JM Financial initiates coverage on Thermax with 'Reduce' rating; check TP

JM Financial has initiated coverage on Thermax with a 'Reduce' rating and a sum-of-the-parts target price of ₹2,700

Thermax share price today: Domestic brokerage JM Financial has initiated coverage on Thermax stock, an energy and environment solutions provider, with a ‘Reduce’ rating, citing concerns over execution in large industrial infrastructure projects and pressure on return metrics from diversification into non-core segments. 

 

While the company remains a leader in energy and environment-related products and services with a strong presence in India and overseas, JM Financial noted that its performance in large project execution has remained inconsistent. The brokerage also flagged expansion into areas such as solar power assets under the developer model, bioenergy, and chemicals as key drags on returns over FY19–25, with the impact likely to persist as the company continues to deploy capital in these segments.

 

JM Financial has set a sum-of-the-parts (SotP) target price of ₹2,700. The brokerage noted that a simple P/E approach is unsuitable given the company’s growing focus on higher-risk non-core segments like chemicals and solar assets. Based on SotP, valuing each segment on FY28E EV/Ebitda against industry benchmarks, results in a TP implying an aggregate P/E of 32x versus 34x on the current market price. If non-core margins fail to normalise, the brokerage expects up to 12 per cent downside risk to this valuation.

 

The target price implies a downside risk of nearly 5 per cent from Tuesday, January 28, closing price of ₹2,831. At 10:50 AM, shares of Thermax were trading at ₹2,856.70, up ₹25.70 or 0.91 per cent. The stock touched an intraday high of ₹2,866.40 on the NSE. In comparison, the benchmark NSE Nifty 50 was quoting at 25,297 levels, up by 122 points or 0.48 per cent.   CATCH STOCK MARKET UPDATES TODAY LIVE

Here's why JM Financial is cautious on Thermax:

Focus on non-core segments: According to JM Financial, Thermax has increasingly directed its growth capital toward non-core segments such as solar assets, chemicals, and bio-energy, which deliver materially lower ROCE (0–5 per cent) compared with the company’s blended ROCE of over 10 per cent and also carry higher execution risks. The brokerage noted that the rising contribution of these segments to sales over FY25–28E increases the overall risk profile. Additionally, the move toward an asset-heavy solar model is a drag on the company’s net cash position. The strategic shift away from core industrial products justifies further de-rating of the stock.

 

Margin recovery assumptions carry risk: Analysts said, Industrial Products margins are expected to remain stable as growth over FY25–28E is driven by lower-margin environment segments. They factor Industrial Infra Ebit margins normalising to 6 per cent by FY28E from 3 per cent in FY25 and chemicals margins improving to 14 per cent by FY28 from 12 per cent in FY26. However, given the weak execution track record in large Infra projects and the ongoing down-cycle in speciality chemicals, margin recovery remains challenging. Overall, Ebit margins are expected to rise from 7.2 per cent in FY25 to 8.9 per cent by FY28E, the brokerage said in its note.  ALSO READ | Tata Consumer Q3 review: Brokerages upbeat on execution-led growth story 

Earnings growth vs balance sheet pressure: According to analysts, Ebit is expected to grow at a 20 per cent CAGR over FY25–28E, supported by commissioning of solar assets and margin normalisation in non-core segments. However, if these margins fail to recover, FY28E Ebit could face up to a 15 per cent downside risk. The brokerage also flagged balance sheet pressure, estimating net cash to decline due to capex-heavy solar investments, from ₹13 billion in FY25 to ₹12 billion by FY28E.

 

Analysts are not optimistic of a near-term (FY27E) industrial capex recovery in India, while the Middle East may remain strong. US tariffs and pricing pressure in chemicals are likely to impact near-term business. Additionally, the management's focus on large projects despite recent profitability setbacks in India can emerge as a fresh concern. However, continued strong performance in Industrial Products and on ESG goals is the silver lining.   Disclaimer: View and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers discretion is advised.