Thermax Limited (THERMAX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Thermax Q2 FY '26 Earnings Conference Call hosted by DAM Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Bhoomika Nair from DAM Capital. Thank you, and over to you, ma'am.

Yes, thank you. Good morning, everyone. A warm welcome to the Q2 FY '26 Earnings Call of Thermax Limited. We have the management today being represented by Mr. Ashish Bhandari, Managing Director and CEO; and Mr. Rajendran Arunachalam, Group CFO and Executive Vice President. At this point, I'll hand over the floor to Mr. Bhandari for his initial remarks, post which we'll open up the floor for Q&A. Thank you, and over to you, sir.

Good morning to everyone that's on the call. I'll -- this is Ashish. I'll keep my remarks very brief so that we can take questions. If the questions continue, I'm okay to go beyond the scheduled hour as well, to make sure we are addressing everything to -- with all the clarity that we can. I'll make only a couple of very brief remarks. In the quarterly deck this time, we have shared a couple of very specific pages regarding the backlog that we have, especially as it relates to these low-margin projects, yes? So you can take a look at those slides, and I'm sure there will be questions about that. The second comment that I have is that we have a change in accounting policy, which has resulted in about INR 190-odd -- INR 197 crores in order book change, and that is specific to TOESL because as the TOESL business was growing, we were reaching a point where the revenues were much higher than orders because of these 10-year contracts, we were only recognizing the first year of order book and the other 9, we were not showing at all. So starting this quarter, we will start to show what are new orders plus kind of the recurring revenue that you get from the customer. This should align orders and revenue a lot closer now. Yes, previously, it was -- revenue was a lot bigger than orders. So there was a mismatch. This change does not affect revenues, doesn't affect profitability. So with that, I'll take your questions. We have a lot to discuss on every part of the business. And I would love to answer those questions and share everything. At the end, if there is something that I want to share that hasn't come out in the Q&A, I'll take that head on and address that as well. Why don't we jump straight into the questions then, please?

[Operator Instructions] The first question is from the line of Jonas Bhutta from Birla Mutual Fund.

Two questions. Firstly, on margins and particularly on 3 segments. On the Industrial Infra, while you've elaborated of how the low-margin contracts are likely to play out in terms of revenue, I wanted to get some more clarity on the surprises that we keep getting on these projects. Was this sort of the kitchen-sinked quarter? Or you think as we still execute crores, INR 500 crores to INR 600 crores of pending revenue, you still expect these kind of surprises. Even if I were to adjust this INR 40 crore number, the implied margins still look low, completely negating what TBWES is doing in terms of contribution there. So if you can clarify on the Industrial Infra. And then I have 2 follow-ups on the other 2 segments.

Okay. Sure. I think let me take this question in some amount of detail and the rest I can address through your questions or through subsequent questions as well. This should be the kitchen sink. Yes, plain and simple. What is left now is getting really, really small. And of what is left, a good chunk is getting delivered through Q3 and Q4. And the rest will get delivered next year. It is not that what will get delivered in Q3 and Q4. If I compare it to last year, last year also, we took quite a few hits relating to project execution. And I'll outline what these areas are and what is it that is different than in terms of how we are performing as well and how we are running things. What is the quality of the rest of the backlog is reasonably good because in addition to the project impact on one particular project, which is the large refinery-related project that we had taken 2.5 years ago, 3 years ago. We also have the FGD projects, which we are working through, and that is also at very low profitability, 0%, 1%, 1% to 2%. And all of that is getting -- going through our system quarter-by-quarter and going through. So in this quarter also, a good chunk of that backlog got worked upon. And what is left is getting closer and closer to finishing. Our second FGD project is -- half of that is already done. The second half will get done this quarter. We will have 2 more left. One of which is of reasonable profitability and even kind of, I would say, almost slightly accretive profitability to the projects business. The third one also will clear through the early part of next year. What will get remaining in -- for the second half of next year is just this very large refinery project, which is NRL of the vestiges of which will remain in maybe until a year from now, though we are working to make sure that by early next year, we clear it off our books. In this hit that we have taken, we have taken a particular contingency for executing these projects and taking a reserve against some of the future costs that are possible as well. The only part that remains now is that BioCNG in the -- in this last quarter, we have got -- last year, if you remember, we took a big hit on the basis of which we put in a lot of cost into these projects to enhance capacity, capability, all of that. Now that the monsoons are over, all of these projects will one after the other in a month start to go through PGTR, which means they will get handed over to the customers. So until we hand these projects to the customers, the operating costs of these projects and the manpower there, we are continuing to almost semi-fund them. In half the projects, the customers are sharing costs, but this is also a slight burden of a few crores that we are managing through on a quarter-by-quarter basis, which is also in that industrial infra number. You will see our backlog is going up in TBWES. And I would say for the second half of the year, you will see -- I've been calling out for some time that I expect large projects to start to show up again. And in TBWES in particular, I expect a very, very strong second half of the year. And even in Q3, it was just below our reporting threshold, but we had a large international order from a Middle East customer for boilers for an upstream oil and gas customer, which is a very prestigious account, and it's a big breakthrough for us to enter one of the marquee names in the Middle East, and we are the only qualified Indian company in a sense. That too creates a much longer repeatable area of business for us. So I hope I answered your questions on Industrial Infra to your satisfaction.

Yes. So effectively, just paraphrasing, worst is largely behind in terms of the hit. Obviously, there'll be some tail impact with the NRL project, but that's more like FY '27, but the impact of that may not be as louder.

Even this size, this quarter was unexpected. And I take blame, but I'm very unhappy on the -- see, when we finish 92% of a project in my period at Thermax, I haven't seen an engineering surprise show up. And in this particular quarter, we had an engineering surprise, which is -- which now basically all of that is complete, and we actually had a third party come in to verify that this is complete, and it is on the basis of this that we are coming in saying we have confidence that this was the kitchen sink. And the engineering surprise stems from us doing a project of this for the first time, and we had an engineering partner who was responsible for the detailed engineering on the project. And there was plain and simple miss at that end. But ultimately, we are responsible, and this was a late surprise. But now the engineering, as signed off by the partner and by a third party is 100% complete, except for a change order we have received from a customer, which is very minor. Now it is entirely to site execution and finishing that. And the relevant reserve for that also, what we think is reasonable, we have taken as part of the hit we have taken in this quarter. So the number that you see is substantial from that point, and it was very, very painful internally. I would also want to call out the second page that we have shared in our backlog, where for now, 2 years practically, we haven't taken anything. And government orders with a long tail, longer execution for 3-plus years, we haven't touched. So we are clearing all of these in our backlog. But -- and we really wanted to start building what we consider as profitable orders that we can do. And as I share the rest of the commentary on Thermax, I'm actually very enthused by where we are adding orders and the quality of orders we are adding.

Sure. So the other 2 segments that I wanted clarity was on chemicals. What seems to...

Can we let -- everybody else has questions because this was a...

So that was just my first question, Ashish. So it was just a subpart. If you can just allow me clarity on these 2 things and then probably I'll fall back in the queue.

Okay. I'll take one of those 2 because you can just -- and I'm saying I'll stay back longer if needed. If it doesn't get answered, I'll -- to the queue.

So how should one think of the Chemical segment margins, A, there seems to be headwinds today and given that the company seems to be progressing more greater focus on the construction chemical side, which is probably higher volume but lower margins. So how should we think of the segment margins maybe 1 year, 2 years out?

So the business actually in the areas that we are working, we don't expect that the margins would be significantly dilutive. We are not playing in generic construction chemicals. In the areas that we are looking to go into, there is a path to reasonable profitability. Currently, we have -- we are carrying about INR 15 crores of costs, about INR 4.5 crores on additional depreciation, about slightly more than INR 10 crores on -- relating to all these investments that we are doing for future growth. And I'm disappointed in Q1 and Q2 on 2 counts. One, even the base business that we had, especially in the Q4 of last year and Q1 of last year got impacted by our international business coming into a little bit of a kind of a stormy period with Chinese competitors really dropping price, some of our customers being uncertain on how this whole tariff thing was going to get looked at. And in a period where we actually added capacity, we lost a bit of volume. The good part is in September and as we see in October and November, that volume is coming back in a very good manner, which means the plant utilization, which in addition to the newer capacity had fallen down to 40% imminently in Q3 itself will start to go up. And some of the investments that we had made in like Vebro for starting our flooring business in portions in construction chemicals, et cetera. Also, we see now that the rains are over, the volumes are starting to pick up, and the numbers are starting to go up. My expectation of the Chemicals business is that we cross the INR 250 crores a quarter order book, and we are right now at INR 200 crores. So between what I expect the business to do and what it is actually delivering, there is a big gap. I have enough confidence that we should reach a number of INR 230 crores to INR 240 crores imminently starting Q3 itself. INR 250 crores is my expectation where we get to back into the teens kind of profitability, which may be a quarter away, but I have -- we have a lot of confidence in where that business can go and also new partnerships that we are doing with OCQ and all that. Again, a lot of confidence in what the future of that business holds. An improvement in the numbers in for Chemicals will show in a reasonably relevant way in Q3 itself.

The next question is from the line of Mohit Kumar from ICICI Securities.

My first question is on the large order segment. The large orders in Industrial Infra has been below INR 10 billion run rate in the last couple of quarters. We have been talking about that there's a healthy inquiry pipeline. Can you talk about the reason for delay in conversion of this inquiry into orders? And how do you see the conversion in the balance of the year? And the related question is what is the kind of margin one should bake in as you start executing the new order, so let's say, a fresh order where the legacy order has no contribution?

So if you take a look at -- which is why there is some amount of detail that we are starting to share, which should start to give you some insights into the mix that is -- that we are looking at. You can see that -- and especially if you take a look at a 2-year period and even in this last 1 year, that TBWES, the numbers are starting to grow. And even in the second half of this year, the TBWES numbers will continue to grow significantly, driven by domestic and international projects. In this particular year, there were a lot of large government-related projects, including at one point, large NTPC and other super critical projects as well. We said no to all of those. In the first half of the year, probably there are INR 5,000 crores worth of projects that we passed on. Last year, another INR 5,000 crores. So in a year's period, probably INR 10,000 crores worth of projects that we said no to or bid at a price that we think we can make money, and it did not happen. That said, we know what we are good at. And the reason I can share some amount of confidence that our order book will improve is that in many cases, we have shaken hands on projects on pricing, and we are now waiting for basically the money to come in and the LCs to get opened. So that's what gives confidence that we have for the second half of the year. The margin profile on these projects is, I would say, in the range that we are -- that we look at about 5% to 8% for domestic orders, 10% plus for international; and with services lumped in, overall, the mix should be 10%-ish. And we are now getting -- sticking to that number and living up to those expectations. In terms of how the profile itself will change, you can take a look. The -- I can share that Thermax overall will grow more than 20% this year on the order book. Revenue and profitability, we will grow both of those numbers, profits, profitability. Profitability with the hit that we have taken in Q2 will get slightly tougher, but I think we should still be able to do better than what we did last year. Profits overall and revenue, we would do better. But orders, I have enough confidence that I can commit to a 20% plus orders growth on the total Thermax portfolio for the year.

My second question on the sulfur recovery unit. Of course, we had a bad experience in executing those. But as we go forward, is it fair to believe that expect that as we look at the new orders, we will have the appetite to take the sulfur recovery units be in the India or Middle East? Is that a fair assumption?

With the caveat that it has to be at the right margins and the right profitability. And for example, in Q1, we picked up a INR 200 crore, essentially a very small sulfur recovery unit for the Middle East, very reasonably profitable, reasonably modular, no site execution risk, nothing, everything that we engineer and build to print, that kind of a model. And now having gone through the savings, we learn what is good about a project and what is not very, very well. If it is not profitable and especially if it is a long-duration government-related project, then we have to make sure that the -- we price the longer duration of the project into the contract costing itself. With that as the basis, and this is now -- this has been extremely painful. All of last year, when -- we did not grow as much as we would have liked last year. And it was painful to come both internally and externally to share that our orders were not improving. But we were very clear we wanted to get orders in that were profitable and that were meaningful. And that we are now beginning to show. Year-to-date, our domestic order book is 25% plus up year-on-year, and this is year-to-date, yes. And going into Q3 and Q4, where Q3 and Q4 last year were very weak, relatively speaking. And this year, with confidence, I can say they'll be very good.

The next question is from the line of Bhavin from SBI Mutual Fund.

A couple of questions. One is, globally, we are seeing very strong growth in the gas power generation business and HRSG is a product that Thermax excels. Could you talk about the opportunity in the global landscape for HRSG? The second is if you could give us a flavor within the products segment to understand the mix change on the boilers and heaters, water treatment and air pollution and the chillers, why we saw a dip in the margins to get more on the mix flavor, the growth within the subsegments?

Sure. Two both good questions. The first is indeed true, which is what is giving confidence on some of the international projects. Right now, we have a pipeline of -- an international pipeline, which is good. And I wouldn't, for competitive reasons, not share anything else, but you are thinking that's the right way to think about it. Second is on the mix. I had alluded to this last year itself that we had a scenario where our heating, which was the most profitable part of Thermax, was growing relatively slower than water and enviro, which are also profitable, but were in a mix perspective, less profitable. That trend on the revenue side has reflected both in Q1 and Q2. And especially last year Q2, heating had -- because of a very strong 2024, heating had a very high profitable quarter Q2 last year, which this quarter was relatively not the case. The good part is heating had a very good Q2. And on the order side, you can see when we grew high teens this quarter-over-quarter last year to this year, that increase was across the board, except in cooling, all 3 businesses grew very well. And going -- in fact, our channels business had their highest ever quarter for heating products and finished September with the highest ever booking on heating in a single month. And that strength is continuing in Q3 also. So that we take strength from cooling also, especially with data centers and many of these newer applications coming in, the pipeline is very strong. So I'll stick with the call that I had made last year that we should expect top line growth and bottom line growth. If we can keep profitability as a percentage flat, I would be happy with that, and that's the line we will stick to.

The next question is from the line of Anup Goswami from SUD Life.

Sir, just a clarity on the previous statement. So you mentioned about some of the legacy orders that getting -- chunk of it getting executed. How do we take this second half of those order execution of roughly a scale and next year of the NRL, how much of that should be executed?

I think I'll let Rajendran share the specific numbers. We have shared in fair amount of detail kind of what our current backlog is. I think it is Page 14 on the summary that we have shared. The breakdown of that between what will get cleared in the second half and what gets remaining for the next year, I'll let Rajendran speak to that, yes.

Yes, I think -- we -- as Ashish mentioned, we have clarified that in the slide that you will see that we have 2 sets of orders there. One is the public sector unit orders with a low margin for us and the BioCNG jobs that we have explained in fair bit of detail in the past. Both of this, I think the current H1 as on 30th September, the order balance is roughly about INR 570 crores, of which 62% would get executed in the H2 and a small portion -- the balance portion, the 38% will get executed in the next financial year. That's this thing. That's the balance that we carry. I hope that answers the question.

Sir, does this include the NRL project as well?

Yes, it includes the PSU jobs as well as the BioCNG jobs that we are currently...

Yes. But NRL, you can specifically share. What is the backlog on NRL of the -- what is remaining is INR 180 crores. That is what is remaining on NRL.

The next question is from the line of Amit Anwani from PL Capital.

First question on the clarity on order book. I think are you talking about order inflow or order book when you say 20% growth? Second, was on the -- you alluded that we are expecting exports to be better, inflow from export is robust. I wanted to have more color on the domestic side. How is the inquiry pipeline in domestic market? Any large orders, which you're eyeing for next 6 to 12 months? And if you could highlight any sector industries where the pipeline is strong and any sector industries, which has negatively surprised to us in terms of order inflows?

And this is just for Industrial Infra or overall?

Overall, sir, yes.

So overall, see, domestic first half of the year, as I said, our order book growth is 25%. And when I say our what we call as orders, so that is what I'm saying year-on-year should be at least 20% up. And that is given first half, we are roughly flat. And I'm not counting the total reclassification in the numbers that I'm sharing. I'm saying apples-to-apples, growing 20% plus on orders, which means Q3 and Q4, we should be up significantly, well above 30% quarter-on-quarter to hit the numbers that we are talking about. Did I clarify and did I share that with abundant clarity?

Yes, sir.

That part. Okay. And then in terms of do we have a pipeline of good projects? We have a reasonable pipeline of good projects across segments. But in -- if I had to say, power, metals, and general, basically refining and petrochemical and fertilizers, that is the space that we typically see these, and that is the space that we are in. International, it is in a mix of multiple applications, including some newer applications that are relating to power for data centers also is emerging as an application in addition to the traditional ones that relate to refineries and petrochemical plants. Pipeline is strong, which is what gives me the confidence to make the commitment that I'm making. Yes, in the sectors that are relatively weak, I think the whole ethanol space, which was weak for all of last year, continues to be moderate this year as well. I think we are not able to -- until we clear some of and start to show it in our numbers, we won't be able to address it, and this entirely comes down to performance in that sense, and that is completely with me in that sense. You take a look at our Industrial Products portfolio, it is just sector after sector, we are able to work through. We are providing water and dedusting and scrubbing solutions for many of the upcoming industries, semiconductors, electronics, solar plants. On the other hand, food and beverage that is growing. We are doing some many innovative services-related ideas that are also growing that business. So a single sector being up or down like textiles that has been affected by the tariffs or the whole kind of ethanol sector, which has been down for some time, relatively speaking, even -- so some of those ups and downs, we were able to work through. So I think I'm, overall as a pipeline, happy with the pipeline and happy that the pipeline is in areas that we are saying we want more business.

So just one more thing on the order inflow for products business. You did highlight a better performance from water desalination and enviro. Can this be the scalable opportunity? What was the contribution current quarter and maybe in the revenue? And is it scalable? Do you feel that water desalination can have better contribution in your products business? And is it more domestic or exports?

Both. So -- and not just water desalination, even applications like zero liquid discharge, even on the innovative ideas around tough-to-treat water, variety of application technology-based solutions have got good growth opportunities. Similarly, in our Clean Air solutions, which are around pollution control and generally scrubbing and dedusting solutions, both domestically and internationally, there is strength. And also on the services side, there is strength. I mean we've grown the business high teens year-on-year. And even on heating, we are selling more electric boilers than we anticipated. Many of our newer products are catching steam too. So across the board, I really like our portfolio and what we are doing with it. And just in terms of execution, like in water, as an example, our second half, we need to execute probably INR 700 crores worth of projects. And 3 years ago, 4 years ago, what it used to do in a year, it has to liquidate that in a quarter now and for multiple quarters going ahead. So the focus is very much on execution. You will see our overall inventory, our backlog of -- our working capital is also starting to go up with the idea that we really need to execute our order backlog in the second half of the year.

Sir, what would be the contribution currently in industrial product from water?

Just go through because I've taken several of your questions. I'll come back if in the end the questions are not answered, I'll come back to that.

[Operator Instructions] The next question is from the line of Mahesh Patil from ICICI Securities.

Sir, my first question is on the data center. So just wanted to understand how is the opportunity here? If you can talk about the inquiry pipeline in the domestic and international market? And how is the competitive landscape here? And if you can also guide in terms of broad order value for us in this segment?

I think if you give us another quarter, we will come and share this. And even for competitive reasons, some portions we, right now, may not be comfortable to share. For our -- I'll say, which portions this is applicable to. International is applicable to cooling solutions and our even boilers. So international, the pipeline is both from cooling and from boilers, including our large boilers business and the TBWES range of boilers as well. Domestically, the pipeline is driven by water and cooling, yes, not by heating as much or by anything else. Of this, the water portion will be competitive -- the cooling portion, where our product fits will be less competitive. The idea is to convince customers that you have a unique energy solution saving methodology for -- based on our cooling capability. So it is more around spec selling and getting your product specified. Once you do that, then it is less competitive. Okay. Pipeline is decent. I think we have shared some examples in -- as part of our industrial products like what all we have done in the quarter, that particular page has some examples also. Numbers, I would hesitate to share. But in a quarter, we will share. And a lot of it has got to do for competitive reasons as well.

Okay. And sir, can you share something on Danstoker? How is the pipeline? What's the opportunity?

I think -- profitability, but not growing on top line or bottom line. I think that's the window in which it should -- you should expect it to be. The next jump for it could come potentially should the Russia-Ukraine war get over.

Okay. And sir, one thing on industrial products...

Please go back to the queue as well. If some questions are not answered, I'll take it later once again.

The next question is from the line of Aditya Mongia from Kotak Institutional Equities.

Two questions from my side. The first is, Ashish, how do you see the revenue line kind of developing for this year and maybe a sneak peek into next year? And given your assessment of when the orders are going to come in, this first half has been like a 4% decline. So just trying to get a better sense of how the revenue line is going to flow in for fiscal '26 and '27.

So you will see a big catch-up on the revenue line in Q3. We have a lot going on right now. And the kind of Q4 we delivered last year, I expect us to do Q3 and Q4 both. That is roughly the expectation as I look at the second half of the year. And as we go into next year, expecting to go into next year with a very good backlog and the backlog, which is comprised of more and more things of the kind that we like, a much bigger industrial products portion, a much bigger TBWES portion, a bigger chemicals portion, a bigger TOESL portion, and even FEPL kind of getting to a year next year where a couple of the projects that we have would be revenue generating and looking forward to a breakeven year. So that's as much detail, and this is way more detail than we have ever shared in the past, but that's the expectation.

Not a question, but just a clarification before I get to the second question. You said 10% blended margins in the Projects segment. This was at an EBIT level that you were referring to, including domestic, international and services all put together?

At the PBT level. That is the...