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

Ladies and gentlemen, good day, and welcome to the Capacit'e Infraprojects Limited Q1 FY '22 Earnings Conference Call, hosted by Motilal Oswal Financial Services Limited. 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 the 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. Alok Deora from Motilal Oswal Financial Services. Thank you, and over to you, sir.

Thank you. Good morning, everyone, and welcome to the Q1 FY '22 Earnings Conference Call of Capacit'e Infraprojects. Today, we have with us from the management, Mr. Rohit Katyal, Executive Director and Chief Financial Officer; Mr. Alok Mehrotra, President, Corporate Finance; and Mr. Nishith Pujary, Head of Accounts. We would start the call with opening remarks from the management followed by Q&A session. I now hand over the call to the management for the opening remarks. Thank you, and over to you, sir.

Good morning, everyone. A very warm welcome to our Q1 FY '22 earnings conference call. I hope you and all your dear ones are safe and healthy. Along with me, I have Mr. Alok Mehrotra; Mr. Nishith Pujary; and SGA, our Investor Relations team. I hope everyone has had an opportunity to look at our results. The presentation and press release has been -- 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. The sentiments among real estate have remained optimistic as realtors managed to cope better with the second wave of COVID-19 pandemic. With relatively less stringent lockdown restrictions and learnings from the last year, we have been able to better weather the situation. The availability of vaccines and aggressive vaccination drive has further helped the optimistic outlook for the sector. The real estate sector is studying cautiously and acknowledges that there is latent demand for both office and residential amidst hindered by the prolonged pandemic. The future of the housing sector remains bullish in view of optimistic GDP, record high FDI and foreign reserves, reviving core sector indicators, credit availability to the branded developers, growing employment rate coupled with an attractive investment climate, resulting in a positive developer future sentiment score. On the public sector side, the industry is also doing its bit by strengthening health infrastructure to support the health infra of the -- industry of the country and by initiating vaccination drives to over 2 crore construction workers. In Q1 FY '22, due to lockdown restriction and labor mismatch issues, our pace of recovery was in turn resulting into lower-than-expected execution across all the sites. However, the situation gradually improved from June onwards. And thus, the issues gradually reduced. As of today, we have close to 10,400 labor strength across all sites, which is an all-time high. Due to second wave, our revenue was impacted by almost INR 100 crores. Our execution on our large CIDCO project was severely impacted, leading to less-than-expected recovery. On the private sector side, the situation was grim, but gradually due to ease in restriction, we ramped up the execution quickly. In Q2 FY '22, we move forward with optimism and keeping in mind the preparedness for the probable threat of third wave. The entire staff of the company has been vaccinated. And as such, we hope for a V-shaped recovery starting Q2 onwards. Furthermore, our focus was revival and growth of the following aspects: focus on increasing the pace of execution across all of our projects, efficiently managing our working capital cycle and stringent cost control measures. Now allow me to give you an overview of our operational performance during the quarter. The total order book, excluding MHADA, stood at INR 8,871 crores as on 30th June '21. Our order book from the public sector at the end of June 30, '21, stood at INR 5,372 crores, which is 61% of the overall order book, while the private sector stood at INR 3,498 crores with a 39% of the total order book. Work is going on at good pace across all project sites of the company. In Q1 FY '22, the company witnessed cash collections amounting to INR 270 crores, indicating reasonably strong collection efficiency. We expect momentum to improve substantially from Q2 onwards. Our continuous focus on client quality and cash flow monitoring has certainly strengthened our business model, especially in these challenging times. Our stand-alone financial performance for Q1 FY '22 is as follows: the total income for Q1 FY '22 stood at INR 282.4 crores as compared to INR 369 crores in Q4 FY '21 and against INR 23.7 crores in the same period last year. EBITDA for Q1 FY '22 stood at INR 41.8 crores as compared to EBITDA of INR 78.5 crores in Q4 FY '21, down by 46.7% Q-on-Q. EBITDA margins in Q1 FY '22 were around 14.8%. Margins have remained stable due to adoption of cost-rationalization measures and reduction in finance costs. PAT for FY -- Q1 FY '22 was at INR 4.3 crores. Cash PAT for the same period was at INR 25.5 crores. Our net debt remained stable at INR 130.5 crores as compared to INR 129.7 crores (sic) [ INR 129.9 crores ] in Q4 FY '22 -- sorry, '21, with net debt-to-equity ratio at the end of June 30, '21, being at 0.41x (sic) [ 0.14x ]. With this now, I now leave the floor open for questions.

[Operator Instructions] We have the first question from the line of Moin Danawala from Tata Opportunities Fund.

Congratulations on a good recovery. My question is primarily around the large area of execution that you mentioned in the press release, which is your expectation around execution coming from the BDD Chawls. Can you put more light on how you expect this execution to be? And how much of your revenue over the next 3 years is expected to come from this project?

Yes. The BDD project has been -- the execution has already started a couple of weeks ago. And with -- you see this government push, we believe that the total revenues, which will be recognized in the current financial year at the SPV level will be INR 300 crores, which will improve to INR 700 crores in FY '22/'23, followed by INR 1,000 crores a year thereafter. The total project on the LSTK basis is INR 10,000 crores plus INR 1,800 crores, which comes from infra development. So we are expecting that the total work which would start over the next 7 months would be close to INR 3,600 crores, and therefore, these projections which have been just given to you.

Sure. I understand these numbers that you've mentioned, which is INR 300 crores in FY '22, INR 700 crores in FY '23 and INR 1,000 crores in FY '24, those are for your portion of contract?

No. No. The total contract at the SPV level. So our portion is 35% share. These are very comfortable numbers, which we have informed to you. The government has advised completion of the rehab portion, which is of INR 5,000 crores over the next 3.5 years. Our commitment is to complete each building from the date of handover within -- 36 months within the date of handover. So if today is a 0 date, within 3 years, that building needs to be handed over, lock and key. So from that perspective, we believe that the rehab portion in all probability should be completed in under 4.5 years. Therefore, there is clear visibility on the rehab side of approximately INR 5,000 crores of revenue happening over the next 4 years. Similarly, the sale portion of the business will also start 4 months from now. The first location has already been handed over. However, those revenues have not been incorporated at the moment in time. The billing breakup has been approved by the client. And therefore, the revenue visibility is absolutely clear as far as BDD is concerned. Answering your question, this is our consolidated level at the SPV level. Only, our share will be 35% of the profits.

We have the next question from the line of Shantanu Mantri from Think Investments.

Yes. Sir, I have two questions. Firstly, now with this slightly weaker first quarter due to the lockdown restrictions, just wanted a sense that as you are indicating that going ahead, in next 9 months, we should really bounce back in terms of execution. So just wanted your sense that, say, for FY '22, you think in the 9 months, we'll be able to come back to that INR 2,000 crore revenue leverage for full year? Is that possible?

So the target when we started was INR 2,000 crores. No one was aware that the impact of second wave would happen and to this extent. Therefore, whatever lost is lost. However, the company has drawn now a revised execution schedule with the V-shaped recovery in quarter 2, and we expect a very strong quarter 3 and quarter 4. Now we are not accounting for the impact, which may happen due to the third wave, fourth wave or whatever we may call that. However, since the entire staff has been vaccinated, therefore the risk of the staff going down due to COVID, which was severely the case in the second wave. Nearly 250 members of our staff were infected and down. Luckily, they all are healthy now. But we do not know what exactly the impact would happen, how the workforce would react. The workforce reacted a little bit more maturely in the second wave as opposed to the first wave. And from that experience, we believe that they will be much better prepared or more mature when the third wave as and when it happens, and if at all, it happens. Hopefully, it does not happen. So from that perspective, our execution for the remaining 9 quarters, we have drawn it down at a minimum level of INR 1,500 crores. We will put all efforts to improve upon that, and we will keep the -- all our investors updated from time to time on it. INR 1,500 crores excluding quarter 1.

Got it. Got it. For the next 9 months. And the margins would be in the range of 15%, right?

The EBITDA margins will be 17.5%, which were there. In the quarter 1, the only impact has been the indirect costs that -- if you see our material costs are approximately 43%, 44%. And therefore, the other costs, which are basically fixed costs could not be distributed over the additional INR 100 crores of revenue, which we would have achieved like we did in quarter 4 of last fiscal. Otherwise, our EBITDA level would have been at the same levels or a little bit better. Because the finance costs have gone down, the PAT would have been slightly better. And we expect that same levels to continue going forward.

Sure. Sure. Okay. Sir, my second question is a little broader. I mean what really worries me is that, say, if we take FY '19, we've done a turnover of INR 1,800 crores. But still, if we look at -- and our PAT was around INR 97 crores. But if we look at our cash flows, probably FY '19 was one of our best years. And if I look at free cash to equity, we've done a negative free cash of INR 175 crores. And even if I look at our last 6 years, 7 years, we've been not able to generate free cash for equity, and one of the main reasons is working capital, and also we've been spending heavily on capital expenditure. So what my question is that going ahead as you are looking to better our working capital, say, FY '23, once we cross that INR 2,000-odd crore revenue mark, so according to you, in your estimation, what would be the free cash generation that we can generate once we achieve that INR 2,000-odd crore revenue mark? Because this free cash generation once the company proves, I feel will be the true rerating factor going ahead.

See, you have to first see that the cash flow from operations have been positive since the inception. What you see is that there has been a core asset investment over the last 8 years of close to INR 700 crores on the core gross block. Net block, you may -- it's visible to you at INR 424 crores. So the gross block is INR 700 crores. Because what Capacit'e has achieved in last 7 years, companies which you compare us with have achieved in last 30 years. So therefore, it was imperative for the company that if it had to grow, it had to do that CapEx. Last quarter also, I mentioned that except for CIDCO CapEx close to INR 75 crores and Piramal central quarter -- central tower, which is about INR 14 crores, all the CapEx has been incurred for the existing order book of the company. And therefore, the CapEx levels will fall. CapEx levels falling will turn the company cash flow positive. It's not a question of INR 2,000 crore revenue, that will happen as a INR 600 crores revenue also. But of this INR 2,000 crore revenue, your cash PAT assuming at 9% will be reflected in your cash flow as INR 180 crores. And if your CapEx out of that or repayment is close to INR 90 crores, you will be still positive of about INR 90 crores to INR 100 crores. Now this could improve depending on various factors like finance cost. At the moment, we are going through a low interest regime. And hopefully, if that continues over the next 2 years, we are sure to see this position. So therefore, the matter of rerating which you just mentioned, any company which has to reach a level of INR 12,000 crores of order book or INR 13,000 crores of order book, executing mega projects in a period of 8 or 9 years of its inception has to undergo this CapEx cycle. And this was absolutely planned, and everyone is still aware of this. Had we not done this CapEx, the question of we executing such an order book wouldn't have risen. And therefore, you wouldn't be asking me this question. So this is my summation to you.

[Operator Instructions] We have the next question from the line of Deepak Poddar from Sapphire Capital.

Yes. Sir, just wanted to understand, you just mentioned like EBITDA margin 17.5%. So you're talking about 9 months or full year?

I'm talking about the 9 months. So you will have to basically take an averaging. Our target -- revised target for the 9 months is INR 1,500 crores. And if you add INR 283 crores to that, so your EBITDA still would come to 16.75% to 17%.

Correct. Correct. Correct. And this includes other income?

Absolutely.

We have the next question from the line of Seetharaman from Spark Capital.

And my first question is, can you give a sense of the big pipeline that we have seen ahead? Possibly, I might have missed it. I joined 5 minutes late.

Sorry, can you please repeat the question?

Can you give a sense of the big pipeline that is ahead?

Yes. The big pipeline continues to be very strong. Now the private sector also had started -- has also started participating. We foresee since -- serious would repeat orders from our existing clients. Having said that, the order book now gets -- has already got strengthened by the start of BDD project. And it is extremely important for the company to focus on the execution and ensure that we are at a full block at -- on the execution side of all the projects. Having said that, with BDD starting, the operational order book has now gone to nearly INR 13,000 crores. And therefore, this gives us a serious opportunity to pick and choose. And we do believe that the government side, the company will add some orders in quarter 3 and quarter 4. On the private sector side also, the company see an opportunity. Overall, as I mentioned last time during the investor conference call, the big pipeline for Capacit'e Infra stands at INR 46,000 crores, and that continues to be in that range itself. Now as the order book is very strong, the pick and choose concept which the company derives will continue. And therefore, the INR 2,000-plus crores order book intake stands at the moment in time, of which about INR 450 crores has already been achieved.

Okay. On the second question, can you give an idea about the working capital situation currently? The various receivables, unbilled revenue, inventory, work-in-progress, unbuild portion, all those things please?

So total debtors other than uncertified debtors stand at INR 342.14 crores. This is down from INR 419 point -- INR 412.9 crores, which stood at the end of Q1 2021, where the revenue was hardly anything because it was a washout quarter then. So if you see that in spite the growth in revenue, the debtor levels have fallen at a net level to INR 342.14 crores as against INR 412.9 crores a year back and INR 366. 2 crores in Q4. The financials left through contract assets are at the same level as Q4 2021 at INR 540 crores or thereabouts. This will improve substantially and get into sales starting Q3 and Q4. So you should see a reduction of approximately INR 100 crores in that. The inventory level remains stable at INR 100 crores over the last 2 years. So there is no change in that. Most importantly, the creditor levels at increased revenues have fallen to INR 304 crores from INR 420 crores in FY '19/'20. I'm talking about the unsecured creditors. The total creditors in FY '19/'20 were INR 623 crores, which have fallen now to INR 449 crores. So if you look at the total thing that once the contract asset reduction of INR 100 crores happens, you should be at the pre-COVID working capital levels, which at net levels were about 76 days, excluding retention money. So at the moment in time...

117.

It is standing at 117 days. So as I told you, the correction of INR 100 crores in working capital will lead you to that pre-COVID level. And obviously, by March end, we had projected in the last investor conference that this should happen by Q4 because of the current financial year. However, now this will take one more quarter, and we will be at pre-IL&FS level by Q1 of next financial year.

We have the next question from the line of Mohit from DAM Capital.

Congratulations on a decent set of numbers in a very challenging environment. Sir, my question is on the CIDCO project and MHADA project. Going forward, of course, I want to know what is the -- what was the run rate for the last quarter for CIDCO, especially? And how do you see the run rate going forward for CIDCO and for MHADA project, if you can throw some light? And how the revenues -- I think this is a JV, so this will contribute only to the qualified associates. Is that understanding right?

So if I've understood your question correctly, you would like to know the run rate of CIDCO and MHADA project, am I right?

Yes. CIDCO, right now, so MHADA, I don't think it started, right, as of now? So MHADA going forward and if possible?

The CIDCO project in Q1, the total sales gross were INR 45.99 crores, as we said that there was serious reduction in labor availability across the project sites. Adjusting for the decrease in WIP of INR 8.14 crores, the net sales stood at INR 37.85 crores. In Q2, we believe that the total sales will be at approximately INR 85 crores to INR 100 crores. However, we can provide you a detailed -- our team will mail that details to you if you could provide your e-mail ID to them. Second point is that from Q3, CIDCO project will be back to the INR 40 crore per month levels; and from Q4, it will be at INR 70 crore levels. That estimate does not change. It only got delayed by one quarter. MHADA project has already started, and therefore, the total sales for MHADA at the SPV level, which is an integrated joint venture with Tata Projects Limited, for the current financial year will be at INR 300 crores; for FY '22/'23, will be at INR 700 crores; and the year thereafter, will be at INR 1,000 crores, of which 35% will belong to Capacit'e Infraprojects Limited.

Yes, sir. So on clarity, sir, there is no hurdle as far as MHADA work is concerned anymore now. Am I right? Or do you -- are still there some part where you can work on some part, and there's some issues with some part?

So you're talking about the hurdles.

In MHADA.

So hurdles for the reason why the project got delayed, the government widened government resolution in December, increased the height of the buildings from 22 stories to 40 stories, the IOD/CC of which has been received. For the rehab towers, the work for 2 rehab towers has already started. We should be working on 6 towers within 60 days, and we should be working on 10 towers within 90 days. And therefore, we do not foresee any hurdle as far as permissions from the client or execution is concerned. Now if there is another third wave of COVID or alike issues, that cannot be projected at this moment in time. However, we are confident that the third wave will not impact the construction industry like it has impacted in wave 2. And therefore, we are quite optimistic of these revenue figures.

Sir, will the EBITDA margin of the MHADA project be similar to our stand-alone numbers? Or do you think it will be different?

It will be slightly better because it's a design-build project, complete lump-sum turnkey.

We have the next question from the line of V. P. Rajesh from Banyan Capital.

Okay. So on the debt side, given the change in the guidance -- revenue guidance this year, does that also changes from what you have indicated in the last con call?

That does not change. But as I have last -- indicated last time also, there could be an increase of INR 30 crores, INR 40 crores or reduction of INR 10 crores. But on the year -- whole year level, that will remain largely unchanged. You will see -- maybe see some reduction on that side. Going forward, again, our projections of going gross debt-free in FY '23 end will get only extended by one quarter at this moment in time.

Right. Great. And my second question is on the revenue guidance. Since we are reducing the guidance by INR 220 crores of revenue, and from the slide in your deck, it seems like you lost only INR 89 crores of revenues in this quarter, which you have sort of circled as a lockdown impact. So -- then there is no -- some delay in around INR 120 crores of revenue. So is that sort of the right way to look at it? Or if I'm missing something?

See, if we had the momentum continued from Q4 of last financial year, we would have been at INR 450 crores plus. It is only an estimate, that number of people, reduction, and therefore, the loss in revenue of INR 100 crores. That's an indicative figure. But if you take a normal situation, when the momentum has peaked to INR 380 crores in Q4 of last financial year, it is only obvious that we would have done better Q-on-Q had the second wave not impacted, okay? So from that level, we would have done INR 450 crores, INR 460 crores very easy in quarter 1 of the current financial year, against which we have done INR 280 crores. Therefore, the impact is -- impact can be concluded at INR 140 crores, INR 130 crores, INR 100 crores. That is only an estimate which has been put. On the whole year, we are saying that if you do not take the impact, but if you leave Q1, then targeting a revenue of INR 1,500 crores, it is important to note that we are already at 10,500 workmen across all the project sites, and this momentum continues, which means that you will see a V-shaped recovery in revenue in Q3 -- in Q2 to some extent, and to a very large extent, in Q3 and Q4. And therefore, the guideline of INR 1,500 crores at least revenue from the remainder 9 months. Now whether that translates into INR 200 crore reduction over the full year, that's only an indicative figure. If the company picks up pace at MHADA also, that would add and could reach that magical figure. Because when we gave the projections last time, MHADA was not included in it, okay? So at the moment also, revenue projections which have been given excludes MHADA. Any positive over there because the work has already started will help the company achieve the original target.

Got it. Got it. But MHADA revenues will be coming not on the top line, right? It will be a one line at the bottom on the profitability. Is that -- my understanding correct?

On the profitability, for sure, but since it's a joint -- it's a company, it's an LLP and not AOP, the auditors are checking up. And we hope that they will find some way out there. Our partners, Tata Projects, will recognize 65%, and we will recognize 35%. So we are on that job. Obviously, it would be in the interest of Capacit'e that it is able to recognize the 35% revenue.

We have the next question from the line of Parvez Akhtar Qazi from Edelweiss Securities.

So two questions from my side. First, on the MHADA order, I mean, you obviously said that the work on rehab towers has started, and you'll start work on 6 towers in 60 days, 10 towers in 90 days, there is some infrastructure work also. So I mean, just wanted to get some sense if it will be possible to break this overall whatever INR 12,000 crore project? Give some idea about work on how much quantum of project can start in how much time line?

So you can just note it down. The project value is INR 11,744 crores excluding escalation and GST, okay? So out of INR 11,744 crores, 15% is the provisional sum for infra works. Infra works is defined in this project as any work done outside the territory of the building. So any roads, electricals, water supply, shipping, transit, all that is housed in the INR 1,800 crores. So that leaves the LSTK work at INR 10,000 crores. Of this, INR 5,300 crores is the rehab portion and INR 4,700 crores is a sale building component, which includes 1 commercial tower. Of this INR 5,300 crores of rehab building, we have to construct now, as per the new designs and the ones which have been approved, 33 towers of 40 stories each without any basement and the podium parking, which will house 250 tenements in each tower. As I have already told you that we have started work already on 2 rehab buildings of 40 stories, the total work at the end of 60 days will be, we would have started work on 6 towers. And at the end of 90 days, we would have started work on 10 towers. 10 towers would mean 2,500 tenements. One building, approximately, you all be alert you catch my words, approximately, I repeat, on sale portion would be close to INR 150 crores. So 10 buildings would mean that you would have started work on INR 1,500 crores of rehab towers. Infra works cannot be projected, maybe we would work on INR 50 crores, INR 100 crores or whatever it is. So that is not being included in the projections which we're giving to you. The sale side, the IOD/CC should come within a week's time. However, that entails -- because these are 80-story towers, that entails wind tunnel test, which would take 3 months. So 4 months from 0 date, that is, from next week 4 months, we would start work on the sale component, which is -- the plot is already vacant, and it can be started as soon as the permissions for wind tunnel tests are received. Point #3 is that 5 months from now, you would start the commercial tower of 50-story approximately on the PWD land, Savli plot to be specific. And that means that in the current financial year, including the sale component of 2 towers and the commercial building of 50-story, you would have started work on further INR 2,500 crores of buildings. Therefore, INR 1,500 crores plus INR 2,500 crores is close to INR 4,000 crores. Since the billing breakup, so that's what is -- can be foreseen as I speak to you today. Out of this INR 4,000 crore work which we'll start, obviously, the billing breakup, since it has been approved now, for all the 3 contractors, Tata-Capacit'e JV, L&T and Shapoorji, we foresee that billing of INR 300 crores is easily doable in the current financial year; INR 700 crores next year on conservative side; and at least, INR 1,000 crores thereafter. So this is how the project is broken up, and therefore, it can be explained very well now.

Great, sir. And the second question is, what is the kind of CapEx that you did in Q1? And what are your plans for the full year?

CapEx in Q1 was INR 10 crores for CIDCO. The aluminum formwork has been received. And for the full year, as I told you, CIDCO projection continues to be at INR 75 crores. There may be some spillover for the next year or maybe it could go to INR 80 crores, but that continues. There is no change in that.

We have the next question from the line of Parikshit Kandpal from HDFC Securities.