Thermax has no respite from dismal order inflows


The size of the order book and order inflows are both crucial to keep the business going for the manufacturing sector. Capital goods firm Thermax Ltd saw a 19% drop in June quarter order inflows, when compared to a year ago. Worse, FY2017, therefore, started with a 24% drop in the consolidated order book. Further, both domestic and overseas order booking was dismal.

Since the announcement of the numbers, the stock has gone downhill. Explaining that India’s growth will perhaps be driven by domestic consumption and government expenditure, a Morgan Stanley report, dated 3 August, points out that private capital expenditure remains weak, due to low capacity-utilization, over-levered corporate balance sheets, sluggish global growth and, therefore, weak exports.

Thermax’s high dependence on capital expenditure in the core sector such as energy and process industries, where investment is still sluggish, is a risk to earnings.

That is precisely what was mirrored in its June quarter results. Consolidated operating profit of Rs.80.4 crore was about 21% lower than the year-ago period. Although raw material cost as a percentage to sales was a substantial 8 percentage points lower, the lack of revenue momentum dragged profitability down. Operating margin at 8% was lower than what the street expected.

Net profit also slipped, although some of the company’s subsidiaries fared better than expected during the quarter. This shored up the reported net profit, which was however 10% lower than a year ago at Rs.49 crore.

Thermax’s management commentary during a conference call with analysts only ratified that cap-ex (capital expenditure) recovery on home ground would take time. Even when private sector and industrial growth picks up, capital goods such as boilers and other equipment used in power and water projects will gain traction in the last lap of cap-ex cycle recovery.

So, the firm is strategically trying to de-risk its dependence on both the area of business and the country by entering into new regions too. Until this begins to pay off by way of new orders, growth in earnings may hit the rough road.