Autos, FMCG orders to pick-up early next year: Thermax

Anuj: The index of industrial production (IIP) continues to disappoint especially in capital goods, we had a minus 11 percent number for last month. Are we not seeing any kind of recovery at all on ground, is that the sense we get?

A: IIP number has to be understood differently for capital goods industry in comparison to the rest of them. So let me take it in a different way. Whatever you are seeing on the IIP drop in the current months, preceding months also is the reflection of the order finalisation or a contact finalisation happened possibly one year back because normal trend to convert an order into a revenue for capital goods companies can vary between a nine months period and maybe twenty-four months period. On account of the fact that long gestation power projects or steel projects, cement projects would take maybe 18 months period for an order to be fructifying into revenue.

Short gestation projects are the smaller capital goods, which are maybe generators, engines, pumps, motors and equivalent of that. So that is a number that you are seeing over there which means a year back, there was an absolute negative order rise up for companies in India that is a reflection of IIP.

Now coming to the ground level -- in my opinion, things haven’t turned around so far at least for the larger ticket sized projects. So there is a positive sentiment prevailing in the market, consumption hasn’t picked up in the market to such a level for our customers -- when I say our customers, the industry’s customers generally whether it is fast moving consumer goods (FMCG) to durables to any of the commodity items - the consumption has not accelerated to a level where CEOs in corner rooms are worried about capacity limitation and are running to finalise orders. So sentiments being positive on the ground level, we are yet to be seeing positive movement in terms of order finalisation.

Q: While the point is taken that there is order finalisation taking place, when do you think it will start showing on the P&Ls, for example when will projects start being executed on the ground, would it be the second half of this fiscal or could we see it possibly going into FY16 as well?

A: I would take this again as two divided forums. First is the companies, which are purely dependent upon consumption and not dependent upon the policy direction or a correction taken by the government which are food, food processing, alcohol, beverages, durables, equivalent of that even automobile to a certain extent. I would imagine the pick up for them will start maybe in next year beginning. Nothing is going to happen rest of the current year and for those who are dependent upon core industries which do depend upon a lot more on the governmental policy direction such as power industry, steel industry, cement industry, oil and gas, fertiliser, I don’t expect any of them to be having any revenue accretion happening in the next one year. I would possibly give them a year and a half plus for them to be showing that in the balance sheet and that is a realistic target rather than being overambitious to believe that things are going to be changing very quickly.

Q: There was this report which has come out by UBS today in fact on the capital goods space and one of the things that they have highlighted is that lower companies or smaller companies are possibly getting even more aggressive in terms of orderwins. So that could be possibly because of low capacity utilisation that they have and hence there is more aggressive pricing from their end and the technology gap is not a big differentiator any more. So that would mean that maybe there could be more pressure on margins for more established companies. Your sense on that and the trend that you are noticing if this is something which is happening on the ground?

A: What happened in the market for the past few years is they had reduction in order finalisation. So the smaller companies especially those who also have debt on the balance sheet, they are deep in trouble. So for them to pick an order means whatever is margin available, it will be sufficient for them to be paying salaries and possibly to repay the loans that they have taken. So they are very aggressive in taking orders and even they reduced the price levels in the market. This will be witnessed for some more time.

Till such time you see a generalisation of orders happened that everybody is getting orders. So this phenomenon, which is happening is not that they have a technology advantage, the gap is lower, I don’t believe in any of that. There is certainly a technology gap between larger and better companies and smaller companies and their ability to execute orders.

There is a desperation prevailing because if one were to get into the interiors of India where supply chain for larger companies are in existence, the job losses are phenomenal and there are companies, which have shut their shutters also. So in that kind of a scenario, I don’t think it has come into the public, if you go to a place like Trichy, where a lot more of suppliers for the power industry are placed, many of them are shed manpower by 40-50 percent. So this is a scenario prevailing. In such a scenario, smaller guys -- their ability to hold on and to stay put is much lower. So they succumb to any kind of a price level and they become very aggressive.