Stock market positive on Thermax despite profit margin decline in Q1

Thermax reported 13 per cent Y-o-Y revenue growth with operating profit margin decline in Q1FY25.

It took a hit of Rs 70 crore on specific projects.

The company enjoys a strong order pipeline across sectors like power, steel, refining and petrochemicals.

Its strengths include technical expertise, a strong balance sheet and good working capital management.

The industrial products segment is poised for double-digit growth driven by solutions for water treatment and air pollution.

The chemical business is on a growth trajectory as supply chain issues ease.

In green solutions, the subsidiary TOESL continues to grow at a steady rate.

Another subsidiary First Energy (FEPL) will continue to be loss-making this year.

Thermax sees opportunities in green solutions in sectors such as bio-energy, heating & cooling, chemicals, and water.

Consolidated revenue rose 13 per cent Y-o-Y to Rs 2,180 crore with growth in industrial products, green solutions and chemicals.

The industrial products revenue grew 14.9 per cent Y-o-Y to Rs 960 crore, green solutions grew 53.5 per cent Y-o-Y to Rs 170 crore, chemicals grew 6.3 per cent Y-o-Y to Rs 170 crore, and industrial infra was flat Y-o-Y at Rs 930 crore.

The gross margin fell 51 basis points Y-o-Y to 43.7 per cent.

The operating profit rose 6.8 per cent Y-o-Y to Rs 140 crore.

The operating profit margin declined by 38 basis points Y-o-Y to 6.5 per cent.

Industrial products margin was 9 per cent, up 232 basis points Y-o-Y; the industrial infra segment turned in a loss at the operating level.

The green solutions margin was 13.2 per cent up 440 basis points Y-o-Y.

The chemical margin improved to 17.8 per cent, up 127 basis points Y-o-Y.

The adjusted net profit rose 12.3 per cent Y-o-Y to Rs 110 crore, including higher other income.

However, interest costs doubled Y-o-Y to Rs 27.5 crore.

The order inflow was flat Y-o-Y at Rs 2,570 crore.

The order book stands at Rs 10,680 crore (1.1 times trailing 12-month revenues), with the contribution of industrial product, industrial infra, green and chemical mix at 36 per cent, 54 per cent, 8 per cent and 2 per cent respectively.

Three big projects are anticipated in H2 FY25 from refining and petrochemicals, and there are major opportunities in steel and thermal power projects.

The company expects higher order flows from Q2 FY25.

The industrial infra segment faced challenges, with cost overruns exceeding Rs 100 crore in bio-CNG and FGD (flue gas desulphurization) installations, due to engineering setbacks and labour shortages.

Thermax is focusing on higher-margin projects and reducing civil and construction orders.

Margins are expected to exceed 5.5 per cent for the rest of FY25.

In bio-CNG, Thermax wrote off Rs 45 crore for expected future losses related to the projects in this business.

It plans to enhance its engineering capabilities and has stopped taking orders in bio-CNG until it has done so.

In FGD, a project remains unprofitable with additional site costs of Rs 8 crore due to delays, attributed to complications arising from Covid-19 and inability to source materials from China.

Big FGD tenders are expected to be split into smaller packages in future, leading to better pricing and flexibility.

Industrial products are expected to grow in double digits and margins have been improving/ stable.

In chemicals, supply chain challenges are expected to ease from Q2 FY25 with a growth rebound.

A joint venture with Vebro Polymers is set to enhance capabilities.

In Green Solutions, TOESL is growing with improved profitability, while FEPL's Tamil Nadu project faced floods and wind project delays.

The company is seen as a high-quality play, but analysts have mixed views on the stock with target estimates varying between Rs 4,200-Rs 5,100.

There was a 9 per cent sell off, pulling the stock down to Rs 4,533 levels.

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