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Edited Transcript of THERMAX.NSE earnings conference call or presentation 14-Nov-19 6:00am GMT

Q2 2020 Thermax Limited Earnings Call

Pune Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Thermax Limited earnings conference call or presentation Thursday, November 14, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* M. S. Unnikrishnan

Thermax Limited - MD, CEO, Member of Executive Council & Executive Director

* Rajendran Arunachalam

Thermax Limited - Executive VP, Group CFO & Member of Executive Council

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Conference Call Participants

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* Abhishek Puri

Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power

* Aditya Bhartia

Investec Bank plc, Research Division - Analyst

* Aditya Mongia

Kotak Securities (Institutional Equities) - Research Analyst

* Bhavin Vithlani;SBI Mutual Fund;Analyst

* Bhoomika Nair

IDFC Securities Limited, Research Division - Security Analyst

* Kirthi K Jain;Sundaram Mutual Fund;Analyst

* Puneet J. Gulati

HSBC, Research Division - Analyst

* Renjith Sivaram

ICICI Securities Limited, Research Division - Assistant VP

* Renu Baid

IIFL Research - VP

* Sandeep Tulsiyan

JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst

* Vinod Chari

Dolat Capital Market Pvt. Ltd., Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Thermax Limited Q2 FY '20 Earnings Conference Call hosted by IDFC Securities Limited.

(Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Ms. Bhoomika Nair from IDFC Securities. Thank you, and over to you, ma'am.

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Bhoomika Nair, IDFC Securities Limited, Research Division - Security Analyst [2]

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Thank you. Good morning, everyone. On behalf of IDFC Securities, I would like to welcome you to the Q2 FY '20 Earnings Call of Thermax. We have the management today being represented by Mr. M.S. Unnikrishnan, Managing Director and CEO; and Mr. Rajendran Arunachalam, Executive Vice President and Group CFO. I now hand over the call to Mr. Unnikrishnan for his initial remarks, post which we'll open up the floor for Q&A. Over to you, sir.

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [3]

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Thank you, Bhoomika. And thanks to IDFC for hosting this call on behalf of Thermax also and warm welcome to all my friends from the fraternity, who have been continuously supporting us.

Starting with the glimpse of the results. Order booking is 28%, up from INR 1,344 crore going all the way to INR 1,723 crore. Of this, domestic portion is the one that really made it happen, which has gone up from INR 751 crore to INR 1,349 crore. And certainly, we had the advantage of having received the order for FGD from another power companies of the country. But even discounting that in the domestic market, overall order bookings had been better off in a very, very tough market. However, the international business, our overall order intake has come down from INR 593 crore in the last year same quarter to INR 374 crore, that's a 37% drop. Primarily because there are no project orders that we have been able to conclude, not that we've lost any orders. The same thing that India's witnessing is also witnessed by most of the markets that we are operating in terms of order conclusions are getting delayed.

Order balance at this point of time for the company has come down from INR 6,400-odd crores to INR 5,334 crores, a 17% drop, which is already understood that in a market like this, when we are able to execute orders at a faster rate, unless order intake substantially goes up, there would have been an anticipated reduction, we were, in any case, expecting.

Our revenues for the quarter from operations have increased by 11% and INR 1,463 crores and gone to INR 1,628 crores. And at the EBITDA level, we are better off, going up from INR 122.9 crores to INR 134 crores, a 10% growth in EBITDA. However, the PBT level, it's just about 2% more, INR 117.9 crores going to INR 120.4 crores. So at EBITDA level, there is a drop of 20 basis points in comparison to last year, but at the PBT level, there is 80 basis points, that is 0.8% drop in the PBT.

A couple of things, at the PAT level, you would have seen that there is a substantial drop in net profits for the company. But this is on account of the -- we have decided to offer the lower slab of taxation. You would not -- that in the earlier past, previous -- many years, you could take it, Thermax effective tax rate has been between 34% and 36%. And we opted for the 22% as a slab. Including the cess, it may go up to 25.12%, which would mean a net savings of approximately 10% expected in the future. So the deferred tax assets lying on the balance sheet for both TBWES as well as Thermax Limited to the tune of around INR 70 crores had to be reversed, approximately INR 35 crores each on both the companies. That INR 70 crores has brought down the PAT substantially.

Apart from that, while we were transferring a subsidiary of our boilers and heater business to TBWES as a part of the agreement, where we shifted it as another subsidiary, we have also taken the charge related to the AR write-offs, which are already provided for, so there would have been some impact on that front overall. Plus, we also had to be taking the depreciation of TBWES on to the group balance sheet, which is earlier as a joint venture. So that is amounting to around INR 36 crores per annum, which would be having a hit of INR 9 crores. It's only at the -- I mean EBITDA -- PBD level. At EBITDA level it's not applicable. That is on that.

Further informations are that we have been able to sell the assets of our Chinese subsidiary, both the land and building is sold off. And we're also on the verge of closing all the accounts over there. And we -- as I mentioned to you, in the last con call, that we'll continue to be having a skeletal operations over there to take care of the warranty obligations. And there afterwards, it definitely will be closed down in China.

Danstoker feedback is operations have turned around in the current quarter. It is a breakeven plus at this point. However, there is a loss, which will be reported on account of the severance pay that you would have paid for the CEO as well as some other employees, who would have left the company. Otherwise, operation-wise it has turned around. And we are expecting that the year-end also, which should be reporting marginally a positive result.

You would have noticed that in the details of the balance sheet, expenses would have gone up a little more than the normal proportion. One of the reasons -- the main reason of it is the way the accounting is done for the freight -- outward freight, we need to be booking that as a separate item, as well as it will go up in the sales value as well as in the expenses. That is approximately INR 26 crores worth of expenses are there, which normally we would have taken it separately, but here it is added on to the expenses. That is 1 major item. There could be some other items, which are minor in nature, which should have gone up or down. Otherwise, there's nothing that you need to worry about that our expenses are rising right now. It's well under control, we have been able to manage it.

TBWES operations are fully now ongoing because from October some sale formalities are completed as a transfer, all that has happened, and employees are all transferred under the new company.

Going forward, there is certain worries in the market, anxiety in the market related to order conclusions. It is not that the orders aren't getting concluded, but larger projects are limited in number. However, I see the -- what I mentioned to you in the last con call, related to the refineries, the Barmer Refineries inquiries are already in the market. We already build it. And the discussion has already started, so conclusion should happen for that progressively, may not expect in the current year unless activated in Q4, sometimes in cases, they would be finalized in the February, March, it may be shifted certainly to Q1. And other 2 refineries also inquiries already in the market, and we are participating in the bids.

Cement industry, there are inquiries, but in the last 2 months, people are a little wary of concluding. And I'm sure all of them are waiting for sentiment turnaround to happen before they can conclude. So that's the overall indication about the economy.

We are all getting prepared to have possibly Indian economy growth coming down to possibly 6% or even sub 6%, we are prepared for it. All the corrective actions related to that has being taken within the company.

So that's about from my side. Now I'll leave it to you to be asking specific issues, but I'll be able to clarify. Thank you once again.

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Questions and Answers

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Operator [1]

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(Operator Instructions). The first question is from the line of Renjith Sivaram from ICICI Securities.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [2]

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Congrats on a good set of numbers, given the challenging environment. Sir, if you can elaborate from where are the domestic orders coming in, if you can give us an outlook regarding the segment-wise like, which are the segments you are seeing uptake and where are the challenges lie for the next 2 to 3 quarters?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [3]

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Orders, 1 order I mentioned to you is that the power industry, where we've already received order for a flue-gas desulfurization system. That is 1 segment that we've got in the environment. The main 1 after that is in the cement sector. There had been orders for waste heat recovery based power plant, a substantially large 1 and also a new line being opened by 1 of the southern cement companies. A substantially large order we have concluded and received -- advance received also. There have been also other inquiries for -- orders for air pollution control systems in the cement industry. Flue-gas desulfurization is also catching up in the conventional industry where notices are getting served by the Pollution Control Authority. So that is picking up in terms of order registration. We are also seeing orders coming from the food processing. It is continuing unabated. Despite whatever you will be reading in the newspaper, there are sufficient number of inquiries and orders ongoing, both in the food sector and also in the dairy sector. We are also seeing maybe temporary, let's say, that paper industry on the back of the e-commerce is expanding. There are orders from that for conventional boilers. Apart from that, we have been able to introduce a new product, which will be able to create waste to energy from the paper industry that we've been able to proliferate in a couple of them, and I'm expecting a fairly large number of orders to be concluded, because all of them are under cost pressure. So if they're able to increase their waste as fuel to produce steam for the process, it will reduce their overall cost. That's an emerging event that I'm seeing.

There has been also some order movement happening in the sponge iron industry all of a sudden, surprising, because steel industry, the parent industry is not doing too well, but then there had been orders of upgrades from the smaller capacity to the next level sponge iron, you've seen that happening.

We've also seen chemical industries, not the heavy chemical, but the normal chemical industry concluding orders. These are -- I mean where I can talk about -- yes, agrobusiness industries, there have been orders coming in. We have fairly good inquiry inflow coming from the FMCG sector despite all the complaints that you may be listening to them that the market in the rural sector is underserved, inquiries are there, and some of them are under negotiation level also. And approval and leverage is also -- there is a revival visible to us right now.

It is on the balance sheet is maybe showing in the last 2 quarters, things would have come down around 1% to 3% or 1% to 5%, they may have a top line reduction. But all of them are also simultaneously planned for expansion. So these are the sectors of industries, which are currently doing quite okay.

We have also pharma industry giving inquiries, not conclusions happening substantially, but some amount of conclusions have already happened. So that's about the overall positive sectors. The ones, which are not seeing any movement is the power sector. Nothing is expected, and I continue to be telling that it may not be moving for quite some time. And steel industry. Main steel industries, there aren't too many of them, any movement visible, nor are we expecting anything to be happening. Fertilizer is also equally negative.

However, I am hoping that refineries, as I mentioned above, 3 of them on the anvil at various stages of movement. It is no more on the drawing board. It is in the -- I mean inquiry levels, all 3 of them. Maybe 1 or 2 more also can happen as to what we hear from the Government of India. That's generally about the sector movement, Renjith.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [4]

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So when we look at our order intake for the first half, it's kind of flat. So for the full year, given these industries still doing well, will we still be able to kind of match the last year order intake so that will give us some visibility on the growth?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [5]

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Right. I mentioned the international market has not really helped us in the first half, overall order intake. If that would also pick up, then only we'll be able to meet it. But in any case, meeting up the last year's number closer to that, in and around, looks possible at this juncture, based on the inquiries. But the order conclusion is something, which I'm a little worried about. There are many -- a good number of my customers don't have any difficulties of generating money, both debt and equity. But they're not concluding orders or even concluded orders where they don't sign a check, or maybe even the advances even, they say, we start the project a little later. That is a thing, which will have to reverse in the market overall. It is more sentimental rather than -- at least for those sets of customers, it's just about their own confidence. That, look, I mean I can afford to go ahead. So 1 thing, which many people aren't recognizing it, when you don't invest for possibly a maybe a 1- or 2-year period of time, you're giving out the space to somebody else in case the market will turn around. And expect the Indian market will not turn around in at least 18-month period of time, I think it is a wrong assumption. In my opinion, consumption will start picking up.

In the auto industry in the month of October, some of them have reported the positive and next year probably, as I have spoke about, it may take a year plus for things to be turning around. It is not a structural thing where automobile industry is going to be permanently in decline. I'm sure it's going to be turning around.

So similarly, all other industries, barring some of the -- power and steel are 2 sectors where I would believe that the balance sheet stress and the increased problem with the bankers, the debt portion will be an undertaking. And because of this, it may take a much longer period of time. All other sectors in my opinion should turn around. And we will continue to be seeing this kind of stress for a couple of more quarters, and some of them would start ordering out for (inaudible).

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [6]

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Okay. And sir, lastly, bookkeeping, the order intake and order book breakup in terms of energy, any number you can give?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [7]

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Rajendran, will you please help him out?

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Rajendran Arunachalam, Thermax Limited - Executive VP, Group CFO & Member of Executive Council [8]

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Yes, we are looking for the booking breakup across segments for the quarter or on a year-to-date basis?

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [9]

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Or both?

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Rajendran Arunachalam, Thermax Limited - Executive VP, Group CFO & Member of Executive Council [10]

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All right. So then I think, I will first give it to you on a consolidated basis, I think that's still on (inaudible) consolidated. So the order book consolidated for the quarter, it was INR 1,723 crores and the breakup of that into segments, energy is INR 980 crores, environment is INR 633 crores, and specialty is INR 109 crores, respectively.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [11]

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Environment is how much, sir?

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Rajendran Arunachalam, Thermax Limited - Executive VP, Group CFO & Member of Executive Council [12]

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Environment is INR 633 crores. We have...

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [13]

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The FGD, we have booked in the environment?

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Rajendran Arunachalam, Thermax Limited - Executive VP, Group CFO & Member of Executive Council [14]

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Environment, INR 471 crores is booked under [FGD] in the Environment segment.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [15]

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Okay. And similarly, the order book?

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Rajendran Arunachalam, Thermax Limited - Executive VP, Group CFO & Member of Executive Council [16]

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Yes, this is order book. This is what I gave you the figures, INR 1,723 crores.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [17]

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Sir, this is the order booking. Order intake for the quarter?

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Rajendran Arunachalam, Thermax Limited - Executive VP, Group CFO & Member of Executive Council [18]

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Order book means the cash flow. You are... order carryforward, okay, Renjith. Our assumption is order booking. Okay. Order balance in the quarter-end is INR 5,333 crores, INR 5,333 crores. The breakup of that between Energy, Environment and Chemical. Energy INR 4,127 crores, Enviro is INR 1,134 crores and Chemical is INR 72 crores.

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Operator [19]

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Next question is from the line of Renu Baid from IIFL.

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Renu Baid, IIFL Research - VP [20]

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So my first question is just to understand a bit more on the execution pattern. Can you just help us understand the strong growth energy that we saw was driven by what type of projects? And does 2Q also reflect meaningful execution from Dangote? Because during monsoons, the shipments for Dangote were supposed to happen post-monsoon. So if you can help us understand what drove the execution in the Energy in this quarter, and to what extent it is sustainable?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [21]

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Yes. In the Energy sector, the carryforward orders were good and Dangote certainly has helped, but to be the clear, I think as of now, Dangote has stopped due to a strike that is happening. There is hardly anything remaining there. There is maybe some INR 10 crores to INR 13 crores is the balance [that is] executed in Dangote. And the good news since, Renu, you asked the question. The entire bunch of boilers, which reached through the first ship, which is 6 of them got installed in exactly 21 hours,. Normally would have taken maybe 6 to 8 months to go construct them or 12 months. So that's already on and execution, even payments also for whatever we received over there, we have received the full payment also. So there is a cash flow also included in that area.

Secondly, we had an order from JSW Group, a number of order for the Dolvi project, we took the order for INR 300-odd crores. That is going on. That has helped us. Then we are also executing a project for RCF for Trombay project. It's a gas-based co-generation plant. So that is going on, moving. Then NFL, National Fertilizer, 3 different locations in Punjab, we are supplying gas-based power projects, execution going on. And GRASIM, there is one order, which we are executing. Plus, Gujarat, there is another large project of captive power plant for a joint venture between NALCO and Gujarat Alkalies. That's a 130-megawatt WTG order. So these are the main large orders under execution. If you ask me, these are all projects where either the balance sheet is strong enough, or they already have the funds allocated or maybe term sheets signed for it. So there are no major delays on account of cash or maybe payment on the larger projects. We are really very prudent in picking those orders. Project delays other than that from the customer side for XY reason could be there. The larger projects in the energy side, I have not seen any delay. Barring in the auto ancillary sector, their orders were available, specifically in the tire sector. There are people who have possibly placed a bulk order for 3 or 4 projects, but after completing one, telling us let's wait for some time. There are no major order cancellations, which we've witnessed so far. We still keeping our fingers crossed. Thankfully, most of the larger projects are under execution, so there shouldn't be a problem on that one. So that is the execution cycle that I'm seeing.

However, the hurry that normally some customers do have -- I mean they're -- people like me, asking me to be meeting with them so that we accelerate the project channel, those kinds of things are missing at this point of time. And we don't mind a little delay here and there. We'd rather welcome it than pushing me to execute it faster. So that's on the execution cycle.

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Renu Baid, IIFL Research - VP [22]

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So the question here is, given that the backlog that you include have not kept up pace, and we are broadly looking at flattish revenues this year. First half has been significantly stronger. So should we be prepared for a flattish second half? Or second half would actually decline over first half, given that energy has been -- I think Dangote is clearly completely out of backlog now, and nothing much left for the second half to be done there?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [23]

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I would say that there is still an opportunity for us to at least have no reduction in turnover in the Q3 and Q4. But it also depends upon -- Thermax has the potential to book and build a INR 1,000 plus crores. Last year, I would have made INR 1,150 crores booking and building in the second half of the year. Because we also have Chemical business. We also got cooling business, standard good businesses, where if I get an order or second order, I can execute it. So what I do get in end of Q3 can be executed. How is this standard order or the project order really need to come in the H2, whether it is -- even if I get in the month of October, November. None of them get to revenue early time. It can't help me for growth. However, the smaller orders, which is short-cycle in nature, can help me to reach that kind of a number. Will there be so many orders coming in, number one. Number two, even if it comes, will they take deliveries for that. These are the issues, which can only be experienced, but we are planning ourselves to have the smaller kind of numbers. That's the only answer I can give you, Renu, at this point of time. We have geared up, but how will the market now pick, it depends upon that. I mean all of you are aware of the sentiments prevailing. Yes, there are guys still calling us and finalizing orders. But it is -- will it be at the same rate as last year is a question to be answered only by experience.

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Renu Baid, IIFL Research - VP [24]

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Right. Sir, Rajendran, can you help us with the exact number of Dangote revenues in the second quarter? It will slightly help us in terms of looking at the numbers.

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Rajendran Arunachalam, Thermax Limited - Executive VP, Group CFO & Member of Executive Council [25]

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Yes. I will have let you know later as I don't have that immediately with me, only in the quarter.

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Renu Baid, IIFL Research - VP [26]

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Because if I remember at the end of first quarter, we mentioned nearly 50% of the order was still in the backlog. So would it mean that nearly 45% is entirely out and done away in Q2 alone? This is where I have the question.

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Rajendran Arunachalam, Thermax Limited - Executive VP, Group CFO & Member of Executive Council [27]

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Not usually, Renu, because a shipment come only in the month of the third quarter, that is October, but if any one of those happen, there could be between INR 350 crores, INR 380 crores, INR 400 crores could have happened in Q2 last year.

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Operator [28]

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The next question is from the line of Sandeep Tulsiyan from JM Financial.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [29]

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Sir, I just wanted to check on the FGD order pipeline, we had shared some numbers in the previous call. That second lot was an under ordering and third lot you expected the ordering to beginning by Q4 or maybe Q1 of next year. If you could just comment on that, which are the orders that you are targeting, where is the average pricing, the order that we book, where will be the margins?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [30]

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Sandeep, the ones where we were [L1] beyond this 1 is now going for re-tendering. So that will be in the lot 4 would be happening. What I have is some information, there is a lot 4 to be concluded, lot 5 to be -- inquiries come out and concluded. All this to happen within the next 18-month period. So lot 4 the expectation will get over by ideally in December, but not later than January because they have to report back to NGT with the Delhi pollution, which is prevailing right now. This is also another issue which has been spoken about. So we are a bidder in that one. For the lot 4, [Kalgam] is 1 project where 4 numbers, 210-megawatt and 3 numbers, 500 megawatts, totaling 2,340 megawatts, 1 order. [Frakka] power station will be 3x200, 2x500, 1x500, total 2,100. Singrauli Super Thermal Power Station is 5x200, 2x500. Feroze Gandhi Unchahar is 1 project of 1,050 megawatt and Rihand. So there are 5 projects ordered in lot 4, each lot is fairly large in size. I mean it's very risky sizes, not the small ones. 2x500 each, (inaudible) projects 2x500. We think we have already put in our bid, but we'll certainly be careful about the pricing.

Last one, the way the pricing has happened, it is a positive order, that much I can tell you. But the project execution for [BDC] will take up -- I'm anticipating that given that so many projects going on, so this may move around, but we will certainly be very particular about the cash flows in that project. So we'll be targeting all these 5, which will be ordered out in the lot 4.

Let's see, I mean how my competitors are going to be quoting the prices. If you remember, in the first lot, we didn't even pick an order for 2 reasons. We did even bid for it because terms of payments were not at all okay for us, 30% retention, and the prices were abysmally low. Whereas the next lot onwards, we started seeing improvement in pricing and some of the small priced people moving out. We also need to be cognizant of the fact that 1 order of NLC has gone to Chinese. Now if that were to be opened up and the way Chinese are in difficulty right now, then people like us will not want to go down to the price level to pick orders. So that is also to be understood.

Then the lot 5, there are 7 orders to be coming in. The smallest 1 being 250 megawatts and the largest for Talcher Super Thermal Power to 3,000 megawatts. So that, I think will go into the next year for ordering out. That's about the India energy market-related to the power. I have not considered anything like many state power plants in this one. Many of them who have notices from the pollution authorities, but I don't think any of them have the financial power or anybody is seriously considering to install it at this point of time.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [31]

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So basically, lot 4 can be anywhere in the range of INR 5,000 to INR 6,000 crores upward or...

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [32]

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That's the kind of size that will get ordered out. You're right. You're right. That's the kind of size of the order. So in that we participate, we'll be very clear about, I mean depending upon if I were to get 1 more order from a private industry, then I'll be very clear about how many will I want to execute. See -- remember, even now in the NTPC, [BDC] and [MMC] 17.5% retention is there. So if you take a INR 1,000 crore order, you will have INR 175 crores stuck for maybe 3 or 4 years period with them. And naturally, most of the people are used to delayed payments. Not -- then even later, it won't come the moment it will be later where they are supposed to be paying immediately, but it can take you months to release the check. So in such a situation, we'll have to look at the cash flow and that's the way we do bidding. For adding on the top line and to further the growth of format, we will certainly not do that. We do serious one, where we do believe we can do the job. That's what we have planned to execute it, I mean we plan to execute it.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [33]

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So my second question is pertaining to the international order date where we have seen a very sharp slowdown. And also, we closed the China plant. So there may be some cost savings arising out of that. So on an overall company-wide basis, how do you expect the trend in the international revenues as well as margins?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [34]

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Currently, we have been lucky because Dangote did most of the portion will go in the current year. And there have been -- some other projects such as (inaudible), which we completed and commissioned the plant in record time. There is 1 more project in Philippines we completed. So we have cleared many of the projects, which were in our hand. There are inquiries under negotiations, both in Southeast Asia and in Africa, both the continents. And the odd inquiry in Middle East also. One thing is there, again, like what we read in the newspapers in India is exactly the truth in South East Asia also. And nobody is concluding orders so quickly. We have almost reached conclusion levels in 2 or 3 orders right now. But when we, like I say, attempt to collect the advance and [LC] because we are particular about the terms of payment and to ensure that cash flows are supported. If that were to happen, then things can improve in the second half. But I'm not seeing any very large inquiries from the international market either. The sizes of -- ticket size of project orders are ranging between $10 million, $15 million, going all the way -- I don't have an inquiry more than maybe $40 million at this point of time at the buying platform. There are inquiries of maybe $60 million, $70 million, but those are not at buying level, even at discussion level. And will that translate into an order in the current year, I cannot say. So that's about those areas.

Similarly, Danstoker, I told you about that we have stopped taking project orders over there. So there would be a drop in the overall order intake. That's something, which we've necessarily decided that we shall not do. And then 1 of the reasons why we have been able to be turning around the operations in the current quarter, other than for the provision for severance pays, so that's [$3] more, but it's not a big part of the size of the company. Fundamentally, our big numbers for the international business will come from the project business, which we normally get some South East Asia. Once in a while South America orders, Middle East and Africa are the areas that we do projects. And all these places, there are inquiries, which are at different levels of discussion and buying platform, where we -- I mean contracting platform, signing platform, there are 3-4 of them at this point of time, but not very large ones. I'm expecting at least some of them should be concluded in the current quarter. I'm looking forward to that.

But this doesn't give you the financial number, as will it match up with last year's order intake numbers. And I'm expecting I'll have a drop in the overall percentage of international contribution in the current year and next year is what my expectation. But it won't be substantial. So my ability to grow the project business can only happen once -- just to keep you informed about it, we already got our registration done in Indonesia for doing EPC. We are also on the verge of getting it converted for Thailand. And we are having our project operations extended to South East Asia, virtually we are executing it from India. So because they categorically qualifying us to participate in any more business, a lot of booming companies. So that should help us. But that won't help the balance sheet in the current year or in the next year, maybe second half of next year, it can happen, I think. That's the reality.

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Operator [35]

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The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.

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Bhavin Vithlani;SBI Mutual Fund;Analyst, [36]

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Just dwelling on to Renu's question. So you've done INR 2,000 crores in the first half. And last year, you did INR 3,500 crores of revenue. Just to get clarification, you are hoping that you will be able to match the INR 3,500 crores of revenue that you did in the second half. Is that correct?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [37]

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Last year, second half numbers, (inaudible), okay. Well, it may not be the same number. As I mentioned to Renu also, that book and bill is main controlling impact of that one. I don't have the right number over here and some of them (inaudible). Last year, we have done a booking and billing of INR 1,150 crores in the second half, means no orders in existence but fresh orders taken and executed in business like chemical, standard products in cooling, in heating, air pollution control, service business equivalent to that, we had that first book and bill done. If I'm able to catch up with the similar kind of a number in the second half, where booking is yet to be done, then coming closer to INR 3,500 crores could be possibly, coming close, I can't guarantee it will be the same number. But of course, INR 3,000 crores should certainly -- I mean near to INR 3,000 crores is what I'm currently anticipating. We have to be cognizant of the market realities. I'm not being over ambitious on that. The capacity is there for me. I mean if I were to get an order in, even a short-cycle order by end of Q3 or so December or so, imagine that you had to get a water treatment standard skid mounted order, I'll push it to the month of February itself.

Even January orders that can be executed. If I get a chemical order in the January month, I'll certainly push it in the month of February and March. So those are the worries -- actually I'm not going to say worry. In reality, will it happen or no? I mean will the market want it or not, is something that we'll have to really experience going forward. Rather than -- I mean committing that this number can happen. See ours is not that kind of an industry where we can predict that it will happen. So we have to wait and watch for it.

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Bhavin Vithlani;SBI Mutual Fund;Analyst, [38]

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The reason I was asking was in the last meeting, sir, you mentioned you are looking at flat revenues for whole of the year?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [39]

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Correct.

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Bhavin Vithlani;SBI Mutual Fund;Analyst, [40]

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So now, you're a little more optimistic that you can actually show some growth, given that you have shown growth in the first half?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [41]

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Well, ambitions and aspirations are for growth. But when I mentioned that in reality that it may be flat on levels, I am not very hopeful that the same enthusiasm will prevail in the market. Remember I currently have INR 5,300 crores worth of orders on hand. Okay? And if the execution can be flawless from the customers, and not from my side. My side, I can execute much more than that. I mean not INR 5,000 crores but a good INR 3,500 [makes the business], no problem total [maximize] all the divisions put together. Will all of them move at the same speed is something, which can be experienced. And as you know, our style, I am not that kind of guy who will push for further sales because I want to show growth. Orders are on hand, but AR will go up. No, we don't do all of that. So in case of the cash flow cycle is not going to be helping me, because under stress now, frankly for the industry and for Thermax, luckily, we have been able to bring down our DSO from 104 to 90. Am I correct, Rajendran? In the second quarter, and I would like to be safe at this point in time rather than meeting up with the market requirement having the growth being shown. That's why I caution that I'd rather prefer a flat turnover or even a slightly lower turnover, because I mean, accounting is done for the balance sheet purposes, but businesses are continuing. So on that front, whether I need revenue in Q4 or maybe Q1, doesn't make it a difference for my company. But certainly, I mean I will have to certainly look at that because I will not go on as 3 or 4 of having committed, maybe I can do INR 3,500 crores, then when we will push orders. No we don't do that. We will have to be measured at this point of time. So there is a stress in some of the industries. For example, while I'm executing orders for PSU, the cash flows are not matching up with my expectations. So naturally, it will slow down the progress of work. Otherwise, I sell -- we have got a treasury available, but it cannot be funded beyond the level for the projects in part. That is the reason for it. So when you ask me specific numbers on arithmetic, everything is possible in arithmetic. But certainly, there are other factors that are related to that on the balance sheet side of the company. Then why I am a little wary about it. I would take it as [that we believe there was a positive] flat, maybe what I thought about earlier about maybe a reduction in second half, we have INR 500 crores, I would rather do that, say than having a INR 500 crores more AR remaining. My AR going from maybe whatever the current number. I would just say INR 90 crores going to INR 140 crores, INR 160 crores. In the industry today, nobody will bother for it. But Thermax will bother for it. So then I get into a realm of borrowing money from the bank to run the operation. That's not the way to operate. You are aware of that.

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Bhavin Vithlani;SBI Mutual Fund;Analyst, [42]

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Sure. The second, is the, on the taxation, so if you can give some clarity, given that you have said that next year as you are aware, you have the time line. So any clarity on that will be helpful?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [43]

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Not -- that is not a subject of a con call. Please, I'm sure as you shouldn't, in private I may tell many things solo, but that's not something which -- see that -- it's a Board level decision, what needs to be done. So that we will have to just wait for the right information at the right time.

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Operator [44]

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The next question is from the line of Abhishek Puri from Axis Capital.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [45]

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Congratulations for the good set of financials. Just wanted to understand on the margin front, energy business has seen, over the last 3 years, the margins have been going down. We are just at about 6%, 6.2% in the first half of the current year, probably just amongst the lowest here in the last 3, 4 years. What is depressing these margins? And when can you see some bit of recovery? I think first quarter, you mentioned there's some provisions related to the INR 8 crores provision related to the China subsidiary.

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [46]

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Current quarter also for the balance of the closure, we have provided some amount of money. For with that, in fact, I think China will be totally over. Other than that, let me tell you, margin improvement is, in the current market condition, is possibly only a limited number of businesses. This is the product business of the company we can improve even today. Where repeat customers are used to our prices. In project orders, in energy business right now, where tender of orders are coming in, or maybe even negotiated ones, all my competitors are in a much more negative conditions than what I am in. So for them to pick an order, breakeven plus at this point of time to keep their factories on are a reality. So improvement in margins beyond that levels that have happened while in the product business. That is the reality. But it may not remain at such as we mentioned, what the current quarter is, whether the -- in the energy business, it's come down to maybe 6 points, am I correct, Rajendran? Energy margins at 6.1%, it's 7.2%. Whereas last quarter, we said last year, 7.2%. So if you go back to those kind of numbers, it's not possible. Certainly, it is going to be happening. It will not be lower than this. As to what happens once in a while when you provide for something that takes place in the project business, quarter-over-quarter, those numbers are -- I won't go by year-to-year number. So I don't think there will be a reduction in the overall profitability in the energy business on a last year versus current year.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [47]

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And what should be the China closure, final settlement numbers, which could be there? I would like -- in the last quarter, you mentioned INR 88 crores, is there any amount for the...

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [48]

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We are similar to what we provided for as the current month to complete the entire closure.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [49]

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Okay, got it. And secondly in the chemical...

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [50]

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I don't know if I mentioned, Abhishek, the factory, the building and everything is sold off and there are some tax liabilities on all of that. That's also taken care of. All that is all done. So it is now -- as far as we are concerned, it is only related to the salaries to be paid for those 6 employees who will remain there for some time to ensure that the rest of the closure activities are completed. And if there's any claim that's unknown to us, which come from a customer or somewhere. Otherwise, there's nothing remaining over there. That is the reality.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [51]

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Okay, great. And on the Chemicals business, also, I think we've seen a very high volatility in the last couple of quarters. Again, I understand we should not look at it from a quarterly basis. But is this 17%, 18% kind of margin-sustainable?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [52]

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17% is a sustainable margin. See, it depends again on the resin business where there is a mix of standard commodity resin versus specialty. Now once the plant is stabilized because specialty resin manufacturing we always [better] in the automatic plant in Dahej. So it is improving right now. And I'm expecting it to be maintained. That kind of numbers can be maintained, certainly, yes.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [53]

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Right. And just as a follow-up on the last 1 in the order booking. I mean obviously, you have order booking, it's 0.8x expected revenues for the current year. Last time we had this number, I think it was difficult to grow revenues in the next year. Would you see this concern for the business going forward? And in terms of the orders inflow also, have you considered any more FGD order to be coming in? I understand you are bidding for it. But in your assumptions. One, you have already won. How about...

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [54]

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I would target for 1 more in the current year of similar nature, and another 1 in the first half of the next year. That is the kind of targeting that we're doing at this point of time. Not that we cannot take many more. But I would rather have the customer concentration, the sectoral concentration for projects of this kind to be limited. Though, one can raise that maybe a couple of thousand crore by bidding very aggressively. That will show very high order intake. But PSUs are not the ones for me. If I take more than this, then I may not be able to take a single order from a PSU for anything else, even for my chemical business I will not do that. There are some sectoral concentration factors we internally have a disciplined managed. Because things can get wrong. It is not by solo sector to collect your money.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [55]

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That's absolutely understandable. If I may ask 1 more in terms of the order intake for the current quarter. If I remove the FGD order, the base orders are pretty flattish versus the last year and the current quarter and the previous quarter as well. So you gave a good overview of all the sectors that are doing well and not doing well. How would you think the base orders would perform from an overall year perspective? Are we looking at flattish number in terms of base orders? Or are we looking at some growth there or decline there?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [56]

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Certainly not a growth in that area, barring 1 sector maybe perform [well there]. See, decline may happen in only limited areas. For example, auto, auto ancillary and light engineering, which also contributes to a lot of orders for our standard baby products, which acts as -- it's not a small number. What I sell through my channel in the year is INR 400 crores to INR 500 crores. About half of them come from MSME sectors only. And that sector is not in the best of conditions. So because of that, I would imagine that even if I'm able to maintain the same base numbers for the next 2 quarters, I should be happy. And that often should be happening with 1 FGD and a couple of project orders, both from India and outside.

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Operator [57]

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(Operator Instructions) We will take the next question from the line of Varun Ginodia from AMBIT Capital.

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Unidentified Analyst, [58]

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This is [Val Shania]. Sir, in a previous con call, we have been talking about moving our subsidiary from Denmark to Poland, and which would result in cost savings. So then can you please help us, what would basically drive this cost savings and how much would this cost savings be?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [59]

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We have already started moving it. In fact, we closed down our 1 factory in Denmark, the Boilerworks factory (inaudible). The entire manufacturing related to that factory is already (inaudible) . In Poland, we have also started manufacturing what we will make in Herning factory, Danstoker also. It is going on very well. I mean to say it's positive. However, there are limitations of shifting the India manufacturing onto [Danstoker]. There are Danish and other customers in Scandinavian countries, who would prefer it had been made in Denmark and are willing to pay a minor premium for it. So the shifting has already happened. And the cost reduction is substantial, because the cost of labor in good quality welding labor vendors in Poland would go to all the way, including benefits, EUR 12,000 to EUR 15,000 per annum. Whereas in Denmark, it would be around 2.5x more. So every work that we're shifting on to Poland, it's bringing down the overall cost by at least a year of 5% to 6%, which would certainly make us competitive and really also go back to profitability over there.

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Unidentified Analyst, [60]

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Okay. Okay. And sir, what was the China factory closure provision that was done in current quarter? I know you have answered it, but the number was not audible, so.

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Rajendran Arunachalam, Thermax Limited - Executive VP, Group CFO & Member of Executive Council [61]

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So the incremental provision this quarter was about INR 1 crores rupees, the YTD provision is about INR 8 crores.

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [62]

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Okay?

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Operator [63]

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The next question is from the line of Krishnakumar from Sundaram Mutual Fund.

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Kirthi K Jain;Sundaram Mutual Fund;Analyst, [64]

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Kirthi here from Sundaram Mutual Fund. A set of questions on the execution of the large orders, 1 in FY '18. Have we completed those orders? What I mean is, the Dangote order, the 2 fertilizer orders and also the Sharjah Cement orders, which we had won and JSW. How is the completion stage and where we are in that -- those orders? And secondly, how is the product project mix in the energy that you are expecting in FY '20 and how that mix will evolve in FY '21? So these are the 2 questions for (inaudible).

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [65]

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Of the orders that you mentioned, Sharjah Cement is commissioned and handed over, working well. The first RCF was commissioned also. Then second RCF order, we will receive 1 more order from RCF. Then you had asked about JSW. JSW execution is going on. There has been some minor stress in the execution of the process -- project, but now it is recovered on that one. The cash flow issues were there but that sorted out and then moving on. Other projects are ongoing right now -- Dangote, sorry, I had already mentioned to Renu about that. Dangote supplies are completed. Shipping is completed from our side. Very minimal electronic item, which would have been fitted onto the boilers, only 1 which will have to be sent, that's a really minor value. There is no -- I mean construction to be done on the site, it is preassembled one. Then the other orders in the energy area, which are currently being executed at 1 for National Fertilizers at 3 plants I mentioned in the Punjab state, another 1 in Gujarat for a fairly large 130 megawatt for BTG order. These are the ones under execution.

The next question that you had asked us about -- I, mean are we expecting any similar kind of orders, could you ask that question?

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Kirthi K Jain;Sundaram Mutual Fund;Analyst, [66]

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Yes, product project mix like where -- are the mix will change to more granular orders, thereby the profitability will improve? That's what my purpose was to ask that question.

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [67]

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Kirthi, Thermax has mastered the art of improving the -- or equalizing the profit in products and projects, frankly speaking. Our executions have been whenever we had good margin available, we retained it, even lower-margin projects, we have been able to improve in most of the projects. But anyway, coming back to that. Certainly, it is going to be on the side of products or maybe smaller projects rather than the mega projects in the next 2 years that we -- indeed, projects will continue. That, those are big value items. But I'm not seeing like a Reliance [out of INR 1,700] crores order or maybe the earlier kind of INR 1,000 crores projects of Meenakshi, those kind of projects are not in visibility right now, anywhere in the world. Though there are inquiries on a couple of hundred crore at discussions platform, but not conclusion platform base now. Maybe going the, I would say, small ticket size projects and products rather than very large projects for some time to happen.

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Kirthi K Jain;Sundaram Mutual Fund;Analyst, [68]

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Okay, sir. Sir, in FY '19, 1 of the reasons of the margins where the steel price had a very sharp increase, which we had in FY '19. Going into FY '20, we have seen the steel prices coming down by INR 10,000 at least per tonne. Do we see the benefit -- and also like some of the old inventory would have got consumed by now. So do we see the benefits in H2 and FY '21, the benefits of the softer steel prices?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [69]

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Not to any major extent. See what happens is, in our kind of orders, every time you negotiate an order with the customer you can do this. Let's say, B2B sales do happen. So customers are equally aware of what is the price reduction that has happened to the commodities, including steel. And they would always have an internal capability to approximately estimate what should have been the newer price. So our ability to retain that reduction totally with us nil, totally nil. However, some minor improvements are possible here and there, and one cannot afford to be stocking those kinds of steel, I mean, barring very few items, we don't stock. It's against order. It's only one of very ordinary standard products we buy and stock, which will be comprising of the total purchase of the company. It will be amounting to, at the best, maybe 5% to 10% of the total value. You look at the Thermax stock inventory, it's right around INR 400 crores at this point of time, for a turnover of INR 6,000 plus crores. It's a miniscule value. And that most of them are under processing for projects only.

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Kirthi K Jain;Sundaram Mutual Fund;Analyst, [70]

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Sir, last 1 question...

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Operator [71]

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Kirthi, I apologize, but...

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Kirthi K Jain;Sundaram Mutual Fund;Analyst, [72]

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I will join back the queue.

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Operator [73]

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The next question is from the line of Aditya Mongia from Kotak Securities.

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [74]

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Sir, the question that I had was again on margins. So I wanted to focus on the international subsidiaries that you're working. In FY '19 for some of these, reporting meaningful losses. I just thought if it would be possible for you to be sharing numbers for the first half and if there is any improvement happening in those subsidiaries from a PBT perspective?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [75]

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The largest operating subsidiary for the company is Danstoker Group in Denmark. They had reported a negative in operations since in the first -- Q1. Second quarter, I told you operations are breakeven plus. However, there is a charge that we've taken for severance pay for employees over there. So it is showing negative, but operations are positive, breakeven. I'm expecting at the year end to wipe off the negatives of Q1 and Q2, and this margin will be positive. So that's about Danstoker Group. China is to be reporting losses for quite some time. So with this, the normal transactions are happening. It's only the operation related, very small amount that may happen of the salaries and expense of the people that are not substantial in any kind. So that's come down. Indonesia is the third subsidiary, which we opened up for the operations in FY '18 -- '17 -- the '17, '18 year. That is budgeted to begin breakeven by [fifth year] what they committed. I'm hopeful that in the current year, in the last quarter, we may be closer to breakeven for a quarter. The losses has come down by a number of almost -- last year losses versus current year first half, Rajendran, do you remember or have the number with you? Indonesia number? Okay. It's last, it's…

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [76]

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Between last year and current year.

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [77]

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Last year, it was for the first half, minus 8.2%, and the current year it is minus 3.6%, okay? These are the loss-making subsidiaries of the company used to be there. And all other subsidiaries Thermax Europe Limited, Thermax Inc. America all of them are making profits, and continue to be making profits.

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Kirthi K Jain;Sundaram Mutual Fund;Analyst, [78]

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Just to clarify, when you say Danstoker you include Boilerworks, to say that incrementally there may not be any losses?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [79]

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At several, when I say, all 3 of them put together, that is Danstoker, Boilerworks and Poland, [please Poland] all together, put together.

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Operator [80]

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The next question is from the line of Vinod C. from Dolat Capital.

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Vinod Chari, Dolat Capital Market Pvt. Ltd., Research Division - Senior Analyst [81]

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I just wanted to ask you about water. Water is talked about a lot nowadays, especially with the [JJM]. So do you see this vertical becoming important for you, especially to compensate for the slowness in power and metals?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [82]

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Vinod, in fact, the Board asked me the same question, why can't you push this up? That's the reality. We are in industrial water and partially the commercial sector in this point of time, and both of which are under stress. The water business that you really, really doing, there are 2 areas where it can do well. The drinking water and the municipal sewage treatment are the largest of the businesses over here, both of which Thermax is absent. We were there but we decided to move out of that. It should have also helped the company to grow and maybe make a decent profit in that. But the blemish in those orders is something, which has forced us to move out of that some number of years back, and we booked a lot of losses because of the fact that we were not willing to go along with the way the system is operating on that.

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Vinod Chari, Dolat Capital Market Pvt. Ltd., Research Division - Senior Analyst [83]

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No, I understand, in the past, you've said that you don't like to work with multiple corporations, where receivables are a very big problem. But now I think under [JJM] wafers, these are going to be multilateral funded. Does that change the game for you?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [84]

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Not exactly, because we are trying out for some technology play over there. I cannot comment on that right now. Because typically, these are all the funding that comes from multilateral agencies, but there are powers that be who are part of decision-making the entire process, local as well as [municipal] . So there, we are trying for joint bidding, if at all if it is practical to do that way. But otherwise, we will keep away from that. I know however, it's the same question, which was asked to me as in the depressed market conditions, why can't we focus on this particular area. But we are not very keen on that. We are willing to also give up requalification to others. And supply to them our major components and the design. That is -- these are the kind of things that we're currently looking at other possibility. And other side is if there are Effluent Treatment Plants coming in as a CETP, we will be wishing to certainly bid because that thing is speedy. It will not be a government-run company. So we would be bidding for it. Because of those are the only things evolving at this point of time.

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Kirthi K Jain;Sundaram Mutual Fund;Analyst, [85]

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And what of it...sorry?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [86]

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You ask me, you can ask me.

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Kirthi K Jain;Sundaram Mutual Fund;Analyst, [87]

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So what does it also mean for Chemical business, especially the water treatment and with your resins and chemicals?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [88]

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I didn't get you, what was that?

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Kirthi K Jain;Sundaram Mutual Fund;Analyst, [89]

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What could this opportunity also mean for your Chemical business?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [90]

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Chemical has got a very good opportunity. Certainly, we are -- the moment the Dahej plant is now stabilized, we are able to be upgrading the order intake, especially focusing on more on the specialty, right? Not the volume business. So that affected the -- see there, to get an order, you have to have a sampling done. Because that specialty needs an application that somebody has identified, and they have to try it out. So we make a table model, then they make a pilot, then they will ship a container and then sit along with them. And then -- for commercial order. So normal gestation period for specialty can be as long as maybe 1 year, the earliest could be 6 months. But there's -- reportedly it's extremely good. That's the only area where you can get maybe upwards of 20% kind of a margin is possible. So there is where are you focusing. Otherwise, what happened is, we created a new capacity at Dahej. Investing in the assortment at that end with the commodities and where we make maybe a 5% to 6% margin. So that is not what we are interested in. So this would progressively grow, as I mentioned about the current capacity has risen all the way to -- resin alone can go to maybe INR 500 crores. And plus the other chemical deals also, other than resin, other specialty also there. So put together the potential there really grows, also. And the industry -- and what we want to do is that having stabilized the plant, and we are wanting to continuously only focus on the high-margin area. I think, just to mention that. Because that will stabilize the company also, if I'm able to get the -- imagine a 17% average margin for that. And in that way, it is growing again at 14%, moderate also, but that is good enough for at some point in time, to be a substantial contributor to the bottom line of the company.

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Kirthi K Jain;Sundaram Mutual Fund;Analyst, [91]

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So do you or your strategic planning team have a breakup in terms of what the opportunity will be, because we have one INR 3.5 trillion macro number, but how can it be broken down into -- across the value chain in terms of opportunity will be? I think nobody is clear probably and the government is still probably at the drawing board, I guess. You guys have a sense of how big that opportunity can be?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [92]

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There are 2 types of chemicals that we're currently manufacturing. One is the polyester resin, which is used for a specific application water treatment. And there are 2 commodity item, the [first], cation resins; second is anion resin. Anion resins specialty resin, can be modified to make it specialty, but predominantly it is a commodity, okay? That is about resin.

The global market is approximately closer to $1 billion right now. And the fastest-growing market for those application are Europe and America, the developed world. And there, there are people who will want to use these kind of resins for multiple processes. Now very few Asian companies have been able to make success barring maybe Mitsubishi. We are 1 company who has entered in that area and have been able to progressively move up from maybe a single-digit share of our entire resin come from specialty, we are almost at 20% right now. If I am able to reach up to 40% of the total production during the specialty application, then you are talking about a good profitable, sustainable Chemical business. That is our intention. So that vision all depends on the market. That market -- in that commodity portion growing at 3%, and specialty is depending upon anybody's effort. So every order, we'll be putting in an effort to prove to the customer that by using the resin, his costs will come down or his productivity will improve. So that is something, which -- I don't know what are the numbers to be put for it. That's for where [this] is concerned. Performance chemicals get into, in power plants. And fertilizer plants where you find cooling towers. So cooling water chemical treatment manufacture. And there are also now construction chemicals that we've gotten into. So these -- both in the construction chemical -- the Indian market, maybe INR 6,000 crores and performance chemicals in India would be around INR 3,000 crores [for INR 9,000 crores] is the size of the market. We are a marginal player as we entered into that. Most of us will be needing service to be added to the chemical supply. That's where the market is turning. So you will need to be training people and providing them, along with the chemical, which is also happening. So it is a little longer journey, but a very steady journey. It is not like the kind of chemical companies that you have heard about, a huge plant and producing millions of tons of chemicals and going in containers and maybe ship and make money. No, ours is an engineering of chemical, let me say that. Just the kind of chemicals we have.

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Operator [93]

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The next question is from the line of Puneet Gulati from HSBC.

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Puneet J. Gulati, HSBC, Research Division - Analyst [94]

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So a quick question here. On the cash flow, you said that PSU cash flows are still weak. So beside what the government has been talking over the last couple of months, is the trend still very much there in terms of delayed payments by PSUs?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [95]

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Yes, certainly. I don't think, first and foremost, the PSU tender, there's always retention. Even if you apply a foundation bolt to start the project where you start the construction work, 10 percentage of the money minimum will be held until the project is over. And the project, when it gets over, it will be a decision by a number of people, not one member, like in the private industry. So you have a retention kind of happening for a longer period of time. In FGD, for example, I mentioned to you that in the beginning, the first lot when it came out, the retention was 30%. So we refused to go for it. Then after a number of representations, we brought it down to 17.5%. So even the 17.5% when accumulated for large projects is a fairly large -- that's a quantum of money. And apart from that, unlike in private customers that sometimes we are able to get a letter of credit, the government will give you letter of credit, PSU will not give you a letter of credit. And so once you supply the material, there is a process sent to the -- for inspecting it, proving it that you have supplied the same material, all that is put together, takes a long time for an authorization of the payment. So normally in a PSU, getting your cash back after dispatching the material, typically [leads to] the same [lumpiness] see. Prior to that, you have already invested money to manufacture it or you have paid for a dominant part of that you will supply, too. That is one of the cash flow issues.

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Puneet J. Gulati, HSBC, Research Division - Analyst [96]

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Okay. But there's no undue delays from what the norm has been?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [97]

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I'll give you some number outside of Thermax I am told in our own group of people who do EPC or similar kind of project works. Currently, the pending retention for A category companies in India is INR 175,000 crores to be received. Well it is their money, so the government took out the 80% of the chemical released against the (inaudible) there was ruling given, also. Even if that didn't help, (inaudible). See, not every company is as healthy as we are for even for a prime guarantee, which will be taken by as many, for example, extraction companies or maybe engineering construction companies in India, we have to put margin money today. Banks (inaudible) margin money now, I believe. So that's because of the banking stress, they are also worried about that. I don't think. So it is managing from the value creating retention and the slowness of payment by the commercial terms. The same PSU, when they have to import an item from China or any country they will give a letter of credit. So he is safe, he can get the money. He will go to the bank the next day, and he will put the [terms] and take the money out. That is the reality. So Indian companies are -- we are normally limiting our India business to the PSUs and the government.

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Operator [98]

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We'll take the last question from the line of Varun Ginodia from Ambit Capital.

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Unidentified Analyst, [99]

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Yes, [Val Shania]. Sir, can you just -- hello?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [100]

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Yes please go ahead, I can hear you.

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Unidentified Analyst, [101]

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Yes. Sir, so what is the reason for the fall in other income, sir, this quarter?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [102]

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First and foremost, the treasury size has come down, number one. And like I said, we only invest our money into very safe investment instruments. And the rates have also come down. Put together, it has had a hit of near to INR 10 crores --

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Rajendran Arunachalam, Thermax Limited - Executive VP, Group CFO & Member of Executive Council [103]

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INR 14 crores

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [104]

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INR 14 crores in the current quarter. [Not INR 10]. Sorry, INR 14 crores for the first half. Sorry.

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Unidentified Analyst, [105]

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Okay. And the depreciation has increased to the tune of INR 9 crores, you said, right, because of conversion of the JV into the subsidiary?

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [106]

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That's correct.

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Operator [107]

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That was the last question. I would now like to hand the conference back to Ms. Bhoomika Nair for closing comments.

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Bhoomika Nair, IDFC Securities Limited, Research Division - Security Analyst [108]

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Yes. On behalf of IDFC Securities, I would like to thank all the participants for being on the call and the management for giving us an opportunity to host the call. Thank you very much, sir.

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M. S. Unnikrishnan, Thermax Limited - MD, CEO, Member of Executive Council & Executive Director [109]

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Thank you. Thanks to each one of you for the kind of questions that you asked, and all of us, at least me and my colleagues, take back a lot more of positive thinking in some areas that we need to be focusing on immediately from the con call. So thanks a lot for the active participation and looking forward to continued support. Times are tough, but there are ways to navigate the company is my understanding. And I'm sure, we'll continue to keep doing this wise thing and the prudent thing for the company. Thank you.