Thermax Limited

Thermax experienced a challenging Q2 FY26, which management explicitly termed a 'kitchen sink' quarter due to an unexpected 'engineering surprise' that impacted project execution. This surprise occurred late in a project that was 92% complete but has since been 100% verified by a third party, providing confidence that the major project-related issues are now addressed. The quarter also saw continued execution of low-margin legacy projects, including FGD and the large refinery (NRL) project, with tail impacts from NRL expected into FY27.

The company is strategically shifting its focus towards securing more profitable orders, having previously declined approximately INR 10,000 crores worth of projects over the last year due to low profitability. For new projects, management is targeting a blended PBT margin of '10%-ish,' with domestic orders expected to yield 5-8% and international orders 10%+. This shift aims to improve overall profitability, despite the current quarter's challenges.

The Chemicals segment faced headwinds in Q1 and Q2, attributed to international competition and tariff uncertainties, which led to a loss of volume. However, a recovery was noted in September, October, and November, with volumes picking up and plant utilization increasing. Management expects the Chemicals segment's quarterly order book to grow from the current INR 200 crores to INR 230-240 crores imminently, starting Q3 FY26, targeting 'teen's kind of profitability' within a quarter.

The Bio-CNG business currently faces significant challenges, with projects operating at single-digit profitability and not yet commercially viable. The company has not secured new Bio-CNG orders for two years, and existing projects are semi-funded until they are handed over to customers after PGT tests. Despite these issues, management believes the Bio-CNG sector has 'tremendous potential' and could become an INR 1,000 crores business over the next couple of years, provided policy interventions address commercial viability and improve IRR to 14-15%.

Thermax is seeing strong growth opportunities across its Industrial Products portfolio, including water desalination, zero liquid discharge, and clean air solutions, particularly for emerging sectors like semiconductors and solar plants. The company is also focusing on expanding its services business, which currently contributes 'low double digits' to Industrial Products, with an aspiration to grow it into the 'teens.' This diversification helps mitigate risks from specific sector downturns.

Thermax is expanding the capacity of its FEPL subsidiary, targeting an increase from the current 300 megawatts to 500-650 megawatts by next year. For its broader Green Solutions initiatives, the company has committed to an investment of approximately INR 750 crores. This investment strategy aims to capitalize on the growing demand for green energy solutions, with potential for external partnerships to further scale these efforts.