Despite Jan-March quarter being the strongest in terms of order inflow, the capital good sector overall witnessed a subdued quarter and the situation was no different with Pune-based Thermax Ltd.
In an interview with CNBC-TV18, MS Unnikrishnan, CEO and managing director, Thermax said, his company has not seen major recovery in order book in the quarter gone-by and he is neither expecting a reversal in trend anytime soon.
Order inflow, considered a key growth driver for the industry have remained lukewarm either due to a general slowdown in India Inc capex or due to drying up of order from power sector Read This: Capital goods to report subdued performance in Q4: N Bang
“We do not see material recovery in power sector in next 18 months. However capital goods industry may benefit from softening of commodity prices,” said Unnikrishnan.
Below is the edited transcript of MS Unnikrishnan's interview with CNBC-TV18
Q: Is it true that the overall order inflow for the capital goods sector has started looking up? Which sectors have you seen any sort of momentum buildup in terms of order inflows?
A: For the entire capital goods sector, we have not seen a major recovery in Q4. We have not seen any traction in announcement of new projects either in the power sector, steel sector, oil and gas sector which are the main contributors to the order intake of larger companies.
We are not expecting a quick recovery because there isn’t too much positive news in the entire market. However, we see a movement happening in the food and food processing sector and to a certain extent in basic chemical sector. Otherwise we haven't seen anything happening in the last quarter substantially different than what happened in the previous quarters.
Q: Power is an important vertical which has remained in a challenging space for many quarters now. By when can we see a material recovery coming to the power sector in particular?
A: Power sector would take a much longer period than what we are currently anticipating on account of the following reasons. Most of the current power purchase agreements (PPAs) signed and being in operation are not really tenable on account of the fact that they do not provide for the variability in cost of coal.
Unless the government and the electricity regulatory commissions agree to the fact that they have to renegotiate the existing PPAs, the power generating companies in the country are going to see pain. One can see negatives on the balance sheet of most of the companies whether it is Tata Power or Adani Power or Reliance Power. None of them are doing too well. So, we have to have a better tariff regime prevailing in the country in tune with energy pricing over the world.
The second is fuel supply agreement (FSA) which Coal India is signing, they are signing agreements but the availability of fuel is a problem even today. They are not getting sufficient quantum of coal even for the existing plants. The third is related to the mining location.
There is no valid land acquisition act in the country by which companies can acquire land, start operating mines and constructing power plants. We were waiting for the past four sessions of the parliament for this particular bill to be passed. Unfortunately it has not been taken up in the current session of the parliament either.
The last one is related to the availability of money in the market. There aren’t enough sector allocations available for the power sector for funding on the debt side. Unless these major issues are resolved I do not expect the power sector to be catching back.
Q: For all this to be happening what is the timeframe one should be expecting?
A: Not less than 18 months and it could go as high as 24 months. It is bad for the country, but it is a reality. I wish the people who are involved right from the government to the regulatory authorities are fully sized up on the gravity of the situation. We are already into summer and I am sure the country is going to sweat without power in the current summer also.
Q: Managements of many companies have indicated that they want to focus on cost rationalization and refrain from bidding for projects with aggressive margins. Have the bid prices started to ease up for the few orders which you are trickling by, especially the small ticket ones?
A: Majority of the Indian companies are making profit and they are adding money to the balance sheet of the surplus. Despite the reduction in consumption, everybody in the industry is aware of the fact that in the future, we will need more capacity.
There is a section of the investors and the existing companies who want to go for brown field expansions. The sector will start trickling in from the second quarter of the current year which should show some amount of an improvement in the ordering booking of majority of the companies.
However for the large ticket items- which are the projects in power, steel, cement, oil and gas sector- we will have to wait for some more time to happen. They will be waiting for many more positive sentiments to prevail.
Commodity prices have started easing; interest rates will have to come down because we already have the inflation under control. Three-four of these factors cumulatively should be contributing to better sentiments to prevail in the second half of the current year where you should see an improvement in the entire order finalization.
Investors in the country are aware of the fact that it is the best time to invest because in an up cycle, they will have to be spending more money to set a capacity. Whereas in the down cycle, when things are difficult, most of the equipment manufacturers will be willing to compromise on their margins to take an order.
So this is the right time to invest and create a capacity. Perhaps not huge, but we should be able to see some progressive improvement.
Q: Has the overall situation started showing any green shoots for these Middle Eastern, African or south east Asian markets and in particular has the situation resolved for the Saudi Arabian markets?
A: Barring one-two wind fall orders that you would have seen in the Middle-East for some companies, we have not seen a substantial improvement in investment cycle of Middle East at this point of time. Two countries are expanding, one is Saudi Arabia, and the other is Qatar. Other than that we are not seeing any substantial movement in investment pattern also which can result into some amount of traction going forward.
South East Asia is exactly the same way that it used to be last year. There is no improvement because they have a lot more connectivity with the Chinese market and the economy is growing, but not at the pace that one would have expected two years back. There is traction but not something which is going to make a dramatic difference.
In Africa there is a positive movement for everybody whether it is consumer durables or capital goods. Now that market is fought by everybody, it is not that only Indian companies are fighting over there.
There is China, Europe and America. Everybody wants a pie in that small market. It is a very large continent but the size of the market for capital goods is not very large. We would see some improvement in African market in the coming year that is the reality.
Q: Put together across capital goods industry would you see an improvement in the international order intake going up in the current year? There would be an improvement but will that be significant to make a major difference in the balance sheets of all Indian companies?
A: I have my doubts. It may take a little longer for it to happening, but many Indian companies are setting their foot and putting lot of efforts to create a market. Engineering companies cannot create markets overnight. It does take some time for them to create traction by setting up local offices, taking local supports, creating partnerships, so collection of orders will take some time.