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Growth and profitability are key drivers of a company's success. With the previous financial year ending on a dismal note, a worried M S Unnikrishnan, managing director of Thermax, is cautious about making any prediction for the next few quarters.
"There is no major improvement in market conditions and the negative sentiment remains. We have to wait and watch. If investments take place in the economy, I will get orders. We are in the capital goods sector, which depends on building new capacities,'' he said.
As with the rest of this sector, Thermax is caught in the middle of a slowdown in the economy. Revenue and profit growth are flat and no new orders are coming to Indian capital goods companies. Margins of all companies have contracted. Hence, the share markets are giving a cold shoulder to the sector. Thermax shares are down 2.8 per cent since January as compared to a 20 per cent fall in the BSE Capital Goods index in the period.
The year 2012-13 was difficult on all counts - drop in revenue, shrinkage in profit and a near-flat order book. With no sign of economic momentum and big-ticket investments, it has not been an encouraging start for the current quarter, too. The company is now banking on an increase in orders from abroad and working on improved product design and innovation to beat the downtrend.
Thermax broadly operates in two main sectors. One is energy, including manufacture and sale of boilers, heating and cooling equipment. The other is the environment vertical, on air and water pollution control. At present, about 25 per cent of the revenue comes from international business and the company hopes to raise that share to 40 per cent over the next three to five years. "That is the long-term plan. It will not happen in a year. Our order booking from the international market has improved. We are also working on cost reduction, value engineering and innovation to ensure we are more competitive,'' said the MD.
For 2012-13, broking houses had estimated Thermax's revenue would fall by eight to 10 per cent and profits by 14-15 per cent. In fact, revenue slipped a little over 12 per cent and profit was down 14 per cent on a standalone basis. On a consolidated basis, the revenue fell 9.8 per cent and profit by a little over 20 per cent.
"We have some advantages in comparison to other capital goods companies. We run projects with short gestation periods. We can also deliver products in four to six weeks,'' says Unnikrishnan.
Though Thermax earlier said it had seen a pick-up in demand from the food processing, chemicals and fertiliser sectors, orders or even enquiries from big-ticket capital-intensive sectors such as steel, cement and power are few.
Analysts say if Thermax is to improve performance, it will have to tap big-size orders. It did well in March, thanks mainly to business from abroad. Order booking was up 45 per cent to Rs 1,155 crore in that quarter, riding to a 100 per cent rise in exports. Order inflow rose 21 per cent on an annual basis. However, the pending order book remains flat - just a one per cent increase over the previous year (Rs 4,878 crore at the end of FY13 as against Rs 4,828 crore at the end of FY12). The company had to scrap about Rs 100 crore worth of orders from its books as these were not moving forward.
Another area of concern, analysts noted, was a 34 per cent rise in debtor days, highlighting the delay in recovering payments. Unnikrishnan said other companies faced similar problems. "Payments are a difficulty. This is the same for all the companies (in the segment),'' he said.
Broking houses are also estimating sluggish revenue growth for the company in the next two years. "FY14 revenue growth is likely to remain sluggish due to a flat year-on-year starting order book. FY15, too, could see a similar fate if orders do not flow in FY14. However, revenue is unlikely to declinem due to sustained demand for the short-cycle product business,'' IIFL Institutional Equities wrote in their march quarter results' analysis.
The report also said Thermax could face margin pressure because of competition and the expected rise in large engineering, procurement and construction orders, which have lower margins.
The company is upbeat about expanding its presence in global markets, particularly Southeast Asia, the Persian Gulf and Africa. The rupee's depreciation will help. "We hope the international business will help us tide over the slowdown in India," says Unnikrishnan.
