Jun 04, 2015 02:27 PM IST | Source: CNBC-TV18

Heating, cooling to grow in FY16; power stagnant: Thermax

MD Unnikrishnan, MD, Thermax told CNBC-TV18 that company will improve its capacity utilisation from second quarter of this year, but doesn't see growth in the power segment.

Heating, cooling to grow in FY16; power stagnant: Thermax

After a lukewarm performance in the March quarter, MS Unnikrishnan, MD, Thermax expects an increase in orders this year.

Thermax's net profit rose 35 percent to Rs 335 crore for year ended March 2015.

Unnikrishnan told CNBC-TV18 that the order book will be better this year and he expected growth in the heating and cooling segmentsgrowth is expected in heating and cooling segments. Capacity utilisation would increase only when the consumption increased around the second quarter, he said.

He did expect any major orders from cement, power and steel companies. He said the gestation period for projects in these sectors is around three to four years. For any project, that the company gets this year, it would be completed only in FY2019-20.

He also said that private power companies are not doing well in terms of capacity in comparison to public companies. Government needs to restructure debt urgently, he said. 

“Overall power capacity of country is 2,40,000 MW and the real usage is around 1,34,000 MW. Power is been supplied to urban areas, but rural areas still have six to seven hours power cuts. This situation needs to be resolved before it becomes a social issue,” he said.

The company has improved its overall working capital in the last one year, he said.

Below is the transcript of MS Unnikrishnan’s interview with Reema Tendulkar and Sumaira Abidi on CNBC-TV18.

Reema: The street is really pinning for some sort of recovery in the second half of this FY16 because the earnings growth has not been good in the January-March quarter, so we are now looking forward to Q3 and Q4 of this year. You have indicated in your various interactions that while the small orders have been coming through, the large power sector orders you have not seen any of those and if they happen, they will only happen in H2. What gives you the confidence about this recovery in the second half?

A: If the consumption were to start picking up, then the current capacities will get utilised and normally for the larger ticket size projects, the gestation period from the date of ordering for the completion of the project could be anywhere from three to four years.

So, any capital goods order placed for cement or steel or power equipment, it will be coming into being a commercial entity or which can produce results will only be three to four years down the line which means what you order in the current year, will be an effective equipment to produce in year 2019-2020 or 2018-2019. So, by that time the consumption should be coming to a level where capacity utilisation should be peaking. So, that is my expectation.

But let me clarify something. I do not think we are expecting a quick recovery in the second half for the larger projects also. You may find sporadic orders getting concluded in power, we are already seeing some inquiries coming out from the power sector, especially the National Thermal Power Corporation (NTPC), a couple of state enterprises, we have information sufficiently clear that there will be tenting happening. And possibly the ordering out in the current year is going to be better than the previous year. That is the current level of information.

Sumaira: This time around when BHEL posted numbers, one of the problems in their order inflows that came out was the delay in bidding by state governments. Is that a relevant risk that is beginning to play out now, you think?

A: Private power producers are not in a healthy condition to be adding capacity, they are all having stretched and stressed balance sheets. The healthier ones are the central government organisations like NTPC, which I am expecting will continue to be ordering. Their ordering is going to be starting.

But the state governments have not gotten their debt restructured and unless there is a tariff increase, which will make the power production, transmission and distribution a profitable venture, I do not think they will be able to be getting the funding from anybody. The government is not going to be funding, the banks have to be funding the debt portion which is a major portion for the power side.

So, barring two or three states, which I do believe have the ability to be setting in new power plants, other states have to take political action later to increase the tariff where they will be able to restructure the debt and come into that.

So, it is going to be playing another major issue and in my opinion, it is going to be a little more difficult issue because at this juncture, in the peak of the summer, there is approximately 2,40,000 megawatt of capacity in the country which can produce electricity and the real usage is only 1,34,000 megawatt.

Does it mean that there is no demand in the country? Sorry, what the state electricity boards are doing is they are giving power to the cities and depriving the rural area of this country of power just by blocking and increasing the power load shedding and power cut. Average power cut in the country maybe currently not less than maybe 6-7 hours in the rural area. So, that is the issue which they are going to be resolving before it becoming a social issue.

Reema: You indicated in your first answer that when consumption picks up, you will see an improvement in capacity utilisation. In April, when we had spoken to you, you indicated the capacity utilisation of Thermax was at 65-66 percent. Has it improved in the first two months of this fiscal year? Where do you see it in FY16?

A: Certainly, no because my carried forward orders which have got into the current year are comparatively lower than the previous year. So, the utilisation is almost at the same level or is marginally lower. Unless fresh orders come, we will not be able to increase our own capacity utilisation and which should take a little longer period of time.

Sumaira: Another question that I want to ask you, which is quite topical these days, is that a lot of the highly leveraged companies have been getting punished by the market; some of these might be consumers of Thermax. Are you really seeing companies or clients, which are actually pushing payment? Is that a real risk that a company like yours might be seeing?

A: There are always some customers who have a habit to delay payments, but if you really ask me in the last one year, we have been able to improve our overall working capital position. In fact, it has come down. Despite an increase in the top-line we have been able to manage with a lower quantum of money to do that which means I have been getting customers’ payment on time. Now, is it that something that we have done wonders or is it because they are paying? It is a combination of both.

If you look at 2-3 other larger companies, barring one very large company in the capital goods sector, everybody had been able to be improve their overall financial position. Though the top-line would not have improved, the profitability could have been a difficulty, but working capital improvement is there. So, that is an overall indicator that despite the customers getting punished by the market on the share market, their balance sheets are becoming stronger and they are paying.

But only thing is there is no frenzy of execution of contracts of the orders on hand, there is no pressure on people like us that we want to advance executions of projects. Everybody goes at an ordinary pace and as if there is no hurry to execute projects. That is the reality in India right now.

Reema: So, recovery is perhaps ambling on. Let us talk a bit about your own company. In the various segments that you operate, the big ones are boilers, heaters, chillers as well as the power segment. So, that roughly contributes about 60-65 percent to your revenues. How is FY16 looking compared to FY15 as well as then if you could help us with the services chemical as well as in the environment business? In all these four, if you could tell us if FY16 be better compared to FY15?

A: Let me start from the positives. We should do better in the environment segment in the current year on account of the orders on hand and also better implementation of the pollution regulations under the new regime. I do not think companies can get scot-free by polluting the environment anymore. I can see a lot more of activity in the enforcement of environmental regulation in the country in the last one year. So, I am expecting environment sector of the company to be doing better in the current year.

Services sector will certainly be growing in the current year, but not in a very large percentage. I would expect it to be growing at the rate of 10 percent.

The core areas are boilers, heaters, which are the energy segment that I would divide into three - the heating, the cooling and the power. Both heating and cooling will grow, but the power segment, where I am supplying equipments for the captive power and the main power area, I do not expect a growth in the current year.

So, if I were to concise it in overall, barring the power segment, which is getting into captive power for cement, steel and heavy chemicals and non-ferrous metallurgy and the independent power producer (IPP) oriented main power plants, I am not expecting any growth in the current year.

Other areas, all other areas for the company will be growing. Now, will I be able to compensate with the growth in so many of the smaller businesses with the largest chunk of the business to make a growth in the current year? You will have to give me time without me giving guidance for the year.

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