New govt must ensure more investor-friendly norms: Thermax

Thermax has been facing the brunt of the slowdown in the infrastructure space.  The company’s order backlog has dipped by -13 percent CAGR from FY11-FY13. Thermax’s turnover has de-grown consistently for the past 8 quarters, including 4 quarters of double-digit de-growth. The company’s consolidated EBITDA margins have dipped from healthy levels of 12 percent in FY09 to 7 percent in 9MFY14E.

Unnikrishnan said the capital goods sector has seen 27 percent decline in order inflows. He feels the new government should bring policy-conducive environment to ease land acquisition. There’s a need to cut down on the number of clearances for projects and interest rates should be lowered to prop up the investment climate, he added.

Vinayak Chatterjee, Chairman of Feedback Infra said that despite the Cabinet Committee on Investments (CCI) having made announcement that they have clearing projects worth lakh crores, the corporate feedback indicates that projects have not yet started rolling, and are stuck at multiple levels.

He feels the new government can do a lot. “There are clutch of decision, action, imperative that are waiting to happen. So we are waiting for strong leadership to make that work such as setting up a ministry for infrastructure,” he said.  

Referring to the current way of functioning, he said: “In Delhi today, there are 16 ministries that are directly involved with infrastructure development in the country. If you add on top of that Planning Commission, PMO and Cabinet Secretary including the CCI, you have got 19 different silos that are attacking the problem and then you multiply that by 29 state governments, who themselves will have another 16 departments under them. So, you have got an incredible matrix of a tangled web of permissions, clearances, logjams and that has been the single-most important item for discussion in the last two years of the UPA II.”

He feels the new government should create a dedicated ministry for infrastructure whose job would be to untangle and push the agenda.

Echoing his views, Unnikrishnan said India has six ministries for industry against one-ministry norm seen globally.

Year 2013 has been, in particular, a bad year for the infra sector. Economic slowdown, high current account and fiscal deficits, have severely constrained government’s ability to undertake fresh investment in the sector. Sectors like roads and power have suffered the most.

The earlier envisaged target of $1 trillion investment in infrastructure sector during 12th Five-Year Plan (2012-17) now seems difficult to achieve.

The road sector has been plagued by problems like delay in project clearances. Progress on national highway stretches awarded under BOT has almost got stalled.

For power sector, generation capacity continues to grow, but the availability of coal is a serious challenge.

Below is the interview of MS Unnikrishnan, MD, Thermax and Vinayak Chatterjee, Chairman, Feedback Infrastructure Services Private Limited, with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: It has been tough times that you yourself seen in the company a de-growth in margins over the last many years, from 12 percent level that you enjoyed in FY09 and now about 7 percent in the nine months of FY14. As a member of India Inc, what would you like or want the new government to bring to the table which could perhaps solve the problems that you are facing?

Unnikrishnan: The new government will have to make the investors both domestic and international, feel that India is a destination where it is worth investing. The fundamentals are right for India, we have got a fairly large market existence, good consumption going on, 65-68 percent of the economy comprises of domestic consumption, not export and a lot of laxity and unavailability of infrastructure – that means there are lot of opportunity.

So, we need a government which gives confidence to investors that their investment is safe and decent returns are available and the government is here to support them rather than challenge them and put roadblocks - that’s at the top level.

Coming down to the earth level, we need to be very clear that policy support is available for supporting the investment rather than cushioning investment, which means conducive atmosphere to be created for land acquisition. All the governmental clearances which are 21-22 because India is rated almost 134th in the list of ease of conducting business in the world which we have to come to double digit number, not a triple digit number, which means the way the government is going to be giving a handholding for an investor so the policy corrections needed over there.

The most important - environmental activism in the country going beyond a level; I am not against environment protection. I am for it because one of my businesses is only to support environment protection but fundamentally a balance between growth of economy and environment is going to be taken as an arbitrator by the government of the country. So, that is the next item.

Making available funds at a rate which is compatible with investment the way it happens in the rest of the world. You cannot be having 13 percent interest and expect that you will have investment happening in the country. These are the fundamentals which are starting on, a lot more is there as we go we can talk about it but fundamentally a reversal of sentiment is what we are looking forward to.

Latha: Have things improved on the ground, something deferral of road developer premia and tariff hikes for power companies. Is the situation better enough to say that we are passed the worst?

Chatterjee: Not yet. I think on the ground rubber has not yet hit the road in spite of all the announcements that we are seeing about the cabinet committee on investments having cleared so many lakh crore worth of projects. My dipstick with many capital goods suppliers as well as financiers and project developers, have not in any sense given a degree of comfort that projects have started rolling. So, they are stuck somewhere else.

However, the only sector that seems to be seeing a little bit of an uptick is coal thermal because the coal shortage fear syndrome has gone and many of the Discoms are getting reset with tariff increases and the restructuring package and we do know that both the public sector with NTPC, with state governments as well as many private projects in coal thermal that were stuck have once again revived their projects.

Latha: When I asked a group of CFOs what exactly do they want from the new government? I got a very strange response. The response was what can the government do different in June. It is the same slow disentangling of things and there will be the green lobby, there are the courts in the Lokayukta and there are state governments. There was a despondence that what at all can change six months down the line. What at all can the new government do different. How would you answer that?

Chatterjee: The government can do tremendous -- I do not see any reason for despondency. There are clutch of decision, action, imperative that are waiting to happen. So we are waiting for strong leadership to make that work such as setting up a ministry for infrastructure and I will tell you why – the biggest problem as you can see and what you have been questioning and discussing on your channel is cabinet committee on investments. That was item number one. What does it address? It addressed the issue of tangles and logjams that need to be untangled.

So, in Delhi today there are 16 ministries that directly are involved with infrastructure development in the country. If you add on top of that planning commission, PMO and cabinet secretary including the CCI, you have got 19 different silos that are attacking the problem and then you multiply that by 29 state governments, who themselves will have another 16 departments under them. So, you have got an incredible matrix of a tangled web of permissions, clearances, logjams and that has been the single most important item for discussion in the last two years of the UPA II.

So, what can the new government do? The new government can instead of creating transient organizations like the cabinet committee on investments, why cannot the country finally have a ministry for infrastructure whose entire job 24 hours a day, 365 days a year is to untangle and push the agenda. Japan has a ministry for infrastructure, Israel has a ministry for infrastructure and France has a ministry for infrastructure. So, that would be my number one item on the agenda and there are many other points.

Sonia: On the ground Mr. Chatterjee says that things have not improved at all. You have faced a big brunt of that; your order backlog has dipped by close to 15 percent compound annual growth rate (CAGR) from FY11 to FY13. Have things improved at all even marginally on the order front and in terms of an order inflow, how much of a run rate can we expect going ahead in FY15 from Thermax?

Unnikrishnan: Vinayak is right that on the ground there is no change. On the contrary past two years we have been seeing a deteriorating scenario for order intake. Thermax is an exception on account of the fact that we have had some orders come in from certain quarters both from within the country and outside the country, so in the current year you might see an improvement in Thermax’s order carry forward, order book and order intake but Thermax is not an example for the entire industry, so since I am also heading the capital goods sector for CII, let me give you the numbers from there.

The entire order intake has come down by 25 percent for the capital goods sector in the current year and order carry forward is going to come down by approximately of 15 percent which means there is going to be a continue degrowht for the industry for the next year too. So, Vinayak is right in telling what he has mentioned about. I do not expect anything to be turning around despite what he mentioned on the coal based thermal sector. Barring the NTPC tenders, which are already in the market, I am not going to vouch for a major improvement in the power sector either because what we plan for the 12th Five Year Plan is 100,000 Mega Watt to be installed or maybe ordered out in a period of five years which means 20, 000 MW per year may be orders.

In FY13-14 we have seen 6700 MW worth of ordering happening. A year prior to that 12-13 we had 5500 or 6000 put together. So, there is already a backlog of approximately 30,000 MW to be ordered in the first two years ’12 and ’13 put together. Going forward I am not seeing more activity in a market related to enquiries coming out, tenders coming out and discussions going on and finance getting tied up for the power sector to be picking up.

I do not think on the ground level UPA or the bureaucracy had been able to move an inch related this and I fully endorse his view that even for energy we have got six ministries in the country whereas normally in any developing or developed world you will have a single ministry; you have got ministry of coal, you have got ministry of power, you have got ministry of oil and gas etc.

Fundamentally, we need to be having, like the way he mentioned about the single ministry for infrastructure, another for energy if you want to have a traction happening at a faster pace.