Thermax up 19% in 4-day rally; with PE at 60x, stock is expensive, say analysts

Thermax Ltd rallied 14 per cent on Wednesday morning to hit its fresh record high. With this, the stock has rallied 19 per cent in the four-day rise, even as brokerages raised concerns over valuations and medium term return ratios. Analysts suggested price targets that hints at up to 27 per cent potential downside on the stock. 

Consider this: HDFC Institutional Equities has a target price of Rs 4,686 on Thermax. Antique Stock Broking finds it worth Rs 4,459; ICICI Securities suggested a price target of Rs 4,406; Motilal Oswal's target stands at Rs 4,180 while Prabhudas Lilladher (PL) sees Thermax as low as Rs 3,923. 

On Wednesday, the stock hit a record high of Rs 5,347.15, rising 13.95 per cent over its previous close. PL's target for Thermax suggests 27 per cent downside ahead. 

Analysts said incremental investments will weigh on return ratios in the medium term. They noted that Thermax's grew at 15 per cent YoY FY24, which is nearly half of the growth seen for the previous two financial years. Order intake for the financial year was on the lower end and the order book now stand 4 per cent over that of FY23. 

"Order inflows were below the initial expectations of the management for a host of reasons, the important ones being a) expectations of policy changes amid the upcoming general elections, b) the expectation of lower production of sugarcane affecting the ethanol sector & c) lower conversion of inquiry pipeline in the steel sector. We downgrade to HOLD at the revised target price of Rs 4,406," it said.

Kotak Institutional Equities said Thermax's Q4 results were healthy on profitability but weak on order inflows. It said FY25 revenue growth and margin may carry impediments in ordering. 

"We increase estimates by 7 per cent and multiple to 46 times (from 43 times) and roll forward to June 2026E EPS-based FV of Rs 4,350 (from Rs 3,550). We downgrade the stock to REDUCE from ADD on expensive 60 times one-year forward earnings multiple," it said.

Motilal Oswal said Thermax's 4QFY24 results were a beat its estimates, as the firm reported in-line revenue but higher-than-expected profit on strong margins. 

"We revise our target to Rs 4,180, based on a higher multiple for core business to bake in expected revival in private capex as well as thermal ordering. We maintain our Neutral stance on Thermax as we believe that incremental investments in TOESL/FEPL will weigh on balance sheet strength and near- to medium-term return ratios," it said.