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

Ladies and gentlemen, good day and welcome to VA TECH WABAG LIMITED Business Update 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 from VA TECH WABAG LIMITED. Thank you. And over to you, Mr. Mittal.

Thank you. Dear friends, good evening. Let me welcome you all to this business update call post successful completion of financial closure of our first Hybrid Annuity Model, HAM, project in Kolkata under the Prime Minister's flagship Namami Gange program. Mr. Varadarajan, our Director; and Mr. Sandeep Agrawal, our group CFO, joins me for today's call. As you would recall, that we had secured our first-ever HAM project in Kolkata. And yesterday, our team, led by Mr. Varadarajan, achieved the financial closure of this project. The signing ceremony was held in NMCG's office in New Delhi, in presence of officials from NMCG, KMDA, IFC, Tata Cleantech and EverSource Capital. I would like to take this opportunity to congratulate Mr. Varadarajan and the team for this wonderful achievement and wish to see many more such successes going forward. I now hand over to Mr. Varadarajan to take you through the highlights of this development.

Thank you, Mr. Mittal. Good evening to all of you. It's indeed a very happy occasion for all of us that we could achieve the financial closure of our first HAM project under the Namami Gange program, the pet project of our beloved Prime Minister. This financial closure is a key milestone in the next wave of growth, I would call it, for WABAG; and is a demonstration also of the confidence shown by large global and reputed organizations in the water sector story. The government, by embarking on the ambitious holy Ganga river cleaning program, put forth its focus on sanitation, hygiene and water infrastructure. The Nal Se Jal [indiscernible] water sector schemes are further testimony for the government's initiative towards promoting water infrastructure across the country. The HAM concept was first brought into the water sector through the Namami Gange program. WABAG is already one of the key contributors to this Namami Gange initiative of the government, where we manage about 197 crores liters per day of treated water flowing into the holy Ganges. WABAG now becomes a complete player in the Namami Gange program rendering EPC, O&M and concession projects. The HAM concept brings the scope of project life cycle management into the hands of the concessionaires, thereby ensuring higher performance levels and [ public ] efficiencies. Backing from the government of India and the World Bank to the Namami Gange project ensures that large and reputed financial institutions are ready to fund the projects [ considering no ] credit risk from the customer. Water sector, with the increased focus on recycle and reuse, desalination, is now becoming self-sustained. Water is no more a social obligation. And this is already demonstrated with water as a commodity joining the likes of gold and oil and being traded in Wall Street. As we have always said, water is too precious a commodity to be used only once. First and foremost, we would like to thank the National Mission for Clean Ganga, NMCG; and the Kolkata Metropolitan Development Authority, KMDA as we call it, for the confidence they have reposed in us to pivot this project successfully. It is with immense pride that we would like to inform all of you that we have successfully completed the financial closure of our first HAM project towards building water infrastructure for the KMDA, treating 187 million liters per day capacity of sewage and operating and maintaining this infrastructure for a period of 15 years post commissioning. This project will follow global best practices in environment and social standards as prescribed by World Bank and IFC. This project gives us great opportunity to not only clean the holy river but also reduces the costs of operating the plants significantly by producing and using green power. WABAG has been fostering sustainability, as we all know. And we deploy world-class, environment-friendly technologies in our treatment plants that contribute to reduction of carbon footprint. Once complete, this project will help reduce the discharge of untreated sewage into river Ganges from the state of West Bengal by around 15%. These projects will be executed under the HAM model. This is Hybrid Annuity Model that the NMCG will fund 40% through a grant during the construction period. And balance 60% will be taken care by the concession through a mix of debt and equity. We are highly pleased to inform that the debt portion of the project, which amounts to about 176 crores, is being funded by a consortium of the IFC, the International Finance Corporation; and Tata Cleantech Capital Limited. This funding led by IFC shows the immense confidence, focus and future that they see in the water sector in India. This also reinforces the trust in the technical capabilities of WABAG to execute such complex and challenging projects. As you all know, WABAG as an organization has stuck to the principles of remaining asset light in its approach to projects to ensure that we deliver the best ROCE to stakeholders. In line with the same, as we have been communicating earlier, we are pleased to inform that we have tied up with EverSource Capital as the investment partner to jointly invest the equity requirement of about 71 crores in this project. EverSource Capital is the fund manager for Green Growth Equity Fund, GGEF, which is established as a joint venture between NIIF, National Investment and Infrastructure Fund, a Government of India organization; and Foreign, Commonwealth & Development Office, that is FCDO, of the government of U.K. EverSource Capital will invest in this project through its wholly owned subsidiary. WABAG's partnership with EverSource and GGEF fits the fund's objective of promoting sustainability as well as meeting the objective of WABAG to build and operate water treatment plants while continuing to remain asset light. With this successful financial closure in KMDA's HAM project, WABAG now has demonstrated its focus on venturing into similar projects and structures going forward. This opens a bigger opportunity in India as well as the Middle East and Africa region. I once again thank NMCG, KMDA, IFC, Tata Cleantech, EverSource and all my colleagues in WABAG for their excellent cooperation in the successful accomplishment of this financial closure. With this, we'll now open the floor for question-and-answers, if any. Thank you.

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

Very congratulations on the successful completion of the financial closure. Sir, my first question is, what is the share of EPC and O&M in the INR 575 crore project?

[ The award then is structurally ] -- so you're talking about the [ onetime ] contract for what we will be executing as WABAG. That will be about 72 crores. The EPC will be of 383 crores.

Okay, sir. And okay. And what is our share in this 71 crore equity contribution, sir?

See, it's generally, on the contract condition, we will have to keep a share of about 51% and 49% till the COD, till the construction period. And that's what we have at the moment.

The next question is from the line of Priyankar Biswas from Nomura.

First of all, my congratulations, sir. My question is, so this financial closure that has been done, as well as the equity partner that has come in, is it specific only to this project? Or is it for the other HAM projects or other future projects that we may get? Is it like a running venture?

It's a specific venture which we have taken. Obviously, you can imagine in any financial closures the kind of work which goes in. So I think it will be a waste if such a partnership is not extended to other projects, but there is no commitment on either side that we have to exclusively work with each other. Other projects, if the conditions are okay, there's always a preference to work with the same partner, but as I said, there's no commitment to work with the same partner.

And sir, just one follow-up. So for the financial closure, what would be the range of the interest cost?

I think these are things which I'm sure we can't tell on this because these are all competitive issues, but if you want, I think you can talk to our team and take it on one-to-one basis.

[Operator Instructions] The next question is from the line of Renjith Sivaram from ICICI Securities.

Yes. Sir, many congrats on this closure, which we have been waiting for long and finally we have achieved it [ to date ] [indiscernible]. So I just wanted to check this: So the whole project -- so what is the kind of the returns that we have worked with in the whole project? And what is the kind of time lines that we are currently working on for the completion?

Thanks, Renjith. I think you know we have been always saying, and Mr. Varadarajan also emphasized a couple of times, our job is to remain asset light. We want to continue to be an EPC and O&M contractor, basically a DBO contractor, which is what we are. Here there was an opportunity and large opportunity under the Prime Minister's flagship program of Namami Gange where they had come up with this HAM project, so we have structured this project such that our interest on EPC and O&M is protected. IRR is only something, by the way, we get for the investment. Our focus is not getting IRR on the project. Our focus is to execute the project on EPC and O&M basis because that's where is our margins would come in. And the IRR [ will be all from ] a financial investor. You can imagine, if investors like IFC, Tata Cleantech and EverSource have come in, this will have a decent IRR.

Okay, so this will sit as an SPV in our books, this whole project.

Yes, it will be an SPV. It's a subsidiary with -- where we will be a shareholder, but we will not be a majority shareholder after construction.

Okay. Okay. So our exposure will be limited to that equity partnership in the SPV, and our major benefit is the EPC contract which we are -- will be executing. And for that, we will get the arm's length margins that we normally get. So that is our sole focus.

So these are all contracts which are all finalized with all the partners where EPC and O&M contracts are final. And as [ you very ] rightly said, we have got into the project to protect our EPC and O&M interests. And any IRR we are getting for this period where we own the equity is just, "By the way, we are getting that." It's on top of it.

And post completion, we will try to sell this off to a new buyer and liquidate it.

That will be our aim, to keep using the same money for multiple projects. We want to remain asset light.

And is there any more of such kind of HAM projects that we are looking at, or is this the only one which we have?

Renjith, I am sure you know it. We also have Digha and Kankarbagh, the Patna project, which is also in the advanced stage of financial closure. Maybe in few months, we will also hear the financial closure of that.

The next question is from the line of Viral Shah from Prabhudas Lilladher.

Sir, a couple of questions from my end. One, in terms of opportunity side, you touched upon Patna. [ And so we are back ] and financial closure is expected...

Your voice is breaking, Viral. So I don't know what we can do to improve.

Can you hear me now, sir? It is clear?

Yes, it's better now.

Yes. So sir, a couple of questions from my end. First thing is in terms of opportunity when you look at it in terms of size apart from Patna. What will be -- the size be in terms of opportunity? And typically how comfortable are we in terms of ticket size? Say 500 crores, 600 crores of project or maybe a 1,000-crore-plus kind of project to be back on standalone on basis. So could you highlight that -- upon that first?

So I think you have watched the progress of this company. I [indiscernible]....

Sir, sorry. Sir, your voice is breaking. You're losing your audio.

I would -- I repeat. I think you have seen our growth -- is it okay?

Yes, sir.

Yes, yes, sir. This is perfect [indiscernible].

Okay. So from that, I think size has never been a hindrance for our growth. And here also, size is never going to be a hindrance because most of the money is going to be invested by our partners, and that's how we've structured it. So even Digha is about 1,200-crore project and we are executing it. This is about the INR 575 crores. And we don't think the size will be anything beyond that. It will be in that range for whatever projects which are upcoming, whatever we know. They are going to be in this range. And we are very comfortable with this range. And our partners are also very comfortable with this range in executing this project.

Fair enough, sir. Sir, just to extend this: In terms of size, could you quantify in terms of opportunities? What can be -- that be...

See, you have seen in the recent budget speech we are provided INR 20,000 crores for Namami Gange programs, which includes HAM as well as DBO contracts, which includes both. So that is about INR 20,000 crores. The opportunity is there in the recent future -- or coming future.

Fair enough, sir, fair enough. And then in terms of borrowing, sir, what will be -- your annuity payment be for the current year or semiannually for this project?

This will be 15 years, which is 60 quarterly installments will be there. 60 annuities, you can say...

Okay, but -- okay. And what will be that annuity amount be?

It will be the same. The CapEx investment, what I mentioned is 40% grant during construction is already paid. The balance 60% will be 1% per quarter, [ we will say ]. Plus, you will get the interest which is linked [ main to ] SBI MCLR. [ The O&M terms ] will be separately paid, and power [indiscernible].

Sir, if I understand correctly, it is 1% plus the MCLR, right? And the O&M expense or the power costs [ maybe additional ], whichever way we -- you want to break it.

[indiscernible]...

Sir, sorry. I think again -- sir, once again you are losing your audio.

Is it okay now?

Yes, sir.

So the CapEx annuity of the 60% at the end of the construction, that will be paid in 60 installments. That's what I mentioned as 1%, okay, per quarter. So it will be paid plus your interest, plus your O&M, plus power. All this will be paid. And there will be CPI, WPI, inflation adjustment. All that will be there.

The next question is from the line of Siddharth Rajpurohit from JHP Securities.

Sir, I just wanted to understand...

Sir, I'm sorry to interrupt you. May I request you to speak a little louder, please?

Yes. Sir what will be the possible operating margin in this business, sir, in this project, sir?

Sorry. Can you repeat your question, please?

Sir, what could be the EBITDA margin in this project, sir?

Well, you have seen the company. We work under close to 10%, 12% EBITDA margin. And this will be the range of EBITDA margin also for this project.

Okay. And are we in talks with the existing partner to sell the project on completion or when the -- or we are -- after the regulatory time is over?