Difficult to maintain double digit margins in FY13: Thermax

Capital goods maker Thermax is hopeful of its order book improving post FY13 on the back of investment cycle picking up in various sectors from where it gets orders. The company which manufactures heaters, boilers and vapour absorption systems for industrial use, currently has an order book of 4412 crore, around 24% less than last year.

In an interview to CNBC-TV18, the company's managing director, M.S Unnikrishnan said in a scenario when the capital goods industry is undergoing stress `in absense of new capacities coming in, it will be difficult to maintain double digit growth in margins.

Thermax derives more than 75 percent of its revenues from the energy segment. Analysts feel issues related to fuel (coal) and increasing competitive intensity (in the BTG space) are an overhang on order inflows and margins for the company in the long term.

Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra.

Q: How exactly order inflows are looking for you in the current quarter? In Q2FY13, it seemed a little subdued.

A: I am seeing a substantial improvement in order conclusion. I am seeing change of sentiments in terms of people calling us for discussions and negotiations in a serious way. Normally, for a slowdown flywheel to catch the momentum back, I would expect it should be anywhere maybe a quarter to two quarter.

I need to be admitting a fact that the booking numbers may not be very high because we won’t register orders, unless orders are concluded, contract sign and advances collected. But the activity in the field related to order conclusion is taking a positive stride. I am only praying and hoping it is going to be for good.

I need to say that it looks like there is a bottoming. We should be able to see some improvement in Q4. In Q3, I am not expecting a substantial improvement. Q4 onwards there could be an improvement.

Q: Would you say the worst is over?

A: There are indications that it can happen. There are two factors. The changes that are being brought in the policy corrections by the new Finance Minister, in my discussions with the CEOs of companies, they are not talking as negative as they were earlier. Atleast there is some amount of bottoming in thinking.

Also, the fresh inquiries, which are received, may take maybe six months for fructification. Despite the RBI not acting on the reduction of interest rates, banking community on it own is willing to be considering a reduction in interest rates for a medium to long-term lending. It may not be a big number. Most of them are currently willing to be giving at maybe 0.5 percent lower than what they were offering earlier.

Banks are having sufficient money available with them right now. They are looking forward to better performance by companies. If I look at the first half of the current year, the profitability across the 500 top industries of the country has only improved. It has not deteriorated. Capital goods industry is only one which would have reported very negative results. All others are talking approximately an improvement of near 10 percent in profits in the quarter coming.

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Q: These discussions you say that you have got enquiries from several companies that you are in discussions, which sectors or companies are these?

A: I would say cement sector is seeing positivism. Steel price are stable. So, Tata’s Kalinganagar project is taking off. That should be an impetus for others. Cement, we have concluded, in the last quarter, one order for captive power plant. There are one or two of them in the anvil.

The cement consumption or capacity utilisation in the northern sector of India is almost 80 percent. Southern part is improving. With the deteriorating power situation, many are currently looking at captive power as an option. That is the second sector. Food and food processing as a sector is not concerned about any downturn. They seem to be quite positive.

There are isolated investments coming from textile sector also. Overall, I would say that couple of sectors where they possibly felt that they will be falling short of capacities going ahead. So, they have to be investing for capacity creation. I am seeing some of them. But none of these are indicators of India going to be turning around and immediately improving. Don’t miss quote me, mistake me. I am only seeing the reaction from the market for the initiative taken by finance minister P Chidambaram are positive at this point of time.

Q: Earlier, there was an expectation that you would have a margin outlook of double digits in FY13. You have maintained it at the 10 percent mark in the previous quarter. How exactly is the pressure looking on the raw material front? What would your guidance be for the second half of the fiscal? Do you expect an improvement or possibly a reduction in the margins from the current levels that it was at?

A: Maintaining double digit will still be a struggle, but we will do that. I am not seeing any improvements in margins in the market, not for me, not for anybody because the numbers of orders and the contracts available are not very much. So, unless they return to the levels for 2005-2006, I do not think any company in the capital goods industry can think about very high margins.

Margin maintenance itself is difficult for many companies. So, I do not think that improvement in margins is going to happen immediately, unless the market catches back. If the order inflows do not improve in H2 of the current year, many companies will have a reduction in margin for the next year. That will be the reality.

Q: In your September 30 numbers, there was deterioration in the cash conversion cycle. From 41 days it rose to 48 days. Debtor days had risen from 68 days to 84 days. These are YoY comparisons. Since you say the situation in the banking side has improved slightly, should we conclude that this problem also is easing or does that still remain?

A: It will continue for some more time. One is availability or liquidity in the market for people to be paying. Unless they see a consistent cash flow, nobody will be willing to part with money so easily.

Secondly, when the banking system provides 9-10 percent on FDs, which customer would want to pay immediately? He will rather keep the money in the bank for three more months, earn the interest and show other income for his balance sheet and pay me later. So, these are the two factors. One is the interest rate coming down. Second is overall predictability in the market, about their margins improving. These are the two factors in my opinion.

It is not that nobody wants to pay, it is only everybody is preserving cash, anticipating things are going to be worsening. So, unless that anticipation is for betterment, the payment cycle will not improve for the industry.

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Q: The other point, which I actually wanted to touch upon, is the broader trend in the capital good sector. There are reports indicating that there is some amount of extreme layoffs within the sector, especially based in south India. Considering that there is a lot of operation unavailability or difficulty at this point in time because of lack of order inflows or execution etc, can you just give us a sense in terms of any sort of reduction in layoffs for your particular company or even general trend for the industry as a whole? With some people obviously contracting their size and moving out because they can’t face the lack of orders, would you say that your margins now start improving? 

A: Not immediately. Nobody is dead, it is only that they have become sick or they are showing signs of sickness. Some people will take very positive action and will not sink further, whereas some people will take very drastic action, which can only reduce the margin. So, I don’t think margin improvement on account of reduction in activity by competition is reality for some time to happen.

If the negativity were to prevail for couple of more years, that is my prediction then many will be dead and the remaining guys will be very healthy. They will be robust. But that won’t happen in a growing India. It is a temporary phase. I don’t think there is any competition is going to disappear from the market. Many of them are under financial pressure, where the balance sheets are bleeding, they have difficulty.

What they do in such kind of circumstances? They go and pick an order at a lousy price at a lousy term and customers fall for it also. Infact it is putting pressure on people like us, good companies in the country. We have to stick on to the commercial clarity that we won’t take orders where the terms aren’t good. It becomes difficult in the market. So, I don’t expect things to be turning in such a way that many companies are going to disappear, certainly not. It could happen only in a dying market. India is still a growing market. So, everybody knows that it is a cycle and difficult time.