It's tough times for cap goods till FY14: Thermax

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It's tough times for cap goods till FY14: Thermax

Speaking to CNBC-TV18, MS Unnikrishnan, managing director of Thermax agrees that the industry is seeing a slowdown in order inflows. In fact, going ahead too, the situation remains grim according to him.

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The October IIP numbers have thrown up a dismal growth scene for the capital goods sector at a negative 25% year-on-year. Speaking to CNBC-TV18, MS Unnikrishnan, managing director of Thermax agrees that the industry is seeing a slowdown in order inflows. He says that the current figure is on account of the orders that were finalized almost 12-24 months ago, and since, there have been no large orders for the entire industry. In fact, going ahead too, the situation remains grim according to him. "We don't see any major improvement in order inflows in the next two quarters," he says.

The impact of this slowdown is likely to be to be seen in the balance sheets of companies in FY13 and FY14.  Unnikrishnan says that this should be of concern to the government since the capital equipment industry is a barometer for what's going to happen in the future.

Below is the edited transcript of the interview. Also watch the accompanying video

Q: 25% decline, perhaps lead by some of these 80-90% decline in some categories, but there is a definite slowdown you would agree?

A: Absolutely, it is visible to us. Whatever we have seen as possibly a dot in the first half is an indicator of the orders which were available on the book of companies, especially larger companies which were at the difference to indicate that way. I would say the capital goods industry is not getting built in the country.

You should also look at what we import from one country and add that USD 10 billion to this, and possibly your number will be positive or may be very similar to the IIP number.

So there are two issues happening over here. One is, the industry itself is going through a difficulty because there is a very reduced and tapering customer confidence in the market and no orders are getting finalized since the past three-four months.

I am worried about what will happen in the future because whatever you are seeing as negative numbers are the result of the orders that got finalized maybe 12-24 months ago and there is hardly any large order getting finalized in the current quarter. I am not expecting any major improvement to happen in the next one-two quarters too.

So the result of this is going to be impacting 2013-2014, which should be the concern for government because capital equipment industry is a barometer for what's going to happen in the future. If you do not invest for capacity building today, you are going to have a shortage of capacity in the future.

So I take these IIP numbers for a reason. Firstly, it is beginning of the quarter, so they could have bulking in September, and that's why we had a very negative number for October. We may pick up by December and have an average number. It will still be negative, but not as bad as 25% degrowth. However, we should be really worried about what the impact is going to be on FY13 and FY14.

Q: Are you experiencing under capacity utilization in your own company or in the industry, are machines already idle because order flows have tapered off sometime back and there is no work to do?

A: There are two types of companies in the capital goods industry. The first is a long-gestation period project companies like BHEL, L&T, half of Thermax, half of Crompton Greaves and equivalent companies. None of us in the long-gestation period area are under-booked. We already have sufficient orders to go for a couple of more quarters. But short-gestation companies which are making equipments for delivery period of anywhere from three-six months, all of them have a very low capacity utilization starting this current quarter.

Q: If machines are idle and production is not moving, there should be some telltale impact on some product prices?

A: Absolutely. There is ferocity of competition in the market at this point of time, especially for larger ticket-size orders. If there is a Rs 100 crore order, there are may be eight-nine people fighting for it. The weakest among the competition, who may have a debt already underlying on his balance sheet, will be willing to accept any kind of price in the term. So we are seeing a deterioration of pricing in the market. But it is not very healthy.

Q: On the manufacturing sector products that you buy, are you seeing any erosion in prices?

A: There is a marginal reduction. Unfortunately for India, there are two factors which are hitting the commodity prices, especially related to capital equipment purchased or maybe component purchased by us. First of all, on account of the Supreme Court's ruling, we have a deficiency in the iron-ore production at this point of time. So the steel prices that should have ideally come down on our capacity utilization, remains very strong. Secondly, the Indian currency has depreciated by at least 20% in the past four months. So there is no way one can resort to import of raw material into India.

So possibly, our suppliers are able to stand on the price level which may not be sustainable in the long-term. However, it has not come down to the extent that we expected, knowing which way the market is moving.

Q: The 14% import duty, do you think it is coming and how soon?

A: I am not allowed to comment beyond a limit because I am a part of the discussion group, but the government has ceased upon the fact that if they do not give a level playing field, we are not imposing the duty. Even China has got an import duty for power equipments. There is hardly any country in the world which doesn't impose duty on equipment import to their country. We gave a concessional of having a nay-duty regime for power plants for 1000 Megawatts, which has not given a level playing field for people like us. So the government is going to be acting to ensure that Indian companies are not at a disadvantage, we have to be ideally at an advantage and the least they can do is to create a level playing field.
So if there is an imposition of 14% duty, whichever way it is going to be done 5+ or 5+4 or so... it is going to award the Indian companies a level which is equal to what others are, but not an all-equal footing considering that that's all what the government can do. I am very confident the government will do that.