PUNE: With the domestic order pipeline virtually drying up and the Union Budget bringing little cheer to domestic power equipment companies either, energy and environment solutions company Thermax is readying itself for difficult times. Thermax derives about 84% of its revenues from the domestic market and close to 80% from the energy segment. So, the crisis in the power sector has hit Thermax hard, just like it has some of the bigger names in this space, such as BHEL and L&T.
Thermax MD & CEO MS Unnikrishnan admits the industry needs to tighten its belt. Unnikrishnan says he has personally spoken to all people in his organisation in batches of 100 to 200, explaining the global markets, the macroeconomic situation and the Indian scenario as he wanted them to be prepared for these difficult times. “We will have to function together so they need to have ideas of how to deal with this situation,” says Unnikrishnan.
During Q3 of this fiscal Thermax posted just a 2% rise in revenues while profits were down 5%. The group order backlog was down 23% at R5,809 crore. Thermax told analysts that order finalisation was hit because of elevated interest rates and deepening fuel crisis and it was likely to be muted for the next one or two quarters so revenue growth were tough to deliver. The management has been selective in picking orders but if the situation persisted few more quarters they could sacrifice margins in order to cover fixed costs.
Nitin Arora, research associate with Angel Broking points of this is what BGR Energy did recently and it bagged orders worth R10,000 crore from NTPC. They were aggressive in the bidding but their margins would be lower but they did manage to get orders in this kind of a market, says Arora.
But BGR is an exception and most of the capital goods companies are in the same league as Thermax, says Arora. There is no decision making happening nor is there any clarity on the fuel issues so no new projects are taking off in the power sector and Thermax is very dependent on industrial capex and if that goes down so does Thermax hence revenue and earning prospects do not look great, points out Arora.
Unnikrishnan says this has not affected Thermax’s overall investment plans and they will continue to create capacity. “There will be no containment but we will be re-prioritising. It will be based on inward cash flow. Investments will continue in a calibrated way,” Unnikrishnan adds. So for Thermax more investments will be on projects where payback period is around three years rather than what the company did in the days when we did expansion for 10 years.
The power equipment JV Babcock and Wincox Co is among the biggest investment for the company. The R850 crore JV plant near Pune for subcritical and supercritical boilers is getting ready. The new performance chemicals unit in Jhagadia, Gujarat started commercial operations, a plant for air pollution control equipment manufacturing is coming up at Solapur with investments of around R30 crore and Thermax is putting up a plant in Baroda for expansion of the standard medium-size boilers that run on multiple fuels to tap growing demand from the market that is looking at reducing dependence on coal-fired boilers. Angel Broking’s Arora says while the new JV plant is slated to get ready in September this year but has not yet got any orders which is a cause for concern.
Thermax is planning to reduce dependence on domestic markets which is not growing much by focusing on exports which currently accounts for about 16% of its revenues. “We are focusing more on markets outside India where there is a sizable market. We are in low single digit market share of 2% to 5% in these markets. So there is opportunity to do more,” says Unnikrishnan.
“Over the years, Thermax has commanded premium over its peers in capital goods space due to its excellent return ratios and strong balance sheet — owing to excellent working capital and stable operating margins. However, due to current persistent slowdown we expect both this levers to be under pressure. Thereby we believe that the premium commanded by the company in past would fade away,” says an Angel Broking Report on Thermax report.