY26. We bake in order inflows to post a CAGR of 16% over FY25-28.

Selective bidding and legacy projects to decide margins

TMX still has low-margin legacy projects worth INR7b in its current order book, which will have an impact on its margins particularly in industrial infra and bio-CNG projects as these projects (INR5b) will get over in FY26 and the remaining to be completed in FY27. For new projects, TMX is now following a selective approach and trying to maintain better margins than low-margin legacy projects.

Financial outlook

We expect a CAGR of 11%/21%/19% in revenue/EBITDA/PAT over FY25-28. We build in 1) 16% CAGR in order inflows, 2) a gradual recovery in EBIT margins of the Industrial Infra and Green Solutions divisions to 6.0% and 11.5%, respectively, by FY28E, and 3) control over working capital and NWC (at 10 days).

Valuation and view

The stock is currently trading at 55.6x/47.3x/39.9x on FY26E/FY27E/FY28E EPS. We reiterate our Sell rating with a revised TP of INR3,450 based on 40x Sep’27E EPS. With the value of investments in subsidiaries, we believe that stock is currently factoring in a possible revival in order inflows as well as margin improvement

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412