Diversified biz keeps Thermax's order flow moving: MD

MS Unnikrishnan, MD, Thermax, says that the company's exposure to the power sector in a good year is 25-27%. He also says that the power sector is not in a good shape nor the situation is likely to improve in the near term.

However, he says that the company's diversified business activities will ensure that there is momentum in inflow of orders but the momentum may not be as per market expectations.

Below is the edited transcript of his interview to CNBC-TV18.

Q: There is a lot of fear in the market with respect to BHEL at least that a lot of these coal issues will mean project cancellations and that could affect order inflow over the longer-term. In your communication with many brokerage firms you seem to be relatively optimistic. What is driving this optimism?

A: Our exposure to the power sector is not in totality of the orders that we do take. In a good year, we have an exposure of 25-27%. I accept that the power sector is not in good shape nor it is expected to improve in near term.

Thermax is a diversified company which is also engaged in water waste solutions, air pollution control, heating and cooling solutions and manufacturing of international chemicals. These sectors have not impacted the way the power sector has impacted, so to a certain extent there is insulation available to Thermax in comparison to a company which is fully dependent upon power sector.

Secondly, the company has very standard products worth lakhs of rupees. The company may undertake two large projects worth Rs 1,000 crore. Small and medium ticket size projects are ongoing even today, maybe limited to certain sectors but the impact in the capital goods sector is predominantly on large orders, which is likely to be under pressure for more time. These two factors will ensure that we will have inflow of orders but maybe below market expectation.

Q: What kind of order book do you have at this point in time and what might it give you in terms of revenues in the rest of FY13. The net sale for Q1 was marginally lower than the year ago levels?

A: We have already conveyed to the market that since we have opened the current year with 27% lower order carry forward compared to previous year, we will certainly see a reduction in the top line by the end of the year.

 

However, in the beginning of the year we had carry forward orders worth Rs 4,000 crore. By the end carry forward orders has improved to 4,270 and I expect it to progressively improve throughout the year.

 

Looking at the macroeconomic scenario prevailing in all the captive markets of Thermax like India, South East Asia, the Middle East and Africa, it will be unfair to expect anything substantially better but certainly better than the previous year.

 

Q: Do you think there will be a lot of project cancellations and in that some of the orders that are already been given out maybe cancelled irrespective of whether it's Thermax or BHEL. Do you think that order cancellations are order of the day?

 

A: If the order is genuine in power sector then at least six-seven pre-conditions should be met and if those were already met, none of the orders will get cancelled which means there should be land available, power purchase agreement in place, environment approval from the ministry and a term-sheet signed with the supporting bankers then why should a project be ever cancelled.

 

It is only those which are where somebody would want to put up a power plant of maybe 2x660 and place an order for 12 numbers with equipment supply saying that they will be put up ten of them in the next ten years and take all of them in the book of your company as order booking. Then certainly these are all 'khokha' order, such orders can be cancelled but 'pakka' orders where you have got money available, advance given to you, highly unlikely any of them getting cancelled.

 

Q: It is more the additional order book that one is worried about perhaps those that have come in will be carried out because money to it would be committed by the banks. When do you think that will start hitting, the fact that there is no further capex in the power sector and indeed in other sectors?

 

A: Improvement in the power sector improvement is at least two-three years away for India though trickle of orders will be happening which is going to be propelled by the state electricity boards like MAHAGENCO, Karnataka Generating Corporation, around six-seven generating corporations, GENCO will be finalizing orders in next 12-18 month But for private sector players like Tata, Reliance, Adani to again accelerating the order book placement they are little far away because they need to be have improved cash position on the balance sheet so that bankers are willing to fund them for future projects.

 

Recovery in power sector will be a much longer game plan especially after coal scams and the difficulties faced by the current power companies. I do not think anybody will be in a position to be investing in power plant for some more time to come.

 

Q: Some brokerage reports say that they are looking at an 8-10% fall in revenues in the current year and 14-15% fall in profit. Would that be the impact of the slowdown, not more?

 

A: On the top-line almost these brokerages are true, but we will try to improve on the bottom line.

 

Q: What is your sense from the non-power sectors? The slowdown has it, everyone. You spoke about industrial chemicals. You spoke about small industries. Most of the banks say that their bad loans are coming from the MSME sector, the vast middle companies sector. Industrial chemicals in the IIP segment is not necessarily doing very well. We get poor numbers on intermediates off and on, in fact frequently. Do you think that even that will continue to stand up or will its shadows be cast on FY14?

 

A: No. I am an optimist on those counts. The turnaround period for medium scale industry is much faster than the large scale industries like power, cement or steel. I think the food and food processing sector will performing good and will continue to do better. FMCG companies would do better, because we are a country with a population increase of 1.5% which is equal to 20 million people getting added, it's equal to size of a country getting added in India every year.

 

Urbanization is continuing unabated despite the government's better efforts to prevent it. So the consumption is fundamentally increasing in the country. So companies into consumer durable oriented business, though temporarily may face a setback but will catch up as we progress and we cannot stopping capacity addition beyond a level, because you will lose out onto the market.

 

So are we going to import everything or are we going to manufacture in the country? So I am sure the capacities will be added in the country. I believe that the Indian economy will have a resilience to come out of the current problem, not in every sector. Power is a controlled sector. Policy oriented sectors like steel, cement and the power certainly will have a longer gestation period to improve, but the conventional ones which are detachment of the governmental control will continue to be improving. So there is a mix.

 

Q: Is there a possibility of some pick up in international orders as well? How is the international business looking like?

 

A: We have seen some traction in the beginning of the year. We have picked up an EPC order from the African continent worth around USD 27 million. There is an improvement in order booking for the company in the Middle East. Southeast Asia is below expectation, but I would believe in the current year my order intake from the international market will be better than the previous year.

 

Q: Are you expecting margins to hold up or even better them from than Q1?

 

A: I am talking about yearly phenomena. Despite declining demand in the market the commodities were strengthening in India for almost a year, but in the last 30-45 days we have seen a weakening of the commodity prices from copper, aluminium to steel. As the Chinese consumption has reduced there is surplus capacity available in the world, I don't expect commodity prices to strengthen any further, because of which one should be in the perception to retain the margins.