JM Financial initiated coverage on Thermax with a ‘Reduce’ rating and target price of Rs 2,700. The price target implies that the stock might fall 7.5% over the next 12 months.
“While it has a robust Industrial Products presence, its performance in large project execution (Industrial Infra) does not inspire confidence,” said JM Financial.
Additionally, increased diversification and expansion into non-core segments like solar power assets (developer model), bioenergy, and chemicals have dragged return metrics over FY19-25. The drag may still persist as management continues to infuse capital into solar and chemical segments.
Shift toward lower-return non-core segments
The brokerage house indicated that Thermax is increasingly allocating growth capital toward non-core areas. These include solar power assets, chemicals, and bio-energy. These segments typically offer a much lower Return on Capital Employed (ROCE of 0-5%) compared to the company’s blended ROCE of over 10%. This shift to an asset-heavy model is viewed as value-dilutive for investors.
Weak performance in large project execution
While Thermax has a strong presence in industrial products, its track record in executing large Industrial Infra projects “does not inspire confidence”. Specifically, the company has struggled with low-margin FGD (flue gas desulphuriser) projects and has faced engineering challenges even at late stages in refinery contracts, such as the Numaligarh refinery project.
“On top of it, management’s refocus on large projects despite recent profitability setbacks in India can emerge as a fresh concern. Even so, continued strong performance in Industrial Products and on ESG goals is the silver lining,” said JM Financial.
Challenges in the Bio-CNG segment
JM Financial views the investment in bio-CNG as “good money chasing below-average projects”. The segment is suffering from the use of ‘pilot-level’ technology adapted for complex, plant-based feedstock (like rice straw) that faces chronic supply challenges and high costs, leading to persistent losses. “We are concerned that just like TMX’s past attempts in sewage treatment plants (STPs), which did not do particularly well, the bio-CNG plants (based on rice straw), too, can face similar hurdles,” said JM Financial.
Adverse profitability headwinds in chemicals
The chemical segment is currently navigating a speciality chemicals down-cycle. Profitability is being squeezed by aggressive Chinese pricing competition and significant US tariffs (a 25% base tariff plus additional Russia-linked tariffs), which complicate the near-term outlook for margin revival.
However, in the near term, Thermax continues to face headwinds on profitability amid undercutting by Chinese competitors at the same time as speciality chemicals are braving a down-cycle. Furthermore, increased capacities in construction chemicals are margin-dilutive as well.
Deteriorating net cash position
The transition from a product-based firm to an asset-owning developer (particularly in solar power) is expected to weaken the balance sheet. Due to the high capital intensity of solar assets, JM Financial estimates that the company’s net cash will drop from Rs 1,300 crore in FY25 to Rs 1,200 crore by FY28 as project debt rises. “We believe if non-core margins fail to normalise, EBIT estimates can be hit upto 15% (FY28), posing major earnings risk,” said the brokerage house.
The shift towards non-core segments for a core industrial products firm adversely alters the risk profile, which the brokerage thinks justifies further de-rating of the stock.
Overall, JM Financial said that a simple P/E-based valuation is no longer appropriate because Thermax’s growing involvement in higher-risk, lower-return segments justifies a relative decrease in its valuation compared to its historical industrial multiples.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.