Speaking to CNBC-TV18's MS Unnikrishnan, MD & CEO of Thermax said Brexit will have short-term ramifications.
He did admit that short-term impact will mean 'aberrations' for Thermax. But it won't be substantial, he said. There is hardly any major capacity addition happening elsewhere, he added.
The European Union contributes 7-8 percent of overall revenues.
About 30-32 percent income for Thermax comes from South East Asia and Middle East, Europe, Africa and rest of the world. China contributes Rs 75 crore or USD 10-12 million income. And income from China has come down in two years, he said.
Thermax has entered the new fiscal year with lower order carry-forward, he said, adding that in acutal terms it is Rs 600 core lower than previous years.
Topline will be lower than the previous year, but we will try and keep our profits in doublt-digits, he said.
The company isn't participating in large projects, but Unnikrishnan is hopeful of improving margins while executing orders.
He spoke about Thermax's investment plans in the new plants it is building in Dahej, and in Indonesia. Capex in the Dahej plant will be about Rs 150 crore and it will be up and running in the first quarter of FY18.
The first phase of the plant in Indonesia will be completed by March of 2017.
The working average days have improved this year but the company has taken a stand in not going to customers with strained balance sheets.
Below is the verbatim transcript of MS Unnikrishnan’s interview with CNBC-TV18's Nigel D'Souza and Reema Tendulkar.
Nigel: What is Thermax's exposure to Britain as well as Europe and would Brexit have a significant impact on industry and Thermax's earnings?
A: We have some direct and indirect impact possibilities. Of our income approximately a 7-8 percent is emanating out of the entire European countries. We have four operating subsidiaries in the entire Europe, two of which are in Denmark, Danstoker and boiler works in Demark. Then we have got a small outfit in Bremen in Germany known as Rifox plus we have got our company which is the marketing and servicing company in London known as Thermax Europe Ltd. Put together they contribute to approximately seven percent of the topline of Thermax.
Certainly they are not contributing to seven percent of Thermax's bottom-line. So, I don't think these numbers are going to be coming down in any way because what we manufacture in Germany and what we manufacture in Denmark are sold predominantly into European Union countries and also to Middle East and South America and it will be remaining intact. Export of our items manufactured in Denmark and Germany into UK is very feeble. So, that much impact won't be there on Thermax as a company directly.
Coming to the indirect impact on this I am sure Brexit will have its own ramification to the global economy for at least in the short to medium term. Long term I don't think anything is going to impact the global economy through Brexit. It can only be positive. But in the short to medium whatever the global economic shock is going to be there will certainly have some amount of an aberration going to be brought to Thermax's balance sheet too. But is this something consequential? I don't think anything substantially consequential is going to happen because in any case none of us are in the greatest of the shape at this point of time in terms of investment cycle. There are hardly any major capacity addition happening anywhere in the world because of which we have seen that on tough days it can't be any tougher. It could only be better in the future.
Reema: Could you also give us a number. What percent of revenue comes in from exports and you have also got an export to other international geographies like China etc? How is demand shaping up over there, will it be able to offset or have you see a pickup in demand in other geographies? What is the order pipeline looking like?
A: Thermax's income from outside the domestic market is approximately 30-35 percent which comes from South East Asia, Middle East, Europe, Africa and then the rest of the world. China is contributing to approximately Rs 70-75 crore which means USD 10-12 million that we generate from China. So, Chinese economy had been in a toss for some time and in fact our income has come down between the last two years. However we see some amount of improvement in Chinese economy in capital investment in some of the areas in the last few quarters. So, I would expect Chinese company of ours to be performing better rather than worsening the performance.
Nigel: But what about the bottom-line? What kind of bottom-line growth can we expect going ahead?
A: I have entered the new year with lower order carry forward. To be precise around Rs 600 crore lower than the previous years as order carry forward. Naturally I have got to depend a lot more on the booking and billion in the same year to have any improvement in performance done. So, I am not giving a guidance in terms of numbers. The topline will certainly be lower than the previous year. However we will try our level best to retain the profitability closer to double digit, like the way we did last year. As a company we have got resilience, we have got capabilities lot more than the rest of the pack because of which we should be able to deliver a decent enough balance sheet in the coming year itself. I cannot promise growth in such a difficult situation.
Reema: You also made a point about how the order inflows have also been a bit stagnant or lower. What is the company's strategy there? Are you looking at getting in fewer orders but they have better margins or are you aggressively bidding for projects? What can be the margins we can expect going forward?
A: As far as the standard products of the company are concerned and the medium sized projects are concerned we are very aggressive and we are participating in every tender and we have to get orders to keep the factories on and try to improve margins while executing the orders.
As far as the power projects are concerned for the larger ones we are refraining from quoting because the prices prevailing in the market are so low that every order that you can get will be keeping a hole on the balance sheet of the company. So, we are not preferring to be participating in very large power projects at this point of time.
Nigel: What is the Capex involved for setting up the plan in Dahej, Gujarat as well as in Indonesia? When will these facilities be online and what is the current utilisation level as well?
A: The investments that we have planned are strategic in nature. In Gujarat, we are setting up an export oriented unit in Dahej which is dedicated to manufacturing high quality ion exchange resins, which is exported out of the country. The current facility of Thermax has got limitations in terms of it is already running at 100 plus percent for the past three years. So, we are virtually waiting for this unit to be ready so that business can pick up. This is an approximate Rs 150 crore investment and we are expecting that this plant should be up and going by Q1 of FY18.
Second investment is in Indonesia aimed at the standard heating, cooling and water products of the company where the land is already procured, construction has already started. The first phase of this should be ready by March 2017 and phase two should be completed thereafter immediately. The reason for us to be setting up this facility is Association of Southeast Asian Nations (ASEAN) countries which is Indonesia, Malaysia, Thailand and Philippines put together contribute to almost the size of the market similar to that of India for the standard products of Thermax.
So, going forward, we are looking forward to a USD 100 million business to come from the entire of Southeast Asia for the standard products of the company and this manufacturing facility will support the entire regional requirement for it.
Reema: Is collection with respect to receivables a problem? What is the average capital working days now?
A: Last year we have improved in comparison to the year prior to that in terms of the number of days of outstanding of sales.
First of all, many of my customers do have strained balance sheets and even those who have got money available, they would rather postpone the payment than give it on time. So, it is not an easy task to collect payment in such difficult situations. But we are managing it. I would believe that the situation would prevail the same way. The ideal solution in such kind of situations is not to go and pick orders from companies where they already have a strained balance sheets and extend the lengthy credit which we are very careful about.
In fact even credit management is currently done from the corporate office rather than from the businesses directly at this point of time.