Thermax Q2 orders upset, H2 looks solid

 Its September quarter results (Q2FY24) were a mixed bag. While margin performance was decent on the back of strong execution of projects, stifled order inflow was a sentiment dampener. Order inflow dipped 2% year-on-year to ₹1,973 crore in Q2, with one key order worth ₹300-400 crore spilling into H2FY24.

The company’s management pointed out that the order inflow in Q2 is lower than what it registered in the past 5-6 quarters. In Q2, industrial products’ order intake was up 12% year-on-year, but that of industrial infra was down 19%. Together they made up 88% of the total order intake last quarter. Thermax sees a pick up in H2FY24 along with an improvement in closure rate. Its overall opportunity pipeline has improved, including larger projects. The company closed Q2 with an order book of ₹10,264 crore, up 8% year-on-year. Thermax said there has been a cyclical shift from refining and petrochemical sectors to steel. In the steel sector, it is getting several smaller orders, while a few big ones are in play too. Besides, the export pipeline has improved, particularly in cement and biofuels.

Coming to profitability, Thermax’s Ebitda margin rose by 210 basis points to 8.9% in Q2. According to the management, half of the margin expansion is sustainable while the other half includes one-time tailwinds. Jefferies India analysts expect lower commodity prices, improving supply chain, and operating leverage to drive margin improvement. In FY23-26, the brokerage expects 17% compound annual growth rate in revenue, which should also support Thermax’s margin expansion.

The stock’s sharp rally indicates the optimism is being captured to a good extent, but valuations appear expensive. The stock trades at 45 times estimated earnings for FY25, showed Bloomberg data. Going forward, investors should pay close attention to the timing of big orders, fluctuations in commodity costs, and the level of competition, as these factors could impact margins.