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Valuation Concerns Mount Despite Thermax's Operational Strengths
Prabhudas Lilladher has downgraded Thermax from 'Accumulate' to 'Reduce'. The brokerage rolled forward its earnings estimates to March 2028, valuing Thermax's core business at 39 times projected earnings, up from 37 times. This higher multiple suggests the stock's recent price surge may have outpaced its earnings growth. Despite a 10.7% revenue rise and an 88 basis point EBITDA margin expansion to 10.6% last quarter, investor focus is now on sustaining these high valuations. The firm's target price was raised to INR 3,696 from INR 3,374, mainly due to extending the valuation period.
Operational Wins Amidst Segmental Pressures
Thermax's recent financial reports show strong execution. Consolidated order inflows were boosted by a INR 16.3 billion boiler order, improving efficiency in the Industrial Infrastructure segment. The Industrial Products division performed well, especially in heating, cooling, and water solutions. However, an unfavorable mix of products affected overall profitability. The Chemicals segment saw its profit margins decline due to ongoing supply chain problems and rising material costs. The Green Solutions segment continued to report losses from project cost overruns. Management warned that the first half of fiscal year 2027 could face challenges from gas unavailability for fabrication and persistent raw material and supply chain issues in Chemicals and Industrial Infrastructure. A promising area is data centers, where the company expects international orders for cooling and heating systems soon.
High Valuation Compared to Industry Peers
Thermax's current valuation stands out against its competitors. Its market capitalization is around INR 49,834 crore, with a Trailing Twelve Months (TTM) Price-to-Earnings (P/E) ratio of approximately 73-79x. This is significantly higher than the industry average of about 34x and the country average of 29x. Peers like Apar Industries trade at a P/E of 62.59x, and Suzlon Energy at 36.17x. Siemens India's P/E was 69.6, and Cummins India's was 42.3. Thermax trades at a premium, reflecting high investor expectations that analysts are now questioning. While India's industrial sector shows positive trends from infrastructure development, it faces cost pressures from materials like aluminum, chemicals, and fuel. This general rise in costs makes Thermax's chemical segment and margin sustainability concerns more significant.
Execution Risks and Margin Squeeze
The main concerns for Thermax, despite a strong order book and revenue growth, are ongoing execution difficulties and falling profit margins, particularly in Industrial Infrastructure and Green Solutions. Delivery delays have impacted revenue recognition. Issues like incomplete civil work, contractor problems, and delays in site readiness by clients also affect cash flow and working capital. In one instance, the Green Solutions segment lost INR 29 crore in Q4 due to a contractor failure, forcing Thermax to incur additional costs. The Chemicals segment's profitability is squeezed by higher input costs, partly due to global instability and rising steel prices, along with an unfavorable product mix. Management's decision to avoid large supercritical power projects in Industrial Infra highlights the segment's inherent challenges. The high P/E ratios, such as 50x Sep'26E noted in November 2024, pose a significant risk if growth slows or execution issues reappear. Unlike some rivals with less debt or more stable revenue streams, Thermax's reliance on large, complex projects introduces volatility.
Growth Prospects in Data Centers and Green Energy
Looking ahead, Thermax is preparing to benefit from the growing demand for data center solutions, expecting international orders for its cooling and heating systems. The company is also a key player in India's energy transition, offering solutions for clean air, energy, water, and chemicals. Thermax aims for ambitious green asset capacity targets: 600 MW by FY26 and 1 GW by FY28. While analysts are cautious on current valuations, they generally expect continued revenue visibility and gradual margin improvements from operating leverage and a changing business mix. However, sustaining growth and margins will depend on navigating operational challenges and successfully executing projects.