International Orders And Renewable Energy Expansion To Drive Growth And Boost Profitability

Key Takeaways

• Expansion into international markets and strategic boiler projects can drive revenue growth and improve profit margins.
  
• Investments in renewable energy and chemicals could positively impact long-term revenue and net margins.
  
• Thermax faces revenue and profitability challenges across multiple sectors, including power, government projects, BioCNG, and Chemicals, potentially affecting future growth and earnings.

Catalysts

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

• Thermax's international order pipeline, particularly large orders from regions like Botswana and potential growth in industrial products and chemicals in international markets, could drive future revenue growth.
  
• The company is selectively pursuing large boiler projects that align with their risk profile, aiming to improve the execution and profitability of such large-scale ventures, which could enhance margins.
  
• Potential growth and investments in the renewable energy sector, with plans to expand capacity to 1 gigawatt, suggest a positive long-term revenue impact as the demand for green energy solutions increases.
  
• The Chemicals business is poised for growth, supported by both organic developments and strategic acquisitions, which could positively influence both revenue and net margins.
  
• Thermax's strategy to avoid unprofitable government projects and focus on more manageable and profitable medium-sized projects indicates a potential improvement in project execution margins and overall earnings quality.

Thermax Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Thermax's revenue will grow by 14.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 8.1% in 3 years time.
• Analysts expect earnings to reach ₹12.0 billion (and earnings per share of ₹105.56) by about December 2027, up from ₹7.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹13.5 billion in earnings, and the most bearish expecting ₹9.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 60.7x on those 2027 earnings, down from 72.1x today. This future PE is greater than the current PE for the IN Machinery industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.58%, as per the Simply Wall St company report.

Thermax Future Earnings Per Share Growth

Risks

• Thermax has decided not to bid for large power projects (₹4,000 crores to ₹6,000 crores) due to risks related to execution and profitability, impacting potential revenue and growth opportunities in the power sector.
  
• The profitability issues in the government project sector, particularly in the medium project size (₹200 crores to ₹500 crores), have caused Thermax to step back, potentially limiting revenue growth and impacting net margins.
  
• The BioCNG sector poses significant execution challenges and performance issues that have not been fully resolved, making future revenue from new orders uncertain and potentially impacting Thermax's earnings.
  
• The FEPL business has been impacted by issues like Tamil Nadu floods, affecting project execution and revenues, with these impacts likely to linger and affect near-term earnings.
  
• In the Chemicals business, despite ongoing order growth, past logistics challenges have affected revenue and profitability, posing risks to sustaining double-digit growth and improving net margins.

Valuation

• The analysts have a consensus price target of ₹4405.95 for Thermax based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹6100.0, and the most bearish reporting a price target of just ₹2400.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹148.5 billion, earnings will come to ₹12.0 billion, and it would be trading on a PE ratio of 60.7x, assuming you use a discount rate of 13.6%.
• Given the current share price of ₹4746.75, the analyst's price target of ₹4405.95 is 7.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.