Thermax Q2 FY26: Sharp Profit Decline Raises Concerns Amid Margin Pressure

The quarter's performance marks a concerning reversal for Thermax, which had enjoyed robust growth momentum through FY25. Net sales declined 5.42% year-on-year to ₹2,473.90 crores in Q2 FY26, whilst operating profit before depreciation, interest, and tax (excluding other income) collapsed to just ₹172.03 crores—the lowest quarterly figure in recent history. This translated into an operating margin of merely 6.95%, down from 10.63% in the corresponding quarter last year, signalling severe pressure on operational efficiency.

The sequential comparison offers little respite. Whilst revenues improved 14.66% quarter-on-quarter from Q1 FY26's ₹2,157.53 crores, consolidated net profit declined 21.47% from ₹152.38 crores, indicating that the revenue uptick failed to translate into bottom-line growth. The company's profitability metrics have deteriorated across the board, with PAT margin compressing to 4.83% from 7.57% a year ago.

Financial Performance: Margin Compression Drives Profit Decline

The most alarming aspect of Thermax's Q2 FY26 results is the dramatic erosion in operating margins. Operating profit (excluding other income) plummeted to ₹172.03 crores from ₹277.97 crores in Q2 FY25, representing a 38.11% year-on-year decline. This collapse in operational profitability, despite relatively modest revenue contraction, points to significant cost pressures and unfavourable business mix.

Employee costs increased to ₹340.50 crores in Q2 FY26 from ₹322.90 crores a year earlier, reflecting a 5.45% rise even as revenues declined. This inverse relationship between personnel expenses and sales growth has weighed heavily on margins. Interest costs also edged higher to ₹32.17 crores from ₹29.39 crores, whilst depreciation surged to ₹51.47 crores from ₹42.07 crores, further squeezing profitability.

Other income provided some cushion, rising to ₹85.41 crores from ₹59.77 crores, but this couldn't offset the operational weakness. Notably, non-operating income now constitutes 49.18% of profit before tax, raising questions about earnings quality. The tax rate also increased to 31.25% from 25.63%, further impacting net profitability.

On a half-yearly basis (H1 FY26), the picture remains challenging. Whilst net sales for the first half reached ₹4,631.43 crores, the company's profitability metrics have remained under pressure, with operating margins struggling to sustain double-digit levels seen in previous periods.

Operational Challenges: Deteriorating Returns and Leverage Concerns

Beyond the headline profit decline, Thermax's operational efficiency metrics paint a concerning picture. Return on equity (ROE) for H1 FY26 has weakened, reflecting the profit compression. The company's average ROE of 10.81% lags behind its heavy electrical equipment peers, indicating suboptimal capital efficiency. More worryingly, return on capital employed (ROCE) for H1 FY26 dropped to 14.05%—the lowest in recent periods—down from healthier levels in previous years.

The balance sheet has also come under pressure. Long-term debt surged to ₹1,161.55 crores in FY25 from ₹789.48 crores in FY24, pushing the debt-to-equity ratio for H1 FY26 to 0.36 times—the highest on record. Whilst the company remains relatively underleveraged compared to highly indebted peers, this rising debt trajectory warrants monitoring, particularly given the weakening profitability.

Operating profit to interest coverage deteriorated sharply to 5.35 times in Q2 FY26, the lowest quarterly reading, down from more comfortable levels above 9 times in previous quarters. This compression in interest coverage, whilst still adequate, reduces financial flexibility and raises concerns about the sustainability of debt servicing if operational performance doesn't improve.

The Non-Operating Income Conundrum

A notable feature of Thermax's recent results is the disproportionate contribution of other income to overall profitability. In Q2 FY26, other income of ₹85.41 crores accounted for 49.18% of profit before tax—a ratio that raises red flags about the sustainability of earnings. Whilst investment income and treasury gains are legitimate sources of profit, such heavy reliance on non-core income suggests that the company's core manufacturing and engineering operations are struggling to generate adequate returns.

Profit before tax less other income (core operational profit) stood at just ₹88.26 crores in Q2 FY26, the lowest quarterly figure, highlighting the extent to which non-operating income is propping up reported earnings. For a capital goods company, this dependence on treasury income rather than project execution margins is a worrying sign of underlying operational stress.

Peer Comparison: Valuation Premium Unjustified by Performance

When benchmarked against heavy electrical equipment peers, Thermax's valuation appears stretched relative to its operational performance. The company trades at a price-to-earnings ratio of 56.64 times trailing twelve-month earnings, significantly above the industry average of 34 times. This premium valuation is difficult to justify given the company's deteriorating margins, weakening returns, and negative growth momentum.

Thermax's ROE of 10.81% is the weakest among major peers, trailing ABB India's 18.91%, GE Vernova's 16.31%, and even Suzlon Energy's 14.45%. Whilst the company maintains a net cash position (negative debt-to-equity of -0.20), this balance sheet strength hasn't translated into superior operational returns. The price-to-book multiple of 7.70 times, though lower than some peers, still appears elevated given the company's profitability challenges and below-average return ratios.

The dividend yield of 0.44% offers little compensation for the valuation premium, particularly when compared to ABB India's 0.87% yield backed by stronger fundamentals. Investors paying 56.64 times earnings are essentially betting on a sharp turnaround in Thermax's operational performance—a proposition that appears increasingly uncertain given current trends.

Valuation Analysis: Expensive Multiples Amidst Deteriorating Fundamentals

Thermax's current valuation metrics suggest the stock is trading at expensive levels relative to its financial performance and growth prospects. At ₹3,020.00, the stock commands a P/E ratio of 56.64 times, substantially above the sector average of 34 times. The premium appears unjustified given the company's negative earnings growth trajectory, with net profit declining 39.27% year-on-year in Q2 FY26.

The PEG ratio of 5.23 indicates significant overvaluation relative to growth, as investors are paying 5.23 rupees for every unit of earnings growth—well above the ideal threshold of 1.0. The enterprise value to EBITDA multiple of 37.31 times and EV to EBIT of 45.11 times further underscore the rich valuation, particularly concerning given the sharp margin compression witnessed in recent quarters.

The stock's valuation grade has oscillated between "Expensive" and "Very Expensive" over recent months, reflecting market recognition of stretched multiples. Most recently, the valuation improved from "Very Expensive" to "Expensive" on August 6, 2025, but this marginal improvement owes more to the 41.03% price decline over the past year than to any fundamental improvement in business quality or growth prospects.

At current levels, the stock trades 43.60% below its 52-week high of ₹5,354.90, but only 3.07% above its 52-week low of ₹2,930.05, suggesting limited downside cushion. Fair value estimation based on normalised earnings and peer multiples suggests the stock should trade closer to ₹2,400-2,600 levels, implying further downside risk of 14-20% from current prices.

Shareholding Pattern: Institutional Rotation Signals Caution

The shareholding pattern for Q2 FY26 (September 2025) reveals notable institutional activity that warrants attention. Foreign institutional investors (FIIs) reduced their stake significantly to 13.44% from 16.02% in the previous quarter, marking a 2.58 percentage point sequential decline. This represents the largest quarterly reduction in FII holding in recent periods, signalling waning confidence among global investors in the stock's near-term prospects.

Offsetting the FII exodus, domestic mutual funds increased their stake to 12.56% from 10.71%, adding 1.85 percentage points. This divergence between foreign and domestic institutional behaviour is noteworthy—whilst FIIs appear to be rotating out on valuation and growth concerns, domestic funds may be viewing the recent price correction as a buying opportunity or maintaining positions due to portfolio mandates.

Promoter holding remains rock-solid at 61.98% with zero pledging, providing stability and demonstrating management confidence. The promoter group, led by RDA Holdings Private Ltd. (53.99%) and Ara Trusteeship Company Private Limited (7.99%), has maintained consistent shareholding across recent quarters. Insurance companies have steadily increased their stake to 1.33% from 0.62% in September 2024, suggesting long-term institutional interest despite near-term headwinds.

Stock Performance: Severe Underperformance Across Timeframes

Thermax's stock performance has been dismal across virtually all timeframes, significantly underperforming both the Sensex and its sectoral peers. Over the past year, the stock has plummeted 41.03% whilst the Sensex gained 7.36%, resulting in a negative alpha of 48.39 percentage points—one of the worst performances in the capital goods space.

The year-to-date performance is equally concerning, with the stock down 25.83% in 2025 against the Sensex's 8.10% gain. Even more telling, Thermax has underperformed its heavy electrical equipment sector by 14.38 percentage points over the past year, with the sector itself declining 26.65%. This suggests company-specific challenges beyond broader sectoral headwinds.

From a technical perspective, the stock is firmly in bearish territory, trading below all key moving averages—5-day (₹3,208.09), 20-day (₹3,207.09), 50-day (₹3,239.36), 100-day (₹3,369.92), and 200-day (₹3,393.71). The technical trend changed to "Bearish" on November 7, 2025, at ₹3,193, confirming the downward momentum. With the stock trading just 3.07% above its 52-week low of ₹2,930.05, further downside risk remains material.

The stock's beta of 1.20 indicates it is 20% more volatile than the market, amplifying losses during downturns. The risk-adjusted return over one year stands at -1.09 with volatility of 37.72%, placing it in the "HIGH RISK LOW RETURN" category—an unfavourable combination for investors.

Investment Thesis: Quality Foundation Undermined by Weak Momentum

Thermax presents a paradoxical investment case—a company with "Good" quality fundamentals but deteriorating near-term financial and technical momentum. The company's quality grade reflects its strong long-term track record: 15.66% sales CAGR over five years, 35.85% EBIT growth, zero promoter pledging, healthy institutional participation (27.39%), and market leadership in heavy electrical equipment. The balance sheet remains relatively strong with net cash position and low leverage historically.

However, these quality attributes are being overshadowed by concerning near-term trends. The financial trend has turned "Negative" as of Q2 FY26, driven by profit decline, margin compression, weakening ROCE, rising debt-to-equity ratio, and deteriorating interest coverage. The technical picture is equally unfavourable, with the stock in confirmed bearish trend since early November 2025.

The valuation remains "Expensive" despite the significant price correction, with the P/E ratio of 56.64 times well above the sector average and the PEG ratio of 5.23 indicating overvaluation relative to growth. This creates a challenging entry point for fresh investors, as there's limited margin of safety even after the 41% decline from peak levels.

Key Strengths & Risk Factors

Outlook: What Lies Ahead

The outlook for Thermax remains challenging in the near term, with multiple headwinds likely to persist through the remainder of FY26. The capital goods sector is experiencing a cyclical slowdown as project ordering activity moderates following a robust FY24-25 period. Thermax's order book execution and margin trajectory will be critical factors to monitor in upcoming quarters.

Key metrics to monitor in Q3 FY26 results include: (1) Operating margin trajectory—any improvement towards 8-9% would be positive; (2) Revenue growth—return to positive YoY growth is essential; (3) Order inflow and backlog—indicators of future revenue visibility; (4) Interest coverage—sustaining above 6 times is critical; (5) Other income as percentage of PBT—reduction below 40% would improve earnings quality.

Management commentary on order pipeline, project execution timelines, and cost management initiatives will be crucial in assessing the company's ability to navigate current challenges. Any signs of margin stabilisation or revenue momentum recovery could trigger a re-rating, but such improvement appears unlikely in the immediate term given prevailing sector dynamics.