Order inflow may improve post FY13: Thermax MD

Capital good maker Thermax expects its order book to strengthen in FY14 as investment cycle in various sectors is pickng up gradually.

The Pune-based company saw a sharp fall in profit and revenues in Q3 on the back of slow moving orders in an unfavourable business environment. While company profit declined 20 percent to Rs 76 crore, Sales too dipped around 19 percent to Rs 1029 crore
In an interview with CNBC-TV18, MS Unnikrishnan, CEO and MD of the company said that despite a challenging macro environment, Thermax's order booked more than doubled to Rs 1280 crore, YoY.
Orders from power sector may be difficult to come by, but good order flow from food and oil and gas sectors cannot be ruled out, going forward. Below is an edited transcript of MS Unnikrishnan's interview on CNBC-TV18

Q: Revenues are down about 19 percent, does it still remain a difficult market for you?
A: It is a very difficult market. It is not such a bad result, the way one should look at in terms of capital goods industry. You are seeing the results of various types of industries. I belong to capital goods industry and one of the core in that is, to be specific. There are plusses and there are minuses. First minus is overall sales lower by 18 percent plus for the quarter.
We had been able to retain our profitability in double digit despite a reduction by this kind of a number. When you have the top-line contracting by 18 plus percentage, you may have the profitability dipping into single digit. We have been able to manage our operating margins and have reported a10.6 percentage profitability also, but this is a reduce number, point one. Also Read: RBI's proposed loan recast norms decoded; impact on banks
Next, the order intake is more important for capital goods industries because what I have delivered in the current quarter was already sealed as my fate almost a year back in terms of the intake of orders. The gestation period for a capital goods order to be revenue recognised is anywhere from 6-18 months period. So, when we had an order intake of only Rs 590 crore in the quarter, Q3 of last year, it is already known that I am going to have a reduction in turnover in the current quarter.
You need to look at how much have we been able to book in the current quarter. As against Rs 590 crore in the last year's Q3, we have been able to manage Rs 1,280 crore in a very tough market, which is almost double than what we have booked in the last year, which will positively reflect on the balance sheet of Thermax in the times to come, about two-three quarters down the line, so that is positive.
Also, we are seeing some traction happening on the ground level in the standard products because Thermax's balance sheet should be understood in two different ways. First is the quantum of orders that I have been taking, which are of larger projects and how much I am getting for the conventional products of the company. So in the conventional products there is no dip at all even in the current quarter. However, the larger and medium-size projects, which are a ticket size of maybe Rs 50 crore, Rs 100 crore, Rs 200 crore are not happening in the country.
Despite all the good things done by the government in the recent past ground level traction and sentiment reversal, converting it into order finalisation is yet to happen. I am not saying that it is not going to happen, but it is going to take time.
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Q: The concerns on your company are multifold, both in terms of the fact that inflows have been quite low. There have been deferrals in the power sector. What can you lay out in terms of an outlook even for the first half of this calendar year in terms of how much you think revenues will pick up by, the order book will increase by and what kind of profitability it may lead you to achieve?
A: Let me take on the order booking first – I am expecting an improvement in the order booking in the coming year – infact in the current year itself – I am talking of a financial year I would be booking much more orders, as at this point of time fresh order intake for the first nine months of the year is better than the previous year and I am expecting it to continue for the next year as well.
The sectors where I am expecting an improvement is oil and gas, food and food processing. Cement sector will start placement of orders beginning next year, so Q1 and Q2 put together. So, there are some sectors that are looking up.
And even on steel sector, I am not talking about the composite large steel mills, I am talking about the medium-size ones, expansion programmes are already on the anvil. So all this should help me for an order intake improvement. To discriminate my first nine months order book between domestic and international – domestic has been almost stagnant or maybe a single digit improvement, whereas for exports, we have been able to increase our order book by almost 15 percent.
I expect this to continue into the next year also, the efforts that we have taken in and the stability that we are seeing in Southeast Asian, Middle-East and European market should be helping me to have a better international order booking. Overall, Thermax should be able to improve the order intake in the next year, point one.
Also, I will be entering next year with almost similar kind of order carry forward or order book as what we had last year. With similar static order book, when you enter the new year, I don’t expect that I am going to be delivering a huge growth in the first half of the coming year. It could be almost at the same level or marginally better.
On profitability, we are working towards ensuring our profitability is retained and maintained. In a depressed market situation, to improve profitability is not the first priority of any company, to retain and maintain the profitability is what our aim would be. I am confident that we should be able to deliver that as well. Q: On that front, you have sacrificed margins of about 140 basis point (bps), down from 10.8 to 9.3. Do you see further shrinkage there?
A: I would want you to make a correction over there, part of the other income that you see are also interest earned by the company on the advances available. So when you do the costing of a project, you factor-in a cash flow, whether I am funding a project or it is a customer funding a project. If I could correct that way my margin shrinkage overall is not the numbers that you mentioned.
It is approximately 0.4 percent, 40 bps - that is expected. I am not expecting it to shrink further, because there are visibilities in the market and the prices have almost reached a bottom level. Below this I don't think even competition will be able to accept orders. So, I don’t expect a further shrinkage of margins. Albeit you can always in a quarter maybe of 50 bps or 100 bps, overall for a year-to-year basis we should be able to retain a double digit margin.