A slowdown in the execution of projects could hurt the firm’s top line growth.
The Thermax management sees the execution of large projects slowing down in the current tight liquidity environment. That’s why even though the Pune-based firm has a strong order book of Rs 4,253 crore, it believes the weakness in some sectors, such as steel, may see manufacturers cutting back on capital expenditure.
That court hurt Thermax, with the increase in the top line growth slowing down sharply this year; revenues in 2007-08 were Rs 3,204 crore, up 49 per cent over the previous year. That also means the growth in the bottom line could be far more subdued —especially if the notional foreign exchange losses go up — than it was in 2007-08, when the profit after tax was up 46 per cent at Rs 281crore.
However, the performance at the operating level (net of foreign exchange losses) may be reasonably good, because Thermax is trimming costs. The results are already showing — the operating margin in the six months to September 2008, expanded by 370 basis points to16 per cent.
That’s despite revenues increasing by just 6 per cent y-o-y. Some of it was expected because Thermax didn’t bag too many orders last year. The engineering division, which contributes around 74 per cent to total revenues, has seen sales fall by about 7 per cent y-o-y in the first half of this year; industry watchers do not see it clocking the 53 per cent that it did in 2007-08.
As for the environment segment, which grew a robust 57 per cent, that too could take a breather. As such, even though Thermax now has orders aplenty, its customers may want to delay projects in a difficult operating environment, in which borrowing costs have risen sharply.
In the meanwhile, Thermax is paring costs — on both materials and employees and fortunately it had stocked up on some inputs when their prices were lower. That should help it post better operating margins for the year.
