Thermax : Optimistic Despite Challenges

The company is entering a phase where the mix of work they do will go through continued change between now and the next couple of years.

Thermax Limited is a global energy and environment solutions provider that has been operating for over five decades in India. The company was founded in Pune in 1966, and since then it has expanded its presence to more than 90 countries worldwide. Today, Thermax is known as one of the leading providers of energy and environment solutions in the world with a diverse portfolio of products and services that cater to various industries. The company’s product range includes boilers, heaters, chillers and other equipment for heating, cooling and power generation. Thermax also provides solutions for wastewater treatment, air pollution control and renewable energy, making it a one-stop-shop for all energy and environment-related needs. 

The company’ clientele includes large industrial corporations, power utilities and government organisations across the globe. One of the most significant advantages of Thermax is its commitment to sustainability. The company is deeply invested in reducing carbon emissions, conserving natural resources and promoting renewable energy. In line with this commitment, Thermax has developed several innovative technologies that help reduce greenhouse gas emissions and improve energy efficiency. For instance, the company's ‘EcoGen’ technology uses biomass as a fuel source to generate electricity and reduce carbon emissions.

Another key aspect of Thermax’s success is its focus on research and development. The company has several research centres across the world, where scientists and engineers work to develop new technologies and improve existing ones. Through this commitment to research and development, Thermax has been able to stay ahead of the curve and maintain its position as a leader in the industry. Thermax is a company that has made significant contributions to the energy and environment industry over the years. With its focus on sustainability, innovation and customer service, the company is wellpositioned to continue its growth and success in the future.

Sector Outlook

The Indian electrical machinery industry plays a crucial role in the growth and development of the Indian economy. The sector comprises various segments such as transformers, switchgear, cables, conductors, motors, generators, and others. The industry is primarily driven by the power sector and industrial activities. With the Indian government’s focus on renewable energy and infrastructure development, the sector has tremendous potential for growth. One of the key drivers of the industry is the government’s push towards renewable energy sources. India has set an ambitious target of achieving 450 GW of renewable energy capacity by 2030. This will require significant investment in the electrical machinery industry to support the development of renewable energy projects.

The industry is also expected to benefit from the government’s initiatives to boost domestic manufacturing under the ‘Make in India’ programme. Another significant driver for the industry is the growing demand from the industrial sector. The manufacturing sector in India is growing at a rapid pace, and this is expected to continue in the coming years. The industrial sector is a significant consumer of electrical machinery products, and the growing demand from this sector is expected to drive the growth of the industry. Overall, the Indian electrical machinery industry has significant potential for growth, driven by the government’s initiatives to boost renewable energy and infrastructure development, as well as the growing demand from the industrial sector. However, the industry needs to address the challenges it faces to realise its full potential and emerge as a competitive player in the global market.

Financials

In Q3FY23, the net sales of the company surged by more than 26 per cent from last year’s same quarter to ₹2,049.25 crore. The EBITDA of the company shot up by 42.97 per cent from the December 2021 quarter to ₹203.40 crore. The net profit of the company zoomed by 58.33 per cent from the corresponding quarter last year to ₹126.19 crore. The profitability was better than the previous quarter due to better performance in the energy segment. As per the latest earnings call, the company’s CEO has highlighted three key points that are worth noting. Firstly, despite having strong momentum across industries, the company has fewer bigger opportunities to work with, which has impacted their performance in the current quarter. 

This trend is expected to continue for the next few quarters as well. Secondly, the company has mentioned that there are moderating challenges on the overall commodities cycle, which is leading to a more predictable revenue stream. Thirdly, the overall market environment is positive, with a tremendous set of opportunities emerging in the climate change set of technologies. Thermax is entering a phase where the mix of work they do will go through continued change between now and the next couple of years. This change will require a lot of hard work and investment, including getting into newer areas that may come with some amount of risk. 

The company has a framework in place to manage this transition. Overall, Thermax’s management is optimistic about the future despite the challenges faced in the current quarter. The CEO has highlighted that there are still a lot of opportunities to explore, especially in the area of climate change technologies. The company is looking to invest more and get back into some newer areas to capitalise on these opportunities.As of December 31, 2022, the company’s order backlog stood at ₹9,859 crore. There has been a noticeable slowdown in the pipeline of major projects in the petrochemical and SGD products. 

The company notes that the wave of such projects may have passed, and that it has adjusted its approach accordingly, focusing on higher-margin businesses that present greater opportunity. Despite the challenge of maintaining a healthy top-line without the large orders of the past, the company reports that it is seeing good momentum and is confident in its overall cycle capability. It expects to continue seeing reasonable momentum this year and into next year, although the lack of big projects could hinder growth in the order book side. Nonetheless, the company remains committed to building a plan that will enable it to grow its order book somewhat in the coming years. 

Outlook

The company’s business is divided into three segments with the first being their solutions business that offers green utilities like solar and wind-based operations. Although this aspect of their business may not yield immediate profits, the company focuses on its long-term return on equity and cash-back compared to their investment. Despite the anticipated loss from their solar-based operations this year and next year, the company is aiming to achieve 200 megawatts from zero a year ago. Therefore, they expect to generate earnings over a more extended period. The company’s second business component is its projects business, which has traditionally generated a profitability margin of 5 per cent to 6 per cent. 

Nevertheless, the company anticipates raising the profitability threshold to between 5 per cent and 8 per cent. This business unit operates on a growth trajectory while maintaining a depreciated asset base, thereby requiring minimal capital expenditure and functioning on a negative working capital framework. The company is satisfied with the profitability range and implements risk management strategies while preserving a negative working capital environment. Lastly, the third part of the business is their products and associated services business where the company aims to attain a 10 per cent margin in this segment, but they have not yet reached this target. 

The company remains optimistic that a sustained favourable economic climate and stable commodity prices could assist them in accomplishing this objective in the long run. The business is interested in exploring new opportunities, such as hydrogen and water, owing to the emergence of several novel technological trends. The steel industry is not considered to be one of the sectors that are being propelled by the shift towards cleaner energy sources. Nevertheless, it is still gaining momentum due to recent capital expenditures. On the other hand, the sugar, ethanol and distillery sector has maintained its strength over the past year and is projected to continue doing so over the next 12 months. 

The cement industry is poised to witness the introduction of new production capacity and the concluding phase of the waste heat recovery cycle. The chemicals sector is displaying sustained growth, whereas pharmaceuticals and food and beverages are demonstrating satisfactory activity. Conversely, the refining and petrochemical industries are anticipated to have weaker performance. Despite facing fierce competition in all its product lines, the company holds a dominant position in most of the areas it operates in, thanks to its expertise in engineering and technology. As a result, Thermax can charge higher prices for its products. The company highlights its 40 per cent market share in areas like biomass, multi-fuel and waste-to-energy as an example of how customers prefer their solutions for their intricacy. 

Thermax is also a major player in the bio-CNG industry, where customers have a strong inclination towards their offerings during negotiations. There has been a decrease in the demand for products made in India in their export markets due to the absence of sizeable international projects. The company has noticed that even the biggest orders from three years ago have been smaller than the current ones. Although the company has observed an increase in projects worth `50-100 crore, it has not made any major project announcements recently. However, there are some positive signs for the company’s waste-to-energy business as it has broken through with some major international players who were previously partnering with Chinese companies. 

If these projects are executed successfully, the company is optimistic that it could lead to more repeat business in the future. Thermax’s chemical business has experienced growth, although not at the rate the company had initially anticipated. This can be attributed to a sluggish US market. However, the company’s outlook for this segment remains optimistic. Additionally, the company foresees a double-digit increase in its capex if the current trend persists. The company is currently receiving a robust pipeline of orders, ranging from `50-100 crore, mainly for waste-to-energy projects in South East Asia and Africa. 

Although there have not been any significant international projects, the company has established partnerships with prominent waste-to-energy leaders globally, which could result in further repeat business. The company is anticipated to profit from the China Plus One strategy as it has received boiler orders from global players. Additionally, its collaboration with an Australian firm that is developing an electrolyser facility for green hydrogen is viewed as a promising growth opportunity. However, the company is predicted to have a mixed financial performance in the upcoming quarters, as stated in the earnings call, and the current price already reflects a significant amount of positivity with a higher PE ratio of 68. Hence, we recommend HOLD.