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

Ladies and gentlemen, good day, and welcome to VA Tech Wabag Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rajiv Mittal, Managing Director and Group CEO. Thank you, and over to you, Mr. Mittal.

Thank you. Dear friends, good afternoon. Let me first welcome you all to the earnings call post announcement of Q3 FY '21 results of VA Tech Wabag Limited. Joining me today for this earnings call is Mr. Sandeep Agrawal, our Group CFO; and Mr. Rajneesh Chopra, our Head of Global Business Development. We hope you all had a chance to go through the results update. We had informed, in our previous interactions, that H2 was expected to be strong. In line with the expectation, you can see that in Q3, our operations across geographies gained momentum. Our construction and supply chain is nearing pre-COVID levels and we are confident that this will further improve through Q4 and going forward. You must have seen our recent announcement relating to order wins worth about EUR 100 million. We are extremely delighted that even during these challenging times, our clients globally continue to repose their confidence in our capabilities and have given us repeat orders which are technologically demanding. Let me take a moment to reflect on this recent order wins. Wabag Swiss bagged its biggest ever order of EUR 26 million from a utility of Biel towards design, engineering of lake water treatment plant, replacing the existing facility, thereby ensuring water security to the city of Biel and Nidau. The plant will be built with the state-of-art technology that purifies water using multi-barrier systems, including reverse osmosis. In Tunisia, we secured an order worth EUR 11 million from SONEDE to design and build 30 MLD water treatment plants at Kasseb that's in consortium with a civil contractor. The project is funded by KFW, will be constructed using advanced lamella clarifier technology. In Libya, we signed a repeat contract worth EUR 62 million with General Desalination Company of Libya to design and build thermal desalination units with multi-effect distillation in the city of Bomba. This plant will provide drinking water capacity for more than 300,000 people in the region. This order is the largest thermal desalination plant order in the history of Wabag. This framework order will be activated on receiving the LC from the customer. I'm happy to witness that One Wabag mantra is working well with global collaboration across our teams in different clusters and helping us to secure these orders from our strategic and core markets. You would already know that some of our biggest orders, like Marafiq in Saudi, Ashghal in Doha, Zarat in Tunisia and Jeddah in Saudi Arabia, are reflections of this global collaboration. It is indeed a proud moment for Wabag as we bagged 2 prestigious awards at the Water Digest Water Awards '19/'20. Wabag was bestowed with BEST WATER TREATMENT PROJECT - INDUSTRIAL for our Petronas effluent treatment plant in Malaysia, and also an Excellence Award for Best Corporate Social Responsibility in water sector. We are delighted that this dual recognition for our efforts with projects and CSR activities. Coming to some of the key project updates. In our Ashghal Doha South project, civil works are substantially complete, and we are now in the installation phase. The odor control unit, the sidestream filtration and digesters are marching towards mechanical completion, and the plant will move into commissioning phase section by section starting from April 2021. In Marafiq project, engineering is complete. Delivery of process equipments have commenced at site, construction activities are in full swing and first batch of hydro test of key water-retaining structures is complete. Commissioning is expected to commence from end of 2021. In our Zarat project in Tunisia, the engineering activities is in final stage of completion. Procurement of key equipments is largely complete, and civil works at site are in peak progress. In our Jeddah project in Saudi Arabia being executed using patented technology of NEREDA, basic engineering is complete and detailed engineering is underway. Site excavation and procurement activities have commenced. I would also like to highlight the performance metrics of the core business for the last 9 months. EBITDA of the core business for the 9 months stood at 9.5%. Full pack of the business for 9 months stood at 4.7% and return on capital employed for the core business stood at 20.5%. Our core business, which is water technology, continues to perform and grow. I would like to also take this opportunity to express my sincere thanks to our direct and indirect employees and all the stakeholders, including our customers, suppliers, investors and banks for their continued support, especially during these pandemic times. I now request my colleague Rajneesh to take you through the outlook for water sector in the backdrop of Union Budget 2021 and the opportunities opening up for Wabag, followed by Sandeep for an update on financial performance. Over to you, Rajneesh.

Thank you, Mr. Mittal. A very good evening to all of you present here. Today's analyst call comes at a time when the market potential of the water system, specifically in our home countries, is extremely promising. Post our Union Budget 2021-'22, let me share a few highlights of the same. The outlay for the Department of Drinking Water and Sanitation in FY '22 is INR 60,030 crores. It's a massive 352% increase in allocation. For Jal Jeevan Mission, the outlook for 5-year plan stands at INR 2.87 lakh crores, while the allocation for FY '22 stands at INR 50,000 crores, an enormous increase of 434%. The Ministry of Jal Shakti has said that 20% of the water demand under the Jal Jeevan mission would be met with the recycled water. Moreover, Department of Water Resources, River Development and Ganga Rejuvenation has been allocated a substantial outlay of INR 9,023 crores in FY '22. Both budgets, the market for water and sanitation in India is looking extremely bright, and Wabag is very well placed to capitalize on the substantial opportunity, especially in Jal Jeevan mission. Here, technology players like Wabag will have a crucial role to play in terms of resource augmentation, because [indiscernible] will lead to exponential demand for drinking water, and it will have to be supplemented by recycled water as well as with desalinated water, given India's huge coastal line of over 7,500 kilometers. In both recycling and desalination, technology players like Wabag will play a critical role in ensuring the water security for the country. Now desalination is emerging as an affordable and reliable source of water with an active pipeline of projects of over 1,000 million liters per day in India. We expect desalination market to grow substantially in a double-digit figure in coming years, both in municipal as well as industrial sectors, primarily for the use of -- captive use. Recycle and reuse policies have already been formulated by 5 states. Others are in the process, wherein they intent to recycle and reuse up to 70% of the treated water. And given the technology expertise and the proven track record of Wabag , we will definitely emerge as a front runner. National Mission for Clean Ganga have implemented river rejuvenation project very successfully and have substantial component of pollution abatement by treating the municipal water as well as the industrial effluent. Wabag, as a leading technology player, has been successful in securing multiple orders in effluent treatment as well as [ river ] treatment. Given the success of the model, the government is planning the same to be replicated across 33 rivers under National River Conservation Directorate, NRCD, in India, opening a huge market in terms of wastewater treatment and management. We hope this to gain traction given the time lines various authorities have submitted to National Grid Cable. Similarly, several countries like Southeast Asia, Indonesia, Singapore, Vietnam and Philippines have immense potential going forward, driven by government regulations and improved focus on water and sanitation. In Vietnam, the National Assembly has agreed to the new draft wastewater regulations, under which new effluent discharge standards are mandated and all industrial parks are mandated to install centralized wastewater treatment plants. For this, a long-term spend of INR 8 billion to INR 10 billion is in the sight, which makes it extremely attractive market. Similarly, in Philippines, an outlay of USD 6.5 billion is mandated for wastewater collection and treatment, under which 16 major wastewater treatment plants will come up by 2027 and existing plants will be retrofit for Biological Nutrient Removal compliance. Going forward, we see that such markets where technical expertise will be the key remain extremely attractive for Wabag. Multilateral funding from major organizations like World Bank, JICA, ADB, KFW will be another key growth driver going forward, which we foresee as a key focus segment for us in developing countries such as India, Southeast Asia and Africa. In India and South Asia alone, the multilateral funding has an [indiscernible] project to the tune of almost USD 2 billion with a further funding of over $500 million in pipelines, compliant with a world-class design and execution standards set by multi-vehicles. Wabag has executed several multilaterally funded projects in the past successfully, and we look forward to executing many such projects going forward. Similarly, Africa, as well, has emerged as a preferred destination for multilateral funding and also G2G funding from the Indian government. This projects amounting to over INR 1.5 billion presently are aspects. With regard to Middle East and Africa cluster, ESA remains a key focus area for us, which is the largest market for desalination in the world. Currently, projects with cumulative capacity of 7,820 million liters per day are under active [ construction ]. The rest of DCP is very rapidly growing market now. In Egypt, water authorities have outlined a 30-year mega program for desalination, under this total desalination capacity of 10,482 million liters per day is to be created and investment of USD 15 billion is in the [ sight ]. As far as Africa is concerned, both Northern Africa and South Saharan Africa have substantial pipeline of opportunities across municipal desalination, industrial desalination and wastewater treatment. Compliance to UN Sustainable Development Goals, SDG, especially SDG 6, remains a top priority for developing and developed nations. The COVID pandemic has reiterated that water and sanitation is imperative to public health, which has also only -- which has only amplified the focus on SDG 6, which aims for clean water and sanitation for all by 2030. This will open huge avenues of opportunities globally. Further water and sanitation has a key role to play in compliance of UN SDGs 3, 9, 11, 13 and 14, the implementation of which will have tangible and intangible impacts going forward. Going forward, industrial segment remains a major growth driver for Wabag and a key focus for all -- for us across all clusters, wherein we see an immense potential of USD 2.4 billion over the next 2 years. In India clusters, several high-technology projects in oil and gas, petrochemicals, metals and mining from major conglomerates such as RIL, IFCN, GSW, Petrovietnam, among many others, are at various stages of entry. Similarly, in EMEA cluster, oil and gas and petrochemicals remains the key industrial growth driver, having several upcoming projects from Saudi Aramco, Qatar Gas, ADNOC and so many others. Europe cluster too has an attractive industrial market, with our several projects across our existing and new clientele such as Petron, [indiscernible], OMV, Shell, Lukoil, [indiscernible] Expected to take shape. In conclusion, driven by improved focus on water and sanitation, especially post COVID, government regulations for pollution abatement across various geographies globally, the global market for water and sanitation has immense potential in coming years. The technology players like Wabag will play a key role in developing, executing and operating major projects across the globe. Thank you. With that, I hand over to Sandeep now.

Thank you, Rajneesh. Good evening, friends. First, you had opportunity to look at the results update presentation as circulated and uploaded on our website. Now let me take you through the key financial highlights for the quarter and 9 months ended December 2020. Our 9-month consolidated revenue from operations stood at INR 1,835 crore as compared to INR 1,772 crores, largely in line with the previous year levels. On a stand-alone basis, the revenue from operations was INR 1,143 crores as against INR 1,254 crores last year. The EPC project, which had slower progress in the last 2 quarters, has now picked up pace, and we expect the progress to further improve and return to normal levels of operations. EBITDA for 9 months period stood at INR 142 crores on a consolidated basis and INR 108 crores on a stand-alone basis. Profit after tax attributable to owners for the period stood at INR 64 crores on consolidated basis and INR 40 crores on stand-alone basis. For the quarter, our consolidated revenue stood at INR 796 crores, a 17% year-on-year growth. Our EBITDA stood at INR 70 crore and PAT at INR 42 crores with a 13 -- 36% year-over-year growth. Now continuing the trend over last few quarters, our net interest cost has reduced by 45% on a consolidated basis on account of significant debt reduction. As always, our commitment to focus on liquidity improvement remains prime. Gross debt position, which stood at INR 520 crores as of March 31, 2020, has reduced to INR 383 crores on December 2020, a reduction -- a 26% reduction in 9 months. Debt reduction has been prime agenda of the management to improve the liquidity levels of the group, and our efforts are showing the expected results. We continue to work closely with our bankers and are thankful for their continued support throughout the quarter. With this, now we open the floor for question and answer. Thank you.

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

Congratulations on good set of numbers, sir, especially on the revenue side. So my first question is, sir, of course, we are in Q4 in the middle, how do you see Q4 panning out? And is there any guidance available for FY '22? And secondly, on the opportunity basket for the immediate opportunity in terms of order inflow, what we are targeting for FY '21 and FY '22? And if you can mention about -- mention some of the large orders we are chasing in India and overseas.

Mohit, as we said in our speech and also in our earlier interaction that, always, our H2 are better than H1. As you have already seen, at the consol level, at the 9-month level itself, we have surpassed our last year 9 month revenues. That clearly is an indicator that the execution speed has picked up and the COVID effect is behind us. Going forward, Q4, we expect a similar improvement, and even going forward in further quarters also, we would consider a similar improvement in the execution speed. And that way, we can always say that the way we are standing now and looking at FY '21, definitely, we are going to do better than what we have done in the last year, even during these pandemic times. Regarding your second question of the basket of order intake. We have said this before and we want to repeat, today with our order backlog of almost INR 10,700 crores, we have enough backlog for next 3 years revenue. So we are becoming very choosy and selective in picking up orders which are funded by central government or multilateral agency. That is where, if you see our order backlog, almost 90% to 95% of that is all funded through a central government or multilateral agency. That's what we are going to focus on. And we will always go for technologically challenging complex orders and from value, large orders. That's what our focus is. And we have enough in our pipeline to give us required order intake to maintain a healthy order book.

If I may ask, sir, what could be your role in Mumbai Sewage Water Treatment Project Phase 2?

I think at the moment, we are a little slow on that. Though we have been following up this project for 10 years, the way it has taken shape and the way it is getting murkier. So we would like to keep a step back unless things change where we will, again, actively participate. But today, it is not on our top priority list.

Okay. Understood. Sir, last question, have you provided anything in the quarter for the bad [ reading ] for the ECL, which affected our margins, if you can quantify that number?

As a part of our ECL policy, we always look at both the default and delay. This is a regular practice we do quarter-on-quarter, year-on-year as per the accounting standard. And that is what I think we do on quarter-on-quarter. So this quarter also, we have evaluated, as per our ECL policy, and we have provided.

So, sorry, number, sir? Number, if you can.

Just a moment, I'll check with my colleagues, because I'm not top of the number.

So about INR 15 crores.

15 or 50?

1-5.

1-5.

[Operator Instructions] The next question is from the line of Siddharth Rajpurohit from JHP Securities.

Sir, the financial closure in the HAM project is done, sir?

It's imminent. You should be seeing this announcement very soon.

Okay. And will the execution start in this quarter or the next quarter?

The execution has already started. If you know the HAM project, we don't wait for it for financial closure, as we are the sponsors and we are also EPC contractor and O&M contractor. So our execution has finally started. As soon as we do the financial closure, we formally announce and start taking the revenues. But the work is continuing.

Sir, what would be the benefit by the change in guidelines in terms of retention in the payment cycles? And what will be -- is there any -- also is there any improvement in the payment cycles from customers?

It's all expected. I think government is doing their best, even they have announced that some of the central government-funded projects, their performance bank guarantees, the bid bonds, all are going to reduce because they want to see more competition to happen. So these are all welcome steps for companies like us because our nonfund guarantees should come down. So this is definitely a priority area. And also, you have seen in the budget, the government has allocated a lot of money for potable water and sanitation. So I'm sure, going forward, this sector will be adequately funded.

Can you quantify the benefits of the release of bank guarantees that would have happened?

I think from the projects, it will be an order of magnitude over INR 150 crores to INR 200 crores.

[Operator Instructions] The next question is from the line of [ Ravi, ] an HNI Investor.

I just would like to know the status of receivables from the Andhra Pradesh government?

I think during this COVID time, Ravi, all of them are in the legal status. Some in TSGENCO, it is waiting for a Supreme Court decision so that we can receive our about INR 130 crore order number. The Andhra Pradesh, there is -- where our earlier partner wanted to attempt arbitration. This is at the High Court level in Andhra Pradesh. That is stuck, and we have to collect our daily amount, which is in the trust of our earlier consortium leader. That is NCLT. So these 3 things are stuck because of no physical hearing taking place. So status has not changed, Ravi, in this last 9 months.

I mean, if at all -- if we get that money, we get with interest, right?

No, no interest, Ravi. We don't get with the interest, and that is the reason the earlier participant asked a question of what provisions we are making. So we are making already a provision for delay every time in our P&L.

Okay. And sorry, another question, like with the huge opportunities in -- across the world, how we are to take a -- or how we are positioned to take up larger stake with respect to our competition from, say, from L&T. I think L&T is also getting into water technology. In the competitive space, how we are positioned to take larger pie of the orders and complex orders?

Yes. I think you're using very right words, Ravi: large, complex, competitive. I think this company has demonstrated in last 24, 25 years of our existence, from a small start-up company in #97 (sic) [ '97 ]. Today, we are one of the top...

No, no, no. Sorry, sorry. I know the history of Wabag, okay? So I have been following up since 10 years. But my only question is when the orders are -- comes, orders would come in, in terms of billions of dollars of opportunities there. So do we have the ability to scale up to execute, say, INR 10 billion worth of order a year. If your [indiscernible] is required, how fast we can fill it up? That's what I want.

I think in our country, there is no dearth of engineers, and we are always dependent on taking fresh talent and training them to our culture and our technologies. That's how we have grown from a 6-people team in '97 to today we are about 1,500. So if we have to go from 1,500 to 1,500 over the next 3, 4 years, I don't see a challenge because we are in all emerging geographies, whether we are in Romania, Czech Republic or Turkey, Istanbul, which is also a very great resource for engineering talent. So we have our presence in the right geographies so that we can scale up. And from a technology point of view, we have all technologies, references. We are second to none. So I don't see if we want to take something and we aspire to take technologically challenging and complex orders, I think we have the right resources to do that.

The next question is from the line of Kaushik Poddar from KB Capital Markets.

I think a month or 2 back, the minister -- the Mumbai minister commissioner was on TV, and he had said that if the COVID doesn't -- is contained, in that case, INR 18,000 crore of orders for sewage treatment will be given. I mean, can you throw some light on that?

This -- I'm sure you have heard this before, because last 10 years, Mumbai is trying to put up almost 7 sewage treatment plants in various parts of the city. We have been involved in the last 10 years. So I don't think there's a wrong statement. Yes, there is an intent to do that. Now how quickly they can streamline and administer so that the awards can happen? But intent has been there for the last 10 years.

And will Wabag be participating in such kind of things?

That's what I just said [ to an ] earlier participant, that as of now, the way that things are structured, it is not one of our top priorities but if things change, we may rethink about it.

Okay. And is Chennai desalination, is there any development there?

Yes. I think the prequalification bids were invited almost a couple of months back. It was submitted, it's in the final stage of getting prequalification done. I think, in a day or 2 that list should be announced. Post that, the tender should come out for bidding. So it is going to be very limited competition for such a mega desalination plant and Wabag will definitely participate in this tender.

And I think in the summary in the presentation, you have talked about 1,000 million liters per day -- this thing, the projects may be bid out. I mean, that will be over how many years? I mean, do you have...

It's basically 1 or 2 years. It's not more than that, like you have just asked, Chennai. Chennai itself is 400. We just needed 3, 4 more projects. We are also bidding for some industrial clients where they are also going for desalination. So it's a mix of both industrial and municipal water, and we will bid for most of them.

And my last question, see, right now, your service income is in the range of 15%. So 3 years down the line, where do you see this service income as a part of your -- as percent of your turnover, say, 3 years down the line?

So our endeavor is to move to about 20% to 25% of the total revenue. So down the line 3 years, we expect that we should move to at least 20% depending up on the various projects, what we are expecting to come.

And is it more profitable?

Yes, it is.

Okay. And so do we see, in that case, the return on net worth, which is around 20%, 21%, that also improving in 3 years down the line?

Yes, of course.

[Operator Instructions] The next question is from the line of Siddharth Rajpurohit from JHP Securities.

Sir, is it possible to give a guidance -- revenue guidance for FY '22?