Thermax Limited
NSE:THERMAX
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Thermax Limited
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Ladies and gentlemen, good day, and welcome to the Q2 FY '23 Earnings Conference Call of Thermax Limited hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Ms. Bhoomika Nair from DAM Capital Advisors. Thank you, and over to you.
Thank you, Sashri. Warm good morning to everyone, and welcome you to the 2Q 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'll now hand over the call to Mr. Bhandari for his opening remarks, post which we'll open up the floor for Q&A. Over to you, sir.
Hello, and a very good morning to everyone that's on the call. Thank you for being with us today. And I think most of you know Thermax well now. So I will keep my opening remarks very, very brief.
As part of the Board, I do a management presentation, as you may expect. And in this last week, when I was doing the presentation, I called the quarter that went by as a goldilocks quarter. Yes. On one hand, you see commodity prices stabilizing, which will increasingly start to reflect in our margins as well. On the other side, we see some of the growth drivers also moderating, yes. So our inquiry pipeline, which was growing continuously quarter-over-quarter, while it is still very healthy, it is now plateauing.
On the large project side, the big base that we had in oil and gas is over. We still see a lot of momentum in much of our base business category. But even there, there is industry shifts, edible oils, cement, some of these sectors, even pharma are seeing reduced inquiries, whereas others, including beverages and steel and a couple of other sectors are continuing to show increased momentum. Overall, I would say, moderating on the inquiry pipeline still extremely healthy and good. Very good on the overall environment on the execution front.
So across the board, we think we see supply challenges, moderating, logistics situation improving, which is also maybe somewhat reflective of logistics into increasing capacity in the overall demand situation globally moderating, which means we are seeing even global freight prices starting to moderate and become more amenable overall. And so in this environment, I think our ability to work our backlog and even our customers for the most part are picking equipment, so we don't see too many red flags that way. So overall, I think on the execution side, we see reasonable momentum across the board.
From a focus perspective, I think the focus is now clearly on continuing to make sure that we win good orders. And this last quarter was a good example in your -- in the Q&A, I'll talk about kind of what's working and where is the focus. And now also continuing to work on some of the cost aspect investing in digital, investing in improving our processes. It's a lot of work, heavy lifting in the plumbing of the organization as such. So that's the focus right now. And the rest of the numbers you have seen from the analyst reports coming from the management presentation that we have shared with all of you.
With that, I'll shut up and open the floor for questions. Rajendran, anything else to add from your point of view?
None, Ashish.
All right. I think we are ready for questions here.
[Operator Instructions] We have a first question from the line of Ankur Sharma from HDFC Life.
Just going back to your comment on inquiry levels kind of going off and that kind of tying it to the fact you also said about large order on oil and gas, also kind of at least not -- or maybe kind of also peaking out. So I'm just trying to understand, when I look at the second half of this fiscal, and I remember from your last call also, you said that steel, cement would be more of a FY '24 kind of to the larger order there may be more of a FY '24 kind of the scenario. And even FGD which was the other big contributor for us, the time lines we moved out. My guess is ordering there who may see some determent.
So just if you could help us over the next 2, 3, 4 quarters, both base large, which are the segments you think could help us get to that the growth in the orders more importantly, given that '22 was such a high base of about INR 9,400-odd crores, 9,500-odd crores?
Good question. And one that I'll try and answer to the best of my ability. And I think we had shared this previously as well that a couple of these big industries will go through date and that date especially on the refining and petrochemical side, especially the government own refineries here. So HRRL, which was the new refinery that is coming up in Rajasthan that being the single biggest one, where there were a lot of inquiries that were in place.
So if you take a look at our current quarter, which was about INR 2,000 crores plus in orders. We deliver that with very little from big orders as such and the entire refining and petrochemical sector was a very, very small portion of this order book, and we have nothing to report. To be fair, we actually had a couple of losses out in the refining and petrochemical space, where we were not willing to compromise our margins, and we chose to keep our prices high and the virtual projects went in -- at a pricing that we wouldn't have touched it any which way. So it's not a regrettable loss, but we have had losses in the last quarter. and those were managed control losses.
Similarly, on the FGD side, even previously when we had spoken, we really haven't forecasted too much on the FGD side. And even going forward, at least in the next 12 months, we've got nothing on the orders front from any of this. So even with -- above these constraints to put out INR 2,000 crores plus in orders was actually fantastic.
So what does that mean for the second half and an outlook? I'll say how I'm looking at it. I'm looking for consistency in getting some of these base orders and continuing to be at these kinds of numbers, and it could be 10% below it. So somewhere thereabout add, and then we have a few big orders that we are going for, nothing that is INR 1,000 crores or bigger than that. But we have got a few in the INR 500 crores to INR 1,000 crores range of the INR 300 to INR 1,000 crore range. And if we win 1 or 2 of those fantastic, but we will not drop our prices to win anything like that.
So there is still a pipeline of big projects. and we will see what happens. But on the base business, which is -- as I said, we've been trying to get to a tire to higher levels. There, we would like to sustain where we are now. We may be, as I said, 10% here or there, but that's the range we would like to be.
And on steel, cement, sir, anything? Because I remember last quarter, you said still not seeing a big pickup there, for instance [indiscernible] is more of a 24% kind of growth phenomenon?
Picked up at 24%. Even last quarter, we have had orders from cement [indiscernible] both. And the way it [indiscernible] in that sense is not growing, but we still -- and even now, the inquiry pipeline for the maintenance fee is lower than what it was a year ago, clearly, but it's still there, yes. So we continue to work through this. The mega projects are -- will -- I think will be for nonperformer. Many of our customers, when we speak with them, they are very, very bullish on their CapEx plan going forward across the globe.
Okay. And just the last one, if I may, on the margins in energy, which again saw drop this quarter as well on the energy segment, a raise about 5.5% EBIT margin. So fair to assume we've hit bottom and now with RM prices kind of either stabilizing or going down, it only gets better from here?
Yes. I think that's a fair expectation or at least that's the expectation that I have from the team to deliver. I think we have in some ways, of course, we may always have some surprise that may come about. And as I see the prices, I'll be open and transparent in sharing any of these. But where we see right now, I think we have gone through a fair bit.
And on the energy margin side, there are few even within the numbers, there were some moves here for our FEPL, which is our solar business. We continue to invest in home growing that. So we are investing INR 3 crores to INR 4 crores almost in terms of losses each quarter in building that platform. And in a future question, I'm happy to answer where that is going.
In addition on the -- both our international businesses took some sort of losses in our large projects business, we had a particular customer where -- and again, at our main customer -- and these are all kind of -- in some ways, I think the government projects have been, while they gave you a good top line, the bottom line always suffers, because it's just difficult working through that entire environment and which is also something that we have kind of worked through and period of our book. So as we look forward, I think what you say in terms of the margins improving on the energy side, that would be definitely my expectation as well.
We have our next question from the line of Bhavin Vithlani from SBI Mutual Fund.
A couple of questions from my side. The first question is actually coming from one of the order wins that you've highlighted in the Slide 6, so which is the ZLD effluent recycling plant for a pharma company. So if you could help us understand maybe the size of the orders that was there, how large is this industry Thermax's market share, your? And now given that the ESG reporting will get more stringent in the next coming years where companies have to report specifics about the water and the effluent. How large can this business be for Thermax?
See, these were all orders that are INR 50 crores and less, yes. But when we talk about purchasing base business of Thermax, this is exactly the kind of segment that we would like to be to get better and better at. Market share, specifically for ZLD, the market itself is also so fragmented and ZLD itself has got intermittent in technologies -- intermediate technologies and the final solution. So what you define is ZLD can also change a little bit depending on how the calculations are done. I don't think I have a ZLD specific market share number to share. But overall, ZLD and associated with ZLD, the technologies of [ MEV ], MVR, they are all in a space where we see a pipeline and then a pipeline that continues to grow. It's also very competitive. Yes. And it has got some amount of technology differentiation, which we think we have, but it's a very, very competitive space because ZLD ultimately is the cost category for our customers.
And so -- but overall, I think water as a space is one that we all think is a multi-decade bet in an investment and more and more water in India has to be cleaned up. Our rivers have to get cleaner.The enforcement will continue to grow and some of these spaces will continue to grow. There will never be a single project at least for us because we don't do municipality in government. There will not be something that we report out individually, but underneath the entire environment sector, which is anchored by our water business continues to grow in pipeline.
Sure. Just a follow-up on this. X of municipal water segment as a whole, what would be our addressable market and rough market share?
Our market share is less than 10%. The overall market on an annual basis will be easily INR 700 crores to INR 10,000 crores, I would say.
Okay. The second question I had was on the chemical segment. We have seen a very strong growth coming back. And in your presentation, you have highlighted about exponential growth that we have seen in oilfield chemicals and construction chemicals. If you could give us an outlook how do we see this segment as a whole? I mean what are these different constituents as a percentage of our chemicals? And when do we see margins revert back to the 20-odd percent that we have seen historically?
So I don't think we have a number specifically on when it will get there. We've always shared that good place, while a 20% EBITDA margin, maybe, yes, but a 15% to 20% PBT was what we thought we wanted to target with our chemical business and increasing top line as well. I think we went through, as you guys know, nearly 3 quarters plus of pain -- 3 quarters worth of pain where the commodity prices, the logistics increases, our inability to deliver reworking contracts with our customers. All that can be into. I think we're now coming out of that, and this last quarter was a good example, where even our execution was getting better, and we were able to deliver on some of what we had committed.
I do see stability in the coming quarters as well. We did have a bit of a good guy on the mix in this last quarter that mean. So while some portions are continuing to get better on the chemical side, the mix situation, at least for one quarter may revert back to kind of what it was before. So overall, I think not 20%, but at the place we are, at least for the next quarter and beyond, I would expect us to hold on to that and maybe improve slightly as well.
We have a next question from the line of Ravi Swaminathan from Spark Capital Advisors.
My question is in continuation with the question that Ankur had asked to be in terms of the large order potential, how many orders, which are more than around INR 250 crores in size are there in pipeline? Which sectors are there both domestically and international source we can use the broad thought process over the next 12 to 18 months?
So I can't share all of it because some of it is competitive information. I would say there are large opportunities still both internationally and domestically in the INR 250 crore to INR 1,000 crore range. Some of that is in refining in petrochemical; steel, we have a decent look; international, we have a decent look; engineering, we have got a couple of projects that are in that space. But that overall pipeline is not as big as what it was maybe a year ago, yes, of large projects. Even though our total pipeline continues to be as good, the large projects are not as good. Yes, the FGD base is kind of over the oil and gas refining base in India, where a lot of projects during COVID were not going through, a lot of that has now worked its way through the system.
Got it, sir. And with respect to the ethanol blending opportunity, you can talk some, is there opportunity for some -- decline in the multiple -- in the small orders?
Yes. I think that is definitely possible. And I'd say pipeline there is building up to the point that the pipeline is a lot more than what we want to sign up because the technology is still emerging out here. We want to be a little careful before we fill ourselves with orders out here because we want to be sure that we -- what we have been working through and we are able to deliver in those projects that we have already taken exactly like we have as we are planned in. Yes, the sector, I think, has got a lot of potential and everything from bio CNG, bio gasification, tomorrow biomass to hydrogen. Many of these places have a lot of potential.
Bio CNG is commercially viable, even now with some of what the government has put in terms of subsidy and support and overall the strong pricing that CNG has. The technology bit, I think still needs to be -- technology and supply chain, both have to get proven in the ground, high degree of confidence that, that can happen, but we need to see that. And that's the stage where pipeline can develop exactly like you said of lot of small projects that can come in to -- come in and can contribute.
Got it, sir. And my final question is with respect to the clinical business, the kind of growth that we can expect over the next 3 to 4 years, 10% to 15% CAGR is something that we can kind of expect?
That's our expectation in investments accordingly as well, and we'll continue to invest on the chemical side. There are just too many geopolitical moves on the chemical side because a fair bit of our business comes from exports. And we are investing, as you know, we have spoken before also in investing in the front end in some of these geographies, and we are continuing to move the ball forward.
Long term, this is a growth area for us. We want to invest into it. But there will be ups and downs, and we have seen it in the last 3 quarters also how the chemicals business can go up and down. I can't predict that such behavior won't happen in the future. But I do think, overall, this is a growth segment for Thermax.
We have our next question from the line of Deepak Krishnan from Macquarie.
I just wondered because there is more on the solar OpEx-based model. Out of the total committed investment of INR 1,000 crores, where are we currently? And in terms of returns, how do we kind of look at the profile? And beyond this, have you kind of made any incremental investments in any of the newer areas that we were focusing on?
So right now, on the solar side, we started the year with an expectation to do about 50 megawatts in OpEx. And may be a similar amount on the CapEx side. The CapEx business, we haven't been able to win anything of note here, and which is why we are running a loss in that unit, which is higher than what we had projected internally when we started the year and we are carrying through that loss. Through that the positive bit, which says we are on something at least, right, is on the OpEx side, where on the OpEx side, we have about 70 megawatts, which is committed 100% sold. And we have 3 projects under execution right now in Tamil Nadu, Maharashtra and Gujarat. So the first one of which will -- should start to produce within the end of this month. And the last one of what is already committed should happen in Q1 of next year.
So over the next 6 months, we have a lot of activity out here. But I think even next year should overall be at best breakeven year for the solar business. The year after would be when good profitable numbers will start to show up. And after that point, I think the businesses should actually start to become a [indiscernible] to Thermax. After the 70 megawatt, our next number we want to go for is somewhere between 150 and 200 megawatts. And the plans for that are being finalized. The capital so far, what we have invested in, I'll let Rajendran share how much we are comfortable sharing about that. But there has been a discussion at the board level that sometime next year, we need to start reporting our solutions business, which is FEPL and TOESL. Both of them separately to our investors in terms of what is the profile, how do we see those businesses and calling them out as our solutions business.
In terms of IRRs in solar, we are seeing numbers of the order of 16% to 19%. To sellers is a couple of percentage points higher, 18% to 21% on equity add-ons. Solar is slightly lower. But I think these are all homegrown projects. We don't expect to buy anything, do any silly move in terms of trying to create a big number. We want to incrementally grow this, working with customers that we know. We have good relationships with [indiscernible] Thermax, and we'll continue to build and work towards this commitment of 1 gigawatt over 5 years.
And even from a capital commitment perspective, we will -- we have a number in mind. We won't go beyond that. And I've shared that number, at least some parameters of that number. If we think we see growth opportunity beyond that, then we will look to bring an external partner in at the right time. Yes, right now, our focus is on developing these projects starting to gain revenue and show the world we can do this consistently across geographies and that we have a good scalable model. Once we do that, then we will figure out how much we want to scale it up and what we can in we want to scale it.
Mr. Krishnan, does that answer your question?
Maybe just one follow-up on my end. Just wanted to check this on the end while your site data, we would have 2 legacy FGD projects and the margin that we reported this quarter. Does it have any write-back of provision or any one-offs that we specifically want to call out?
So on the FGD side, specifically, our 2 projects are in all projects now are in full execution mode. The 2 that are relatively a lot more stable. Both are practically through all of their buys, majority and that had been overwhelming belling majority of the buys are done, well above 90%. They're all going through commissioning and site work with full progress at -- on location.
And in terms of where are we on the book side, there were no unforeseen write-offs or anything on the FGD side. If anything, all the results that we had booked, we were able to release a little bit of those reserves based on the project progress that we were seeing. So whatever was our mechanism in terms of how do you release that contingency based on the accounting treatment, we were able to release a little bit of the contingency on to the 2 projects. The higher revenue from these projects will start to come in, in the coming quarters. And along with that revenue, some amount of margin release will also start to increase in these projects in the forthcoming quarters.
We have a next question from the line of Renu Baid Bet from IIFL Securities.
Firstly, [indiscernible] for more update on the green energy side where we have taken off some initiatives on technology tie-ups for solution in the country. So are we update on that segment of the business?
So we talked about on the green energy side, few different things. I don't know which ones specifically you are referring to. One is the JV that we have done with EverEnviro for executing bioCNG projects. I've given an update on that already, Renu, in one of the previous questions that came by, we see an extremely strong pipeline, but we need to be careful and cognizant and not jump in.
So deep before we know what is our execution capability because we see this as a multiyear play and there is no point being silly upfront. The potential in the market is definitely there. And we think we have good technology and now pretty quickly, a very good sense of what the execution takes where we think we are ahead of the curve compared to the rates of the market. Yes, we've got a couple of projects, which should finish in the next 3 months, and that should give us a very good idea about what is the execution capability. Based on that, we will see how fast and how much to expand the funnel back.
Sure. Secondly, if you look on the margin side now, it's been a bit of mix where energy margins have been for account of certain projects EverEnviro feel some relief. And telcos too, as you have guided are now in double-digit margin target [indiscernible]. So the early estimate becomes [indiscernible] -- sorry you mentioned or an...
Hello. Can you please use the handset, your voice is not very clear.
Sorry, I have a sore throat. So I was just trying to say now that the commodity rate implications from the various segments have been visible in the last few quarters. When we look at these commodity cost related headwinds easing out, do you foresee that there could be certain pockets of projects where still some of the impact could continue in the second half or broadly are behind in terms of the headwinds that we have seen?
And also on FGD for the residual value, while backlog, from your perspective, what should be the broad profitability on those projects? [indiscernible] indicated breakeven to low single-digit. Do we think that receivable orders now have better margins with even commodity cost structures, or they would still be at near breakeven levels?
There would be maybe whatever I would have shared previously on the FGD side, maybe 1% to 2% better, not that much here. So if it was 2% or 3%, maybe now 4% to 5%, but that's it. It's a business, which is -- and also because when the commodity prices just started to somewhat moderate. And when we had to lock in, a, because projects have got very strict delivery time lines and to stay with those delivery time lines. We have to make calls and we move forward. And so wherever commodity prices are today, we could not benefit entirely we had to make our moves, but it had some improvement. I don't think anything beyond 1% to 2% in the numbers that I've seen on the FGD side.
On energy segment, overall, as I said before, that I think we have now an opportunity to improve margins. Yes, some of what we have gone through in terms of commodity prices, taking those [ headwind ] increasing our pricing or leveling our pricing to somewhat. There is still an impact while a lot of commodities have leveled out certain kinds of steels, especially certain exotic steels, which we depend on Europe. Anything that is Europe supply or dependent on higher grades of steel is very extremely high. Not only is it high, the availability is also very low because many of these European plants, because of their energy movements have had to increase their prices substantially, which means the overall prices for those across the ecosystem have gone up tremendously.
So while a lot of the base steel prices have come down in tubes, which is something that we buy quite a bit of, the prices haven't come down to the same extent that they come down for plates in flat steel. And certain exotic steels, which we need for many of our FGD projects and many of our other projects, there the writing has actually gone up. Overall, though prices have clearly stabilized and moderated and we are able to manage this little bit of change up and down within our system.
Sure. And just 2 questions. First on the international subsides, can you share in your update in terms of both in terms of demand outlook and margin profitability for Danstoker and Indonesian business?
And lastly, you did also mention about, as in your comments on order inflows were a bit mixed in terms of large orders flowing and these orders moderating still remaining will be. So you think that the overall value [indiscernible] or the moderation that you've seen is largely -- this is also linked with the commodity price moderation, the absolute volume or the number of projects itself has now started to reduce?
I think I'll answer both your questions. I do think the volume of orders is also starting to plateau at least, if not shrink. And a good example of that is in our channels business, we went through 5 quarters of doing better than the quarter before. This next coming quarter, I don't think we will be able to sustain it, which means there will be some gaps. And the focus then is on market share, et cetera. And how do you win more. But that -- all of that ultimately is to speak for expect some pricing to start coming down. It will get a little bit more competitive. We see a very strong overall inquiry flow.
So our numbers inquiry flow is well beyond pre-COVID times. And in this time period, we've also built up a decent services portfolio [indiscernible] total chemicals business are proof in the sense their continuous kind of base business in a way. But on a channel side, we see now finally kind of we have reached a number and we are not able to grow beyond that number, which we were for 5 quarters. So clearly, there is a bit of plateauing in a slowdown.
On the international businesses, between Danstoker and PTTI, which is our Indonesian business, we had a loss in the last quarter. The good part is both of them are doing extremely well on the order side, which means for the remainder of the year and for the next 12 months, I would say, we should be -- we should have some of our, I wouldn't say best numbers, maybe our best numbers as well for both of these businesses as we're looking on and with different drivers. In Indonesia, as we have said previously also, we were starting from zero. And so everything was competitive, difficult as we are starting to make a name out there. We're starting to make a name out there. We're starting to do better and better. We have a better inquiry flow. We have slightly better win rates. And as that win rates and all start to get better, our backlog is also improving.
We have had challenges in execution, which is why we took hit even last quarter on add-back business. But as we get better and better, the expectation is, some of this will eventually become a strength for us. So still very committed. We see the pipeline in Indonesia and our ability to execute it continues to improve. I do expect at least that, that business will not have losses for the next 2 to 3 quarters.
We have similar end result in Denmark and Poland in our Danstoker business, but a very different driver. There, we have a massive inquiry flow because what has happened is that the decoupling of Russia and Europe has resulted in a big requirement for biomass and biomass-based boilers and all the kinds of things that we are good at. We have 2 very different challenges out there, which is mindbogglingly horrible in a way that when inquiries were low, we were not profitable for one reason. Now the inquiries are so many that we are not taking orders, and we're not taking orders beyond a particular point because we don't have an ability to supply. And we don't have -- not only do we not have the ability to supply because our plans are full, but also overall, energy prices have just shot through the roof, yes.
So the order book that we had the profitability on that went down because energy prices in both Denmark and Poland went up like 5x. And they're now starting to more but we will not increase strength, worker strength in those plants here because we've gone through that difficult cycle once before. And so we will not take orders beyond the point. We will outsource work wherever we can. But as we look forward, I think that business should also make money at least for the next 1 year.
We have a next question from the line of Sandeep Tulsiyan from JM Financial.
My question is pertaining to the environment segment. You did mention that the inquiry pipeline for FGD has slowed down. And when we look at that quarterly order inflow run rate, although there was some improvement in past couple of quarters, it has come back to that INR 250 crores, INR 300 crores run rate back. So do you foresee these numbers being in this range kind of flatten at these levels? Or do we see a further softening from where we are currently at the domestic and enviro part?
On the enviro side, if you take FGD out, we -- only we have our buffer in our clean water and our clean air portions of the business. Both of them are also at their highest ever kind of run rate in all ways, yes. So both those businesses are doing at least on the order side, fantastically well, different drivers. The clean air portion is more related to kind of capital investments and the like. I think, no, I wouldn't say entirely capital. I'm just saying that the water business and the clean air business that together make our environment business have got different drivers. I guess that's a better way to say. Both of them have got tailwinds right now.
So we don't expect anything beyond FGDs. And FGD is not slow down. I think, even when we have started the year, we had said at least internally, we don't expect to get any wins in FGD and the first 2 quarters have been testament to that. I think as we look forward, whatever remains should be -- should grow, but -- and we are very, very bullish on long-term potential of both of these businesses. And where we are is, I think, that's the base you can look to grow from.
Got it. Second question is on the chemical segment, just delving a little bit deeper in terms of different subsegments within this, historically, of course, the resins used to be around 50%, 55% and balance was the specialty in performance chemicals, including oils and chemicals that we are doing -- this quarter, of course, you expect there was a large order in international space. But can you give us some more color in terms of how it is segmented between these major subsegments between domestic/international, and also in terms of capacity where we were expanding at capacity in the range, there are in terms of total capacity and utilization there? That would be the fun question.
Sure. On chemicals, I think our mix changes a little bit based on what kind of orders we see. But at an annual basis, our mix is pretty consistent and to help that about 40% of our business is resins of which depends, but around 1/4 to 1/3 can be specialty resins or resins going for specialty applications. Then another 40% is basically a water treatment business, which is India having. And the last 20% is construction chemicals and oilfield chemicals and the like. We used to also do pulp and paper and all that, which we have stepped back from, but these segments, all 4 of these, the water treatment, the resins and the construction chemicals and oilfield chemicals, all 4 of those, we see decent momentum Yes. So we like where we are.
Overall, from a capacity utilization at Dahej now starts to go up some of those water treatment and ETP issues we have worked through, of course, while we were renegotiating contracts, et cetera, with customers, even our demand number had softened. We are now effectively beyond 50% capacity utilization of the plant, but we still have quite a bit to go from a top line perspective. in terms of how we can grow our chemical resin top line at Dahej. So at least for another 1.5 years, we think we can continue to grow out of Dahej. After that, we will need a new plant, and we are planning for additional capacity investments in that business.
We have a next question from the line of Aditya Mongia from Kotak Securities.
My first question was to the team on margins at an overall level. The question was that if you see RM prices stabilizing, if not moderating, have you seen some improvement in our bid margins given where your backlog is as you see benefits of leverage, both operating expansion is coming about? Do you envisage 10% EBITDA margin as a reality that can happen over the next 2 years for you?
Look, I think at some point, we need to, as I said, start to show our business a little differently. On the project side, I don't think 10% is, I wouldn't say it's impossible. It's definitely possible, but it is not something that we should bet on. And that's because I've already shared, yes, a big portion of our backlog will be FGDs, I've shared with you the profitability that we expect. On the rest, there is definitely opportunity for improvement over where we are, and we will show that, and that will start to show up in the energy segment over the next 12 months as we continue to execute and work through. Because understanding the competitive nature of these businesses, 10% EBITDA, maybe at the -- I think, at the higher end of quarters, what can be reasonably expected.
But the business will always be maintained as a healthy cash business. We have very good cash flow, profitability translating keenly into cash and relatively low investments in capital equipment and kind of managing the depreciation line very, very well effectively. So that's how I would look at the projects business. Beyond the projects business, which is our products and services business, to expect a double-digit EBITDA, of course, we should do that, and that's our focus. And even when I said, what are we going to be working on right now, a big chunk of our focus will be to invest in the guts of Thermax, which is invest in process improvement, invest in digital, a lot of other places, so that we don't go back to poorer profitability when markets change. We really want to use this to this time period of relative stability and health to make us a better business for the long term.
So in that sense, we will be investing internally to -- and take some additional cost to ultimately become better, yes. And so these are not easy decisions in terms of really digitizing portions of our business, investing in digital for our services capability, lot of these things in doing process improvements, doing shared services in a much bigger way. All of this will take some time and a significant amount of effort potentially a little -- some amount of money as well, which is not very significant, but significant, which otherwise may have been given back is EBITDA, but it's very, very important for Thermax to improve the guts of our business to make us a very competitive business for the long term. And we want to take the time to do that.
So overall, in that products and services business, though, to expect double-digit EBITDA is, of course, has to be done and delivered. And then the third part of our business is our solutions business, where more than EBITDA and profits, I think equity IRR is the right metric to look at. And I've shared kind of what those numbers are for that part of the business.
Extremely valid points taken. The second question that I had was more on sustainability-linked businesses. You've said in the past that some of these businesses obviously are a cost to the customer and then profitability for us becomes an issue. Do you see businesses let's say, Waste to Energy kind of businesses, which actually aren't the cost, wherein the company can make decent profitability? And can they be a driver of your beef ordering -- beef orders in any -- [ equal manner ] in the next 2, 3 years?
Look, it already is, yes. So that's the place where our investments are going in. That's the place where our effort is going in to differentiate ourselves, build capability A lot of things that we have done on our own, some of which we have even talked and announced about, but that's exactly what's driving the business, completely. And even on the -- when I talked about the really specifically as a cost to the customer, there is still investments that you can do in technology to make your technology be more efficient than and alternate technology like your ZLD takes less energy than somebody else's energy -- ZLD, but then you need to convince your customer that, that is actually something that happens and that they should be okay paying a little bit more on the CapEx side to recover a lot more money over time.
So none of these are easy cells, but technology differentiation on multiple of these places is absolutely possible. That said, industrial products in general, unlike software or consumer products, differentiation and technology improvements mean small, small bits of leverage, which ultimately results in small -- possibly a bigger number on the top line, but small improvements on the margin lines. Here, the Indian customer is very, very, very effective negotiation. But you are seeing that margin play come out. And you are seeing in some of our active decisions also where some of our biggest projects in our history for the government business we turned our back from to say we will not take those projects at a low profitability, even though they would have given us a massive top line, and that was a very active decision on our front in terms of how we want to work our backlog.
We have a next question from the line of Jonas Bhutta from Birla Mutual Fund.
So Ashish, I just want to circle back to this comment where you said that you're going to spend some time over the next year or so in trying to sort of even out the cyclicality that our product and services business have, while that endeavor may have some sort of front-loaded costs. But can you just sort of elaborate on what we are actually trying to do? Because as far as we understand it on the product side, particularly on the boiler side, we are already at market leadership. And we would already have top quartile margins there. So if you can just give us an example because digital by that way is a very vast area? So what are we trying to do here? Some color on that would be really helpful.
Thermax to its history, we have been a very people-intensive business, which means in previous times when we have grown we have grown that by adding people, which also shows up as our employee cost as a percentage of revenue. What that means is, overall, at the back end, we were running more as a company, which was not leveraging best-in-class processes, and I'll explain what I mean by that. What it means is that we were in terms of order, how standard are you? How quickly does an order flow through engineering get into manufacturing? As you go into all of this, every time there is a change, how much does that design change reflect in engineering time that you need versus how quickly can you take some of that complexity in a customer inquiry and translate it into a product that you can deliver.
Ultimately, what it means is to be able to take the chaos that is outside and build processes and systems, that chaos on the outside doesn't result in chaos inside. And that ultimately means having a digital backbone through the company, which is -- and not just digital is just one, but your processes that are lean a lot of your capabilities that are modern. It also then reflects in your ability to get good people, who come not because they have to do mundane tasks again and again, but are really focused on differentiated growth.
So it ultimately connects to be able to attract and retain people it goes to the ethos of who we are as a company because I think the world around us is changing very quickly, especially in the energy space with what the demand of green energy, waste to energy, all of this requires complexity in the system on water, the number of technologies that are coming in are so quick, the customers demand shorter lead times, better product all of that. And so Thermax has to be at the front end of some of these spaces, we need to be able to respond really, really fast to our customers.
And to do that, we need to take the time that now if we grow, we don't really need to grow with people additions. And not only that, eventually to make digital as a driver of our business where we are able to give customers deeper insights into how their products are being used, what efficiency, what uptime are those assets working at, give them valuable insights, which will ultimately help them come back to Thermax again and again for their needs. So we are looking to transform the company to this entire experience system.
We have a next question from the line of Mihir Manohar from Carnelian Asset Management LLP.
Largely, I wanted to understand the comment that you made around the inquiry pipeline, we are seeing moderation on the inquiry pipeline front on steel, cement as well as oil and gas. I mean I just wanted to get an understanding, we are seeing CapEx happening across all the 3 sectors. Why are we seeing a moderation that front? And could the moderation continue even in FY '24? Or is it only there for the balance part of the year? That was my first question.
Second question was largely on the fundamental side. I mean I wanted to understand the fundamentals of the process boilers. I mean [indiscernible] process boilers, so that largely -- that's only purpose of steam or high-pressure steam, are there a challenge with the renewable energy going up? So I wanted to understand that part on a fundamental level? That was my question.
On our overall inquiry pipeline, if I take a look at maybe where we were 1.5 years ago or even a year ago, yes, our inquiry pipeline right now would be 20% plus relative to -- in absolute terms, relative to where it was. Relative to where our inquiry pipeline was 4 months ago, maybe we would be 5% to 10% lower, yes. So that is why I'm saying we have reached a plateau. And especially in some of the larger projects even in large projects. I would say we are much we have a much lesser pipeline than in previous quarters, which is not to say that we don't like our pipeline. We actually absolutely like our pipeline because a lot of it is good, profitable base orders that you need to win through competitive working with the customer, but they are not really government-based orders as much. These are things where Thermax is differentiation, et cetera. We may play slightly more of a role than otherwise. That's all I think I can share as much color to some of the previous question -- answer to some of the previous questions as well.
And what the outlook maybe for the second half of the year also, in one of the previous questions I've given as much color as I possibly can. And to be fair, that is exactly how I am looking as well. We don't run by a number or a specific number to it. We have got a lot of individual actions that add up and some of the bigger orders, you can't say whether you will win them for sure or not. What we are clear is we don't want orders just to fill up a plant or otherwise, we are not at that point at all. So that was the first question.
Your second question on what does this mean? I think we can all have a debate on what the world will be 10 years plus from now. But for the next 10 years, you will need a lot of process boilers for every application that you can think of. And even when you move from the whole move towards green energy, if anything, the process boiler will need to change. It will need to change from coal to multi-fuel, somebody is looking at biomass, somebody will look at electric boilers, all of those are actually opportunities. I don't think of them at all as something to be scaled up. Anything complexity going up will typically help a company like Thermax, which invest in technology and wants to stay on the frontline.
So at least in the shorter, medium term, I don't see any risk of -- there will be an economic cycle, of course, but I don't see a risk on technology or technology of solutions of any sort affecting our business on the heating side, at least.
We have few questions from the line. Would you like to take that?
Rajendran, what do you think? Should we take one more question, and we call it a close after that?
Yes, fine with that Ashish.
We'll take our last question from the line of Rahul Modi from ICICI Securities.
Just a couple of quick questions that I had. Sir firstly on your coal gasification, pilot project that you developed, how that's progressing and the opportunity size going forward in that segment? And some views on concept of community boilers coming up in the MSME space. What is your view on that? And how do you see that market going up, whether that will enable our business in the boiler market or if it's sort of restrict a bit of in terms of sizing? Your views on both will be helpful.
Sorry, I lost you a little bit maybe the problem was at our end. Could you repeat your question? First, the community boilers in the -- could you repeat that one, and then I'll come to your first question as well.
Yes. Sir, I have 2 questions. One was on your thoughts on the concept of community boilers being prevalent in the MSME space and going forward, whether that is a way of going, or what is our opportunity there, whether it enables our opportunity or you think it restricts us? Certainly on the opportunity of the coal gasification, which we had developed very successfully. So how do you see both the things panning out over the year?
Community boilers, I think, is a good option and a good opportunity overall. But it will ultimately -- from an overall market perspective, it'd be less than 5% of the overall space. Yes, if it was 0 sometime or very small a few years ago, I think the especially in places like industrial parts and all, it is a good option. The challenge that is back to drive steam over long distances is quite extensive as well. So only in certain industrial parts, it makes sense and where it makes sense, I do think this will take on. Our interest has been that these boilers should be -- not be coal driven. They should be driven on different technologies. And that's what we have been pushing in and talking to the people setting up these community projects and providing steam through that. Yes, that's the answer to your first question.
The coal gasification, we are far from like a big market from a Thermax point of view. And there are 2 intermediate steps between where we are today and what can be like a massive business for Thermax. The first part is you need a -- we have a technology, which is unique. We think for coal gasification, we have possibly -- not possibly, at least with confidence, we can say India's best technology and especially for working on high-ash Indian coal. But what we have done and demonstrated is a small pilot plant. Between our pilot plant and a large-scale plant that somebody can use is the 1,000x kind of expansion. And that 1,000x expansion is not something that somebody can overnight sign up for.
So Thermax will not sign up for a INR 4,000 crore project where our technology will be put, and we will have to make a big investment that is your technology -- you are the one who is underwriting that entire project. That's not rule for Thermax, and that's not right either. The intermediate project is more likely something that is of a 50x scale-up of our current technology, where also we are willing to put some of our own money as risk capital. But we are not a developer of a project. So we need to find the right developer of the project, then we are working. Ultimately, our hope was that the government itself after making such a big set of announcements will look to push technology like what Thermax has developed across coal gasification. And we continue to work with the government to look at us as a partner, but it hasn't been easy by any means because the government has its own procurement tools and tendering process and all that. And none of that is easy.
So I would say I'm still bullish on coal gasification, but don't expect that this will become home run. But it has very much the potential to become a massive home run, and we are also working on carbon capture technologies in other parts that are important to making coal gasification success. But the first part is we need to go from a pilot scale to some sort of a commercial scale project. And that will be the first thing. After we do a commercial scale project a couple of years after that, you can talk about doing big, big projects on coal gasification.
So we are at least 4, 5 years away from anything really, really big I would say. Not at least, I would say we are 4 to 5 years ago. But of course, if we are not able to scale up our technology and don't figure out intermediate project, then we don't know what the future itself is. This should be really sad because we keep talking as a country about coal gasification so much.
Okay. So that is the end of the story from our side. Thank you for listening in. Rajendran, any closing comments or anything that have incorrectly indicated or otherwise?
No. I think there was one question on investment [indiscernible] which I can clarify at this time. We have invested close to about INR 92 crores in the segment for [indiscernible] including of last year. This year, the investment is about INR 52 crores, yes. So that's I think one data point that has been sort, yes. Otherwise, I think there have been many questions which has been cleared all again by you, Ashish.
Okay, thank you.
Thank you, sir. Wishing all -- thank you all -- thanking all the participants for being on the call and thanking you, sir, for giving us an opportunity to host to you yet again and wishing you all the very best.
Thank you.
On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.