Slowdown in conversion of enquiries into orders: Thermax

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There has been a lot of buzz around heightened competition between Indian power companies and Chinese companies. With project implementations in China slowing down, Chinese banks have started offering loans on projects at lower rates to finance more than USD 50 billion worth of power equipment for Indian companies.

For Indian power firms, this is a big leg-up since local banks are reluctant to lend to these companies. MS Unnikrishnan, the managing director of Thermax says the promise of a line of credit from Chinese banks will only heat up the competition even more.

However, power companies continue to witness a slowdown in order inflows and the US downgrade hasn't helped either. For him, one thing is certain, that the positive attitude needed to grow economies, including, India is not prevailing either in the country or in the world. "There is going to be a little struggle that all of us are going to be facing going forward," he adds.

Below is a verbatim transcript of his interview with CNBC-TV18's Latha Venkatesh and Gautam Broker. For complete details watch the accompanying videos.

Q: Have things gotten much tougher with competition from Chinese companies in the past one quarter? How will it impact your margins in FY12?

A: There are two factors to it. The implementation of projects in China is slowing down so there is a visible surplus capacity available in China for power equipments so they look forward to any country where there is a possibility for them to be selling their wares. India happened to be one destination where in any case there is a power shortage and a lot more power plants are getting implemented. So, China is looking at India as one destination.

Secondly, Chinese companies are now in a position to offer a line of credit from Chinese banks, in Chinese currency at much lower interest rates than what is prevailing in the country. These two attractions put together, they are able to take on the Indian market. I am expecting the competition to get hotter in the coming time.

Q: Last time, you spoke about the slowdown in the conversion of enquiries into orders. Is that trend still persisting? Can you quantify it in terms of the expected fall in enquiries to order book?

A: There is a major slowdown. I would say moderation was a word that we used a quarter back but, currently, I am compelled to use the word slowdown. In the last one quarter, the number of orders which got finalized in the upper range of Rs 100 crore kind of order was absolutely retarded. Yes, orders are continuing to be getting finalized in the Rs 5 crore to Rs 25 crore range, where an individual or an industrialist is able to take a positive decision like - I am going to go ahead, despite what is going to happen to the economy.

Whenever you set up a capacity, it will come into being only 24-36 months down the line. But for the larger projects, they have to depend upon the banking system of the country and the government of the country for various permissions and the interest rates as well.

Global conditions are deteriorating at this point in time and I wouldn't expect an improvement in the next two-three quarters. Things are looking a little negative right now which normally I would not say because you have seen the US getting downgraded and the European crisis which is hitting the world.

Q: Is Thermax witnessing a slowdown in terms of order inflow? What is the kind of visibility that you have?

A: As a company I will not want to rate it right now because we are fairly safe in terms of the orders available on hand. We have got a wide portfolio of products like chemical, got water treatment, air pollution control, so power is only one of the segments that we are operating in. I don't think we will be greatly impacted in the short-term. Medium to long-term there could be a ramification and that is a very volatile situation evolving in the world. Unpredictability - is the catch word at this point in time.

Nobody is able to predict what the ramification of an American downgrade is. One thing is certain, that the positive attitude needed to grow economies, including, India is not prevailing either in the country or in the world. There is going to be a little struggle that all of us are going to be facing going forward.

Q: We understand that many SEBs have become incapable of paying their bills. Bankers are saying that their interest payments are escrowed with them. Are you one of their unsecured creditors?

A: I don't expect so. Any off balance sheet IPP or any power plant projects is normally after financial closure is over. Once the consortium of bankers sign on the term sheet, they would already have the backup funding availability for it. For the projects which are ongoing, I will not say that there is going to be any difficulty.

On the contrary, it is on the on balance sheet projects where the balance sheet of the company will have to support the project funding, the medium size funds which may find difficulty because profitability of the companies are going to be a challenge going forward. I don't find the foreclosed projects where there is ongoing execution; I don't think there should be any problem related to payments because banks are already covered for the funding.

Q: In your first quarter, your revenues were Rs 1,040 crore. Are you saying that it is not at all possible to assume that as a prorate revenue flow for the remaining quarters?

A: We have grown by almost 33% in the first quarter which is an exception by industrial standards also with what is prevailing. Repeating the same for the year is not going to be practical, though we have orders on hand. I would expect a moderate growth in the current year. More important and challenging will be how the order booking shapes up.

Thankfully, for the first quarter I had a better order booking in comparison to Q4 of last year. Retaining a similar kind of number will depend upon market sentiment rather than Thermax's intention of booking more orders. We are very aggressive in the domestic and international market at this point of time. We are not leaving any enquiry nor are we being very choosy.

We are moving at a very-very positive energy phase, looking forward to finalizing orders if customers are ready for it. The customer's readiness is the criteria which I cannot say because sentiments aren't positive.

Q: At the end of the first quarter, you ended your order book with Rs 5,900 crore. How much did you add in the first quarter?

A: We have added on Rs 400 crore excess than the previous quarter because we had Rs 1,440 crore of order booking and Rs 1,048 crore of execution or revenue recognition which is a positive sign for the quarter.

Q: How much do you expect to add in the remaining three quarters? Will you be able to do Rs 400 crore?

A: We expect to clock a higher order book number than the previous year closing. But as I mentioned, it also depends on the international scenario which will have an impact on the Indian scenario. We have capacity available, we have capabilities in existence for executing orders and customers have a marked preference for companies like Thermax to take orders but their final decision to go ahead with placement of an order is unpredictable at this point in time.

Q: With all this volatility in commodity prices, what kind of a expectation do you have for FY12?

A: For our kind of company, thankfully, we have got a de-risking of multiplicity of business available. In any case, we have double-digit margins which we should be able to maintain but for the Indian power equipment industry, their ability to be retained in the margins will be under threat because everybody in the larger sector has got to compete against the Chinese.

They have to be taking orders than the question which arises is between the chicken and egg should we have orders or should we have margins. Fixed cost will become the primary responsibility of industries. They will certainly take on the Chinese competition and pick orders. After picking orders, we always have an avenue for reduction in costs and negotiation with our suppliers and improvement of the margins.

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