Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities of Thermax Ltd (Thermax).

 

The ratings continue to reflect the healthy position of Thermax in the energy, chemicals and environment space, diversified product portfolio and geographical presence (which lends stability to its revenue streams), and robust financial risk profile. These strengths are partially offset by exposure to cyclicality in end-user industries and modest operating profitability owing to intense competition.

 

Consolidated revenue rose 15% on-year to around Rs 9,335 crore in fiscal 2024, driven by strong order book execution, especially in the Industrial Products and Industrial Infra business segments. Meanwhile, the operating margin increased to 9.4% in fiscal 2024 from ~8% in fiscal 2023, led by lower raw material cost and other costs. The unexecuted order book stood at Rs 11,593 crore as on September 2024, which, coupled with healthy sector outlook, provide prospects for the company’s topline growth while sustaining its profitability.

 

The financial risk profile remains robust due to the company’s net debt-free status, healthy debt protection metrics and strong liquidity. The debt levels have steadily increased over the years (Rs 363 crore as on March 31, 2022; Rs 1,256 crore as on March 31, 2024; and Rs 1,451 crore as on September 30, 2024) led by the company’s increasing investments in its renewable energy arms—First Energy Pvt Ltd (FEPL) with its target to deploy 1 GW of hybrid renewable energy solutions over the medium term, and Thermax Onsite Energy Solutions Ltd (TOESL). The gearing was low at 0.29 time as on March 31, 2024, and is expected to remain below 0.5 time over the medium term despite the company’s focus on renewable energy solutions. The debt protection metrics are expected to be robust, with interest coverage ratio likely to remain healthy over the medium term. Cash and liquid investments were sufficient at over Rs 2,400 crore as on September 30, 2024.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Thermax, and its subsidiaries and joint ventures, as these are in the same business.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Robust financial risk profile: The company has a net debt-free balance sheet and large estimated networth of over Rs 4,400 crore as on March 31, 2024. The capital structure has remained comfortable in the past, with total outside liabilities to tangible networth (TOLTNW) ratio of less than 1.5 times over the past four fiscals. The debt protection metrics are robust along with healthy cash accruals. Investments in renewable energy solutions, in its subsidiary FEPL and its special purpose vehicles (SPVs) over the medium term, will be met through equity infusion or internal accrual and long-term debt. Hence, the financial risk profile will remain steady over the medium term. The liquidity is adequate, supported by cash surplus of over Rs 2,400 crore as of September 2024 and moderately utilised bank limit.

 

• Diverse product portfolio and geographical presence leading to stable revenue stream: The product portfolio comprises boilers, waste-heat recovery systems, cogeneration plants and absorption chillers in the energy business; and water-treatment plants, air-pollution-control equipment, and water treatment chemicals in the environment business. The company is a leading player in several of its product segments, such as vapour absorption chillers, low- and medium-capacity boilers, and electrostatic precipitators. Besides, Thermax has been steadily increasing its global footprint with 30-35% of the revenue coming from the overseas market over the past few years. While the Industrial Infra and Industrial products segments contribute over 80% to its revenue currently, Thermax has been increasingly investing across the green energy sector, focusing on expanding its presence in the solar, wind, biomass and waste to energy and has outlined investment of Rs 800-850 crore in its subsidiaries—FEPL and TOESL—over the medium term. That said, scaling up of FEPL and TOESL and the need for incremental investments will remain monitorable.

 

Thermax, through acquisition of 100% stake in Buildtech Products India Pvt Ltd (for Rs 72 crore in October 2024) and 51% stake in TSA Process Equipments Pvt Ltd (for ~Rs 71 crore in February 2024), will strengthen its water and tunnelling portfolio and expand its offerings.

 

• Prudent working capital management: The net working capital cycle has been around 40 days due to prudent collection policy and inventory management. Despite having exposure to large turnkey projects, receivables have remained at less than 120 days in the past due to careful selection of projects and tight control on collections. This has also led to low dependence on working capital debt.

 

Weaknesses:

• Exposure to cyclicality in end-user industries: The engineering and capital goods industry remains susceptible to business cycles; slowdown in overall infrastructure spending and absence of large orders may affect the operating performance. Historically, the domestic market has led growth for Thermax, while increased focus on the international markets exposes the company to commodity price fluctuations given fixed price contracts (especially in its project business). That said, order book of ~Rs 11,600 crore (as on September 30, 2024) across end-user segments provides robust revenue visibility over the medium term. Timely completion of the orders will remain monitorable.

 

• Modest operating profitability due to intense competition: The company faces intense competition in business segments such as low-capacity boilers and packaged water treatment plants. Hence, the operating margin has largely remained at 7-9% in the past. While it increased to 9.4% in fiscal 2024 from ~8% in fiscal 2023, it is vulnerable to volatility in input prices owing to fluctuating commodity prices. The company has taken several measures to reduce input costs, such as centralised purchasing of raw materials and components for all divisions and global sourcing, back-to-back placement of orders for components and prudent hedging of forex (foreign exchange) exposure.

Liquidity: Superior

The liquidity of Thermax is supported by expected annual accrual of more than Rs 700 crore over the medium term, and cash and equivalents of around Rs 2,400 crore as on September 30, 2024, which is expected to be sufficient to meet the capital expenditure (capex) requirement across the group.

 

Despite increased debt levels over the past three fiscals, primarily in FEPL, Thermax has net nil debt. Bank limit utilisation was 58% on average over the 12 months through September 2024.

 

ESG profile

The environment, social and governance (ESG) profile of Thermax supports its already strong credit risk profile. The thermal power sector has significant environmental impact in the form of high emissions and water consumption. The sector has a significant social impact because of its direct bearing on the health and wellbeing of its workers and customers.

 

The key ESG highlights

• The company has focused on energy and emission management by initiating various actions on charting the decarbonisation path, with a clear roadmap for achieving 25% reduction by 2025.
• It has reused and recycled 261,246 cubic metres of water.
• Thermax integrates the needs of its stakeholders and delivers on its commitments to create an enabling environment for its operations and investments. It maintains effective partnerships and relationships with its customers, suppliers, shareholders, dealers, employees, local communities and the regulators.
• The governance structure is characterised by split chairman and chief executive officer positions, extensive financial disclosures, presence of an investor grievance committee and a board comprising six independent directors out of nine members.

 

ESG is gaining importance among investors and lenders. The commitment of Thermax to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

The credit risk profile of Thermax will remain stable over the medium term, backed by healthy balance sheet and large cash surplus.

Rating sensitivity factors

Upward factors

• Healthy double-digit growth in revenue and improvement in operating profitability to over 12% on sustained basis
• Increased diversity of revenue in terms of products, customers and segments
• Sustenance of strong financial risk profile, with TOLTNW ratio of less than 1 time and superior liquidity

 
Downward factors

• Decline in market share also impacting business performance; operating profitability below 6% on sustained basis
• Major debt-funded capex or acquisition leading to significant moderation in credit metrics
• Material reduction of liquid surplus due to high dividend payout, share buy-back or capital reduction

About the Company

Pune-based Thermax was incorporated in 1966 as Wanson India Pvt Ltd and went public in February 1995. It began operations by manufacturing packaged boilers but subsequently diversified its product portfolio, which now includes packaged and custom-made large boilers, cogeneration equipment, air pollution-control equipment, water- and waste-treatment plants and chemicals, and absorption chillers. Thermax has traditionally focused on turnkey projects for large boiler systems, water- and effluent-treatment plants, air-pollution-control systems and co-generation plants. It also pioneered the vapour-absorption cooling plants segment in India.

Any other information: Not Applicable

Names of entities consolidated	Extent of Consolidation	Rationale for Consolidation
Thermax Babcock & Wilcox Energy Solutions Ltd	Full	Subsidiary
Thermax Onsite Energy Solutions Ltd	Full	Subsidiary
Thermax Instrumentation Ltd	Full	Subsidiary
Thermax Engineering Construction Company Ltd	Full	Subsidiary
Thermax Cooling Solutions Ltd	Full	Subsidiary
Thermax Sustainable Energy Solutions Ltd	Full	Subsidiary
First Energy Private Ltd (Consol.)	Full	Subsidiary
Enernxt Private Ltd	Full	Subsidiary
Thermax BioEnergy Solutions Private Ltd	65%	Subsidiary
Thermax Engineering Singapore Pte. Ltd.	Full	Subsidiary
PT Thermax International Indonesia	Full	Subsidiary
Thermax Inc.	Full	Subsidiary
Thermax Europe Ltd	Full	Subsidiary
Thermax Netherlands B.V.	Full	Subsidiary
Thermax Denmark ApS (Consol.)	Full	Subsidiary
Thermax International Ltd	Full	Subsidiary
Thermax Energy and Environment Lanka (Pvt) Ltd	Full	Subsidiary
Rifox-Hans Richter GmbH Spezialarmaturen	Full	Subsidiary
Thermax Energy & Environment Philippines Corporation	Full	Subsidiary
Thermax Engineering Construction FZE	Full	Subsidiary
Thermax Sdn. Bhd	Full	Subsidiary
Thermax Nigeria Ltd	Full	Subsidiary
Thermax do Brasil-Energia e Equipamentos Ltda.	Full	Subsidiary
Thermax International Tanzania Ltd	Full	Subsidiary