Capacit'e Infraprojects Limited (CAPACITE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Capacit'e Infraprojects Limited Q2 FY '21 Earnings Conference Call hosted by Anand Rathi Share and Stockbrokers. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. [ Rachit Kamath ] from Anand Rathi Share and Stockbrokers. Thank you, and over to you, sir.

Yes. Thank you, Faizan. Good afternoon to all participants to the Q2 and FY '21 earnings conference call of Capacit'e Infraprojects. We shall open with a brief commentary from the management and then proceed to the Q&A session. Today, from management we have Mr. Rohit Katyal, Executive Director and Chief Financial Officer; Mr. Alok Mehrotra, President, Corporate Finance; and Mr. Nishith Pujary, Head, Accounts. Without any further delay, I will now hand over the call over to management. Thank you, and over to you. Rohit, sir.

Good afternoon, everyone. A very warm welcome to our Q2 FY '21 earnings conference call. Along with me, I have Mr. Alok Mehrotra, President, Corporate Finance; Mr. Nishith Pujary, Head of Accounts; and our Investor Relations team. I hope everyone has had an opportunity to look at our results. The presentation and press release have been uploaded on the stock exchanges and our company's website. Before I take you all through the operational and financial performance, I would like to highlight a few points. We are assessing encouraging trends in the real estate sector after a very long time. Historical low interest rates coupled with lower stamp duty has enabled very healthy sales in the MMR region, leading to cash flows in the sector, which augurs well for all stakeholders. We see this momentum to continue and expect pace of execution to grow. Commercial real estate is witnessing stable demand and corporate started planning for larger office spaces. We have seen commercial real estate attract very healthy institutional investor interest, lending long-term capital to the sector. After a period of pain, which started in March 20, we can finally say that we have overcome labor availability problems in totality and what has started on the entire part of order book. We have seen an increase in execution on a month-on-month basis. It is leading us to a faster recovery and helping us build strong brand equity with clients. Further, our strategy is to focus on the following aspects: increased sales of execution for our clients and projects with last mile completion stage; focus on execution of public order book when the working capital cycle is more favorable; further increase our collection efficiency; and strengthening our working capital size cycle to pre-COVID levels by March 2021. We expect government works on infrastructure creation to continue, which will benefit the [indiscernible] and building segments as well. Now allow me to give you an overview of our operational performance during the quarter. Our total order book, excluding MHADA, as of September 30, 2020 stood at INR 9,873 crores. The residential segment constitutes 24% of the order book; commercial and institutional segment, 20%; and mixed-use, 56%. Work has started on all sites as of end of September 20, comprising 100% of our order book. Our order book from the public sector as of the end of June 30 stood at INR 5,630 crores, representing 57% of the total order book. The company is confident to achieve project completion within stipulated timelines. A significant part of our order book is from CIDCO. I'm happy to share that all sites have been handed over, and we have ramped up execution of the project. In Q2 FY '21, the company was able to recognize healthy revenues and expect better earning trajectory from Q3 FY '21. We expect to gain significant momentum pick up by the end of Q3 FY '21, which will lend good visibility for revenues and cash flows in the coming quarters. It also offers us very healthy working capital support for our revenue recognition purposes. Our order book from the private sector as of the end of September 30, 2020, stood at INR 4,244 crores, representing 43% of the total order book. We are witnessing gradual ramp on -- ramp-up in execution and are focusing towards execution of orders with profitable working capital side, we are allowing financial flexibility in its operations. Our continued focus on client quality and cash flow monitoring have certainly strengthened our business model, especially in these challenging times. Total income for Q2 FY '21 is INR 187.5 crores as compared to INR 23.7 crores in Q1 FY '21. Increasing our pace of execution after easing of lockdown restrictions. We would also like to share and reiterate that we have achieved labor availability of 100% of our pre-COVID levels. EBITDA for Q2 FY '21 is INR 45.3 crores as compared to EBITDA loss of INR 18.4 crores in Q1 FY '21. We have witnessed significant increase in EBITDA on account of design-related revenue we earned for all of our large-sized projects, along with cost control measures. We believe we will be able to improve it to historical levels of EBITDA in the quarter to come. Debt of Q2 FY '21 was INR 4.6 crores as compared to a loss of INR 42.4 crores in Q1 FY '21. Our net-debt-to-equity ratio at the end of the period stood at 0.14x. The cash and bank balances stood at INR 351.69 crores as at the end of September 30. Collections improved in the company realized INR 362 crores in Q2 FY '21. With this, I now leave the floor open for questions.

[Operator Instructions] The first question is from the line of Mohit Kumar from DAM Capital.

[indiscernible] numbers in Q2. I have two questions. Firstly, on the how do you see -- given all the sites are open now, how do you see H2 and quarterly run rate going forward? And anything on FY '22, if you can comment on? And on the labor availability, how these sites are shaping up, given that all the construction companies are seeing an improvement in labor availability now?

Yes. So let me start with labor availability, as I already said in my opening comments, we are close to 10,000 workmen now, which is about 500, 600 more than pre-COVID levels, which means that from that front, we have no issues whatsoever. I do believe that the challenges which are being faced on the supply chain because the small traders and service providers have had a very bad deal, more worse than what would have imagined. They should also come back to some sort of normalcy in this quarter and greater normalcy in quarter 4 of the current financial year. Coming to our revenue run rate, we do believe that this will be substantial because we don't give a number, substantial increase over Q2 and a meaningfully substantial increase. And as far as Q4 is concerned, we should be on a growth trajectory at pre-COVID levels. Concerning FY '22, the order book, considering that we don't take any further orders and stabilize what we have at the moment, obviously, we should be back to the growth. We have been guiding a [indiscernible] CAGR a factor of 25%. And we don't see any reason why that should not continue in FY '22.

And second, has you taken any write-off on the order book Q-on-Q?

So as a company policy, any order which is under suspension is removed from the main order book. And therefore, we have reduced 1 order of INR 300 crores, which is under suspension.

Okay. Understood. And sir, on the quarterly revenue of the Q2, how much you have booked from the CIDCO project in this quarter?

The CIDCO project could be close to INR 43 crores.

[Operator Instructions] The next question is from the line of Parvez Akhtar from Edelweiss Securities.

A couple of questions from my side. On the CIDCO project, you said that already all the sites have been -- had delivered and this quarter, we booked about INR 43 crores on revenues. Looking ahead, how do we see our worker shipping at?

You see that we have received 1 site in the current quarter. And therefore, if you take about a month to mobilize that. Apart from that, we are confident of clocking about INR 20 crores to start with and improving by quarter 4. We will get a peak revenue in this project, which is close to INR 100 crores from the financial year. So the gradual improvement you will see in quarter 3, you will see a greater improvement in quarter 4, and we will be peaking the next financial year.

And sir, what is the difference of the MHADA project?

As I explained last time, MHADA project, the [indiscernible] full progress at the moment in time. And the commercial building NOC has been received. And we are very optimistic that we will start the commercial building of close to about INR 1,300 crores in the current quarter, and we will start -- we have built in Cluster 3 and 4 in the next quarter. So the total quarter value-wise, which would be under execution in the -- starting this quarter and over the next couple of -- our next financial year will INR 2,200 crores.

Sir. And lastly, sir, what is our thought process towards bidding for new projects? What are the segments that we are targeting towards the end?

So at the moment, we are more focused on institutional. We have already submitted our bid for certain depots, which is a part of Metro project. We have already submitted our offices for some hospitals. And quarter 3 and quarter 4, the focus will be purely on such type of projects. Obviously, there will be some repeat orders from existing clients like Raymond, where we may add about 4 or 5 towers. So that will happen. We don't keep those new orders, as we have already told you earlier. So we should be [indiscernible] little and asking a question specifically. We're focused continuing at this for next 2 quarters will be more and more on institutional side, which includes hospitals, includes commercial and includes retail income.

The next question is from the line of Jiten Rushi from Axis Capital.

Sir, my question was related to the [indiscernible] project [indiscernible] right now. So what is the status there because there was some issues because of Metro work. So has the project started? Or it is yet to start? And there could be any change in design and cost?

Justin, am I right?

Jiten.

Jiten, it is not prudent to comment on a specific plans at the moment. We believe that we have been told that we should be ready for construction maybe by quarter end. However, that would not be taken as any commitment from the client. These are discussions which are on one-to-one basis. So whether they are undergoing any design change also cannot be commented upon because of the routine work, all developers will look at their portfolio, the market requirements. And because the demand is currently picked up, maybe they may like to realign the size of the apartment so on and so forth. But it's still on track. And obviously, we will be taking the benefit of the new development control rules of 2024.

And sir, on the collection, has been too good this quarter. So what I understand is this has been the collection of last 2 quarters and probably some execution in Q2. So this collection run rate will gradually come down? Or we have done the collections of past quarters are still remaining because COVID led people stop making payments or business has stopped or something like that? Can you sir, throw some light why the collections were high? And how could be the collections come in coming quarter?

So obviously, we have which were put during the COVID period, result in realization of about INR 85 crores of old outstanding retentions. So that was one positive impact. The second impact was that the pre-COVID and post-COVID regimes should not be compared. I just mentioned that the supply chain was totally broken, which means the credit period which any or all companies were enjoying from supply chain pre-COVID does not hold true at all. And when the supply chain [indiscernible] falls, we also have to demand money from our clients. It's a new norm, an not post-COVID. That's number one. Number two, if you see at our creditor level from March levels, we have reduced the level 2 by INR 266 crores. Why has this happened? Because the pre-COVID link periods are no longer available. If you have to necessarily take special care of the labor contractors, subcontractors. So therefore, the focus on collections is an ongoing process. We do believe the net working capital to be at pre-COVID levels, at the latest quarter 1 of next financial year or better than that. So the focus on collections will continue. Obviously, collections will be on the basis of the revenue being rose quarter-on-quarter, which I just mentioned that we should be at total normal fee in quarter 4 of the current financial year. And therefore, I don't see any big in collections. Obviously, the old collections it may give us higher in a particular quarter, maybe lower through the quarter. So these are things. Obviously, we are yet to connect another advance on CIDCO and maybe in after third quarter at the collection is lower by INR 15 crores, INR 25 crores, these are markets in ensure that there is more stability on the collection front.

So as you said, CIDCO, we have received all the 7 land parcels. And on giving all the bank guarantee, we'll get the balance advances. And we have started mobilizing all the 7 land parcel, if I may understand correctly?

I want to correct you, we have started on 5 locations already. [indiscernible] And we have already raised our articles for that. Location #5 will start in this month -- location #6 sorry and location #7 will start by next month end.

Understand. Sir, one last question on the bookkeeping. So can you give me the mobilization advance outstanding in June and September and unbilled revenues in June and September and retention as in June and September? If it is okay with you, sir.

No problem, Jiten, but you can just drop a small mail to our PR and [indiscernible] respond in more time. I don't have these details of June in front of me. But they can provide you with parallel box.

And sir, just one last to squeeze. So from Q4, as you said, things would be fine. So we can expect a run rate of over INR 120 crores, INR 130 crores, monthly INR 100 crores in terms of execution?

More.

More? INR 150 crores.

The next question is from the line of Alok Deora from Yes Securities.

Sir, just a couple of questions. One was on the -- actually, I joined late. I'm not sure if you answered that. One was on the operating margin, which has improved quite drastically in the quarter. So what is the outlook there? Or is it some sort of one-off included in that?

No. It's not one-off. You know that the company is moving towards more of electric and design projects. So whenever there are design projects, whether it is CIDCO, whether it is JD hospital and the like, you basically do the designing over a period of a year, and that design is built at a particular time. So a portion of that has been built in this quarter, the total CIDCO project building in the quarter is in INR 43 crores. And therefore, the expenses were already debited on the P&L over the last 3 quarters. So it has given us a spike of about 800 basis points and in absolute terms, about INR 10 crores in the current quarter. So that's the basis. However, on a midterm and long-term basis, we have been, pre-COVID period, grossing EBITDA of 17 plus, and we believe that, that could improve a little bit slightly. However, that is the mid-term and the long-term guidance on EBITDA front. And the design charges as and when they get build for CIDCO and for J.D Hospital and whatever new position are they there, as and when that happens, in that particular month, maybe you may see a little bit spike.

Sure, sir. So actually, before, like a couple of quarters back, you used to guide for around somewhere between 15% to 15.5% sort of margins. So now is it fair to assume, I mean, removing the one-off quarters, is it fair to assume that, that number could be close to 18% -- 17% to 18% or same sort of a margin performance?

Let me correct you. Firstly at June 2019 was 18.3%; September 30 was 18.2%; 30th December was 18.8%, too; March of the last financial year, 15 days covered was 17.02%; 30th of June was 20%; [indiscernible] washout, so not comparable. And as I told you, the EBITDA received a 800 basis point flip this quarter. So therefore, I am saying that we will be at 17-plus-percent going forward.

And sir, just one question on...

Including other income, please [indiscernible]

Yes. Got that. Got that. One question was on the order inflows. So you mentioned that you would be sort of focusing more on the execution part. So what's the order inflow outlook now for -- are we looking -- are we in discussion for any orders which are going live? Or we are -- are we looking at any order inflows for the third and the fourth quarter?

So that's a gradual process. As I told you, we'll be looking at the institutional, commercial and retail portfolio for the moment. However, having said that, the order book of the company, even excluding MHADA, is INR 9,800 crores. That's a huge order book. So the focus, while the operations team are committed to stabilize and start improvement in revenues in quarter 3 and quarter 4, which is a given thing, the marketing team will look at these orders. And we do believe that a couple of orders will get closed in the current financial year. But however, we are in no hurry to take any order because amongst other peers in our side, I think we still carry the highest order book and very well balanced order book from both private sector and government, and we would like to continue with that.

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

I call congratulations for improving the balance sheet quality during the second quarter by having a good cash flows of INR 380 crores, which you have done a good job, sir, congratulations for that. My first question is with regard to, say, debt reduction over the medium term and when you expect to be achieving a gross debt that pre status you envisage target, sir? That's it for question.

So sir, our temporary spike of the INR 56 crores, what you see over March 31, I will not refer to quarter -- I do not refer to 30 June quarter is because of the bank's permitting interchangeability between LC to CC to support the supply chain, number one. And with that, we see getting corrected back to LC latest by 30 June 2021, which means that you will be back to pre-COVID level a little bit lower by June 30, 2021. We had earlier made put a date of 31 March '22 to be gross debt-free. We have now because of COVID, paused this to June 30, 2023. And we believe that the project execution, the cost to complete as we -- as an income of control document, these are enough visibility and we look to believe that by June 30, 2023, the company will be gross debt free.

Sir, my second question is, given that we have 9% of order backlog and 100% of sites are ready, and now this order backlog, it's one of your -- very high-quality clients and high-quality government clients are there in our backlog. And we have to finish in 3 or 4 years. Sir, do you expect that on a quarterly basis INR 100 crores to INR 800 crores, you should be continuing in next 2, 3 quarters, sir? Do you indicate that possibility over the next 2 to 3 quarters?

As I told you, generally, when you are aware that when you start a site in [indiscernible], you have to do remobilization, blah, blah, blah. Now that takes 3 months --- 2 months, 3 months to start with revenue building. In our case, we have only had to remobilize the labor. So the revenue buildup will start during 30 days, and it will take a quarter to stabilize. So obviously, from quarter 3, you will see the 3 -- quarter 4, you will see the pre-COVID spike rate, which I already made a comment to be more than INR 130 crores. And obviously, with CIDCO peaking in the next financial year, you are extremely smart to guess as what we can do because we do not give a projection of absolute numbers as our sales are concerned. But given the order book, given the fact that all orders are operational at the moment, there is no suspended order containing the order book of INR 9,800 crores. We do believe that the next financial year, given no new surprises on COVID or some other financial [indiscernible], et cetera or whatever, given that situation, we do believe that the next year should be a historical high for the company.

The next question is from the line of Parikshit Kandpal from HDFC Securities.

Congratulations on [indiscernible] quarterly financial. My question was that earlier, you commented that in the supply chain has been compared we have to definitely fund because of the liquidity issues there. And that has resulted in free cash flows be going out. So you also mentioned that we're talking to clients to get better payment terms. So any success, any progress there? I mean how are the plans now? Because ultimately, takes the pass on the benefit of the liquidity to your suppliers, when you have to get that benefit from your clients. So how issues the clients have been towards notices?

Look, pre-COVID, we were a little bit liberal. We should always tell you all that if the client will not pay in 60 days, we will suspend with [indiscernible]. Now that liberty is not available. It's a payment terms under 70% have to come in 25 days, the clients will have to pay. That's what we are insisting. We are not asking them to improve upon the contractual terms. But the liberality which we gave them earlier because of higher credit period from our associates or vendors, that luxury no longer exists. And that is what is visible from the creditor level falling by INR 260 crores. Now a part of this has been financed, obviously, by the increase in working capital of INR 56 crore on -- from, let's say, from FY -- sorry, quarter 4 of last financial as compared to quarter 2 of current financial, but majority of that has been reduced only because of [indiscernible] payments from the client, which has been actually at one of the historic highs in the short history of the company. Therefore, going forward, I do believe that there will be a reduction in debt levels. Certifications will be faster. And there will also be a slight reduction, okay, can be INR 25 crores, INR 30 crores, market reduction or a slight increase in the greater level. But greater levels at this level are here to stay now.

But on one side, the creditors are compressed, but your terms have not changed on the data side. So would we lead to expansion in net working capital days? Because historically, you were about, I think 60, 55 days, which you target on maximum 70 days. So now do you see that increasing on a normalized basis now?

That's what I'm trying to say, you will see a reduction in debtor levels also. Over a couple of quarters, you will see a reduction in the debtor levels because this quarter -- last quarter, we have received -- at quarter 2, we have received substantial payments from the old debtors towards retention, towards the whole amount. The company has fared quite well on that front. The current order book, what we are executing, let's say, CIDCO has a payment term of 15 days [indiscernible] cooperation is 30 days. [ BSNL, ] which was earlier 60 days, they are trying and they agreed to compress to 45 days. [ Agro ] has been going and supporting us by further reducing or is in the process of release of payments. [ Soinlove ] has accepted to our request. So we do believe that there will be substantial improvement by quarter 4 of the current financial year. Please do not see distortion in the net working capital cycle, improvement one time, some partial [indiscernible] that increase that would not give you a [indiscernible] full picture.

Okay. Sir, secondly on the [indiscernible] price, it has all the intents and [indiscernible] this has been removed there by the government and is the site clear now for execution because I think you did touch upon that next month and, I mean, you're looking to start work?

The last earnings, you're talking about [ cargo 43 ]?

I mean the biggest package, which was the one which were liking the biggest package of all the 7 packages.

Yes, partially has been removed. So therefore, we believe that 50% of the lots will be available. And 60% of lots means our other addition of INR 1,000 crores -- INR 1,200 crores to the open revenue, but those are little encouragements. Partially, the [indiscernible] has removed and I think last week. And in totality, in the next 15, 20 days, that's the assurance statement to us. And therefore, we do believe that we will be in good position to start by December end. Any which way, 6 locations. Amounting to INR 2,100 crores has already been handed [indiscernible].

So this was, I think the largest one, 6 locations, '21, I mean balance '23 [indiscernible] INR 2,300, INR 2,400 crores. So I think out of that INR 2,300, INR 1,000 crores, will be handed over to you?

No, the [indiscernible] will be fully handed over to us, but it takes time to start. You cannot start all the bulding that longer. So any which way, the [indiscernible] date is from the date of giving us an encroachment free plus to start the work. So any which, we have 43 months to execute that. Our momentum and I encourage you to please look at projects of CIDCO and see how -- at what pace works, whether it is timing, we have already completed putting. And we do believe that from January, we will start our [indiscernible]. And then you will see the bigger billings coming into play, okay? So I do encourage who wants to go, which will connect with our PR team, and we will organize a [indiscernible] so that you can see exactly how the revenue data is going to happen.

Just on the pending operation advance, sir, I understand correctly, there was INR 122-odd crores from CIDCO the the last tranche. So how are you placed to get it? And by when we expect to get it?

So we want to apply for the class tranche at the moment, all the contractors have taken 7.5%. We do believe that in quarter -- sorry, by -- in December on the current quarter, we will be issuing the bank guarantee and requesting that we release the last tranche.

Okay. And lastly, the funding side sir on the banking and the financial institution. So how are we approaching the credit for this sector now? Do you see the challenges on the funding side proceeding and there's improvement in liquidity, so we can comment on? Because now we are coming back to the growth starting off it and execution is ramping up. So definitely, there'll be requirement and investments in working capital. So how are we, please, in terms of liquidity and working capital limits, if you can just touch upon that?

We have discussed with our bankers and we have moved on to project-specific escrow accounting, but most of the large-sized projects be it [indiscernible] leverage, be it CIDCO and [indiscernible] and PWDG Hospital, right J.J Hospital also first will have been submitted in September. Payment has been received in our account. So we do believe that with only a little bit support of the interchange equity which [indiscernible] gave us, we have managed our cash flows very well. Obviously, the private sector banks have their own issues. But fortunately, for us, our exposure to private sector banks is very, very limited. On the contrary, we would have reduced our exposure by INR 40 crores, INR 50 crores with private sector banks over the last 6 months. So -- but the debt comparison is actually not apple-to-apple because we were enjoying healthy limits of INR 150 crores when the lockdown happened, and that was interchanged to CC limit in the current financial year. Basically, we have reduced nearly around INR 40 crores in that also. So when you compare all the list look together, the banking finance on fund-based and healthy nonfund-base even reduced for the company, which is a mark of improved working capital coming from the clients. We do see that all the national and large-size banks will continue to support our company. The balance sheet, the order books are even more healthier. And I don't think any banker can find a fault as far as our client order book is concerned. So at the moment in time, I don't see any challenge over there. But yes, there will be challenges going forward, which cannot be identified today. But as and when they happen, we have been very transparent in having all of you know about that.

Sir, any thoughts on restructuring?

What is the need for restructuring. INR 20 crores of terminals, no company was restructuring. Our PC limits are a 100 limit. When you look at our total fund base exposure of close to 23 -- INR 128 crores a term loan, reduce that, there's hardly any amount to working capital. And our fixed deposits stands at INR 351 crores, all right? So I don't see why the capacity is going to be restructuring.

I just wanted your thoughts on that. I'm confident in not opting for it. Yes.

The next question is from the line of Sagar Parekh from [ Deep Financial.]

My question has been answered. I just have one small down. So you mentioned INR 128 crores is the fund-based -- I mean down loan and the remaining is the CP loan, right now at the moment, out of the INR 420?

So if you renew INR 128 crores, balance is about INR 308 crores of working capital. And this is basically CCM Bill discounting. Bill discounting take about INR 35 crores and the remaining is INR 50 crores.

Okay. And you are saying that the CC will be converted to LCY June [indiscernible] 2021?

So about INR 108 crores, INR 108 crores will get -- will you get -- go back to the LC by June of -- latest by June of 2021.

Okay. So we'll be back to the pre-COVID debt levels [indiscernible]

Lower than that, lower than that.

Okay. And when you say that by June 2023, would that be a gross debt-free companies? What are the [indiscernible]

Sorry, I lost you. What are the? Yes.

[indiscernible] as to be a gross.

Sir, I can't hear you. [Technical Difficulty]

Yes. Can you hear me now?

Yes.

Yes, I just wanted to check, if we -- if you are talking about going gross debt-free by June 2023, so what are the things or what are the steps that we require? So one would obviously mentioned that the debtor days will come down structurally. But apart from that, is there any other way that you think that we can be gross debt free?