Thermal captive power projects account for just 10-15% of Thermax’s revenues vs 50%+ in earlier years. 70%+ of orders is driven by green offerings. Higher margin products and services is 50-55% vs 39% in FY18. We believe the business model change points to strong earnings recovery although thermal captive power is unlikely to grow and is being under-appreciated by the market. 38% EPS CAGR in FY21-25E and 19% ROE vs 8% should drive upside from current levels.
Sea change in 2022 vs 2008: Contrary to perception, Thermax is a beneficiary of corporate India’s moving focus to ESG. W2H recovery, biomass plants, solar opex, absorption chillers, water and waste treatment chemicals account for over 60% of Thermax’s revenues. FGD and services accounts for another 24%.
Break-out in revenue in FY23E: Thermax’s revenue is below its `61 bn FY12 peak for the past nine years. 83% y-o-y growth in 9MFY22 order flow and 28% y-o-y in order book gives visibility for revenues finally crossing this peak to touch `75+ bn in FY23E.
Gross margin should settle by FY24E: We reduce our FY22E-23E EPS by 5-6% to factor in the recent commodity spike and look forward to margins normalising in FY24E. Even with some gross margin decline, 23% revenue CAGR in FY21-25E and lifetime high revenues should see operating leverage boost margins to 9.5-10%.
Business transition to green yet to be recognised: Management’s aim is to be a leader for India in clean water, clear air and clean energy by offering new product solutions. India’s capex cycle has been in a downturn in the last 9-10 years and Thermax traded at an average 40x PE (our FY24E target multiple). The band is wide at 16-58x, but in the past five years it has traded above 35x PE and re-rated each time earnings visibility improved. We believe in the next 12-24 months, capex outlook should improve. As revenues mirror macro trends, margin outlook should improve and drive stock upside. Downside risk: mkt share loss and lower revenue.
