Thermax to restructure operations

Energy and environment engineering major Thermax Ltd proposes to withdraw from non-core sectors, and concentrate on its core activities of energy and environment, power and chemicals. The Rs 500 crore company has seen a slew of activities and joint ventures in new and related sectors in the past few years, including software, electronics, control and instrumentation, water treatment, waste management, energy systems, surface coating, chemicals. It proposes to withdraw from some of these.

"We are aggressively restructuring Thermax," says company CEO and managing director Abhay Nalawade. "We will essentially focus on energy and environment, and if necessary, spin off other businesses." The most recent of such non-core distancing by Thermax is the dissolution of the joint venture in instrumentation and control with Fuji Electric Co Ltd of Japan (see Thermax, Fuji Electric call of joint venture). The project, Thermax Fuji Electric Ltd. which begun in 1996, was found to be unviable in the face of poor demand growth and changing technology. A number of green-field projects in power, petrochemicals, had been abandoned or delayed, which affected the growth of the transmitter market.

"At the time of forming the joint venture, we had expected the market for transmitters to grow to 50,000 a year by 1999. This has not happened," says Nalawade. "In this situation, we did not hope to break-even for another few years." With transmitter technology changing too, Fuji preferred to centralise manufacturing operations in Japan, he says. "Adopting the new technology would mean making fresh investments. With the kind of numbers in demand, it was not found viable to continue in India."

First off the block was Thermax Systems and Software, which Thermax spun off, selling 70 per cent stake to US-based NovaSoft. "Electronics could be the next in line," indicates Nalawade. "We will look at each business and decide which of these makes sense."

Significantly, in its bid to stick to its knitting, Thermax's movement has been getting out of sunrise sectors such as electronics and software, where presently the market is seeing a boom. Nalawade justifies pulling out of these new growth sectors and focussing on energy and environment on the plea that these are areas that would become "critical" in the years to come.

"The biggest problem of the environment in the years to come will be energy," he asserts. "Every time you burn fuel, for heating, cooling, power, transportation, you increase the greenhouse gases in the environment, especially carbon dioxide. With every progress there will be more and more release of this gas into the air, leading to global warming and climatic changes. As a result, five years from now, there will be a movement to stop power stations, especially those that run inefficiently. The only alternative will be co-generation." An area where the company has been shoring up its capabilities, and plans to refocus resources.

He points to an estimated $ 2.5 billion that would be spent annually on energy-efficient equipment and the Kyoto Protocol that calls developing countries to bring down energy consumption by 5.2 per cent and the US by 40 per cent by 2002.

The company will be offering both energy solutions on a BOT basis and energy services, including providing financing and investment options to its clients. "We would be offering total schemes including investments," says Nalawade, so as to beef up co-gen projects upwards from current levels of three per cent in India. Co-gen projects account for 42 per cent in the Scandinavian counties, while in the US, it still remains low at eight per cent.

Thermax has been taking a beating the last couple of years, with both sales and profits dwindling, largely due to the downturn in the capital equipment sector. From a turnover peaking to Rs 530.13 crore in 1997-98 and profits to 45.32 crore, the company has been showing a declining trend. For the financial year 1998-99, income slid to Rs 507.61 crore, and net profit to Rs 38.31 crore. This year, the declining trend continues, with nine-monthly income slipping to Rs 298.66 crore from the corresponding previous Rs 312.69 crore, and net profit to Rs 13.43 crore from Rs 16.48 crore. Significantly, the nine month turnover includes an 'other income' component of Rs 44.28 crore (Rs 18.66 crore during the corresponding period last year) which makes for a massive operating loss of over Rs 30 crore.

Nalawade admits that the order book on projects was not good. "We have short cycle orders and products business for boilers, absorption chillers and chemicals, but are lagging in power projects. Our carry forward orders are to the tune of Rs 30 to 40 crore. The business situation was tough during 1995-99, so there was not much movement in sectors like power."

Issues such as global warming, environment pollution, however, he believes, will give demand to sectors such as co-generation inthe coming years. "We have the financial strength to stay and sustain our business. Despite the poor off-take thus far for energy and environment, do not think it is a declining business," he says. "We are internally putting our act together, and will be ready by March 2000. Financial year 2001 should see our operating profits coming through."