VA Tech Wabag Limited (WABAG) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the VA Tech Wabag Limited Q2 and H1 FY '21 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Rajiv Mittal, Group CEO and Managing Director. Thank you, and over to you, sir.

Thank you. Dear friends, good afternoon. Let me first welcome you all to this earnings call post announcement of Q2 FY '21 results of VA Tech Wabag Limited. Mr. Sandeep Agrawal, our Group CFO, joins me today for this earnings call. We hope you all had a chance to go through the results update. To start with, let me first wish you the best of health during this tough times due to COVID pandemic. The pandemic continues to have adverse economic and health impact globally. We are seeing a second wave in many countries in Western world. Though in India the position is getting better, we must all take necessary precaution to avoid any resurgence in infection, especially during this festive time. The first quarter of this year was overshadowed by the nation-wide lockdown in India for most part and lockdowns in some other countries where in -- also in operation. Directionally, overall business has started moving towards normalcy in Q2, especially in the overseas region. As we mentioned in our previous quarter earnings call, our engineering and procurement activities were less affected while the site activities slowed down due to COVID-related restrictions. Activities in our overseas EPC sites have been picking up pace since the start of Q2 and slowly being ramped up to the pre-COVID levels. Indian projects have also started ramping up, and we expect to reach a top line similar to that of the last year. Labor availability, both in India and MEA region, Middle East and Africa region, has been continuously improving. We have implemented best practices on health and safety at all our sites, in line with the government directives and customer advisories. It gives me immense pleasure to announce that Wabag has been recognized and awarded under the Best Research/Innovation/Adaptation of New Technology for Water Conservation category under the National Water Award by the Ministry of Jal Shakti. Wabag is the only private sector organization to be recognized at this National Water Award. Such recognitions keep our engineers motivated to innovate and contribute more vigorously for sustainable development of water infrastructure. Our order book position remains extremely strong at over 3x the annual revenue with a healthy mix of multilateral-funded projects from marquee customers with innovative solutions. We continue to pursue our focus on O&M to ensure getting 25% of overall revenue in the near future. Now coming to some key projects update. In our Doha South project in Qatar, civil works are substantially complete, the procurement of bulk item is complete and installation work has started. Final inspection of some balance equipment is underway as we prepare for testing and commissioning. Being a rehabilitation project, the project is being progressively handed over section by section, and we expect to hand over the total plant by May 2021. In our MARAFIQ project in Saudi Arabia, we are very happy to inform you that team has achieved around 3 million safe man hours. Engineering is also completed, and key process equipment deliveries are underway. Construction activities are in full swing, and project is expected to be completed by June '22. In our Dangote project in Nigeria, engineering is complete and delivery of equipment is in final stages, and we expect to complete the deliveries by next quarter. In our Polgahawela project in Sri Lanka, engineering is also complete and finishing work of water retaining structures and other civil works is in progress. All major equipments have been delivered and pipeline work -- pipe laying work are currently underway. In our Zarat project in Tunisia, engineering is in advanced stage of completion, ordering of key and long lead items are largely complete and civil works are progressing well. I would also like to give a short update regarding the recent development with Delhi Jal Board has issued regarding Delhi Jal Board. Wabag had issued them a termination and a dispute resolution notice for our only O&M project due to nonpayment of our invoices for DJB. In turn, DJB had arbitrarily and in violation to the contractual provision issued a debarment letter. We have filed a writ petition with the Delhi High Court, and we expect the stay order by the Honorable Court in our favor against this debarment letter issued by DJB. In line with our practice, in this year, of presenting a metrics of core business, I would like to give you a short update of the core business numbers for this half year too. EBITDA of the core business for H1 stood at 8.7%. Working capital levels of core business stood at 83 days, and return on capital employed of the core business stood at 20.7%. As you can see, the 3 key metrics of the core business, which are profitability, working capital and return on capital employed, have been intact. Our core business, which is water technology, is intact and growing and growing strongly. I would like to express my sincere thanks to our direct and indirect employees and also all the stakeholders, including our customers, suppliers, investors, bankers for their continued support. I now request Sandeep to take you through the financial highlights. Over to you, Sandeep.

Thank you, Mr. Mittal. Good evening, friends. First, you had an opportunity to look at the results update presentation as circulated and uploaded on our website. Let me quickly take you through the key financial highlights for the quarter and half year ended 30 September 2020. Our 6-months consolidated revenue from operations stood at INR 1,039 crores compared to INR 1,093 crores, largely in line with the previous year levels. On a stand-alone basis, the revenue from operations was INR 634 crores as against INR 767 crores last year. The EPC project continue to witness slower progress amidst the lockdown restrictions, while O&M revenue has increased by 30% over year -- year-over-year, with key contribution from the new One City - One Operator projects. EBITDA for the 6 months period stood at INR 72 crores on consolidated basis and INR 55 crores on the stand-alone basis. And profit after tax attributable to the owners for the period stood at INR 22 crores on the consolidated basis and INR 12 crores on stand-alone basis. Continuing the trend over the last few year quarters, our net interest cost has reduced by 35% on a consolidated basis and 30% on stand-alone basis on account of significant debt reduction. As always, our commitment to focus on liquidity remains prime. And in line, our gross debt position, which stood at INR 520 crores in March 2020, has come down to INR 432 crores in September '20, which is about 16% reduction in 6 months. Especially the gross debt in our overseas entities, which stood at INR 79 crores in March '20, has reduced to INR 42 crores in September '20, a reduction of about 47% in 6 months. Gross debt in India has reduced by 10% from March '20 level and stand at INR 390 crores as on September 2020. We recently completed the equity raise of INR 120 crores from marquee investors, and same will be invested in the working capital and execution of the project to expedite the project execution. Debt reduction has been prime on the management's agenda to improve the liquidity level of the group, and our efforts are showing the expected results. I'm also very happy to inform that Wabag has recently received a credit rating upgrade to A+ on long-term rating and A1 on the short-term rating with stable outlook. This recognition especially coming during the COVID time, is motivating to us and all our stakeholders. We continue to work closely with our bankers and are thankful for their continued support together throughout this quarter. We wish all of you a very safe and happy Diwali and a festive season ahead. With this, we now open the floor for question and answer. Thank you.

[Operator Instructions] We have a first question from the line of Mohit Kumar from DAM Capital.

Congratulation on a decent set of numbers. Sir, two questions. Primarily, sir, can you comment on the EPC execution, which you expect in H2 and FY '22 going forward? And anything -- and any comment on the labor availability or any issue you are facing in the -- as of now? And when do you expect it to be completely -- complete recovery and the normal execution to start?

Sure. I think the first question is what kind of EPC revenues or execution speed we are expecting in H2 and next year, FY '22. I think as I mentioned in my speech, we have already seen the traction in our international sites. They are almost at the level of pre-COVID. And Indian sites have started picking up speed. And we expect after this festive time, they will also pick up speed in this H2. And we definitely expect H2 be substantially better than H1. And that's what I said, by doing that, we will reach as an annual numbers, which are going to be similar to last year. So it's like pre-COVID numbers. Now talking about FY '22, we all hope and pray that this COVID is behind us for FY '22, and we are at a normal operating situation. With the kind of order backlog what we have, you can definitely expect FY '22 will be much better than the previous years on the back of the projects, which have already started execution. As I said in my speech, most of the projects have finished engineering. So we are in the peak of our execution. So FY '22, definitely is going to be much better. Second part of your question was on the labor availability. It goes along with it. First thing you must know that we are more of an engineering and a technology company. So only a small part of our revenue is directly linked to the labor at site. And our engineering procurement activities, even when there was a lockdown, we could manage to work from home, and we were doing fairly well. Now at sites, also, things have started picking up. Most of the migrant labors are started returning back to work. So I'm sure in next couple of quarters, we should reach the pre-COVID level and the labor availability should not be a concern in another quarter or 2.

So one more question I have on this MCGM, the bid, which was open. I think, it was supposed to happen in November. Is there something you can update on the same?

Yes. I think this project we have been following last call -- con call also I had mentioned. We have been following this project for last 10 years. Okay. And for one reason or other, it is not going for conclusion. So I'm sure this time also we would expect some delays. We'll get some further postponement of bid submissions and price bid openings. So I'm not taking this into consideration for this financial year.

And how is the outing pipeline looking at this point of time, sir, globally and in India?

Pipeline is adequate for us because, as I said, we are very lucky that at the time of this pandemic, our order book is full. We have enough order backlog to execute our projects and get the desired revenue. So we are not so much dependent about our revenue and performance on the new orders. Hence, there is no desperation for the company to go and book orders. We have our terms. We have our criteria to pick orders to book. And if we get those orders, we will definitely book. And from that point of view, our pipeline is adequate to book those orders.

[Operator Instructions] We have next question from the line of Kaushik Poddar from KB Capital Markets.

Yes. See, you're talking of normalization of operation in FY '22. So can we expect your normalized margin of around 11% next year?

11%, we have always done at the stand-alone basis. So yes, on a stand-alone basis, you can, why not. Because we are also taking -- this COVID has also helped us to think, and we are also taking some measures to manage our cost. So from cost optimization also, we are seeing some good results. So we are very confident if this situation is normalized in FY '22, will definitely be giving better results.

And just on the positive side, because of this increasing concern on hygiene and health, do you see it helping in some incremental way the water business as such?

Yes, true. I think very good question and very right thing. Because see we all, okay, in this time, the number of times we go for our hand wash, the clothes which we wash, the shower which we take, I think everyone is taking minimum 2 showers a day. So I think these are the small things in your lifestyle, which has resulted in higher consumption of water, higher generation of wastewater. Naturally, this will increase the demand of this water sector. And anything on health and hygiene will directly impact the water business. And I see coming years, we will see a much higher demand for water and wastewater.

[Operator Instructions] We have next question from the line of [ A Chakraborty ], an individual investor.

Now I've got one question. There is a -- specifically to the CFO. There is an item called other current assets of INR 1,433 crores in the balance sheet. So could I know major component of that INR 1,433 crores of other current assets?

So other current assets, basically, the largest item in other current assets is unbilled receivable, which is close to INR 1,050 crore. And apart from that, you have various other current assets like deposit with governments or GST credits, et cetera, et cetera, the normal stuff. The largest one is unbilled receivable.

So unbilled receivable means the work done -- that is the WIP?

Yes. You can say because...

But not certified, non-certified...

No. no, it is not billed to the customer, work done but not billed.

That's why I am saying, non-certified, not yet certified, right? Like, okay, so we have done the job, but it's not yet certified by the client, so the billing has not yet been done? Is it like that?

Yes. Based on the progress cost, we need to recognize the unbilled receivable -- unbilled revenue. So that unbilled revenue is sitting there by way of unbilled receivable in other current assets.

Okay. Okay. And then another question to Mr. Mittal. Sir, about the JICA project in Chennai. Any update?

I think it's good. You are well informed. So I must say, this project is out now. You must have seen a notice. This is a Japanese-funded project, one of the largest desal plants in this region. It's 400 million liters per day. And this is being funded 100% by JICA, the Japanese funding agency. Already, I think the consultants are employed. The prequalification criteria has been done. The request for prequalification is already out. So I think next month, the prequalification bids are due. So we are definitely participating in it. And we are submitting our prequalification bids. And maybe after they assess the prequalification bids they have received, they will prequalify some of the prospective contractors and issue the bidding document for us to prepare a technical and a commercial offer. So I would expect that this offer, they will request sometime in January. And we may have to submit the bid by March, April. So it's an order intake for next year.

2022, financial year '22 -- '21, '22.