With the dawn of a new era in economic expansion, bolstered by a resurgence in investment activities, the spotlight turns toward Thermax as a potential standout choice for investors. Although curiously absent from the top echelons of analyst favorites, Thermax, headquartered in Pune, has garnered favor among discerning investors due to its adept leadership, robust order inflow, and promising growth trajectory. As a multinational corporation rooted in India, Thermax operates in 29 countries, boasting 14 manufacturing units—ten within India and four on foreign soil. The company’s diverse portfolio spans over 15 industries, encompassing domains ranging from automotive to textiles and power generation.
Amidst the ongoing march of economic advancement, driven by a resurgence in investment momentum, the proposition of investing in Thermax takes on an intriguing hue. However, despite witnessing a noteworthy surge in stock prices, the stock does not occupy the coveted top ranks in analysts’ recommendations. The question looms: Why? Should Thermax, a company that has witnessed a substantial uptick in its stock value, be regarded as a long-term investment opportunity? Especially in a sector where exemplar governance practices and proven management are rare finds.
Exploring the Detractors
Certain factors contribute to analysts’ cautious stance, casting shadows on Thermax’s allure. These include tempered growth in orders, narrower margins in select segments, the specter of price volatility in commodities, and a lack of clear visibility regarding refinery orders.
Thermax’s operational landscape is partitioned into four distinct sectors: industrial products, industrial infrastructure, green solutions, and chemicals. Of these, industrial products (41%) and industrial infrastructure (45.2%) constitute the largest contributors, followed by green solutions (5.5%) and chemicals (7.9%).
In the first quarter of the fiscal year 2023 (Q1FY24), Thermax disclosed revenue upswings across all its segments. Notably, revenue in the industrial products sector surged by 26% YoY (Year-over-Year), amounting to Rs 836 crore. The industrial infrastructure segment witnessed a 13% YoY revenue boost, reaching Rs 916 crore. During the same period, the Chemicals and Green Solutions segments reported revenue upticks of 7% and a remarkable 94%, reaching Rs 161 crore and Rs 113 crore, respectively.
However, a deeper dive reveals challenges. Despite progress in industrial products and chemicals during Q1FY24, the industrial infrastructure segment encountered headwinds, primarily due to narrower margins in the sector.
An assessment by ICICI suggests that the outlook for smaller orders remains promising, while the horizon for substantial orders appears unlikely to brighten in the near term. Management anticipates opportunities for orders below Rs 500 crore. The report also underscores a muted anticipation for orders in the refinery sector in the short run, with significant orders expected to materialize starting FY2027.
In Q1FY24, Geojit analysts rated the stock as a “sell,” citing concerns about its current “expensive” valuation and a moderation in major orders. At the present price of Rs 2,783, with a FY25 EPS of 60.4, the stock’s valuation stands at 35x. Geojit sets a target price of Rs 2,113 for the stock. Nonetheless, the firm acknowledges the potential for growth estimates to rise for FY24 and FY25, to 15.3% and 11.5% respectively, driven by a robust order book pipeline and enhanced execution.
Analysts at BoB (Bank of Baroda) uphold a “hold” recommendation, adjusting valuations to June 2025E and arriving at a revised target price of Rs 2,600. This valuation is based on a 40x P/E multiple, aligning with the stock’s 5-year average. While order inflows exhibit vigor, BoB analysts remain cautious due to weak infrastructure margins stemming from prior orders.
In contrast, ICICI Securities downgraded their rating from “buy” to “add.” Despite this shift, they raised the target price by 5.2% to Rs 2,703, citing a robust order outlook. The analysts allocated a 40x FY25E earnings multiple to the green solutions business, reflecting its leadership in energy-efficient offerings. For the chemicals business, characterized by promising growth prospects albeit in a nascent stage, a relatively conservative multiple of 30x FY25E was assigned.
Resilient Amidst Fluctuations
Thermax’s stock price has demonstrated a steadfast rise, even amid occasional market volatility. Starting at Rs 1,961.35 on January 3, it surged to Rs 2,749.7 by August 28, marking a remarkable 40% increase. This optimism finds its roots in a grander panorama.
Embracing the Positive Aspects
One area where Thermax radiates strength is its industrial products sector, buoyed by a burgeoning domestic economy, the momentum of energy transition, and the development of water treatment infrastructure in India. Notably, the heating solutions sector is a potent driver within this segment.
The Union Budget of February 2023 allocated a substantial Rs 10,222 crore towards the renewable energy sector—a noteworthy 48% increment compared to the previous year’s allocation of Rs 6,900.68 crore. This budgetary shift underscores the priority accorded to “Green Growth.”
According to Prabhudas Lilladher analysts, Thermax is strategically poised to capitalize on the escalating emphasis on energy transition and decarbonization efforts. The company’s strong balance sheet, technical expertise, and prudent working capital management position it favorably to ride this wave.
HDFC Securities analysts echo this sentiment, projecting that Thermax stands to gain from investments in clean energy, sustainability, international market stabilization, and the impetus toward cleaner air and water.
Additionally, Thermax’s solid management team and robust promoter holding constitute a significant advantage. Over the years, the company, operating within the capital goods sector, has secured substantial contracts from the government. Despite challenges, particularly in recent years, this sector is undergoing revitalization, particularly within India. CRISIL, a rating agency, forecasts the Indian capital goods sector to grow by 16-18% in FY24.
Financial Terrain: A Mosaic
For Q1FY24, Thermax reported an 18.5% increase in revenue, reaching Rs 1,986.02 crore from the prior year’s Rs 1,675.02 crore. Operating revenue mirrored this upward trajectory, rising 16.8% to Rs 1,932.96 crore from Rs 1,654.48 crore. Impressively, the company’s order inflow expanded by 11% YoY in Q1FY24, surpassing market expectations. The quarter witnessed orders worth Rs 2,570 crore, marking an 11% increase over the previous year and a 14% QoQ rise.
Cultivating Long-Term Optimism
While the near-term projections among analysts may diverge, some brokerages advocate for Thermax’s merit as a long-term investment proposition. In a Bloomberg analysis involving 26 analysts, nine proffered a “buy” recommendation, ten advised “hold,” and seven suggested “sell.”