MS Unnikrishnan, managing director and chief executive officer, Thermax talks to Priya Kansara Pandya about how Thermax is committed to deliver even though the economy is struggling to grow and how the power equipment industry will continue to face challenges. Edited excerpts:
How do you see order inflows panning out in the second half and full year FY13?
In the first half, our order intake has been around Rs 2,500 crore on a stand-alone basis. The second half should be similar to the first half. But we will certainly book more orders in FY13 and should cross the order book of the previous year.
Are you seeing anything concrete happening in terms of order discussions, negotiations or finalisations?
The bold moves by the government in the past couple of months despite political difficulties are commendable. There is no improvement in order finalisation in comparison to what was prior to the changes initiated by the finance minister and what is currently there. However, the inflow of enquiries has increased, though I am not seeing a frenzied pace in order finalisation. We certainly do not see any green shoots in terms of order inflow.
So will FY14 be another bad year for order inflows?
I do not think India can afford to slow down any further. I expect India to grow at a better pace, next year. But for the momentum to catch on, it will take time as any policy change cannot be acted upon by the industry overnight. Overall, I expect FY14 to be better than FY13 for the order book as well as for revenues. One should also recognise that many companies do not need policy support from the government since 65% of India’s GDP comes from consumption.
Which sectors are seeing or can see a revival going ahead?
In the cement sector, I expect orders to start getting finalised in FY14 because capacity utilisation of cement companies has improved and their profitability is better compared to the past. The oil and gas sector will also catch up in FY14 compared to the stagnation of FY13 due to possibility of two more PSU oil companies declaring their expansion next year. As regards the steel sector, I am not expecting a revival beyond some brownfield expansion in the near future. Food processing continues to see expansion and new investments. There are new medium sized engineering organisations being set up across the country.
The only laggard is the power sector where nothing substantial is going to happen and I am not expecting any turnaround even next year. However, the shortage being faced in many states across the country will compel the revival of captive power generation in the coming year led by medium power consuming sectors (new clients) like tyres, textiles, chemicals and pharmaceuticals. This augurs well for our captive power segment, which forms about 30-40% of our entire revenues including EPC.
You have been bidding aggressively for large orders but are confident of double digit margins? How will it happen?
I did not mean that every quarter we will be delivering double digit margins. We are struggling and we will attempt to deliver a double digit margin for overall fiscal. It will be a result of multiple actions like belt tightening, a lot of innovation to contain costs and a favourable product mix across our portfolio. Then we also have international orders (27-28% including subsidiaries), which will benefit from rupee depreciation. Also, part of the burden will have to be borne by our suppliers since not everything is manufactured by us.
Your boiler plant is ready but you have not got any orders? Wouldn’t that strain your balance sheet?
We will be incurring an establishment cost to the tune of Rs 100-120 crore of which our share will be 51%. We can utilise this facility for our industrial boiler segment, should there be an improvement in the parent company’s order booking. Besides, our American JV partner can also utilise this facility if it gets an order for manufacturing or engineering. It shall be our endeavour to minimise the losses of this joint venture.
In any case, the JV was not expected to turn profitable for the first three-four years, which is applicable to any new player setting up a supercritical boiler facility. In the current circumstances, there could be a minor delay of one or two years to reach break even. One should remember that this joint venture facility is intended for a life span of at least 40 years and will return the investment manifold in its life time.
Do you expect any improvement in Indian power equipment industry scenario?
At present, all power equipment players in India are finding it difficult as the sector has certainly some major issues to be addressed in the short term which could take anywhere from one to three years. The sector faces issues such as land acquisition, funding, fuel pricing, tariff revision, sectoral banking limit exhaustion etc. Only when all these issues are satisfactorily resolved will you find the power equipment sector taking off. However, it cannot become any worse.
What about the international power equipment market? Is it any better?
The international market is witnessing even tougher times. European capacity is available as surplus for the entire world as their economy is declining. They make high quality equipment which was not affordable by the rest of the world earlier. But now they are willing to bring down their prices to earth levels. Then there is huge capacity in China and the industry there is growing only at 7-8% as against expectations of 10-11%. So there is surplus capacity available there too, making export of power equipment out of India a tougher task.
