Thermax legacy project overruns hit margins despite strong order backlog and US data centre pipeline

Investment View and Valuation

Motilal Oswal Financial Services retains its Sell rating on Thermax and has reduced the target price to Rs 4,000 from Rs 4,300. The negative view reflects the company’s high valuation and a sharp negative surprise from the legacy Industrial Infrastructure order book.

Thermax traded at 76.2 times FY27E EPS, 48.7 times FY28E EPS and 39.6 times FY29E EPS. The revised target price is based on a sum-of-the-parts approach and 40 times September 2028E earnings for the core business.

Q1 FY27 Financial Performance

Thermax’s Q1 FY27 performance was significantly below Motilal Oswal’s expectations. Revenue increased 7 per cent year-on-year to Rs 2,300 crore, compared with the broker’s estimate of Rs 2,440 crore. EBITDA declined 70 per cent year-on-year to Rs 68.6 crore, versus the expected Rs 210 crore, while the EBITDA margin fell to 3.0 per cent from 10.4 per cent a year earlier. PAT declined 86 per cent year-on-year to Rs 21.8 crore, against the broker’s estimate of Rs 110 crore.

The shortfall arose mainly from an additional Rs 91 crore cost-to-complete provision on a loss-making approximately Rs 1,200 crore legacy government project in Industrial Infrastructure, lower-than-expected Industrial Products dispatches of about Rs 300 crore and commodity inflation.

Legacy Project Overruns and Industrial Infrastructure Recovery

The legacy government project faced significant unbudgeted engineering changes from its engineering partner in June 2026. Cumulative expected losses are about Rs 150 crore. The project is 74 per cent invoiced, while the remaining 26 per cent is execution-heavy and is expected to run over the next four quarters through Q1 FY28.

Management expects the material cost impact to be absorbed in FY27. Remaining legacy government exposure of only Rs 300 crore to Rs 400 crore is expected to near completion by the second half of FY27. As better-margin private and export projects replace legacy work, management expects Industrial Infrastructure profitability to recover to above 10 per cent. Motilal Oswal, however, will monitor execution and delivery of this expected recovery.

Order Book and Execution Visibility

Quarterly order inflow was Rs 2,810 crore, up about 2 per cent year-on-year, taking the order backlog at the end of June 2026 to Rs 14,000 crore, up 23 per cent year-on-year. Motilal Oswal views the backlog as providing strong execution visibility.

Only about Rs 2,500 crore is scheduled beyond FY27, implying more than Rs 3,000 crore of quarterly revenue over the next two to three quarters. Deferred Industrial Products shipments should also support upcoming execution. The opportunity pipeline spans domestic supercritical, subcritical and captive thermal power, waste-to-energy, selective EPC work, the Middle East, Africa and US data centres.

Business Segment Outlook

Industrial Products

Management expects double-digit FY27 growth in Industrial Products, supported by opportunities in water, clean air, cooling, process heating, heat pumps, biomass boilers, zero-liquid-discharge, effluent-treatment and desalination.

Steel plate prices rose about 18 per cent over two months, putting pressure on margins. Management expects margins to improve in Q3-Q4 FY27 as commodity costs are absorbed and the higher-margin cooling backlog is executed.

US data-centre cooling is a differentiated opportunity. Thermax has memoranda of understanding with two major US solution providers, expects two further cooling wins in Q3-Q4 FY27 and expects the first major US shipment to contribute in Q3 FY27.

Green Solutions

Green Solutions ordering was strong, with TOESL inflows increasing 149 per cent year-on-year to Rs 400 crore. Management sees an annual revenue run rate above Rs 600 crore, with visibility towards Rs 800 crore to Rs 900 crore.

FEPL recorded an unexpected Rs 20 crore loss because completed Tamil Nadu projects are awaiting power-generation approvals. Bio-CNG continues to carry quarterly costs of Rs 7 crore to Rs 8 crore.

Chemicals

Chemicals saw a recovery in volumes and returned to double-digit EBITDA margins. Management expects at least 20 per cent growth in FY27. Raw-material inflation, a 10 per cent US tariff and Chinese competition remain risks.

Estimates and Forecast Assumptions

Motilal Oswal reduced its FY27 and FY28 PAT estimates by 20.3 per cent and 2.9 per cent, respectively, following the Q1 miss. The broker forecasts revenue, EBITDA and PAT CAGRs of 19 per cent, 24 per cent and 22 per cent, respectively, over FY26-FY29.

Key Risks

• Slower order inflows.
• Further commodity-price increases.
• A slower revival in private capital expenditure.
• Greater competition.