Thermax focuses on clean energy growth, expects positive margins ahead

The electrical equipment manufacturer is expected to gain from investments in clean energy, decarbonization and increased focus on improving air and water quality. Its emphasis on products and projects, such as bio-CNG, low-voltage electric boilers, thermal heating, ventilation, and air conditioning (HVAC) systems, coal gasification plants and hydrogen looks encouraging.

Thermax has established differentiation in its products, either by being the sole provider or facing limited competition in the specific offerings, said Motilal Oswal Financial Services analysts. The company is the only player in flexi-fuel boilers, thermal HVAC, and has limited competition in bio-CNG, cooling solution, coal gasification and chemicals, they said.

Further, the management’s commentary on profitability was upbeat. Thermax is grappling with margin issues due to low-margin flue gas desulphurisation orders, its China business being shut and Indonesia business facing headwinds with Chinese firms giving stiff competition. In the September quarter (Q2FY24) operating margin rose by 210 basis points to 8.9% and the management had guided that half of the margin expansion is sustainable and the rest includes one-time tailwinds. It has stated its intention to steer clear of the orders with weak margin profile. It anticipates an improvement in margin, driven by the orders in key segments such as chemicals and industrial products that have better margins.

“Project and turnkey businesses in the industrial infra segment, often involve orders with relatively low margins. Thermax is hoping to secure profitable orders, which is a positive development,” Amit Anwani, analyst at Prabhudas Lilladher, said. In Q2FY24, industrial products and infra segments dominated the order book, with the latter being the second biggest contributor.

Motilal Oswal projects a 21% compound annual growth in profit after tax over FY23-26 supported by higher sales and better margins. So far in 2023, Thermax’s shares have surged 43% thanks to the strong order backlog and intake, amid positive momentum in the capital goods sector. That said, the stock trades at 43 times estimated FY25 earnings, which looks pricey.