Thermax Limited (THERMAX) Q2 FY23 Earnings Concall Transcript

Thermax Limited (NSE:THERMAX) Q2 FY23 Earnings Concall dated Nov. 14, 2022

Corporate participants:

Ashish Bhandari — Managing Director and Chief Executive Officer

Rajendran Arunachalam — Group Chief Financial Officer and Executive Vice President

Analysts:

Bhoomika Nair — DAM Capital Advisors — Analyst

Ankur Sharma — HDFC Life — Analyst

Bhavin Vithlani — SBI Mutual Fund — Analyst

Ravi Swaminathan — Spark Capital Advisors — Analyst

Deepak Krishnan — Macquarie — Analyst

Renu Baid — IIFL Securities — Analyst

Sandeep Tulsiyan — JM Financial — Analyst

Aditya Mongia — Kotak Securities — Analyst

Jonas Bhutta — Birla Mutual Fund — Analyst

Mihir Manohar — Carnelian Asset Management LLP — Analyst

Rahul Modi — ICICI Securities — Analyst

Presentation:

Operator

Operator

Ladies and gentlemen, good day and welcome to the Q2 FY ’23 Earnings Conference Call of Thermax Limited, hosted by DAM Capital Advisors Limited. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [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.

Bhoomika Nair — DAM Capital Advisors — Analyst

Thank you, Shashi, 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.

Ashish Bhandari — Managing Director and Chief Executive Officer

Hello, and 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. Yeah, 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. Yep, 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, I’ve seen reduced inquiries, whereas others including beverages and steel and couple of other sectors are continuing to show increased momentum. Overall, I would say, a moderating on the inquiry pipeline, still extremely healthy and good, very good on the overall environment on the execution front, yep, so across the board we think we see supply challenges moderating logistics situation improving, which is also maybe somewhat reflective of logistics, include increasing capacity and in the overall demand situation globally moderating, which means we are saying 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 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 aspects, investing in digital, investing in improving our processes, so 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 — I mean 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.

Rajendran Arunachalam — Group Chief Financial Officer and Executive Vice President

None, Ashish.

Ashish Bhandari — Managing Director and Chief Executive Officer

Okay. All right. I think we’re ready for questions here.

Questions and Answers:

 

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have our first question from the line of Ankur Sharma from HDFC Life. Please go ahead.

Ankur Sharma — HDFC Life — Analyst

Yeah, hi sir, good morning, thanks for your time. Just going back to your comment on inquiry levels kind of plateauing off and tying it to the fact you also said about large orders in oil and gas also kind of, at least not– not maybe kind of also picking 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 cement would be more of our FY ’24 kind of the larger orders there will be more of FY’24 kind of scenario, and even FGD is the other big contributor for us with timelines we moved out, my guess is ordering there, you may see some deferment. So just if you could help us over the next two, three, four quarters, both base large which other segments do you think could help us get to that, the growth in the orders more importantly, given that ’22 was at a high base of about INR94 crores, INR95 crores, INR100 odd crores.

Ashish Bhandari — Managing Director and Chief Executive Officer

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 couple of these big industries will go through base, and that they’ve been especially on the refining in petrochemical side, especially the government-owned refineries, yeah, so HRRL which was the new refinery that is coming up in Rajasthan, that being the single biggest one, where there were lot of inquiries that were in place. So, if you take a look at our current quarter which was about INR2000 crores plus in orders, we delivered 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 eventual projects maintain 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 have got nothing on the orders front from any of this.

So even with some of these constraints, to put out INR2000 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 there, so somewhere thereabouts at, and then we have a few big orders that we are going, for nothing that is INR1,000 crores or bigger than that, but we have got a few in the INR500 crores to INR1000 crores range, or the INR300 crore to INR1000 crores range. And if we gain one of two 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’ve said, we’ve been trying to get to aspire 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.

Ankur Sharma — HDFC Life — Analyst

And on steel, cement or anything, because I remember last quarter you said still not seeing a big pickup there, so are you still sticking with that? It’s more of ’24 kind of a phenomena?

Ashish Bhandari — Managing Director and Chief Executive Officer

Yes, we picked up in ’24, even last quarter we have had decent orders from cement in both and the base kind of in that sense is not growing, but we still, and even now the inquiry pipeline for cement entity is lower than what it was a year ago clearly, but it’s still there, yeah, so we continue to work to this. The mega projects, I think, will be nonperforming. Many of our customers, though, when we speak with them, they are very, very bullish on their capex plans, yeah, across the board.

Ankur Sharma — HDFC Life — Analyst

Okay, and just one last one if I may, on the margins in energy which again saw a drop this quarter as well on the energy segment, that is 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.

Ashish Bhandari — Managing Director and Chief Executive Officer

Yes, I think that’s a fair expectation or at least that’s the expectation that I have from the team to deliver, as I think we have in some ways of course we may always have some surprise that may come about, and as I see surprises, I will be open and transparent in sharing any of these. But where we see right now, I think, we’ve gone through a fair bit, and on the energy margin side, there are few, even within the numbers, there were some moves. The FEPL, which is our solar business, we continue to invest in home growing that, so we are investing INR3 crores to INR4 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 a government customer, and these were all kind of in some ways, I think the government projects have been, while they give you a good top-line, the bottom-line always suffers because it’s just difficult working through that entire environment, which is also something that we’ve kind of worked through and cleared off of our books.

So as we look forward, I think what you see in terms of the margins improving on the energy side, that could be definitely my expectation.

Ankur Sharma — HDFC Life — Analyst

Sure, okay, got that, thanks a ton.

Operator

Thank you. We have our next question from the line of Bhavin Vithlani from SBI Mutual Fund. Please go ahead.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Good morning, gentlemen, 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, which is the ZLD and the affluent recycling plant for a pharma company. So, if you could help us understand maybe the size of the order that was there? How large is this industry Thermax’s market share here, and now given that the ESG reporting will get more stringent in the next coming years where companies have to propose specifics about the water and the effluent, how large can this business be for Thermax? See, these were all orders that are INR50 crores and less, yeah, but when we talk about budgeting 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, it’s the market itself also so fragmented, and ZLD itself has got intermittent in technologies — intermediate technologies and a 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 our pipeline, and then the pipeline that continues to grow, it’s also very competitive, yeah, 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 the space is one that we all think is a multi-decade baton in investment, and more and more water in India has to be cleaned up, rivers have to get cleaner, the enforcement will continue to grow and some of these spaces will continue to grow them. There will never be a single project at least for us because we don’t do municipality and 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, ex of municipal water segment as a whole, what would be our addressable market and rough market share?

Ashish Bhandari — Managing Director and Chief Executive Officer

Our market share is less than 10%. The overall market on an annual basis will be easily INR7,000 crores to INR10,000 crores, I would say.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Okay. The second question I had was on the chemical segments. We have seen a very strong growth coming back, and in your presentation, you have highlighted about exponential growth that we’ve seen in oil field chemicals and construction chemicals. If you could give us an outlook, how do we see this segment as a whole lot, 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.

Ashish Bhandari — Managing Director and Chief Executive Officer

So, I don’t think we have a number specifically on when it will get there. We have always shared that as good place, while like 20% EBITDA margin maybe a bit of 15% to 20% PBT was what we thought we wanted to target with our chemicals business and increasing topline as well.

I think we went through as you guys know nearly three quarters plus of pain — three quarters worth of pain where the commodity prices, the logistics increases, our inability to deliver reworking contracts with our customers, all that pain we’ve been through, I think we are 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 good guy on the mix in this last quarter that went, 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.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Sure, sir. Thank you so much for taking my questions.

Operator

Thank you. We have our next question from the line of Ravi Swaminathan from Spark Capital Advisors. Please go ahead.

Ravi Swaminathan — Spark Capital Advisors — Analyst

Hi sir, thanks for taking my question. My question is in continuation with a question that Ankur had asked, so, basically in terms of the large order potential, how many orders which are more than around INR250 crores in size are there in pipeline? Which sectors are there, both domestically and internationally, so if you can do a broad thought process over the next 12 to 18 months, it will be great.

Ashish Bhandari — Managing Director and Chief Executive Officer

I can’t share all of it because some of it is competitive information. I would say, there are large opportunity still both internationally and domestically in the INR250 crores to INR1,000 crores 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 couple of projects that are in that space, but that overall pipeline is not as big as what it was maybe a year ago, yeah, of large projects, even though our total pipeline continues to be as good. The large projects are not as good, yeah, the FGD wave is kind of over the oil and gas refining wave 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.

Ravi Swaminathan — Spark Capital Advisors — Analyst

Got it sir, and with respect to the ethanol blending opportunity, you can talk on, is it a big opportunity for Thermax? Can it multiple, many small orders?

Ashish Bhandari — Managing Director and Chief Executive Officer

Yeah, I think that is definitely possible, and a big pipeline there is, is building up to the point that the pipeline is lot more than what we want to sign up to, 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 what we have been working through, and we’re able to deliver them those projects that we have already taken exactly like we have, as we are planning, yeah. The sector I think has got lot of potential, and everything from bio-CNG, bio gasification, tomorrow biomass to hydrogen, many of these cases have a lot of potential. Bio-CNG is commercially viable even now with some of what the government has put in, in terms of subsidy and support, and overall the strong pricing that CNG has. The technology bit, I think it’s 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, yeah, and that’s a space where pipeline can develop as exactly like you said, a lot of small projects that can come in and can contribute.

Ravi Swaminathan — Spark Capital Advisors — Analyst

Got it, sir. My final question is with respect to the chemical business, the kind of growth that we can expect over the next three to four years, 10% to 15% CAGR is something that we can kind of expect for which [Indecipherable]

Ashish Bhandari — Managing Director and Chief Executive Officer

That’s our I’ve expectation in investments accordingly as well and will 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’ve 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’ve seen it in the last three 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.

Ravi Swaminathan — Spark Capital Advisors — Analyst

Got it, sir, thanks a lot.

Operator

Thank you. We have our next question from the line of Deepak Krishnan from Macquarie. Please go ahead.

Deepak Krishnan — Macquarie — Analyst

Thanks for the opportunity, sir. I just wanted to first tell more on the solar opex based model, with the total committed investment of INR1,000 crores, where are we currently? and in terms of returns how do we kind of look at the profile and beyond this, have we kind of made any incremental investment in any of the newer areas that we’re focusing on?

Ashish Bhandari — Managing Director and Chief Executive Officer

So, right now on the solar side, we started the year with an expectation to do about 50 MW in opex, and maybe a similar amount on the on the capex side. The capex business, we haven’t been able to win anything of note, yeah, 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’re 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 MW which is committed, 100% sold, and we have three projects under execution right now in Tamil Nadu, Maharashtra and Gujarat. So, the first one of which 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 the next six months we have lot of activity out here, but I think even next year should overall be at best a 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 business should actually start to become accretive to Thermax. Yeah, after this 70 MW, our next number we want to go forward is somewhere between 150 MW and 200 MW. And the plans for that are being finalized. The capital so far what we have invested in, I’ll let Rajendran share on 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%. TOESL is couple of percentage points higher, 18% to 21% on equity IRRs, solar is slightly lower, But I think, these all home-grown projects. We don’t expect to buy anything, do any silly moves 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 Thermax, and we’ll continue to build and work towards this commitment of one gigawatt over five years, and even from a capital commitment perspective, 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 external partner in the right time. Yeah, 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 mechanics that we want to scale it.

Operator

Mr. Krishnan, does that answer your question?

Deepak Krishnan — Macquarie — Analyst

Yeah, thanks. Maybe just one follow up remaining. Just wanted to check if on the enviro side that with the two legacy FGD projects and the margins that we reported this quarter, does it have any write-back of provision or any one-offs that we specifically want to call out for?

Ashish Bhandari — Managing Director and Chief Executive Officer

So on the FGD side specifically, our two projects are in — all projects now are in full execution mode. The two that are relatively lot more stable, both are practically through all of their buys, majority, and by that, I mean, overwhelming majority of the buyers are done well above 90%. They are all going through commissioning and site work with full progress at on-location. And in terms of where are we with on the book side, there were no unforeseen write-off 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 onto the two 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.

Deepak Krishnan — Macquarie — Analyst

Sure, sir, those were my questions. Thank you for the opportunity and best of luck.

Operator

Thank you. We have our next question from the line of Renu Baid from IIFL Securities. Please go ahead.

Renu Baid — IIFL Securities — Analyst

Yeah, hi, good morning, and thank you for the opportunity. Firstly, what’s been for you to become more update on the grid energy side where we had spoken of some initiatives on technology tie-ups of solutions in the country for any update on that segment of the business.

Ashish Bhandari — Managing Director and Chief Executive Officer

So, we talked about, on the green energy side a few different things. I don’t know which one specifically you are referring to. One is the JV that we have done with EverEnviro for executing bio-CNG projects. I’ve given an update on that already 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 multi-year play, and there is no point being silly upfront, but the potential in the market is definitely there, and we think we have good technology and now pretty quickly very good sense of what the execution takes where we think we are ahead of the curve compared to the rest of the market. We’ve got couple of projects which should finish in the next three 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.

Renu Baid — IIFL Securities — Analyst

Sure. Certainly, if you look on the margin side now, it’s been a bit of mix where energy margins have been soft on account of certain projects, Enviro hasn’t seen some relief, and [Indecipherable] you had guided are now in double-digit margin [Speech Overlap]

Operator

Hello, can you please use the handset, your voice is not very clear.

Renu Baid — IIFL Securities — Analyst

Sorry, I have a sore throat. So I was just trying to say now that the commodities did implications on the various segments have been visible in the last few quarters, when we look at these commodity cost-related headwinds easing out, do you perceive that there could be certain pockets of projects were still some of the impact could continue in the second half or broadly behind in terms of the headwinds that we have seen? And also on FGD for the residual value which is there in the backlog. From your perspective, what should be the broad profitability on those projects? Earlier we had indicated breakeven to low single digit, do we think the suitable orders now have better margins with even commodity cost structures, or they would still be at near breakeven levels.

Ashish Bhandari — Managing Director and Chief Executive Officer

There would be maybe, Renu, whatever I would have shared previously on the FGD side, maybe 1% to 2% better, not that much, yeah, 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, because the projects have got very strict delivery timelines, and to stay with those delivery timelines, we had 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 we have had some improvement. I don’t think anything beyond 1% to 2% in the numbers that I have seen on the FGD side. On Energy segment, overall as I’ve 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 hits, increasing our pricing or leveling our pricing to somewhat. There is still an impact. While 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 still extremely high. Not only is it high, the availability is also very low because many of these European clients 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 have come down for plates and flat steel, and certain exotic steels which we need for many of our FGD projects in many of our other projects. There the pricing 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.

Renu Baid — IIFL Securities — Analyst

Sure. Just two more things. First, on the international subsidiaries, can you share any update in terms of both in terms of demand outlook and margin profitability for Danstoker and the 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 base orders moderating still, remaining healthy. Do you think the overall value shrinkage or the moderation that you’ve seen is largely due to also linked with the commodity price moderation or the absolute volume or the number of projects itself has now started to reduce.

Ashish Bhandari — Managing Director and Chief Executive Officer

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 five quarters of, you know, 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 dips, and the focus then is on market share, etc., and how do you win more, but all of that ultimately is to speak for expect some pricing to start coming down. It will get 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 have also built-up a decent services portfolio, lot of our TOESL chemicals business are proof, are in the sense they are continuous kind of base business in a way. But on the 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 five quarters. So clearly there is a bit of plateauing and slowdown.

On the international businesses, between Danstoker and PT TII which is our Indonesia 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 have some of our, I wouldn’t say best numbers, may be our best numbers as well for both of these businesses as we as beyond. And with different drivers, in Indonesia as we have said previously also, we were starting from zero, yeah, and so everything was competitive, difficult, as we are 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 a hit even last quarter on add-back business, but as we get better and better, the expectation is some of this eventually become a strength for us, so still very committed, we see the pipeline in Indonesia and our ability to execute continues to improve. I do expect at least that that business will not have losses for the next two to three quarters. And similar end result in Denmark and Poland in our Danstoker business but a very different driver. There we have 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 two very different challenges out there which is mind-bogglingly 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 not only do we not have the ability to supply because our plants are full, but also overall energy prices have just shot through the roof, yeah, so the order book that we had, the profitability on that went down because energy prices in both Denmark and Poland went up like five times. Yeah, and they are now starting to moderate, 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 a point. We will they will outsource work wherever we can. But as we look forward, I think, that business should also make money, at least for the next one year.

Operator

Operator

Thank you. We have our next question from the line of Sandeep Tulsiyan from JM Financial. Please go ahead.

Sandeep Tulsiyan — JM Financial — Analyst

Very good morning. 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 were some improvements in past couple of quarters, it has come back to that INR250 crores, INR300 crore run-rate back. So, do you foresee these numbers being in this range kind of plateau at that these levels, or do we see a further softening from the levers that we are currently at the domestic and Enviro part.

Ashish Bhandari — Managing Director and Chief Executive Officer

Look, on the enviro side, if you take FGD out, we only have our clean water and our clean air portions of the business. Both of them are also at their highest ever kind of run-rates in all ways, yes, so both those businesses are doing at least on the orders 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 FGDs has not slowed down. I think even when we started the year, we had said at least internally we don’t expect to get any wins in FGD, and the first two quarters have been testament to that.

I think as we look forward, though whatever remains should grow, 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 drop the group from.

Sandeep Tulsiyan — JM Financial — Analyst

Got it. The second question is on the chemical segment. Just delving a little bit deeper in terms of your different sub-segments within this, historically [Indecipherable] used to be around 50%, 55% and balance were the specialty and performance chemicals, including oil field chemicals segment that we are doing. This quarter of course seems that there was a large order win in the international space. Can you give us some more color in terms of how it is segmented between these major sub-segments between domestic, international, and also in terms of capacity where we were expanding our capacity to the hedge that are in terms of total capacity and utilization there. That could be the final question.

Ashish Bhandari — Managing Director and Chief Executive Officer

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 in the mix bag, about 40% of our business is resins, of which depends but around one-fourth to one-third can be specialty resins, or resins going for specialty applications. Then, another 40% is basically our water treatment business which is India heavy, and the last 20% is construction chemicals and oil field 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 four of these, yeah, the water treatment, the resins, the construction chemicals and oil field chemicals, all four of those we see decent momentum. Yes, so we like where we are overall from a capacity utilization at the hedge, now starts to go up some of those water treatment and ETP issues we have worked through. Of course, meanwhile while we were renegotiating contracts etc., with customers, even our demand number had softened. We are now effectively 50% capacity utilization of the plant but we still have quite a bit to go from a topline perspective in terms of how we can grow our chemicals resins topline at the hedge, so at least for another year and a half, we think we can continue to grow out of the hedge. After that we will need a new plant, and we are planning for additional capacity investments in that business. Thank you. We have a next question from the line of Aditya Mongia from Kotak Securities. Please go ahead.

Aditya Mongia — Kotak Securities — Analyst

Good afternoon, everyone, and thanks for the opportunity. My first question was to the team on margins at an overall level. And the question was that if you see iron prices stabilizing, if not moderating, have you seen some improvement in your EBIT margins given that your backlog isn’t as you see it’s the benefits of leverage both operating and financials is coming about. Do you envisage 10% EBITDA margin as a reality that can happen over the next two years for you.

Ashish Bhandari — Managing Director and Chief Executive Officer

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 think I may have already shared, yeah, 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. Of course, understanding the competitive nature of these businesses, 10% EBITDA may be at the, I think, at the higher end of what can be reasonably expected, but the business will always be maintained as a healthy cash business, yeah, very good cash-flow. Profitability translating cleanly into cash, and relatively low investments in capital equipment and kind of managing the depreciation line very, very well effectively. Yes, 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 you know 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, lot of other places, so that we don’t go back to poor profitability when markets change. We really want to use this at 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. Yeah, and so these are not easy decisions in terms of really digitizing portions of our business, investing in digital for us, 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 some amount of money as well which is not very significant, but significant, which otherwise may have been given back as 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 so 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 profit, 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.

Aditya Mongia — Kotak Securities — Analyst

Sure, and the second question that I had, and thanks for the color for the first question, extremely valid points, well 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 had a cost to the customer and then profitability for us becomes an issue. Do you see businesses, let’s say [Indecipherable] energy kind of businesses which actually aren’t the cost within the company can make decent profitability and can they be a driver of your base orders in any meaningful manner next two to three years.

Ashish Bhandari — Managing Director and Chief Executive Officer

Look, it already is, yes, so that’s the place where our investments are going, and that’s the place where our effort is going in to differentiate ourselves, build capability, 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 our business, yeah, completely, and even on when I talked about that ZLD specifically as a cost to the customer, there are still investments that you can do in technology to make your technology be more efficient than an alternate technologies like yours, ZLD takes less energy than somebody else’s 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 sells, 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 result in small improvements on the margin side, possibly a bigger number on the topline but small improvements on the margin lines. Here the Indian customer is very, very adept at 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 backs on to say we will not take those projects at a low profitability even though they would have given us a massive topline. And that was a very active decision on our front in terms of how we want to work our backlog.

Operator

Thank you. We have a next question from the line of Jonas Bhutta from Birla Mutual Fund. Please go ahead.

Jonas Bhutta — Birla Mutual Fund — Analyst

Good afternoon gentlemen, and thank you for the opportunity. 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 baby boilers 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. Thank you.

Ashish Bhandari — Managing Director and Chief Executive Officer

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, you know, in terms of orders how standard are you, how quickly does an order flow through engineering get into manufacturing.

As you go into through 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 bill processes and systems that that chaos on the outside doesn’t result in chaos inside, yeah 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. 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 task again and again, but are really focused on differentiated work, yeah, so it ultimately connects to be able to attract and retain people. It goes to the toes 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 customer’s shorter lead times, better products, all of that.

And so if 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 through this entire experience system.

Jonas Bhutta — Birla Mutual Fund — Analyst

Understood. Great. And probably will want to hear more of it as you progress in time thank you.

Operator

Thank you. We have a next question from the line of Mihir Manohar from Carnelian Asset Management LLP. Please go ahead.

Mihir Manohar — Carnelian Asset Management LLP — Analyst

Yeah, hi, thanks for giving the opportunity. Sir, I wanted to understand the comment that you made around the inquiry pipeline. We are seeing moderation on the enquiry pipeline front on steel, cement as well as oil and gas. I just wanted to get an understanding, we are seeing good capex happening across all the three sectors, why are we seeing a moderation on that front, and could the moderation continue even in FY ’24, or it is only for there for the balance part of the year. That was my first question, and second question was largely on the fundamental side. I mean, I wanted to understand the fundamentals of the process boilers. I mean, will the process boilers that largely was sole purpose of steam, of high-pressure steam. Are there challenge with renewable energy going up. I think, so wanted to understand that part on a fundamental angle. Yeah thanks, that was the question.

Ashish Bhandari — Managing Director and Chief Executive Officer

Look, on our overall inquiry pipeline, if I take a look at maybe where we were year and half ago or even a year ago, 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 four months ago, maybe we would be 5% to 10% lower, yeah, so that is why I’m saying we have reached a plateau and especially in some of the larger projects, imminent large projects, I would say 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 lot of it is good, profitable base orders that you need to win through competitive workings with the customer, but they’re not really government-based orders as much. These are things where Thermax’s differentiation etc., may play slightly more of a role than otherwise. That’s all I think I can share. I think I’ve shared as much colors through some of the previous question and answered 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 have 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 specific number to hit. We have got 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 yet. What we are clear is we don’t want orders just to fill up a plant or otherwise, we’re not 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 lot of process boilers for every application that you can think of. And even when you move from the oil, 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 scared of, anything complexity going up will typically help a company like Thermax which invests in technology and wants to stay on the front-end. So, at least, in the short or 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 obsolescence of any sort affecting our business on the heating side at least.

Operator

Thank you. So we have a few questions on the line, would you like to take them.

Ashish Bhandari — Managing Director and Chief Executive Officer

Rajendran, what do you think? Should we take one more question and we call it a close after that?

Rajendran Arunachalam — Group Chief Financial Officer and Executive Vice President

Yeah, fine with that Ashish.

Operator

All right, sir. We’ll take our last question from the line of Rahul Modi from ICICI Securities. Please go ahead.

Rahul Modi — ICICI Securities — Analyst

Thank you for the opportunity. Just a couple of quick questions that I had. Sir, firstly, on your coal gasification, pilot project that you developed, how is that progressing? and for the opportunity side going forward in that segment, and some views on the 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 it’s sort of restrict a bit of in terms of sizing. Your views on both will be helpful, thank you very much.

Ashish Bhandari — Managing Director and Chief Executive Officer

Sorry, I lost you a little bit maybe the problem was that our end. Could you repeat your question? First, the community boilers and the, could you repeat that one, and then I’ll come to your first question as well.

Rahul Modi — ICICI Securities — Analyst

Yeah, so I had two 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 might think it restrict us. Secondly 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? Thank you.

Ashish Bhandari — Managing Director and Chief Executive Officer

Community boilers, I think is that good option and a good opportunity overall. But it will ultimately, from an overall market perspective, will be less than 5% of the overall space, yeah. If it was 0 sometime or very small a few years ago, I think the — especially in places like industrial parks and all, it is a good option. The challenge that is back to drive steam over long distances is quite expensive as well. So only in certain industrial parks it makes sense, and where it makes sense, I do think this will take on. Our interest has been that these boilers should not be coal driven, they should be driven on different technologies, and that’s what we have been pushing and talking to the people setting up these community projects and providing steam through that. Yeah, that’s the answer to your first question. To coal gasification, we are far from like a, big market, from a Thermax point of view, and there are two intermediate steps between where we are today and what can be like a massive business for Thermax. The first part is you need — 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. Yeah, 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 1,000X kind of expansion, and that 1,000X expansion is not something that somebody can overnight sign up for. Yes, so Thermax will not sign up for INR4,000 crore project where our technology will be booked and we will have to make a big investment that says your technology — you are the one who is underwriting that entire project, that’s not who Thermax is and that’s not right either.

The intermediate project is more likely something that is of 50X scale-up of our current technology where also we are willing to put some of our own money as risk capital. But we not a developer of a project, so we need to find the right developer of the project and we are working. Ultimately our hope was that the government itself after making such a big and 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 a 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, couple of years after that you can talk about doing big, big projects from coal gasification. So, we are at least four or five years away from anything really, really big, I would say. Not at least, I would say we are four to five years ago but of course if we are not able to scale-up our technology and don’t figure out an intermediate project, then we don’t know what the future itself is, which would be really sad because we keep talking as a country about coal gasification so much.

Okay so that was the end of the story from our side. Thank you for listening in. Rajendran, any closing comments or anything that I have indirectly indicated or otherwise.

Rajendran Arunachalam — Group Chief Financial Officer and Executive Vice President

No. I think there was one question on our investment in first energy, which I can clarify at this same. We have invested close to about INR92 crores in the business, including of last year. The [Indecipherable] investment took about INR52 crores. Yeah, so that’s think, is the valid data point that are being sought. Yeah, otherwise, I think there have been many questions which have been already answered by you, Ashish.

Ashish Bhandari — Managing Director and Chief Executive Officer

Okay, thank you.

Operator

Thank you, sir. Wishing 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 once again.

Ashish Bhandari — Managing Director and Chief Executive Officer

Thank you.

Bhoomika Nair — DAM Capital Advisors — Analyst

[Operator Closing Remarks]