See some improvement in capex, but not a jump: Thermax

While the market expects capital expenditure (capex) to soar given the current sentiment post state elections outcome, MS Unnikrishnan, MD, Thermax does not see any significant improvement. India's main opposition party, Bharatiya Janata Party (BJP), which is widely perceived as being more business friendly, performed well in state assembly elections. It won in four states Delhi, Rajasthan, Madhya Pradesh and Chhattisgarh.

Another factor that would give a boost to capex is positive global cues as one is seeing recovery in counties like China, Japan and the US, he told CNBC-TV18 in an interview. “The lifting of these three markets will have a trickle impact on India also. Irrespective of the election results, we will benefit from the positivity in the global markets,” he said. Meanwhile, speaking about the latest happenings in the company, he said the company is hopeful of stable third quarter and is likely to see an improvement in performance in the fourth quarter (Q4). Unnikrishnan further added that the company’s margins are unlikely to improve in the second half of this financial year unless orders pick up. In Q2FY14, the company had reported a standalone sales turnover of Rs 1,043.27 crore and a net profit of Rs 30.17 crore. Its standalone sales turnover was Rs 1,192.38 crore and net profit was Rs 91.06 crore for the same quarter last year.  Recently, Thermax conducted an analyst where it said that the management’s focus is on cost curtailment. Below is the edited transcript of MS Unnikrishnan’s interview with CNBC-TV18 Q: The big theme in the market after the state elections got over is that confidence maybe coming back and over the next five-six months there might be a big jump in industrial capex. Do you think that argument is simplistic and in reality would we have a jump in capex going forward? A: There will be an improvement in capex. Jump is not the right word. Jump is something when you talk about a planet reach going to happen. It does take a much longer time for a capex cycle to be catching back to the jump level. A reversal is expected based on the current sentiments prevailing in the overall Indian market because of the very positive reaction to the election results and confidence building happening that we will recover. Secondly, global recovery is also on. We can see that happening in Japan, China and America and the lifting of these three markets put together will have a trickle impact on the overall industrial economy of India also. Naturally irrespective of election results, you certainly will have a positiveness prevailing in the global market and India cannot be isolated from that. Added to that is what we are expecting four-five months down the line. One more negative is removed. There is a possibility of a stable government for India. If that be the case with the global cues in positive direction and positive government in the country we should have an improvement in the capex cycle in the country. In my opinion, you should see FY14-15 as an improvement year for everybody. Q: You also did hold an analyst meet recently which a lot of analysts were surprised about because they did not really understand why since everything was status quo. Some of the analysts were actually surprised on why the management stated during the analyst meet that they would need to invest in new capacities if in case there is an upturn that does materialise. Can you just give us more perspective on any sort of capex that you would be investing in or you would start investing in? A: Let me clarify related to why did we conduct an analyst meet. First of all, there had been too many requests from the analysts. I would have had to spend virtually 10 hours per day for next one month to meet up with everybody. To avoid that complication, I called everybody to Pune. There is no other reason for us to be conducting a meeting. As far as the capex is concerned, I mentioned that we have identified international markets where we want to be making a difference as a relevant player. Southeast Asia, Middle East and Africa are those three markets where we are going to be moving from an export model to a capex model, which means localisation of activities. What are activities that we would be localised in these market are actively would be decided depending upon the market demand. So, we would need capex for that purpose, but that may not be a huge capex. Thirdly, I had also mentioned that we already have created capacities which are sufficient to take care of the growth path we are anticipating in the next two-three years time. However, if India were to really have jump the way somebody has mentioned earlier then I may need to be investing further - we are ready for that and we have the money available. Q: The brokerage report says that for captive power the inquiry levels remains high, but ordering is sometime away. How much time away? What really is the difference? What is going to translate these inquiries into orders? A: When people find that it is cheaper to be generating electricity within your premises and consuming it rather than buying from outside - for example, my own company buys for the commercial premise of my company, which means office of the company electricity at near to Rs 10/unit of electricity. For my Gujarat and Pune factory our tariff is above Rs 8/unit of electricity. If I could have had a critical mass of our requirement, means a 10 MW and above, I would have personally go for a captive power plant and unfortunately I cannot because my demand is only 2 MW. Anybody who is buying electricity at Rs 8/unit should ideally go for a captive power plant. That is where my thinking is, inflection will happen over there. Second is the delay in the decision making related to power capacity creation, which has happened for the past 18 months, no substantial ordering has happened and this is going to continue for another one year. This 24-28 months of inaction of Indian power industry is going to result into a shortage of capacity of electricity as India is going to turnaround. There will be shortage of electricity in 2015-16-17-18 unless otherwise something miraculous happens. That is the time when I would believe that Indian investors will have to go for captive power and that will be specific for those who need steam plus power, which is called cogeneration. My expectation is that more than captive there is will be lot more of cogeneration going to happen in Indian industry and timeframe would be 2015 onwards. The pinch is not felt by people currently because with the degrowth, there is surplus electricity available in the country at this point of time, but things will change once you turnaround the economy. Q: How is this quarter looking as compared to the quarter gone by which was quite difficult for you considering that the profits eroded 67 percent on a Year-on-Year basis and total income also fell over 10 percent? A: On the bottom-line there was an incidence in the last quarter where we have provided for something, so that 67 percent reduction is on account of that. Otherwise, I would expect a stability in the current quarter and possibly a betterment in the quarter after that.