Utilise competitive benefits, export more: Thermax

MS Unnikrishnan, managing director, Thermax sees a deep sectoral divide in the economy — one that will suffer because of lack of government initiative and the other that will grow even without government support. The first category includes infra companies and the second includes food, food processing, automobiles and pharma companies. 

He advises the capital goods companies, which fall in the first category, to look at the option of raising exports. He says the fall in rupee has made imports costlier and hence exporting option can give Indian companies a competitive advantage. "The proportion of input cost increase versus additional gain in terms of the currency gain will be available to improve the profitability.” Below is the edited transcript of Unnikrishnan’s interview to CNBC-TV18. Q: Just wanted to touch upon how order inflows could possibly pan out in the remaining part of the fiscal and the reason I ask is that there are lot of brokerages which are now expecting order activity to not pick up at least before there is some amount of clarity before elections. Is that the case that you would possible concur with? What is your point of view on the same?
A: It is not a straight answer. If one were to look at the entire industry and divide them into two, the first industry would be dependent on the policy directions of the government to take charge for ordering- this is the infra area- power, steel, cement, oil and gas. These sectors will certainly have to depend upon governmental support, allocation of coal mines and decisions from the government. Those will certainly have retardation.
In any case, nothing great was happening in any of the sectors in the first half of the current year. I don’t expect them to be picking up barring couple of them which is already announced.
There are liberated sectors that are segregated from governmental interference or decision making process in the country which are food, food processing, automobiles, pharma and these kind of industries. There will certainly be investments into it and they are not going to be related to election or to the government change.
I won’t think the Indian investment story currently is any more negative, it is at neutral level. The Left side will continue to be interesting and the governmental infrastructure oriented efforts will take a beating for H2, that is my opinion. Q: Any way this sector is reeling under very high competition on a very limited order pie which has been hurting margins in the entire sector now with the additional pressure on account of rupee depreciation which could push up input prices are margins for the coming quarter going to be subdued or lower – any pressure on the margins that you foresee?
A: Certainly. Unlike the case of the consumer companies or durable companies where they can keep on passing the increase in input cost to the customer, most of the capital good companies have carried forward orders which may vary between a quarter to maybe three to four years of orders on hand.
Many of the orders are with fixed price and variability’s aren’t allowed. So, when the input cost does go up, the uncovered portion of the input cost cannot be passed on to the customer. That will take a hit on the balance sheet and the margins which will vary between 50 bps for a safe company to 200-250 bps for other companies. That kind of a margin pressure should be seen for existing orders to be executed in the future.
But as compensation, one could look at it as rupee depreciation has also got another advantage for capital good companies which we aren’t talking about. Importation of international capital goods into India is going to be more expensive, so there is a possibility for Indian companies to have a better market share when one compares with the imported machinery.
There is a competitive advantage position available for Indian companies to export out of India to make a better margin also because the proportion of input cost increase versus additional gain in terms of the currency gain will be available to improve the profitability.
The exporting companies those who have domestic market and international market, they have an opportunity open for them to compensate for the reduction in margin in international markets.