Thermax Q1 FY27 earnings call

Thermax Limited reported a difficult Q1 FY27 with only 7% revenue growth. The quarter was significantly impacted by a INR 91 crore cost-to-completion hit on a legacy INR 1,200 crore government project, which is now expected to result in a total loss of INR 150 crores. Additionally, INR 300 crores of finished goods inventory in Industrial Products could not be shipped due to international customer delays, and the company faced a INR 10 crore impact from commodity price increases. Losses of INR 20 crores in FEPL and INR 8 crores in Bio-CNG further contributed to the challenging quarter.

Management explicitly acknowledged that the INR 1,200 crore government project was a 'wrong project to take' and has since implemented a strategic shift in project selection. Going forward^⏳, Thermax will only bid for government and PSU projects at appropriate pricing and where it possesses unique capabilities, aiming to reduce its exposure to such contracts to 'almost 0%.' The current government/PSU portion of the INR 14,000 crore order book is a minimal INR 300-400 crores, reflecting this new cautious approach.

Despite current losses, Thermax sees significant future potential in green solutions. The Bio-CNG business, which incurred an INR 8 crore loss in Q1, is poised for growth contingent on anticipated government policy changes, including expected price increases of 20-30% and announcements around August 10. Similarly, the company is focusing on green methanol, with the Kandla Port project serving as a showcase for indigenous technology, and SECI actively driving a 'big pipeline' through tenders.

Thermax is making strides in its hydrogen business, having 'shaken hands on one project' that is expected to be announced next quarter and generate revenues next year. This initiative is supported by a partnership with Hydrogen Pro and the development of a demo plant, scheduled for completion by year-end. The demo plant will showcase capabilities with global standards, with a dedicated team of 40-50 people focused on engineering and setup, positioning Thermax for future growth in this sector.

Despite Q1 challenges, Thermax maintains a bullish outlook for Industrial Products, expecting 'good profitability growth, good orders growth and good revenue growth' for the year, with targets of two to three quarters exceeding INR 3,000 crores in revenue. The TOESL business, a key green solutions segment, demonstrated strong performance in Q1 and is on track to grow from its current run rate of over INR 600 crores to an INR 800-1,000 crore business within the next two years, driven by robust order booking and pipeline.

Thermax is strategically positioned to capitalize on the burgeoning data center market through four business segments: cooling, TBWES, water treatment, and chemicals. The company highlights its unique differentiation in cooling solutions for co-located data centers, particularly in the US market, where it anticipates securing 'two more wins' between Q3 and Q4. This focus on high-margin, specialized solutions underscores its commitment to profitable growth in this sector.

Management expressed strong confidence in a 'significant improvement' in profitability for Q2, Q3, and Q4 FY27 compared to the previous year. This recovery is expected to be driven by the execution of the profitable Industrial Projects backlog, the recognition of delayed INR 300 crore shipments (now shipping in Q2 for Q3 recognition), and benefits from LD reversals and cash collections. The company aims for Industrial Infra to achieve '10% and beyond on profitability,' signaling a clear path to margin expansion.