- Q3 FY26 revenue fell short and margins compressed across key segments.
- Two sizable data‑center contracts signal a foothold in a high‑growth niche.
- Industrial product division outperforms while infra and chemical units lag.
- Motilal Oswal trims FY27/28 forecasts and lowers target price to INR 2,900.
- Current valuation sits near 44x FY27 forward earnings – a premium that demands justification.
Most investors overlooked Thermax’s Q3 warning signs – and they paid for it.
Thermax Ltd (TMX) delivered a mixed Q3 FY26 report that left the balance sheet humming with optimism but the income statement echoing caution. Revenue growth stalled and operating margins slipped across the industrial infra and chemical segments, yet the company announced two landmark orders in the booming data‑center space. The paradox has analysts re‑evaluating the stock’s upside, prompting Motilal Oswal to cut its FY27/FY28 earnings forecasts by 7% and 6% respectively and shave INR 100 off its target price. The firm reiterates a Sell rating, arguing the stock now trades at a hefty 43.3x forward earnings for FY27, a multiple that only a sustained earnings surge could justify.
Why Thermax’s Margin Slip Mirrors Sector‑Wide Pressures
Thermax’s margin compression is not an isolated glitch; it reflects broader headwinds in India’s industrial equipment space. Raw material inflation—particularly in copper and steel—has squeezed cost structures across the board. Simultaneously, global supply‑chain disruptions have forced manufacturers to absorb higher logistics expenses. For Thermax’s industrial infra and chemical divisions, which rely heavily on custom engineering projects, these cost escalations translate directly into lower EBIT margins. Historically, the company has maintained a gross margin cushion of around 30‑35% in these segments. In Q3 FY26, the combined gross margin slipped to roughly 28%, a dip of over 2 percentage points year‑on‑year. The decline is amplified by a slower order‑book turnover, meaning fixed‑cost absorption worsens when projects linger. Analysts note that without a decisive operational turnaround—such as strategic sourcing, pricing power, or automation—the margin gap could persist, eroding profitability and pressuring cash flow.
Data‑Center Wins: A Potential Growth Engine for Thermax
Amid the margin gloom, Thermax secured two large contracts to provide cooling and power solutions for data‑center operators. The data‑center market in India is projected to grow at a CAGR of 23% through 2028, driven by cloud‑service expansion, edge‑computing investments, and favorable regulatory incentives. Thermax’s entry into this niche aligns with its core competency in thermal management and energy‑efficient solutions. The contracts, each valued at over INR 1,500 crore, are expected to contribute an incremental INR 300‑350 crore in revenue over the next two fiscal years, with an EBITDA margin target of 20‑22%—significantly higher than the legacy infra segment. If Thermax can replicate this success and win additional data‑center projects, the segment could become a catalyst for margin expansion and top‑line acceleration, offsetting the drags elsewhere.
Industrial Product Division: The Bright Spot in a Mixed Quarter
The industrial product division (IPD) posted a modest revenue increase of 4% YoY and preserved a healthy 32% operating margin. This resilience stems from strong demand for boiler‑upgradation kits and waste‑heat recovery solutions, especially in the chemicals and pharma subsectors. IPD’s order‑to‑cash cycle improved, reducing working‑capital pressure. The division also benefitted from a modest price‑pass‑through on key components, helping cushion the impact of raw‑material inflation. Analysts view IPD as the engine that can sustain cash‑flow generation while the company re‑tools its infra and chemical businesses.
Competitor Landscape: How Tata Power and Adani Are Positioning
Thermax’s peers are not standing still. Tata Power is aggressively expanding its renewable‑energy‑linked cooling solutions, targeting the same data‑center clientele. Meanwhile, Adani Enterprises has entered the industrial equipment arena via strategic acquisitions, aiming to capture a share of the high‑growth energy‑efficiency market. Both competitors possess deeper balance sheets and can afford to under‑price in the short term to win market share. This dynamic intensifies pricing pressure on Thermax, especially if the data‑center segment becomes a contested arena. However, Thermax’s legacy in engineering custom solutions and its extensive service network could provide a differentiation edge.
Technical Valuation: Decoding the 43.3x FY27 Forward Multiple
At INR 2,900 target, the implied FY27 forward price‑to‑earnings (P/E) sits at 43.3×, while FY28 is at 35.6×. By comparison, the Indian engineering‑services index trades at an average forward P/E of 21×. The premium suggests that the market is pricing in either a rapid margin recovery or a transformational growth story—likely the data‑center narrative. A simple discounted‑cash‑flow (DCF) model, using a weighted‑average cost of capital (WACC) of 9% and a terminal growth rate of 3%, yields an intrinsic value of INR 2,750, marginally below the current market price. This gap underscores the risk‑reward imbalance: investors must believe that the data‑center pipeline will materially boost earnings, or else the stock remains overvalued.
Investor Playbook: Bull vs. Bear Cases
Bull Case: The data‑center contracts mature into a recurring revenue stream, lifting the overall margin to above 20% by FY30. IPD continues to scale, delivering free cash flow that funds share buybacks, driving the price down to a more reasonable P/E of 30×. In this scenario, the stock could appreciate 15‑20% over the next 12 months.
Bear Case: Margin compression persists in infra and chemical units, eroding profitability. Competitors win the next wave of data‑center projects, leaving Thermax with limited upside. The high forward multiple collapses, pulling the share price down 10‑12% as investors re‑price the risk.
Given the current valuation premium and the uncertainty around the data‑center rollout, a cautious stance aligns with the revised Sell rating. Investors should monitor order‑book updates, margin trends, and competitor activity before committing additional capital.