Thermax is a leading company engaged in the manufacture of capital goods mainly in the areas of energy and environment. It also undertakes turnkey projects in the areas of waste heat management, pollution control and captive power plants upto 100MW. The company has a strong technology base. Over the years, what started as a boiler manufacturing and equipment fabrication firm, has diversified into air conditioning, refrigeration, waste heat recovery, pollution control and turnkey project contractor. Recently the company has tied up with Allied Signals of USA for sourcing microturbine technology.
The last couple of years have been bad for the capital goods sector. To quote from your annual report: there is a "severe drought in green field projects". There has been a lot of talk on the signs of revival in the economy in the 1QFY00. Would you comment on the same?
Capital goods manufacturers are still finding it tough because of dearth of demand. Recently as a member of CII Capital Goods committee, I had opportunity to meet other CEOs in the capital goods field and the tune is the same. There are very few, if any, new projects coming up. Primary market for equity is virtually non-existent. Indian industrial groups are not planning fresh investments in new projects ? their mood is that of consolidation. Investments in new projects are mainly from the MNCs. Even where projects have been developed, financial closures are proving to be elusive. FIs are now finding it difficult to get good proposals for their lending. There has been some talk of revival of the markets but this is happening in specific sectors like cement, cables, sugar and a few more. Moreover, given the very few prospects, competition is fierce. This in turn is bringing the worst of price wars.
What do you think are the reasons for this downtrend?
I believe there are two main reasons for the downturn that we have been witnessing:
Companies are realizing that there is a big difference between protected markets and open markets. In open economies competition is global and one cannot plan growth without taking into consideration global market realities. As a backlash we are witnessing some lack of confidence and some moves for consolidations.
I see Thermax?s long term growth coming in from the following two areas:
You are very optimistic on the potential of micro turbines. Could you discuss for the benefit of our readers the concept of micro turbines, its applications and benefits and potential in India?
We have done some research on the market potential for micro turbines in India in the range of 50KW to 1MW. North American Industry Association Classification lists 67 sectors, which can potentially use the micro turbines in the above range. We found that there are 244,000 such establishments in India in this category. We did a market survey with 600 of these establishments. Today it is a new technology and costs are high ? each machine would cost about Rs. 25 lakhs or so. 50% of the surveyed customers were willing to buy based on the product features. Nearly 1/4th of them were still serious potential buyers in spite of relative higher initial investment. Our assessment is this new technology will get absorbed in the market at the rate of around 5000 units per annum. Our beta trials are on for this year. We feel we have a good product technology platform for commercial and light industrial sector.
Thermax?s mainstay of the business has been the medium sized companies. These are some of the worst affected companies in the current downturn. Will Thermax?s focus on its clients shift? If so can you discusses Thermax?s strategy in light of the above?
You are right when you say that our mainstay clients mid industrial sector, some of these are very significantly affected in the current downturn. Some of them of course continue to do well like pharmaceuticals, food and beverages etc. We are witnessing some shifts from this traditional demand base to commercial sector i.e. hotels, hospitals, IT establishments, cinemas, shopping arcades, etc. I also mentioned earlier that in our existing base we are focussing on the market leaders and stable companies. There is also a shift from industrial to infrastructural demand. We are focused on water and sewage recycle segment in this regard.
The big opportunity is in exports. Right now our strategic tie-ups are getting in place. Our chemicals and absorption chilling business is doing quite well and we have been exporting to USA, Europe and the CIS countries.
Moreover, energy and environment business will have excellent opportunities, once the implementation framework for Kyoto protocol is in place. The protocol has already been signed by 160 nations. With increase in carbon dioxide content in the atmosphere (from 17 billion tons to 27 billion tons in the last 8 years), the Eco system is being extensively damaged. Consider a single issue of conventional electricity generation. When we generate electricity using fossil fuels in central thermal plants, the overall efficiency of generation and distribution is of the order of 20-25%, whereas with simple Co-generation the system efficiency is as high as 70%+. Such gains will have enormous impact on carbon emission. Supported by the carbon emission trading and Clean Development Mechanism, the demand for such systems is bound rise exponentially as is happening in Europe. Thermax is uniquely poised with its heating, cooling, power generation and recycle (energy and environment) technologies to tap such demand. We no longer treat energy and environment as separate issues but single focused issue concerning our eco-system. We believe that by providing solutions to global warming, we will do well for the future generations as well as our shareholders. With this purpose, we have decided put all our energies into energy + environment businesses and to get out of all businesses that are unrelated.
With this perspective we are bound to find needs of our existing customers in terms of shifts from lower energy efficiency level to higher level, higher energy intensity processes to lower intensity ones, and from higher carbon emitting fuels to lower ones. To address to these needs we have to get closer to our customers and to partner them in their improvement endeavour. We are realizing that in many industries multifold improvements are possible. To give you an example: take the textile industry, where dyeing and printing takes place. For dyes and colors, water is required and to dry it, heat is required. Thus, one discharges effluents and consumes large quantities of energy. In a recent exhibition in Paris, we saw textile printing equivalent to inkjet printing. The colors are applied in dry form electronically ? no use of water and minimum use of electricity. Thus, the conversion process is supremely efficient.
Our biggest challenge is to inculcate this culture in our 3,000 odd employees and create a spirit of missionary zeal. We should no longer approach our customers with an objective of securing his order; but to deliberate with him how we can improve his process, help him save energy (really his costs) and precious resources. We are presently developing a business of energy services that is based on this very approach.
Last time when I met you, you had mentioned that very often you get offers to buy out companies. Has the same changed? How has the competitive landscape changed in the current downturn? Also in light of your strategy outlined before, who do you think are your major competitors?
We still get a good number of offers to buy out companies that compete with us. But you have to understand that while fighting for limited market, many of us have brought our prices down which is causing downfall of many companies. The truth is we cannot drop prices if we can not drop our costs. In the last 18 months, our manufacturing unit is fully focused on cost reduction projects - much has been achieved but a lot more is needed. Further with cycle time reduction, our effective capacity has gone up considerably. Thus, without adding to capacity, we have enhanced our delivery capabilities. Given this situation acquiring companies that failed to achieve cost-competitiveness and that would add only to capacity, is not attractive for us. Now what we are looking to is to add to our existing competencies and capabilities. If an acquisition gives us access to technology and/or markets, then we will go ahead with it. With this objective, currently we are studying a couple of companies (both in India and abroad).
However, in the longer term, we would like to change from being just a competitive product/project company to a company that can effectively work in partnership with its customers. And I believe that the potential of this is so vast that there is no reason to talk of competition. Rather we all will need to collaborate. Tomorrow?s challenges like global warming will necessitate that we along with our customers and competitors work together for addressing to them.
What is the present order backlog and how does it compare with the same time last year? What are your expectations of current year performance?
The current order backlog is about Rs1.5 billion ? somewhat less than what it was at the same time last year. We expect that this year?s revenues will remain flat. However, since financial closures for our project divisions are delayed we will certainly get affected when it comes to this year?s profits.
Your big hope has been the Cogen orders. What is the current status of the various orders?
We have three orders for gas turbines based IPPs and a sugar Cogen IPP. But none of the projects have achieved financial closure yet.
Do the restrictions on imports of second hand machinery in the last Exim Policy benefit your company in any way? Recently Maharashtra government has banned the setting up of captive power plants. Do you see the government putting similar restriction to the installation of micro-turbines?
We are not too much anxious about the import of second hand machinery.
As regards captive power plants we have serious concerns on the present policies getting evolved. Government?s desire to protect interests of SEBs is quite understandable. But if technology like micro-turbine (especially in Cogen and Trigen mode) presents opportunity for sustainable development then the government should carefully study and in consultation with industry take steps that are pragmatic and not parochial. I am quite certain that ultimately short-sighted policies will be short lived since environmental challenge will over ride all other priorities.
Going forward what are your capex plans? You have a fairly large investment portfolio in excess of Rs. 100 crores. What are your views on pruning your portfolio and returning money to shareholders by way of dividends or buy back?
We do not have any major capex plans as of now. Our investment portfolio has grown because apart from our share premium reserves we have added a sizable amount due to ploughing back our profits in the last couple of years. We have evaluated the two options that you mentioned:
Buy back of shares: We do not see this as a desirable move as this will mean only the floating stock will decrease. Higher dividend payout: We have followed a conservative but consistent policy of dividend payout. Incidentally the core promoters ? the Aga family, are the largest shareholders and they are not interested in higher payout. Instead they are keenly interested in building Thermax as an institution.
We have plans for the use our investment portfolio in terms of strategic acquisitions and for leveraging it manifold to enhance our businesses like BOO/BOOT projects.
There has been some major restructuring within Thermax, with Mrs. Aga relinquishing executive responsibilities. What has been the main aim of this reorganization? What would you think would be the major impact on the company and how will it change the way Thermax conducts its business? Would Mrs. Aga?s pulling out of day to day management a prelude to the family selling out its stake in Thermax?
Mrs. Aga has always been involved with the company initially in HRD function. After Mr. Aga?s death, she took on the mantle of executive chairperson while I became the Managing Director, and as such we operated in matrix set-up at the highest level. After the initial disturbance, we now have stabilized operations. Thermax has always been a professionally managed company though family owned. Now we wanted to send out a clear-cut message of one decision center in the company. Hence, Mrs. Aga decided to assume the role of a non-executive chairperson leaving me to head the company as Managing Director and CEO. In some more restructuring moves, Mr. Girish Trivedi, our erstwhile Director (Finance), moved to Thermax Babcock (TBW) as Managing Director and the TBW chief - Mr. Prakash Kulkarni moved in as Joint Managing Director in Thermax to look after our Chinchwad plant and core energy divisions.
The question of Mrs. Aga selling out is asked to us at regular intervals. There are people who have approached us saying that they are willing to buy whenever the Aga family decides to sell out. But let me clarify for the nth time, that there are no such plans of Aga?s selling out. In fact, as you may be aware, that Mrs. Aga?s daughter and son-in-law are presently working in Thermax as directors looking after few business areas.
What is the present shareholding pattern?
The Aga family holds 64% of the shares. They along with their close associates and company senior executives hold about 70% of the shares. The balance is distributed widely.