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 3,900 crore as on March 31, 2023. 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 last four fiscals. Debt protection metrics are robust given limited and healthy cash accrual. Investments in renewable energy solutions in its subsidiary First Energy Pvt Ltd and its special purpose vehicles (SPVs) over the medium term, will be met through equity infusion / internal accrual and long-term debt. Hence, the financial risk profile will remain strong over the medium term. Liquidity is adequate, supported by cash surplus of over Rs 2,600 crore as of June 2023 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 also been steadily increasing its global footprint with 30-35% of the revenue coming from the overseas market over the past few years.

Prudent working capital management

The net working capital cycle has been 50-70 days for the three fiscals ended March 31, 2023, 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 

Strong demand and investment climate has led to increase in orders across end-user segments, which has resulted in Thermax focusing on renewable energy expansion plans. However, the engineering and capital goods industry is highly vulnerable to economic cycles. While the existing order book of ~Rs 10,500 crore (as on June 30, 2023) provides robust revenue visibility for the next 1-2 fiscals, timely completion of the orders will remain a key 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, operating margin has largely remained 7-9% in the past. While it increased to ~8%in fiscal 2023 (~7% in fiscal 2022), 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 as well as global sourcing, back-to-back placement of orders for components and prudent hedging of forex (foreign exchange) exposure.

Liquidity: Superior

Net cash accrual is expected to be Rs 380-400 crore per annum in fiscals 2024 and 2025 while cash and equivalent were Rs 2,600 crore as on June 30, 2023, and should be more than sufficient to meet the capital expenditure (capex). Thermax is looking at increasing its exposure to renewable energy solutions (through investments in its subsidiary First Energy Pvt Ltd and its SPVs) over the medium term, which is expected to be undertaken through equity infusion / internal accrual and long-term debt. Besides having net nil debt, the bank limit utilisation was 60-65% on average in the 12 months ended April 30, 2023.

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 2,49,510 cubic metres (m3) of water.
• It has also achieved 93% waste recycling rate during the year.
• 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.

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

Key Financial Indicators (consolidated)

Annexure - Details of Instrument(s)

Annexure – List of entities consolidated

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