Thermax Limited
NSE:THERMAX
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Thermax Limited
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Ladies and gentlemen, good day, and welcome to the Thermax Limited Q1 FY '23 Earnings Conference Call, hosted by DAM Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Bhoomika Nair from DAM Capital. Thank you, and over to you, ma'am.
Thanks, Azan. Warm -- good morning to everyone. On behalf of DAM Capital, I would like to welcome you to the Q1 FY '23 Earnings Call of Thermax Limited. We have the management today being represented by Mr. Ashish Bhandari, Managing Director and CEO; and Mr. Rajendran Arunachalam, Group CFO and Executive Vice President.
I now hand over the floor to Mr. Bhandari for his opening remarks, post which we'll open up the floor for Q&A. Over to you, sir.
Thank you very much, and a warm welcome to everyone that's on the call. I'll keep my opening remarks very brief.
You can see the numbers in -- as we have reported them. No surprises. We expected, going in, a very difficult quarter in terms of margins and that's what shows up in our numbers. Particularly April and May were very, very difficult. And June overall had much better performance. That gives us confidence for the rest of Q2, what is coming, and the visibility that we have into portions of Q3. I think there's just too much going on in the macroeconomic environment to predict too far out.
But overall, happy with the order intake that we have, happy with the broad-based number strength. And this is not just one large order. Everything, the strength below that and some of the very specific information on international, chemicals, services, some of the investments, et cetera, that we have made, the partnerships that we have started. Happy to answer those questions as you ask them.
So with that, let's just get into the questions themselves here.
[Operator Instructions] The first question is from the line of Nitin Arora from Axis Mutual Fund.
Sir, my first question is on the margins. I remember in the last 2, 3 quarters when we asked you that the value growth is how much in your new orders you said that value growth is pretty much covered up by the client. And we assume that you partly or at least -- because the value growth of the order intake was quite high, 50%, 60%, 120%. And in that, you were very confident that value growth is largely getting passed on. It's nothing that we are undercutting on the value side in order to get the orders. But when that corroborate to your margins, it's like optically very low. And I'm assuming the commodity pressure is across the industries. But looking at your margins, it's something really at a very low level.
So one, if you can throw some light, is it more of aggressiveness in the orders, which led to this as well? How much was the commodity impact in the margin? And if we -- which we aspire to become a double-digit margin company, taking your margins from 6%, 7% to 12% doing already a top line of a quarterly run rate of INR 1,500 crores, INR 1,700 crores. How would that margin go to that side? That's my first question.
Okay. And Nitin, I'll first start by indicating and sharing that on the statement that you have made, the fact that are we cutting down prices to win projects, I will say absolutely not. What happened in this last quarter -- and you can come back and say maybe we guys should have been doing better in looking around corners. We did not do as much of a good job. But what happened in March and April was unprecedented. Yes, the way the commodity prices went up, and we have a chart which shows what happened between December to March and then April, steel was just, in days, was going up 20%, 30%; nickel, aluminum, up 100%; styrene jumped up. So almost everywhere we look, everything had gone up massively, yes.
And while you have a -- when you bid those projects, you bid them with the sense of margins that you have. You are constantly executing in the backlog that you have and the pressure that we have, deliveries continues to be extremely high. So that particular portion that we executed during that period was -- went through a bit of challenge or you can say more than a bit of challenge because the impact of commodity prices was quite substantial to the tune of 6% to our bottom line.
Let's take this 6% and divide it into its individual categories a little bit. One big place -- the single biggest place was in our chemicals business. And our chemicals business, which last year was easily the most profitable part of our business and our year before was the stellar part of our business, Q4 when we finished at 0. Yes. And Q4, actually, when we finished our March quarter, we lost money. And still on a run rate basis, we lost money in our chemicals business.
It was also a business that we were doing a lot of actions in the background. We are passing freight charges back to the customers, many of our lower-margin accounts we were getting out of. We were also redoing the analytics behind to be able to do a lot of work. We were going through cost-out at the refinery, going through a new ERP. So it was just a business that went through hell.
And the result of all of that is now starting. It also was a time period where our mix was really bad on specialty chemicals. Both Q4 and Q1, our mix on specialty chemicals was at practically at an all-time low.
Part of that is now behind us to the point that we can comfortably say that Q2 we will post a double-digit profitability on chemicals. So I think that is one big part of the numbers that you have.
The second part where we had a difference was on FGD. The FGD, the backlog that we have, there was nothing we could do. Commodity prices went up. The delivery cycle on these projects was quite long. And so there was nothing we could do. We had to take the hit, eat it and move forward. And the FGDs continue to be a drain on the environmental segment.
The good part on the FGDs is the backlog that we have now, which is what we were worried about even last time when we spoke. That backlog now is back at a -- cost of that backlog is back at a place, which is only slightly higher than when we bid those projects and not a lot higher because where commodity prices are, they are behind or they are somewhat lower than where prices were last December. Yes. And some of these projects we had paid were in the March to June frame.
So that June to December price increase, we still have to absorb and take that out to productivity. But all the December onwards cost increases, we hopefully should be manageable given how commodity prices have come down. So that was on the environmental segment.
On the energy segment, which is the heart of our business, there, you can see we could absorb the commodity pressures and still turn out a decent margin. And that should hold in Q2 and Q3. I think -- I would not go far to say that double digits is our -- is something that you can expect immediately. But in terms of strength in margins, Q2 and Q3 should definitely be better than where we showed Q1 at. Yes. And chemicals easily being the single biggest turnaround piece. Okay. I hope I answered your question or...
Yes. It was helpful. Second, on the big pipeline. Can you throw some light in terms of the large orders and as well as the base orders, any changes do you see? Because last year has been heavy from the pet chem part for us. So this year, if you can throw some light on the bid pipeline, both in the base as well as in the large-sized orders?
Bid pipeline on the base is reasonably good. So Q2, we have a decent visibility and it's happy with what we see.
The large projects continue to be there. But on the large projects, in some cases, especially last quarter, we were a little conservative on our pricing and all that with what was happening on the commodity prices. So we will see how the larger ecosystem behaves and there are enough projects in the pipeline. The winning thing, let's wait and see what happens.
The next question is from the line of Sujit Jain from ASK Investment Managers.
Just order book actually fortunately in FGD [indiscernible] left in the order book currently? And then does one assume that till then the environmental margins will remain low because as I recollect one of your commentaries earlier in one of the con calls where you said the extent of the players in FGD, is that the margins are low?
I think -- so I think the big question is specific on FGD pricing. I'll divide the FGD projects into 2 parts. There were 2 projects that we had taken previously, which were all in the '19, '20 kind of a time frame. Yes. Both of those projects are now going through their final bits of execution with 1 project having 95% of its material buy complete. And the other one having, [ Aikon ], how much would the number be? I think, if I remember right, 80%-plus of its buyouts are complete. Yes.
So both of them are -- I think we have taken hits on both of those projects. We have taken reserves, all of that. Where they are, I think it shouldn't get any worse than what it is, yes. So I think overall, we are comfortable with both of these projects that the bad news has been sufficiently accounted for. So on the -- sorry.
So on the order backlog that I think you are possibly asking as well. So this give you order backlog in our current number is about INR 1,800 crores.
Yes. And then if I could talk about the 2 new projects that we have, both of them, they were both spread at reasonable margins, actually accretive to our overall project businesses. There, at one point, our costs had gone up quite substantial and this particular project profitability it also come down.
Where things right now stand in the last 60 days, the profitability has gone back up with the softening in commodity prices. And we are looking to make sure that as much of our buy that we can finish off in this 30-day, 60-day period that we have, we want to be able to do so. So we are going forward and accelerating the ordering of many of our major items to be able to finish it off, and we may not get the 8%, 9% kind of profitability at which some of these projects were bid. But the 4% to 5%, which is the -- which was at one point potentially our worst case -- I mean, in this particular case potentially a worst-case scenario that we want to protect by closing out all the bids. So that's how I would answer your question.
Right. So which means that the margins could look up 4% to 5% kind of levels or possible FY '23, '24 in the environmental segment?
Absolutely.
Sure. And styrene impact, you said...
Taking that drag, but in future quarters, I would say, yes.
Sure. And styrene impact, what portion of sales in chemical segment is CapEx? Is the understanding correct that it is mainly the raw material origins business and the resin will be 50% of your chemicals business?
So yes, I think resin is 40% of our chemicals business. The single biggest driver of resins is styrene, but there are a lot of other raw materials that are also part of this, not just styrene. And you -- we will -- we will have [ DVB ], caustic lye. Both of those are also a driver of our -- of many others. Yes, the whole list of chemicals is quite long. And in Q1, what also happened was when the whole -- the war started, many of these commodities, which are actually not even imports and not even dependent on crude, things like caustic lye, their pricing for a 60-day period went up by more than 100%. Like completely, everybody just suddenly increased their prices and these are complete consumables in a way that you order on a 1-week lead time kind of a basis and that costing went up quite a bit, yes.
The other thing that happened in our chemicals business was the availability of natural gas in Dahej went down quite a bit. Pricing of natural gas like right after the war went up substantially, which you guys know. LNG supply went down, all of that. So that last quarter was just April and May, but just hell overall.
So safe to assume we can climb back to the margins what we posted in FY '22 based on your initial commentary about chemicals segment now that the mix will improve?
I can't say too far out. But definitely Q2 and Q3, we can project double-digit profitability of what we can see. Yes.
One last question. EDGE [ TL ] specific in-house solution, what kind of money has been spent, which you've mentioned in your presentation? So it is our IoT solution. So what kind of capabilities you're building in-house? And what kind of spend you're going to build those capabilities in terms of OpEx?
So EDGE is our way, and this is the realization came during the COVID times where customers would reach out to us for interest services, punting spare parts and the whole supply chain because of all the COVID challenges was a little broken to say. That part is thinking in our -- the way we relate and we connect with our installed base.
And of the tens of thousands of units that Thermax has supplied over the years, almost 2/3 of those we had lost touch, which means we didn't know where they were, what -- how the customers were using it. They were sold through distributors. So who did the distributors sell it to, when were the spare parts provided, who was even providing spare parts. So a lot of that information we did not have. We were getting ad hoc information from customers that we are having a problem.
So EDGE was our response to start connecting with these customers. Think of EDGE as not just one thing. For us, it is like our iPhone 1 in a way. There'll be a lot of different improvements that will come. And EDGE I effectively was followed very quickly by EDGE Live, which EDGE I was connecting our customers for them to know what is the asset them to say, okay, I have a problem or I need a service request or I need a spare part, whatever the case may be.
EDGE Live gives the customer the ability for a portion of our portfolio, which is the heating and the related set of products, to take that asset online, which means to be able to monitor that asset continuously and have a variety of different efficiency and uptime-related models running in the background, giving them fantastic insights into their assets.
So we are super excited about this capability. The numbers that we'll get for a year, our projection is not that much for the first year because our projection for the first year in terms of -- just EDGE Live revenue as such is only INR 5 crores to INR 10 crores, yes. But the impact it will have on our ability to service, which means in the spare parts that we provide, field services that we provide, the new products that we can sell and overall our ability to engage with our customer much better is extremely, extremely high.
So take this as a journey. We will -- for the next 3 years, we'll continue to invest in that growing bit. This has been built largely in-house. We have had development partners and all. You can see we've also made a couple of minority investments in start-ups. They are helping us in big portions of EDGE and EDGE Live.
Very, very excited about what the future holds. And I think in terms of total investments, the investments in the start-ups we have shared what those numbers are. But our investments internally in terms of building some of this capability, building the platform, our ability to connect with the dealers and all that is of the order of a few crores.
The next question is from the line of Renu Baid from IIFL Securities.
I have 2 questions. First, if you look at TOESL business, in the annual report you have seen almost 75% growth in this business. But when it comes to profit margin, 20% growth. So if you can help us understand, a, in terms of this portfolio from INR 200 crores in FY '22, how do we see the growth panning over the next 3 to 5 years? Can you see the business approaching INR 1,000 crore mark then?
And how should we look at the profitability of this business improving? Because it just seems to be more of a utility-driven portfolio. So if you can help us understand the flow to profitability, it would be helpful.
So overall, TOESL is growing continuously and will continue to grow for the next 3 to 5 years. We see -- we don't see -- at least for the next 12 to 18 months, we see a very strong pipeline. We should finish that business this year at a run rate that is between INR 300 crores and INR 400 crores. And next year, we should be able to add another INR 100 crores to INR 150 crores, for sure. So I think line of sight to in 2 years to INR 500 crores clearly exists. Can this get to INR 800 crores in 4 years, I would think possible.
In terms of profitability at a project level, it is not reducing. These are all decent IRR projects. There has been some loading of costs because as we are adding these projects online, most of these projects have an incubation cost, which is early on, which is starting to hit those profits. But overall, we don't -- and we are also adding head count and all to be able to make this a long-term business. We don't see a slowdown and our margins at an asset level are still holding strong.
Yes, Rajendran, would you want to share anything else?
Yes, I think you covered it. And there is also a fuel cost increase that has happened during the last quarter as a [indiscernible] particular business, which is a pass-through. But then I think the fuel cost when it increases, we don't have the same level of margin that we would have on the overall project. That will be a marginal markup to a fuel cost increase.
While it's reflecting in the top line as well as in the consumption costs, the margins are not as high. I think you would see a material percentage going up and then profitability margins percentages being a bit [indiscernible] in this business, but I think that's the structure of the business.
And the solar utility portfolio would also be house in the TOESL or will it be under a separate subsidiary through which the project would be executed?
So I think good question. I can spend some time talking about our solar Opex business. Our solar Opex business is housed in FEP, yes, First Energy Private Limited. And that particular business showed a loss of INR 4 crores in the -- in this particular quarter. And that was driven by a shift in the mix. Historically, we were doing CapEx projects, which means we were selling equipment and doing the EPC of small rooftop projects in solar.
So that is a business that we are a little bit -- no, more than a little bit, walking away from. And our focus is on Opex projects. And as we speak, we are executing 3 clusters on Opex projects, one in Tamil Nadu, one in Maharashtra and one in Gujarat. And all 3 of these should give us a projected revenue and the projected megawatts installed that is beyond our projections for the business.
Yes, so it's doing better than what we expected, but the impact of that will only start to show up in Q3. The first asset that we have in Tamil Nadu will start to show revenue in October -- late October. The second asset in Maharashtra will start to show revenue in November. And the Gujarat asset, which is a hybrid asset, will not start to show revenue until Q1 of next year.
So we are building up. But meanwhile, that business is, because of the operating costs of the business, is taking that cost, which is a negative INR 4 crore profitability number that the business is taking. But we like the backlog and the pipeline the team is developing.
Got it. And lastly, if I may, can you all comment on the order inflow. You did mention that the export duty on steel could have some impact on large projects in pipeline, some delays could be expected. On the flip side, if you see the commodity prices coming off, would you believe that large order inflows, which were delayed from the government sector could actually see acceleration in project pipeline? So if you could just collaborate and help us on what the aspects, how do you look at the large project pipeline picking in the next 6 to 9 months?
Renu, very good question and I don't have a 100% answer to give you, yes. And you hit the nail on the head when you said that. The risk that you run is that some of these bigger projects, especially in steel, where there are some really big projects being talked about, those project owners may slow down those projects. So that is a clear risk.
On the other side, the fact that there is softening in the commodity prices makes it much easier for the refining and petrochemical projects to hit their budgets and for those projects to go ahead. So you see a mix of both things that are possible: possible economic slowdown, making certain people in steel and potentially cement a little conservative. Meanwhile, many others who had projects that they had envisaged that was sitting on the fence may come in and say, okay, we are seeing stability. Let's move forward.
I don't know how things will pan out, yes. But as we see overall, what I can talk about is our pipeline of inquiries. Our pipeline of inquiries is strong.
[Operator Instructions] The next question is from the line of Ankur Sharma from HDFC Life.
So my first question is on your [ lower ] revenue and EBITDA numbers. When I look at a 3-year CAGR basis and just comparing it to Q1 '20, which was the last pretty normal kind of a quarter, your top line growth is about 5% CAGR and EBITDA will be slightly down. So are you -- this is coming despite us having pretty strong order backlog. We obviously booked very, very strong orders as well, both based on large orders.
So just trying to understand, is there some constraint on our supplies? Or is there a constraint from the customer side, which is keeping us from ramping up our top line significantly? Or do you believe that will happen maybe over the next few quarters, and therefore, we see a significant growth over last year?
I think I don't see any constraints right now -- any significant constraints. There are always project-to-project moves. But any constraints in delivery nor are there any significant customer projects where customers are not asking for delivery. If anything, this is as smooth as I remember in my 2.5 years with -- in current role. So comfortable with that.
Our backlog that we had built up was built up with a certain maturity. And we are sticking to that maturity. We have had -- I mean, during the COVID period, there were a lot of stuff that happened. But I think now it's all smooth and manageable. I don't think internally, as an example, while we did more than INR 1,600 crores, our backlog internally when we had projected, we had only projected INR 1,500 crores, yes.
So we -- overall, each business ended up doing more, more, more than what we were projecting. And if that holds, as the backlog matures, we should be comfortable. We don't see any particular concerns on this front. The only place where we had a little bit of execution challenge was on our PT TII business where we had a negative INR 3 crore loss despite the fact that our inquiry pipeline was decent and the order backlog was decent where there were 2 projects, which we wanted to deliver where the customers were not ready to take deliveries. But beyond that -- and that is a small part of our business overall, here, but most of the rest of the business, not a problem.
That's good to know. And sir, second question, as you also said and what we are seeing on the RM side, steel, copper, aluminum, pretty much most RMs are kind of correcting by anywhere between 20%, 25%. So just wanted to understand how does this work in our case in terms of both our large and our base orders? Do we kind of reduce prices once these RM prices fall? Do we kind of largely retain our existing order backlog values, and therefore, any fall in RM prices kind of results in higher margins. We're just trying to understand how does that piece work?
So all of our projects are fixed price projects. There should not be a scenario where we would have to -- customers would come back and renegotiate pricing for steel prices going down, yes. So haven't had anything. There may be one or two, there have been cases where people have come to call saying, can you cut down your prices and all that. But I think in all cases, we are still higher than where we were a year ago, so to speak here. So I think those are manageable discussions. We don't see a concern.
I think what you will see is an improvement in margins in Q2 and Q3, clearly. You will not see that like if our backlog is INR 9,500 crores and that means we need to buy INR 4,700 crores worth of material that at INR 4,700 crores just because the steel prices have gone down by 10%, 15% will certainly become lower by that 10%, 15%. Not happened because we have been doing one of the things we've been pushing very hard internally is to cut the cycle from when we get a project to when we order out extremely, extremely short.
So we are trying to make sure that if we take a project, that even if it's a higher price, you are clearing out the ordering of it so that your margins do not dilute relative to what you committed. Q1 was horrific because the pricing went up like day by day things were going up, yes. And so in that 1- to 2-month period, you could do nothing to prevent yourself.
So I think that portion is completely behind us. I expect Q2 to be much milder, much -- where you see the impact of volume showing up in a much bigger way and a moderating of overall cost.
Right. Okay. And just one last one from my side. You did touch about large orders potentially from steel getting delayed because of this whole export duty, which has come in. If you could also touch upon the ordering phase of FGD power, other, say, refining, what's the kind of backlog -- sorry, the pipeline you see there and then how hopeful are you that, that's finalized?
Okay. So FGD moderate to low. We don't expect too many orders. There are some things, but I don't think we will be super aggressive, as I stated previously. And also there is a limited amount of uncertainty in the FGD space where many of the companies have gone made representations that given the steel price increase, they may be given some relief in executing these projects.
So the government, I think the Finance Ministry had written to the Industry Ministry to the -- to potentially look at that delay. And so many of the customers have used that letter of Finance Ministry to the Industry Ministry to hold off and slow down their projects. Meanwhile, the reason that letter was written, which is the commodity price increases has -- is no longer holding true. So that industry also does not know what will happen.
So we have got multiple projects, which are going through the quoting phase, but we don't know what will happen today. So I'll keep them all in the moderate to low phase.
Similarly, the large steel and the cement projects, all of them, the customers are like going through with getting quotes for the projects, doing all that. Whether they go forward with the projects or not, again, we wait to see.
Petrochemical, the projects are going ahead, and many of them are driven by government PSUs where we see projects happening. And now that the commodity prices have stabilized, their bids will open and they will get awarded. Whether we will know or not, we don't know, but our pipeline of projects here is strong.
Beyond this, in portions of international and portions of waste heat, multifuel, there we see considerable strength. None of these will be orders that we will come and report out. But in the INR 200 crore range, we see a very, very good pipeline still.
The next question is from the line of Deepak Krishnan from Macquarie.
I just specifically wanted to understand on the international front, especially European business, what has been the impact so far? And are we seeing any materials go down there?
As well as for your chemical retailers business in the U.S. given the overall macro environment, how are we seeing order pipeline over there?
So the order pipeline overall, I think, still good. We don't see a slowdown in our international business. Also in Europe, if you take an example, which is where our Danstoker business is currently, it's actually seeing some of its strongest order inquiry pipeline. And that is driven by many of the countries in the European Union, figuring out how do you disconnect from Russia effectively. So which means looking at biomass as an option, looking at electric boilers as an option, all of that becomes of a lot of interest, which is driving a strong order inquiry book for us.
Yes. So I think we don't see a slowdown on the international side at all. In fact, if Southeast Asia and Europe, both of which were last year somewhat slower than what we would like them, today we are comfortable. And in the case of Europe, having an order inquiry pipeline, which is beyond what we think our plant can deliver because we were cutting down capacity at the plant in the last couple of years. So don't see a slowdown right now.
And even in our dealers business, as I said, that's driven by waste heat recovery and some other macroeconomic drivers, which are beyond just an economic slowdown. No particular slowdown, yes, manageable.
Sure. Just probably one follow-up question on the chemical segment first. If you kind of look at the impact of mix, impact of [ sizing ] and impact of freight, I mean how would you kind of classify all 3? And where do we see probably the easing out faster? And where do you still see some scope of work to be done?
And just from an overall order book position, how much of it would you say will be fixed price? And how much of it has some form of variable or WPI-linked pass-through?
Okay. So Deepak, I understood that you wanted to understand slightly better on the Q1 performance? And are you looking to also understand Q2?
Yes. So Q1, especially for the chemicals and the trend ahead? And just comment overall perspective where are we on fixed-price versus variable-priced contracts.
Yes. So I think by and large, chemical business as well it's a short-cycle business, so they are primarily fixed-price contracts. Of course, there are a portion of slightly long-term contracts, but yes, so they are only a portion of it.
And so on the impact for quarter 1, yes, I think Ashish did cover a about it earlier on the commodity costs, we see elevated still on our resin business. And that's one of the challenges that we continue to have in terms of price pass-through. So that is what is impacting us.
And as well as the product mix is a significant factor because we are different product groups with different margins in this particular business with the water treatment chemical to construction chemical to [ infill ] chemical.
And so we are multiple product groups with differing margins and different customer segments, which have also different margins. And so those come into play, and that's one of the reasons that we have some fluctuation in the margins manage. There is also certain specialty chemicals that we continue to target to improve where the margins are better, as we have shared in the past, which also has certain role to play.
So suffice to say some of these were not in the positive side in quarter 1. But yes, in quarter 2, we are expecting some of the product mix issues to be in favor, specialty chemicals and some better margin orders to be executed in quarter 2. And also the commodity costs declining in some of the product groups should also be positive for us. And I think Ashish earlier confirmed that we are looking for better numbers on that business on the profitability front.
The next question is from the line of Deepak Narnolia from Birla Sun Life Insurance.
I have one question about your profit margin. Actually, it's been, I think, more than 2 years, every quarter, the company is reporting a volatile margin and off and on there are various reasons. So one of the key reasons for that is the spike in commodity price.
But in that context, sir, I just wanted to know how much is your fixed-price contracts and how much is variable-priced contracts? And from when you see this profitability coming back to 9% or 10% level?
Okay. I think -- I hope I understood your question right, you're talking about volatile margins. And what is the price impact -- price driver of these margins? And how much are fixed priced and how much a variable priced? I think particularly all of our contracts, and I'll state a couple of exceptions. And overwhelmingly high portion of our projects are all fixed price. Yes, there are 2 FGD projects, which have some amount of price flexibility. But other than that, our entire set of projects are all fixed priced, which means when commodity prices go up, we take the hit. When commodity prices go down, we get a bit of an advantage.
What is not fixed priced is our products businesses and our services business, which are also fixed priced, but we have the ability to react there much, much faster. And there, our ability to react is of the period of few weeks, which means we can increase our prices because our quote validity is a month. So that much of a freedom and flexibility, you would have to be able to increase prices overall. And then on the services side, we can -- I guess, we can increase our prices even more because that's our people and everything thereabouts.
Okay. As I look at our backlog, as I have said, yes, when do you think the margins will get to 9% to 10% profitability? I don't know when was the last time we were at 9% to 10% profitability. We were always a good cash-generating business. And you can see our management of working capital and all continues to be solid.
In terms of margins and profitability, I think the last 1.5 years, the way the commodity cycles have moved -- and they haven't just moved being volatile. They've just been up, up, up. It's only now in the last 2 months that we are seeing a down portion. Yes, we don't care if it's up or down. We just want stability in the commodity prices so that we can price ourselves accordingly and win those projects at the margins that we think we bid them at.
Yes. So if I take -- just to give you an example of the kinds of things that happened. Yes, steel, long steel, INR 58 per kg; March '22, INR 71 per kg. BQ plates, INR 80 per kg in December; March, INR 105 per kg. Aluminum, INR 152 per kg to INR 78 in March. Yes, nickel, INR 1,500 per kg in December; INR 2,750 in March.
So we can't -- I mean, it's just not something that we could absorb through -- into our business. The good part is by June a lot of that has come down again. We are back to where we were in December.
So I hope you will start to see profitability also, which is relative to how we bid it in December. And I think I challenge our teams, and I'll put it out there to look at Q2 and Q3 as a performance that -- at least a sense of direction on what we are working on, yes. And it won't be 10% profitability, but it will be much, much better than what we showed in Q1.
I, personally, from my point of view, Q1 was a fantastic performance because of everything that we had to take in and to be able to still deliver a profitability, which showed the power that scale can bring in, yes. And so with a INR 1,600 crore top line, if we could deliver that kind of a profitability, with the INR 9,500 crores backlog, which you can see if you break it down what kind of top line we can deliver in future quarters, the impact on the top line with the softened commodity prices should be something that I'm looking forward to delivering.
And sir, in your backlog, how much is product and services and how much is project, if you can broadly split that?
In our backlog, we have more products -- more projects than products relative to history because we have been winning lot of bigger stuff, but everything that we have has grown. Like in this particular quarter, we grew our projects business from -- INR 1,230 crores of the orders we got this quarter were projects, INR 790 crores were products and INR 300 crores were services. All 3 of them are 20% above relative to what it was in Q1 of last year in terms of the order bookings.
And really, I mean, the services part to grow that has been the focus that we have on services right now because that is not the history of Thermax. Projects go up and down in some sense. We are right now focused on -- focusing on improving our base business as well. And services profitability, if our overall profitability on a gross margin basis came down by 7% in Q1, the services profitability on a margin percentage basis came down by 1%, yes.
So we love the services part of that business and the resilience that it has to be able to be profitable. And in many ways, those are the kinds of initiatives that allowed us to deliver what we were able to deliver in Q1.
So the mix you didn't mention, sir, the project versus product mix in your order backlog? And has it changed in the last couple of years?
We mentioned it.
I don't know on the backlog, what is the mix. See, the backlog mix is also a wrong one to look at, yes, because our services numbers, as an example, are very largely book-and-bill, yes. So if you look at our backlog, of course, our backlog will show predominantly projects. But that is not right because in any particular quarter, right now as this particular quarter as an example...
Got it. And what you can say the split, sir?
So turnover split, I think Ashish just mentioned some time back. Yes.
I take the order split -- on the...
But we don't have the...
On the turnover split, we do not, but maybe we can do that and share that, yes, on the turnover. On a subsequent page, we can share that.
Okay. And the order book is largely projects?
No, no, no, 50-50, my friend. I just said, yes, of the INR 2,300 crores, we got INR 1,100 crores were products and services, INR 1,100 crores were projects. So 50-50, and that is in -- I mean, look, in our history, we would not be ever be doing 1,000-plus crores in a quarter of products and services. We are super bullish on that part of our business.
The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
Ashish, sorry to hop again, you have dwelled enough on the margins front. But just to understand a more sustainable level of margins as the commodity headwinds go past us. Will it be fair to say that roughly 1/3 of our revenues on a sustainable basis will be the larger projects, which are 5%, 6% kind of margins? Services will be about 15%, which will be high teens, closer to 20%. And products will be 11%, 12% will be the balanced part of the revenue? And that is how we could get to a margin level of 10% to 11% on a sustainable basis?
I think not a bad summary from an aspiration basis. I think the services percentage is a little lower than what we are targeting, what you have shared. And maybe from a long-term profitability basis, the product business may not yet be at the numbers that you are sharing. But from a direction perspective, you're absolutely right.
The only other caveat that I would provide is that over time, we need to be able to show you guys the solutions part of our business separately as well, which is the question that Renu Baid asked on how is the TOESL business doing. And on top of the TOESL business, starting in Q3 and Q4, the solar part of the business will also start to overlay to create a solutions business, which today is maybe not as strong, but by next year will start to become possibly INR 700 crores, INR 800 crores worth of recurring revenue on a continuous basis for Thermax. So like INR 200 crores, INR 250 crores worth of our quarterly revenue will start to show up from these segments.
Then on top of it, if I add the regular services revenue, a good 25%-plus of our numbers should start to become a lot more stable and continues with a decent margin associated with it. So that direction holds.
And then if I add chemicals out of it -- so our idea is to get more than 50% -- well more than 50% of our business become predictable, stable and hopefully with standard -- with a bit more stability on the commodity pricing, a lot more predictable overall.
No, that's helpful. Just the last question from my side. I mean energy transition is one of the key risks that you have anyway you've been citing on. Could you just help us understand the initiatives you're taking, especially on the R&D side, and that's one part that I see Indian-owned engineering companies missing the R&D card. The efforts that you have been doing on the R&D innovation and the kind of products that you see, the kind of move that we are seeing maybe hopefully next 2, 3 years. And once that kind of settles down, the next leg of growth that we see from some of these products?
Bhavin, good question. And now that I think, as you know, Thermax more and more, some of these questions are really starting to get to the core of what we are looking to do. Some we could talk about; some for, as you can imagine, competitive reasons, we cannot.
As an example, this quarter, you will see we announced this subsidiary specifically to focus on BioCNG. We are doing it because we think it is meaningful enough as a segment and can become sufficiently large and we could convince a major developer of these kinds of projects, EverEnviro, to come in and actually take a stake in that subsidiary as well and become a partner, yes.
So that's an example. That particular subsidiary right now has only 3 orders. But to take 3 orders already, all of the -- each order would be INR 50 crores, INR 50 crores. So these will never be orders that we'll come and report out as an exception to The Street, yes. But the opportunity that this creates is to create a whole different segment for Thermax, which starts with EPC of these projects, then you can do O&M and services around these projects, create long-term revenue streams, which can be very, very interesting. So we need the time line, time to build and grow them.
One more thing that you would see that we have released, and it's a product which is already out, so it's called FlexiSource. It allows us to take various different kinds of biomass and waste and convert them into energy in 2 hours. And this has been particularly targeted to customers that currently run coal because the boiler has the flexibility to run coal as well. So the boiler actually costs 50% more or maybe 100% more than a traditional coal boiler. But the flexibility that it gives the customer to be able to run multiple different kinds of fuels means that for many, many customers the payback would be less than 2 years. And then it addresses their sustainability story as well.
Yes. So 2 couple of -- 2 small examples of the kind of things that Thermax is able to do, which are relatively novel in the space. There are others who can -- who are also in this space, but I would say we are what -- some of what we are doing is definitely unique, yes. Many of the cooling applications that you will hear, you have low-heat waste recovery. And taking that low-heat waste recovery and driving heat pumps from it, chillers from it, I mean, the applications are numerous. And they're all driven by an R&D capability that is based on understanding the science behind absorption chillers that Thermax has, which, I guess, at least in the Indian framework, nobody else would have.
So these are all sets of things that you're working on that you're really excited upon. And none of them are clean. I mean you can come and do something, lithium bromide, which is the heart of these chillers. Lithium bromide pricing went up 300% last quarter. 300%. Okay, you've got to go absorb that in all of this that you provide. You think you have cool technology, your customers like you, but nobody is going to allow you to take a 300% cost increase on the price that they have agreed upon and manage it through.
So we work through some of those challenges. But in terms of application sets, quite excited. And this is on top of everything that green hydrogen and all those other bits can come to bear with.
[Operator Instructions] The next question is from the line of Shaleen Seth from Seers Fund Management.
I hope I'm audible.
Shaleen, you are.
Okay. So I think, Shaleen, if you can just ask 1 question and not 2, I'll try and be super brief in my answers as well so that we can run through the questions a little faster.
That sounds perfect. I only have one. So first of all, I would like to congratulate on this buoyancy in the order book. I think we have almost doubled our order book in the last 2 years. So my perspective is what is the execution feasibility that we look at specifically in energy and environment going forward?
Fairly high. I think no concerns on execution. We are very focused on executing without adding significantly more people, yes, and which is a big emphasis for us. And also looking at this in time to actually spend a little bit more, but spend it on automation, on productivity on a lot of different things.
And if you take a look Thermax's cost of manpower through the years has gone up, yes. So -- and last year, when we finished, we were -- in 2021, it was north of 15% with the numbers that we -- that happened last year, that number came down to 13%. We are really looking at how do we pay our people more, but try and focus a lot more in productivity so that we don't add people.
So that will -- emphasis that we have on productivity is resulting in a lot of initiatives internally. Some of them will be difficult because it's asking change, process change and all that. That will, I think, put some burden on our ability to deliver. But otherwise, from a capacity point of view, availability of people, all of that manageable. Attrition is in double digits, but manageable.
Just a follow-up, if you just see this -- if the price is constant, if you should put a number on this, what will it be?
No, no, no follow-up. Put a number on?
Put a number on the execution capability. That's it.
Execution capability...
Put a number on your quarterly execution on energy and environment.
Quarterly execution? Is that like a future backlog?
Yes.
So future backlog, look, we have stayed away from sharing future projections in an exact number. But I'm sharing, yes, that we understand our backlog. We understand the maturity with which it took -- was taken. And overall, we don't see too many execution challenges right now, yes.
So I think that -- I don't know, Rajendran should we share a future look on backlog? We haven't done so, yes. So we'll stay away from that guys. You guys are now doing a better and better job of anyway forecasting Thermax's numbers. So I'll leave you all to it.
The next question is from the line of Aditya Mongia from Kotak Securities.
The question that I have is more linked to the Waste to Energy segment. How much does it contribute to, let's say, India, overseas put together for you at a portfolio level? The opportunity size and the competition that you face in this segment?
Over the last 1.5 years, significant and north of 30% across our overall portfolio because we have been running about 70% green. Of our 70% green, nearly 50% has been driven by base to conversions of some sort, yes. Variety of different applications, different applications have had strengthened different parts of our portfolio.
The Waste to Energy part, the specific one, which is around this multifuel one that I talked to you about, that portion is around INR 40 crores to INR 50 crores of brand new business per quarter that we are -- we did in Q1. This is the FlexiSource that I was talking to you about [ and ] nonrecoverable solid waste.
Overall, Waste to Energy has been 30-plus percent of our portfolio in this last year, continues to be extremely strong. The newer applications, this new FlexiSource that I talked about is INR 40 crores to INR 50 crores in Q1, continuing to grow. And like this, there are a couple of other applications also that we are quite excited about. The BioCNG was one more example that I talked about that we are very excited about.
The next question is from the line of Rahul Agarwal from L&T Mutual Fund.
Sir, just one question with respect to understanding the commodity impact on the incremental order inflow. And with order book of INR 9,500 crores, can this be the peak, let's say, in 1 year or 2 year because of this commodity fall?
Sorry, could you repeat. What is -- what will peak in 1 to 2 years because of the commodity fall?
So the commodity order inflow and the commodity order book that we have reached are at elevated commodity prices. And now with the commodities coming off, do you see that order inflow can also see the similar fall and the commodity order backlog as well could see that kind of fall? So volume growth may not be impacted, but because of the pricing fall...
I think -- so I'll try and answer both parts of what I -- how I read that question. Can the slowdown in commodity prices signal a slowdown in the overall industry? And can that bring our top line down?
I think you clarified that it was not your main question, but I'll answer that question as well. I think quite possibly. And if the whole world goes through a recession, India, too, will catch a cold. You cannot be completely disconnected. So far, we are not seeing that. We're seeing reasonably strong inquiry outlook, as I said before.
The second question, which you asked, which is that some of what you are seeing in our top line is increased pricing that we would have. And as the commodity prices come down, will that pricing come down as well? I think that is a -- that is also a very valid question. I would say our impact of commodity prices was in the low single digits. Yes, low -- I mean, it was in single digits, not low single digits. So overall, was of the single-digit pricing. So in that -- to that amount, maybe the top line can moderate.
I would take the margin side of the equation any day on that front. Yes, because if the commodity prices come down by 15%, I would be more than happy to pass on a 7%, 8% price reduction to our customers. That is possible. We will see quarter-by-quarter, yes. I think, right now, we are holding on to our price increases. We will see. It's a competitive space. I'm sure as our competition starts to reduce prices, we, too, may be in environment where we have to reduce prices.
The next question is from the line of Amit Mahawar from Edelweiss.
Ashish, I just have one question. So as Thermax goes ahead with both domestic and globally, that business growth model, a lot of large projects will basically increase in terms of overall share of business. The complexity of the book will keep on to new challenges. So just want to understand what kind of process and rigor you're following evaluating the large tickets, especially with respect to credit risk, payment cycles, et cetera? That's my question.
I think that it -- and I would say Thermax is the best practice here. We are fairly conservative. Even in our history, previously also some of the biggest projects that we have taken, which are Dangote, Reliance, they've all been actually accretive to the business, the largest of the large here, where we have been very, very conservative.
If you take a look at our TOESL business, which is a regular continuous business where we are putting a cost at day 0 and the revenues get realized over the next 10 years on a continuous basis, our client list is AA and AAA, yes. It's the who's who of the world, the top-notch FMCG customers, the top-notch pharma customers. So there is no dilution in that sense.
And from a risk profile, I do think Thermax's processes overall need to improve in terms of how do we execute projects turning and bringing it more digital, making it less manual, bringing in productivity, bringing vendors into the mix, bringing very modern technologies that are available. But from a risk perspective, we are absolutely solid.
The next question is from the line of Akshay Kothari from Envision Capital Services.
I just have one question. Considering all our contracts, sir, fixed-price contracts, we would be hedging. I'm sure we would be hedging. So sir, I just wanted to understand how much is the hedge is effective in the [ hiking ] commodity price scenario?
We have looked at it in a lot of detail and we have looked at it every time prices go up and we haven't found a suitable hedge. Yes, in our chemicals business, styrene and crude are related, but they are not -- they don't follow each other to the extent that you would say I will go and hedge crude to get a hedge on styrene. And the cost of hedging styrene by itself is so expensive that it's not worth it.
Similarly on steel, multiple grades of steel that we buy and the good chunk of our buy is even like stainless steel tubes for our boilers. And so we can't -- we haven't found a suitable hedge at all. The only hedges that we do are on FX. And on FX, we are practically 100% hedged. On commodities, we have no hedge at all.
I would now like to hand the conference over to Ms. Bhoomika Nair closing comments.
Yes, sir. Just thank you very much for answering all the questions and all the participants for being on the call. Wishing you all the very best.
Thank you. Thanks, Bhoomika, for hosting us. Wish you all the best.
Thank you. Ladies and gentlemen, on behalf of DAM Capital, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.