Thermax Limited (THERMAX) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Thermax Q1 FY '27 Earnings Call hosted by DAM Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kunal Shah from DAM Capital. Thank you, and over to you, sir.

Yes. Good afternoon. Welcome to the 1Q F '27 Earnings Call of Thermax Limited. We have the management today, Mr. Ashish Bhandari, MD and CEO; and Mr. Arunachalam, Group CFO and Executive Vice President. At this point, I'll hand over the floor to the management for their opening remarks. Thank you, and over to you.

Thank you very much, everyone, and I hope I'm audible. And also thank you to -- for coming into this call, and I'm sure there are a lot of questions. Before I get to the questions, I would like to share my thoughts on what happened in the quarter. A very difficult quarter, felt like was the toughest one, at least relative to expectations for the past few years that we have had, not that we haven't had tough quarters in the past, but this one felt particularly so. I would want to spend a few minutes talking about what happened in the quarter, what are we doing to fix it and also share why I continue to be bullish about the year as a whole. Let me first start with what happened in the quarter itself. Of the things that did not go relative to expectations, the first was and by far, the biggest was the hit that we had to take for one specific project, which is the cost to completion for government project, which it is part of that same bucket of projects that we had said that we don't want to do. And it is the same project against which we had taken a hit last year. We are now in the last 4 quarters of execution of that project. In June, the engineering partner that we had, which is the detailed engineering partner on the basis of whose design and prior expertise we were doing the EPC of the project came back with some significant changes. those set of changes at that late tower was not something that we had budgeted for and given it was a loss-making project. We took that time to take a step back, understand all the risks that we have in this project that we can see and the contingency for what we cannot see over the -- as we execute the project over the next 4 quarters. And we took the impact of this forecast and change in cost, including what it would take us for site extension, expediting to meet customer commitments, et cetera. We have a reserve for LD, a portion of the LD, which is -- which we have kept intact. and some other numbers for what may come about in the future. But this is the hit that we have taken from a cost to completion perspective. There was also an impact in industrial products more so than other places of not being able to ship inventory -- ship finished goods inventory to the tune of -- overall to the tune of about INR 300 crores. A good portion of it was for international customers, including for the Middle East, where because of the Gulf war, shipping rates were quite high and many customers chose to delay picking up equipment. Also, there were some commodity price impact to the tune of INR 10 crores, which some portion of it was expected that we would have a tough quarter because the commodity prices went up in February, March and as some of those projects which have got shorter durations on the -- on the product side as they converted into products. So we were expecting some part of that hit to come in. And in that sense, the hit was not too much. It was in line with what was expected. It is the increase and not being able to ship what we wanted to ship that had a bigger impact on our profitability. And then finally, within Green Solutions, -- and now we have done 2 parts. We have recasted our BioCNG business as part of Green Solutions. It is how it is operated. It has moved from Industrial Infra to Green Solutions, and it is led by Green Solutions as well. And FEPL in particular, which is our wind, solar renewables business, we were -- we had not expected a INR 20 crore loss in that business. That INR 20 crore loss is a combination of 2 factors. One is in Tamil Nadu, where we had a project which was like actually 2 projects, which were complete, but they got complete during the period where the government changed. And so the whole portion where the government was -- the elections were going on and later on when the new government came in, many of the projects which were just put on hold for no particular reason. So those projects we expected were just sitting on somebody coming and saying, yes, you can produce electricity from these assets. We expect to get this approval done within the next week itself, we have got teams that are just sitting at the bureaucracy and talking to the ministry, but that change in government really set us back. The other reason at FEPL was that as we are now choosing to cut back in areas and we think we have a good set of assets. We want to bring an external investor into the platform. Some of the carrying costs of the people that we have affected the bottom line as well. So both of these together resulted in a INR 20 crore loss in FEPL and we are carrying an INR 8 crore loss in BioCNG, which is the -- I'll talk about BioCNG later otherwise. So these are the things that contributed to Q1. As I look at the year as a whole, I am as bullish as I was when we had shared when we had talked about the Q4. And let me first start with the revenue and profitability portion. I'll then go into the order side. On revenues, our backlog is quite significant. And in Q1, we barely delivered 7% growth in revenue. Some portions of it was because I talked about this INR 300 crores that could not ship out. But even with the INR 300 crores taken in, our backlog is building up very nicely. And our backlog -- the quality of our backlog for the most part, especially on the project side is very good. On the industrial products, there is one more quarter of some amount of volatility as the commodity prices completely get flushed out of industrial products. But otherwise, in industrial projects, the backlog that remains is very, very good and profitable, and that will start to show up in Q2, Q3 and Q4. You have also previously seen that when we do better than INR 3,000 crores, just the gross margin impact that you get and how the gross margin flows through to profitability is nice. Last year, we did 1 quarter, which was more than INR 3,000 crores. This year, we'll have to do 2 and hopefully 3 quarters that are more than INR 3,000 crores. So you will see that impact on profitability as well. Next on profitability. I have said and we have been saying that there are 3 areas that have -- where we need to do better. One is these government projects that are long duration with civil construction, which for the last 3 years, we haven't taken at all. And I previously committed that this would be the last year we would have any exposure to those. I think for the most part, I would stick to that. NRL with this change will slip into Q1 of next year. But all the cost impacts, I expect that we have absorbed and taken care of this year. Whatever remains, hopefully, something that will not have any major impact. But our FGD projects, HRRL, everything. HRRL is over with this quarter. FGD, all the FGD projects are going as we had committed and planned previously and will get executed between Q1 and Q2, one more plant got handed over. Q2, one more plant will get handed over and the last one in Q4 of this year. So all of FGD would be and there are no surprises coming on FGD. They're not very profitable, but there are no more surprises on FGD. We are executing every project. And now that we have delivered one plant to the customer, we know very well from an engineering point of view, what is, and we are just working that on schedule. FEPL, I've already shared what our path on FEPL is. This year, we will look to bring a partner to the platform who will take substantial majority of the platform. And third is Bio-CNG. On BioCNG, we have 4 projects, which I talked about, which are the Enviro projects where we had PGTR commitments, which is performance commitments to the customer. Of those 4 customers, of those 4 projects, one, we have finished PGTR successfully. Second one is going through PGTR where half the PGTR is over and it's also going through successfully. The next 2, because of some of the monsoon changes, monsoons have significantly affected operations in those areas where the rice straw coming in was wet and there were some other challenges in terms of enhancing electricity, et cetera, at those sites. They will go through PGTR in August and September. So next quarter, I should have much better insights into how those projects are going. But that is the last remaining portion on the BioCNG side, where at that point, our liabilities all across would be over. The question now is for 2 years on BioCNG, we haven't taken any new projects. Whatever orders we have had have been change orders on existing sites to add capacity or whatever the customer would pay us for. But we haven't taken on any new projects. And we are carrying a team, which is -- for which we are taking a hit of about INR 8 crores a quarter right now, INR 7 crores, INR 8 crores. We are waiting that cost will get liquidated against new projects because that's the manpower that we need to execute the project. And we need to the tune of 2 projects, which is INR 250 crores to basically work this -- the team and the cost that we have against that -- the expectation is that there are some big policy changes that are expected imminently, which should then create a significant pipeline for Thermax. And I'll answer kind of whether that is -- how -- what is the outlook, et cetera, as part of the questions that you have. So this is kind of the things that are the tractors to the Thermax numbers on the revenue and profitability side in my opinion on those. On the order side, while we -- it looked like it was a weak orders quarter, we have a significant opportunity pipeline across the board. And we had a very good orders year last year. I expect us to exceed that order book this year. which means we have got -- even in Q1, there were 2 big shake hands that were done, relatively big, a few hundred crores, but we could not -- because the advance didn't come in, we couldn't book it. Super critical also, there is a continued pipeline. International across the board, there is a very good pipeline. So I stay very bullish on orders and continuing to build a pipeline of the kind that we like and want to execute better on. Chemicals also, we have had a turnaround in the business. There's still some risks relating to commodity prices. But on the volume coming back and which helps us on the bottom line, that part is good. So with this opening and preamble, because you would have a lot of questions, I'm okay to go beyond the standard time that we have set for our discussion. I look forward to answering your questions one by one by one.

[Operator Instructions]

Sir, my first question is you did touch upon the order where this is really coming from. Could you quantify the size of the project, which was there? And how much of that is pending in the execution, which you expect to complete over the next 4 quarters where you've taken this INR 91 crores hit?

Yes. So the original order was about INR 1,200 crores, of which now it is running at negative teens profitability, which means the loss that we have on the project is close to INR 150 crores. Rajendran, could you specify what the number is, if you're comfortable sharing that? The order itself was taken in FY '22, and it is in its last portion of execution now, where what remains is now execution on the ground. The last 4 quarters are still execution heavy from a civil and construction -- civil is largely over. It's on the construction side, it's still heavy. But the engineering portion, which is where some of these changes and the corresponding equipment and all those other changes came about. We now have a formal letter from our engineering partners saying the engineering is now 100% complete in their part. At the final stages of commissioning, there could be some minor movements here and there, but the large -- the engineering is now complete. Have I answered your question?

Yes. The balance, I think that's something which we're just waiting for.

The invoicing completed is about 74% and balance 26% .

Sure. Sir, my second question is, with Thermax, we are seeing when you are delivering project, if there is any shortfall in terms of the output that was expected and we'll end up having penalties or higher cost or make good for the loss that the customer would have had. Now I want to know, is this the normal terms and condition of the industry? Or is it that it's different with every customer?

See, we have -- and we have shared a page which we would like to go into a little bit more detail with everyone. the realization is the kinds of projects that we had, FGD, HRRL, majority of the FGD projects, HRRL, NRL, they all have one theme which is common, yes. Customers that are government customers and L1 method of bidding and are typically tougher line taken by customers on what feels like are reasonable decisions and which is why these projects tend to go on forever and customers -- and we have got a lot more highly demanding customers here, our international customers that we serve in the Middle East and other places, they are way more demanding. But there is a practicality in how that whole discussion and those relationships work, which for government projects, we have seen really doesn't happen. So this method and the way this happens is in some ways, unique to us kind of set of things that we have said we'll just walk away from. Yes. So there is a whole set of government projects, which we are not saying we will never do them, but we will do them at a price point and which are commensurate with the risk that you are taking. And if you don't get those price points with those customers, then it is okay if those numbers go down to 0. And over the last 3 years, they have come down to 0, practically. Yes, we are doing nothing. We have taken one IOCL project, which is very small, which is INR 50 crores, INR 60 crores. But otherwise, there is nothing that we have taken on a government project where we will have. We are still living through things that we had taken some time ago, and this is the last year that we are working through. The only other one where we have risk is relating to the -- on the bio-CNG side, for example, where there is a performance contract in bioCNG projects. Typically, almost everywhere where we have performance targets. We know our equipment well enough that very rarely, if ever, we get into the performance of our equipment. We tend to work in areas of energy, water, air pollution control. We know very well what we can deliver or not deliver. And we can talk a little bit about supercritical as well on why supercritical is in that sense, a part of what we understand much better than otherwise. BioCNG, we went in because the whole industry was very nascent. We took on some performance guarantees, which were difficult to handle because on both sides, the feed itself that we got was very different than the feed that was expected. So it went into a little bit of back and forth. Other than these 2 areas, there is nothing -- and both of these areas for the last -- for BioCNG more than 2 years and for these large government projects, more than 3 years, we haven't done anything. And we are bringing this portion of our business down to 0 where we have customers that we don't like or economic models that are not completely in our control. Both of these, we are bringing down to 0. We are just cleaning up our book from what was in the past. But otherwise, with most private customers, international customers, there is a relationship which is back and forth. It is not like every project is smooth. In some projects, we have LD exposure, et cetera, as well. We manage that in a reasonable fashion with 90-plus percent of our customers. The last thing I would say, Rahul, is that the way we account for things is that if it is a profit-making project and you have a cost increase, that cost increase gets accounted for as the project accounting happens, which means even if there's a cost of increase of INR 10 crores, but you have INR 300 crores to go over, say, 4 quarters, you take proportional risk as you execute the project itself. But for loss-making contracts, the way our accounting works is, you have to do loss accounting for whatever you see in the future. So this is the loss accounting for execution that will happen over the next 4 quarters.

Sir, just following up on this aspect. Now I clearly understand how the government contracts will -- now that we'll be probably at the last leg of it. But as far as on the bioCNG performance guarantees, how long do they typically have? I mean, is it 1 year or is it like a 5-year performance guarantee that our response?

So it is 1 month or 3 months. So that is -- and as I shared in the opening, there are practically 4 projects on which we still have that performance risk, of which one we have delivered, handed over. Second one has crossed more than 50% and is continuing to make good progress. We are confident we will hit the commitments that we have made to the customer. The next 2 will go through performance execution in August and September.

[Operator Instructions] We have the next question from the line of Atul Tiwari from JPMorgan.

Sir, my question is on your order book. So as a part of your order book, what will be the proportion of the government and PSU credits currently?

Of our order book, what remains? I think it is INR 300 crores, if I'm right, INR 300 crores to INR 400 crores is what would be.

Okay. So very miniscule.

Out of almost it's INR 14,000 crores... Just INR 300 crores... To less than 5%, and we've got -- and almost going towards 0%.

Okay. And at least in the foreseeable future, you do not see yourself bidding for any more PSU and government projects.

I don't say absolutely no. I would say we would do those at our terms and price correctly. So I don't think it is right to say never because in cases where boilers and certain capability that we have, where we can do something that nobody else can, if there are only 1 or 2 participants that can do that correctly and you price it right and you win it, then we can look at that. But not at -- not -- certainly not at the way we bid them in the past where we took those projects the way we bid a domestic project. And that is really not the case. We are working those because the sites get delayed. It is not in your control. Most private players account for that correctly, give you extensions, give you money for those extensions. Government customers, even good ones. In this particular case, I wouldn't say the customer is too unfair. But just the way the process works is not something they have to price it correctly. So I wouldn't say a complete no or never. -- but we would price it correctly. And we would do things where we are -- we have a particular capability, which is not available with anybody else. By the way, sorry, I'll make an exception to what I had said. I said there is only one IOCL project, which is of the tune of INR 60 crores. There is one other project, which is also less than INR 100 crores, which is a green methanol project for Kandla Port. Kandla Port, I suspect, will get treated as a government entity at the end. But this is producing green methanol, where we have the technology for producing green methanol from syngas to green methanol, which nobody else in India does with indigenous technology. So the project was configured and developed on the basis of our capability, which is why we were doing.

And for this project, which has the cost of INR 91 crores, you seem to suggest that -- I mean, mostly it was because of some last minute engineering changes by your engineering partner. So how does it work? Now that you have booked the losses, do you have some kind of claims against the engineering partner as well? Because it looks like that what they should have done in the earlier part of the project, they delayed it and out of control.

Yes. So first, I think this was a wrong project to take. Yes, we shouldn't have taken it. It was -- it was just wrong. It was -- and after this, '23 and '24 onwards, we have completely changed the way we take on projects and the kinds of things we put in place before we look on a project. So for example -- so I'll stop there, to say that this project itself was a mistake to do. And because the engineering partner in a project order of INR 1,200 crores has an exposure of less than INR 100 crores. And they build that in portions where what you are left with is a few crores of LD. And that few crores of LD is nothing that you can do, whereas you are taking a hit of more than INR 100 crores and you've got working aside. So just the model itself was a mistake on our part. What -- and this was also something was in an area that we were not -- was relatively -- not relatively -- was new to Thermax. In almost every other case, we do the engineering ourselves. So the question is why did we take on a project which was that large where we did not know the engineering and furthermore, was a PSU and all of that. Those are all the questions that our Board has also asked. And the only answer I can give is it was a mistake and not one that we have remotely done in the last 3 years. Now for almost every project, including this the project that we took for green methanol, we do majority of the engineering before we even bid on the project. And if we can't do that, then we just walk away and we don't even bid for the project. So we do like a 3D model, which is not 100% accurate, but a largely accurate model on the basis of which you can do the costing of the project and retire the engineering risk, including -- we did this for supercritical as well before we take on the project itself. Yes. So a lot of work is done in advance so that your costing is extremely granular and you are doing engineering and you have a methodology by which even if the engineering partner is involved, like in supercritical, we have got BMW as our engineering partner. all the risks that are in the project are identified before we bid for the project itself, which is why for the first supercritical project, it took us nearly a year to close with the customer. And also in the case of supercritical, we said no to all civil and construction. We said no to all balance of plant. We said we will just deliver the boiler and nothing else. With the customer, we had changed provisions for commodity price increase for the imported portion that we had currency fluctuation, all of those safeguards we had put in the order itself that we took on. So those are -- a lot of things were put in place. In this particular case, it is something that internally has just taken so much of our discussion bandwidth for the last year. because it's called into question practically everything about how we execute projects and Thermax, which is why this time around, we took a page to share with all of you because projects execution can never be completely perfect, but it was important for us to share with you how we see our own execution, and this is something that we are sharing with the Board on a continuous basis. This is the first time we have shared it with our analysts. But we are sharing -- I'll spend some time on that slide. We have taken all the projects that we have been executing that are greater than INR 100 crores over the last couple of years, and we have broken them down between private export and PSU. And what we are talking, it doesn't matter what -- how -- at what margin you book the project. What we are looking at is relative to how you book the project how did you deliver the project? Yes, that is the range at which -- how did you deliver or in your system based on your current visibility, how do you think you will deliver the project, which is why the export projects are not all delivered, but how -- on what path are you to deliver those projects. So in that list, which is more than 30 projects that we have shared, 35 projects, if I remember right, total, other than the PSU projects, almost all the other projects where you have price movement, which is negative is less than 10%. And of those 10% that are more than 5%, you will see there is a corresponding number, which is greater than 5% as well, which means while there are price movements, everything else is largely under control or better than under control, yes, doing better and better. It's only on those PSU projects where we have had an issue, which we are completely bringing down to 0 and being very careful in terms of how we book even if we choose to bid on anything going forward.

if you can allow the last one from my side on...

Sorry to interrupt, sir. Look, I'll go a little longer, because people have follow-up questions. If it is a question in the same category, then I'll allow it, because if there are follow-on questions in just the same category, I'll allow it.

We have the next question from the line of Pankaj Tibrewal from Asset Manager.

Coming from investor side, the problem we are grappling with Thermax for last many quarters is the commentary and finally, what comes out in execution. and the consistency has been an issue, which was not there for a long time because I've been seeing this company for more than 2 decades now. In your view, what's going wrong? Because even if I look at your fourth quarter commentary and to just, you said that in the Industrial Infra business, we are fairly confident we should definitely have confidence in the margins going forward. And I'm sure this project, as you alluded, has been a point of discussion for the last 12 months within your boardroom. And you fairly were aware that this could be something which could hit us as you move ahead in FY '27. So I'm just trying to understand that how as investors we should take that from an overall commentary perspective because that's something what the market reaction is also showing out investors are not very confident on what the commentary has been and what the execution finally turns out to be. I'm a little bit candid, but that's the discussion that people are having.

Your question is very valid. And I don't think it is unfair by any means. Anybody looking at our numbers would have that same opinion, including our Board, which is absolutely clear, transparent and brutal in its expectations of us as a team. And I don't have -- I think anything I share beyond making excuses would only take away from the fact that we haven't done a good job of showing what it is that we are capable of. Yes. So let me just take -- with that as a preamble, let me take a step back on 2 parts. We've been saying now for now a few quarters that we realized we made couple of mistakes. And then in the last 3 years, we have been working to bring these mistakes and the impact of these mistakes down to 0. Even last year that we had -- when we had shared our numbers, I had talked about that 2027 is the last year where we will see impact of some of these businesses. And I will stick to that world, and I'll continue to stick to that. It is -- despite all of this, at least in this period, despite taking all of these hits, we have been showing by the time the year gets done that our revenue, while it may be flat, our profitability despite taking all of these hits has largely been going up moderately, not as much as I would like, but it has been going up moderately. And I would say even with taking this INR 90 crores hit, I expect this year to be a very good year. And at the heart of it comes down to the backlog that we have built up and getting that backlog to translate into revenue as we -- as some of these legacy projects get worked out and finished. So that is the only thing I can say why I see consistency in our future and these 3 areas where we need to clean up our act and what we are doing to clean up our act. Now let me talk about this particular project and what happened and what changed. The engineering change that came from our partner came in June, early part of June. And when it came in, it was first a surprise that we did not expect or like. And then the team took a couple of weeks to go out and say, okay, this is a change that has to come through. What is the impact of this change that will come about. It will so that impact then came out as a bigger number than what we were expecting. And then as is prudent accounting, we took a step back to say, okay, this is what is happening. And then we need to take into account other impacts that will happen, which means the site can get longer, you will have to account for that. You may have other changes which were in your medium risk, even though you may have opportunity of change orders and all that, you need to start accounting for those medium risks in your number as well. And so then after looking at all of that, this rather large number came up and prudent accounting said, just take that hit and which was not easy because it's taking away from a lot of other good work that is going on in all other parts of Thermax, which is why we shared the execution profile on how tightly we are monitoring and working almost all of our projects. Outside of this one project, there's less than 10% of our projects, which have a movement of less than 5%. It is more than corresponded by many projects which are more than 20%, which have an impact of better than 5%. So net-net, we actually -- outside of this one project, we -- our project execution adds to our as-sold profitability, not takes away from our as sold. But your point around us not doing a good job overall, in terms of what we are showing to our investors is correct. I think it is something not just this year, it is what has been getting us to work extremely hard for 4 quarters. And in fact, it actually starts the year before where we said no to so many orders because we didn't think they were the kinds of orders we should take. So all of FY '25, we said no to orders and FY '26, where we started to focus a lot more on international, even domestic, we said no to NTPC orders for super critical because they had all the characteristics that we did not like. We were extremely patient on when we acted on our first one, the breakthroughs in data centers and all. And none of those things have been delivered yet. Yes, the entire data center backlog, which is now several hundred crores for the U.S. and extremely profitable are things that are sitting in our backlog and will get executed over the next few quarters. So the good portion, we haven't been able to show to the extent that we would like. Certainly, we are showing the bad portion more often than we would like to. I don't know, any more questions you would have on the...

Only just one maybe an observation suggestion, whichever way you can take it. And whenever there's a huge divergence between what you have said previously and the outcome is very different. Like the IT company, you can give a profit warning just at the start of the quarter. so that every investor, everybody is on the same page. And this kind of a negative surprise probably takes everybody very negatively. So profit boarding could be a better way to do it rather than surprising it every quarter on some of the other side. So -- just an observation. It's a good corporate governance, and it will help you in the future.

I think we -- even this point got discussed and a couple of members of our Board have made that very specific comment that you do that IT companies and take time out. We debated that internally. I think going forward, I'm not committing to it. It's between us as a team to decide, but I think this is something that we could have done. Also, what happened was the -- as the numbers came out, -- and we had some idea about what that looked like to clear that through our Board and through our auditors also took a couple of weeks because this was a surprise at many levels on this particular project. And the questions were exactly the questions that you are asking, can it get any worse? Are you being conservative enough? How could you be so bad? All of those questions that you are asking, which were valid. So some of that also took a little longer to conclude and to finish. But your feedback is very well taken. And without committing to it for sure, your suggestion is something that we are looking at very strongly to say if there are such surprises, we need to be sharing those much earlier and doing so. And we will take this into account.

[Operator Instructions] We'll take the next question from the line of Bhavin Vithlani from SBI Mutual Funds.

So Ashish, this is like if I look at the Thermax pre-COVID and post-COVID, I mean in the 2 halves, there was a difficult 6-year period where a lot of talent was being restructured. But even in the pre-COVID era, even the project was taken in a difficult environment. 5% margin, but at the end, it used to come out with a 6%, 7% margin. But have we seen that the restructuring of talent? And I think if you could answer that, is that the talent issue where we had Thermax with an impeccable execution track record and that has become completely inverse over the last 6 years, and we've been consistently seeing disappointments over the last 24 quarters. So maybe you could talk about the talent. The second thing is while we have seen a few mistakes and you called out those mistakes, you pointed out public sector. And the why that is that because of the 1 or 2 mistakes, will you compromise the growth significantly because in the hindsight, you could say that, okay, these were things that you could have correct on, but not taking public sector projects and taking projects with these specifics. would you be compromising on the growth and that can hamper the underlying long-term growth for Thermax for just want of being conservative?