Valuations capture upsides in Thermax stock; double-digit growth likely

Thermax is looking to build technical capability in boilers, electrostatic precipitators, regenerative air gas heaters, and pulse jet bag filters, as well as other new areas

Thermax recently held an analyst meet to explain how it is a likely beneficiary of the energy transition story. Most recently it won a Rs 500 crore tender to supply five bio-CNG plants and it targets setting up 1 gigawatt (GW) of renewables plants in the next three years. It now has 14 bio-CNG plants at various stages of operation and construction. In coal gasification where the Centre targets Rs 3 trillion investment by 2030 with 100 MTPA of capacity, Thermax has set up pilot plants, which it intends to scale up after stabilising the technology.

In green hydrogen, the Centre has a target of 5MTPA by 2030. Thermax has technology tie-ups for green hydrogen and is seeking to build manufacturing capacity for electrolysers, and develop biomass-to-hydrogen technologies and enter engineering procurement and construction or EPC contracts for hydrogen plants and also supply hydrogen to industrial users.

Thermax is also looking to supply equipment for ultra-pure water for semiconductor manufacturing. It is looking to build technical capability in boilers, electrostatic precipitators, regenerative air gas heaters, and pulse jet bag filters, as well as other new areas like gas de-sulphurisation, low-cost flexible solar films, solid waste to energy, AI solutions to decarbonise manufacturing. The portfolio would include flexi fuel boilers for biomass, electric heaters to reduce carbon footprint in heating applications, zero liquid discharge solutions, software for tracking industrial assets and cooling solutions for heavy commercial vehicles by using exhaust heat transfer technology.

Many of these offerings come from subsidiaries such as Thermax Onsite Energy Solutions and Firset Edge. In many of these areas, like in flexi-fuel boilers, thermal heating ventilation & AC, it is the only major domestic player. There is limited competition in bio-CNG, cooling solutions and coal gasification. Many of the new products in its portfolio have higher initial costs but lower energy consumption and should therefore be return-on-investment-accretive fairly quickly.  

Healthy double-digit growth can be expected. Its current order book is Rs 10,300 crore which is around 1.2 times the estimated FY24 turnover and features many “green” orders. It has consciously avoided bidding for large thermal power projects.

Thermax has turned cautious on international markets since it realises it cannot compete with China. However, forays into West Asia have been encouraging and the company is also exploring Indonesia where it sees competition but also higher opportunity.

The company’s careful selection of projects and areas to enter has helped it to maintain a strong balance sheet with no net debt. It is likely to stay cash-flow positive through the next two or three fiscals even as it wheels out the new portfolio. It should be able to maintain an operating profit margin of 8 per cent or more till FY26 though for FY24 this is likely to be lower.

One issue is valuations – Thermax is very highly valued with current PE running at above 60 times. The other issue is that the caution about avoiding low-margin big-ticket orders has meant slower revenue growth though Thermax has maintained high margins. Investors seeking value may wish to wait for a dip in price.