Q4FY23 Review: Thermax: Short-cycle products to outpace projects

Thermax’s new reporting structure of business segments gives a much better perspective on the performance of its products and projects portfolio, while highlighting ramp-up in BOO-driven asset portfolio (5% of sales). While management has been cautious on large projects orders, short-cycle products portfolio continues to be the mainstay with various new products in pipeline and thrust on deepening channel presence with services & digital solutions.

Inflows to moderate as large orders thin: 

Order inflows declined by 7% YoY to Rs88bn, due to decline in Industrial Infra (project business) which had received large orders in PY. While Products and Chemicals (55% of mix) should sustain growth with steady capex and various new product introductions & upgrade in solutions offered, uncertainty of the timing of finalisation of large private capex in Steel sector is likely to consolidate inflows in Infra segment (share to consolidate from 43% to a third). Greater acceptance of TOSEL’s offerings and commissioning of new solar PV assets — should aid growth in green solutions.

Margin outlook improves across businesses: 

All segments saw robust growth in FY23 revenues, driven by cyclical rebound in demand for short cycle industrial products and chemicals. Commissioning of solar assets and expansion of portfolio in TOSEL aided growth Green Solutions business. Industrial Products, Chemical (legacy issues resolved) and Green Solutions are expected to sustain double-digit growth momentum with healthier margins, while OPM for Industrial Infra is expected to be stable in FY24 with stability in commodity costs.

Healthy FCF enables investments in renewable assets: 

Better asset turns and OPMs in FY23 aided ROE/ROCE at 12.2/15.5% (+3pps); cash chest of Rs25bn (>55% of NW). Strong FCF generation for FY23 at Rs4.5bn (vs –Rs4bn in PY) enables TMX to infuse growth equity of Rs5-6bn required in its green solutions-based BOO segment over the next fiscal and invest in new product development without straining balance sheet.

At 36xFY25 EPS, valuations have seen some consolidation, yet remain richly priced in line with the sector. Analysts of IIFL Capital Services revise FY24 EPS by 3% and retain ADD with 12-month TP of Rs2,514 (10% upside).