Legacy Businesses Will Shrink Amid Decarbonization And Supply Hurdles

Key Takeaways

• Accelerating decarbonization and environmental mandates threaten legacy core businesses, while slow adoption of green solutions risks long-term profitability and margin pressure.
  
• Intensifying competition, volatile supply chains, and exposure to cyclical sectors increase risks to order inflows, revenue stability, and international market expansion.
  
• Strong growth in innovative, sustainable solutions, expanding international presence, and stable recurring revenues are driving margin improvement and long-term business resilience.

Catalysts

Provides energy, environmental, and chemical solutions in India and internationally.

• The accelerating global shift away from fossil-fuel-based solutions threatens Thermax's legacy core businesses, particularly boilers and large thermal energy equipment, which have formed a significant portion of both the company's backlog and current order pipeline. As decarbonization mandates strengthen, long-term revenue streams from these conventional offerings are likely to face progressive structural decline.
  
• Intensifying global supply chain disruptions, combined with the trend toward deglobalization and a heavier reliance on imported raw materials, are set to raise input costs and cause delays in project execution. This creates risk of margin pressure and erratic earnings, especially as Thermax increases its capital expenditure and international ambitions.
  
• Margin compression appears likely as heightened environmental compliance costs and expensive retrofitting requirements for industrial clients trickle down to suppliers. Thermax's relatively slow pace in shifting its product mix from conventional thermal equipment to newer green solutions increases the risk that future investments will be less profitable, impairing net margins.
  
• Persistent aggressive pricing from Chinese and other international competitors in chemicals and engineered solutions is already weighing on Thermax's ability to achieve growth expectations from its expanded capacity. Market share gains abroad are far from assured, with both revenue and margin guidance in international markets at risk from an erosion in pricing power and contract profitability.
  
• A slowdown or cyclical downturn in major capex sectors such as power, refining, and cement-core to the company's industrial order pipeline-could lead to reduced order inflows and deteriorating revenue visibility, especially given Thermax's large backlog exposure to project businesses that are vulnerable to delayed or cancelled investment cycles.

Thermax Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Thermax compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Thermax's revenue will grow by 12.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.5% today to 7.7% in 3 years time.
• The bearish analysts expect earnings to reach ₹11.3 billion (and earnings per share of ₹100.04) by about August 2028, up from ₹6.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 38.0x on those 2028 earnings, down from 55.0x today. This future PE is greater than the current PE for the IN Machinery industry at 30.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.73%, as per the Simply Wall St company report.

Thermax Future Earnings Per Share Growth

Risks

• Thermax is seeing growing demand across secular themes such as renewables, waste-to-energy, water management, and industrial decarbonization, with new products like heat pumps, ZLD, electric boilers, and advanced water solutions already contributing about 20 percent of the Industrial Products business, which may help accelerate revenue growth beyond 15 percent annually.
  
• The company's international business is experiencing robust pipeline growth in new regions including Middle East, Africa, Latin America, and Southeast Asia, with management confirming that export margins are higher than domestic margins, and geographic diversification should drive topline growth and margin stability.
  
• Significant investments are being made in R&D and innovation, already resulting in accelerated commercialization of new products such as 110
• and 120-degree heat pumps, lower-footprint ZLD systems, and fast-ramping electric boilers, which should support higher-margin product offerings and a better net margin trajectory in the medium to long term.
  
• Recurring revenues from operation and maintenance services and government incentive schemes are improving cash flow stability and margin visibility for the next two years at least, which is further underpinned by a formal project risk evaluation process to de-risk project execution, so earnings remain resilient even with short-term fluctuations.
  
• The secular tailwinds of tougher environmental regulation, rising industry focus on ESG compliance, and the clamor for smarter, more digitalized solutions in industrial energy and water management are directly benefitting Thermax's core and emerging businesses, ensuring a large and stable order pipeline-eventually supporting growing backlog and improving long-term revenue visibility.

Valuation

• The assumed bearish price target for Thermax is ₹2532.96, which represents two standard deviations below the consensus price target of ₹3646.86. This valuation is based on what can be assumed as the expectations of Thermax's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹5100.0, and the most bearish reporting a price target of just ₹2400.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹146.3 billion, earnings will come to ₹11.3 billion, and it would be trading on a PE ratio of 38.0x, assuming you use a discount rate of 14.7%.
• Given the current share price of ₹3274.3, the bearish analyst price target of ₹2532.96 is 29.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.