A heat recovery steam generator. (Photographer: Tomohiro Ohsumi/Bloomberg)

Consumer-Facing Companies Have Led To Order Uptick, Says Thermax

Capital goods or heavy machinery and equipment, a key barometer of economic health, may be showing first signs of a revival.

Capex by consumer-facing companies has led to a minor uptick in orders, MS Unnikrishnan, managing director and chief executive officer of Thermax Ltd., told BloombergQuint in an interview. These industries, pharmaceuticals and food processing in particular, are growing irrespective of economic disturbances due to increased consumption and investments, said the head of Pune-based equipment maker.

Demand for capital goods had remained sluggish as companies were not investing in new projects to expand capacity. Investments in sectors like power, steel and infrastructure had got stuck, adding to stressed assets of Indian banks. Demonetisation and the Goods and Services Tax further disrupted the economy.

Unnikrishnan is seeing some capex expansion in the textiles, alcohol and dairy industries as well, but none in steel, oil and gas and power because infrastructure has been on a standstill.

That may change as the government’s infrastructure and affordable housing push is expected to boost demand.

Good times lie ahead for the construction industry, with schemes like the Bharatmala project. The “trickling impact” of road construction will come next year, Unnikrishnan said.

GST Woes

Thermax’s revenue for the quarter ended September declined as the company missed out on input tax credit. The government had mentioned that input tax credit may be available for one more month, or a grace period of 30-60 days, for various industries, he said. Capital goods industry was an exception, Unnikrishnan said.

Discounting the GST impact, the company’s revenue would have risen 5-7 percent as against a dip of 6 percent, he said.

Watch the full interview here:

Here are the edited excerpts of the interview:

What’s going on the revenue front and on order front?

First, the revenue. The current quarter is an exception for the Indian industry. At the end of June, the government had mentioned that input tax may be available for one more month or a grace period of 30-60 days for various industries except for capital goods, which meant that the entire month went to reset the GST regime. Predominant parts of the industry started billing by the third week of July. The larger companies could start towards the end of July. So, there was a virtual month for majority of companies. If GST was not there in the quarter, then our revenue could have been up by 5-7 percent as against a dip of six percent that we have recorded. Same is the case for everybody barring the construction-oriented companies.

On the order intake side, we are seeing a minor uptick in majority of capital goods companies... But there are segments where investments are happening without much of difficulty. These are customer-based industries and are not much worried by the economic growth prospects, commodity prices, etc. I am also seeing a positive momentum in the cement industry: a couple of new projects being announced, orders being placed and also the waste capacity power generation picking up.

On the order side, some of the consumer-focused industry’s capacity utilisation numbers are higher like automobiles, consumer goods. Cement being the one-off, wherein regional players are adding a bit of capacity.

That’s correct. But I am also seeing a lot more inquiries coming in the cement industry in anticipation of an improvement. But they (investors) are looking at the government’s new infrastructure push, which will be benefiting the steel and cement industries. If they decide to put up a capacity, it will take 28-36 months, which is the three-year period for a cement plant to get ready to commission. So, many are looking at the consistent growth of road building in the country with Bharatmala coming in and Mr (Nitin) Gadkari putting a lot of money into construction.

So, I think there is uptick happening in that industry.I also see a good amount of momentum in the textile industry, alcohol and beverages. An uptick is also seen in the pharma segment, despite worries regarding U.S. FDA (Food and Drug Administration) and share price momentum. Many who have developed their intermediaries and are out of the patent regime, are looking at expanding the capacity because the medical consumption in the country is going up.

Food processing is another industry where I am seeing (momentum), irrespective of what is happening with the economy. There is unabated investment, and many new players are getting into it. Some small-scale industries are becoming medium, and medium scale ones are becoming large scale in investments.

In the dairy industry too, there are 10 ongoing projects. So, the consumer-facing industry looking at the income generation and there is growth, people are creating the capacity. But it is not applicable to the steel industry, oil and gas, and not even for power, as infrastructure-oriented sectors are at a standstill, but in other areas, the momentum is happening.

Can you break down the contribution to your order book into domestic business and international business? In the cement business, you bagged a big order. By what percentage will your domestic order book increase on that order?

The quantum of order intake was Rs 1,397 crore, an increase of 14 percent. Of this, Rs 692 crore has come from the domestic market and Rs 705 crore from the international market. Domestic order book, for a change, has seen a growth of 20 percent, as from the past four quarters, we were seeing a stagnant or negative order intake.

The cement order you are talking about is not from India but from the U.A.E. for a captive power plant worth around Rs 280 crore for the group. But that is not the only order which has moved the order book. I would say there has been an overall increase in order intake. My order book is more from outside India than from within it: around 50-52 percent from outside and only 48-49 percent from India. Our domain name was Thermax India earlier, which we changed to Thermax Global a year ago. Maybe, the providence is helping us in becoming a global company.

Is the growth in the global order book sustainable to you? Can it improve over the next few quarters? Can you share some outlook on it?

There are two types of orders that we pick up in international business. One is, medium-sized projects – boilers, captive power plants and pollution control equipment. The project sides will be chunky once in a while. But the standard products of our company and the way we have taken initiative to set up a factory in Indonesia and have our subsidiaries created across in India and Southeast Asia, is bearing fruits.

With oil prices fuming up above 50 and touching 60, there is confidence in the Middle East market. I am seeing the momentum in this market for the standard products of the company. So, we can talk about the outlook for the rest of the year as I am certainly expecting an improvement in the order intake for the international market on a yearly basis. I am also expecting something in domestic market. Not that I am seeing domestic order intake coming down but I am expecting a sustenance in the current quarter and in the next two as well.

What are you hoping to close the year by in terms of revenue numbers?

We will be better than the previous year because our orders carried forward are far superior than the previous year. Despite all the glitches in the market related to multiple issues, we have orders on hand and the customers are ready for taking deliveries and projects are moving smoothly. Also, there are not too much of credit issues in the market right now. We will close better than the previous year on both the top and bottom line.

We keep hearing from the government that they are pushing capex. Is nothing coming in from there?

I have not seen anything coming from them. There are three sectors in which they should fuel money. First is the defence sector. Orders are in need of being concluded, investment needs to be flowing in but the money is not coming from the government into these companies. Unless that happens, I don’t see the momentum happening.

Second is railways. A lot of talk has happened but in reality, very little is translated in orders. Third is road building. I should appreciate that the government has concluded projects.

The way they are able to push the construction on the ground level, things are happening in that area which will allow a trickling impact in the cement and steel industry in the coming year. A lot more construction will happen because once we got newer roads constructed, you will have mini cities coming in the array of the road, which is a practice anywhere in the world. It will be a good time for cement, steel and construction industry going forward.

What is your road map because it doesn’t see early FY19 recovery?

I am not expecting to see across-the-board recovery as witnessed between 2004 and 2009. But selectively, there is recovery taking place in the cement sector. For a change, most of the steel companies are seeing positive results. I’ll keep a couple of names outside for various reasons. They are already talking about expansion. I am happy, looking at the improvement in the steel industry, the sponge-iron industry started re-investing in the country. So, selectively you can project growth in the core sector, not in one time as the way it happened earlier, but it may happen selectively quarter on quarter from the next year. But to get back to a generic growth in commodity level, I agree that we are at least 2-3 years away from it.

What is the pricing pressure on projects right now? Do you hope profit margins would be protected?

Margins will be protected in terms of percentage but there are lot of difficulties and lot of work needs to be done. It is a buyers’ market and not that of a seller. Customers have better choices available today, including global ones...

The kind of innovative companies which are resting with the good companies in India, we are resisting that, and the margins are under pressure. But that’s the time when you use the innovation to be able to come out with better solution at a cheaper price. That’s the only way. If you are stagnant, thinking that the actions are being taken, I am sure margins will come down. But we are protecting it by internal capabilities.

Can you give us a sense of how much lower a standard contract would be now than few years ago when things were looking much better?

On the pricing front, prices have not improved. If you have to sell the same product today, as compared to five years ago, prices have only come down and not gone up. Whereas the other issues have gone up, including the labour charges. There is 200-300 basis point challenge in India for capital goods industry right now, which you will recognise on the balance sheet of many companies.

Those who have the capabilities to challenge the onslaught of international companies and also the smaller companies nibbling you from the bottom, they are able to retain the margins. So if you are stagnant in action, like not reducing costs, not rationalising, you will have a reduction of 200-300 basis point. That’s the play going out in market at this time.

Can you give me a percentage growth figure for your international order book and what it will you see in the coming two quarters?

The Indian rupee strengthened from 68 to 65, which is almost nearly 5.5 percent in 8-9 months. If our rupee remains at 68, then we will have a cost advantage in the international market. Whereas many other currencies have weakened across the globe. Indian companies’ ability to get a better margin in international market is not as good as we have seen earlier. Unless the rupee weakens, there is a possibility of improving the margins. But for anybody who is exporting out of India, it may not be workable at this juncture.

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