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

Ladies and gentlemen, good day, and welcome to the VA Tech Wabag Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Rajiv Mittal, Chairman, Managing Director and Group CEO of VA Tech Wabag Limited. Thank you, and over to you, sir.

Thank you. Good evening, ladies and gentlemen. We extend a very warm welcome to you all to this Earnings Call Post Announcement of Q1 FY '23 Results of VA Tech Wabag Limited. Joining me today for this earnings call is Mr. Skandaprasad Seetharaman, our group CFO. To start with, this has been another successful quarter for us with our journey of profitable growth continuing to this quarter as well. We have had to counter cost headwinds coming from the commodity price increase, and despite the same, our strategy of focusing on international projects; industrial projects; high technology plant and EP, which is engineering and procurement business, has helped in both execution excellence and improved operating margins. If you have a look at our revenue in the last few years, more than half of it has been from the international geographies, which is in line with our strategy to be a global player. Our order intake in the past few years have been in line with our focus to remain a high technology business leader in desalination, reuse and recycle and effluent treatment business lines. A few examples of our reference projects include on the desalination front, Reliance Jamnagar plant and Senegal 50 MLD desalination plant, which we have received in this quarter, has given further momentum to our desalination business. We are currently executing a 50 MLD desalination plant in Tunisia, funded by KfW and have recently completed also a desalination plant for MRPL Mangalore. Wabag was first to construct the largest operating 110 MLD municipal desalination plant in India on a DBO basis, at Chennai. Of course, you all would already know about the 400 MLD Japanese funded desalination project coming up in Chennai where we are 1 of the 3 bidders. The bid is at the moment under evaluation. In the last year, we had a Marquee order intake of $165 million towards the affluent treatment plant on Zero Liquid Discharge basis from Russia, which was followed by an EUR 18 million order this quarter from Daelim. We have also completed effluent treatment plant for the largest single stream-refinery in the world for the Dangote, Nigeria and also commissioned a large ETP for Petronas for their integrated refinery and petrochemical complex in Johor Bahru, Malaysia. We have been in the forefront of recycle, reuse in India, both on municipal as well as industrial purposes. Our 45 MLD [ reference ] plant in Koyambedu, Chennai was inaugurated in 2019 by honorable Chief Minister of Tamil Nadu, has been a key milestone in Chennai's recycle and reuse learning. We have recently also signed a concession agreement for a 40 MLD recycle reuse plant in Ghaziabad for Ghaziabad Nagar Nigam on a HAM basis. It's worth noting that Wabag already has to its credit, constructing a direct portable reuse plant built in Namibia. While continuing to remain asset light, we have participated in capital project business by securing 4 HAM and BOOT projects, of which 3 projects in Calcutta, Ghaziabad and Bihar are already under execution. Our participation in contribution to the Namami Gange of the Government of India has been significant. Our presence in the projects on a DBO basis and HAM basis under Namami Gange has been across the flow of Holy River, Ganga. We also commissioned our first and largest STP under Namami Gange, a 40 MLD sewage treatment plant at Dinapur, Varanasi, which was inaugurated by Honorable Prime Minister of India. Currently, more than half a dozen projects are under various stages of execution, once all these projects are completed, the Holy Rivers water quality will undergo a marked improvement. Our focus on developing the Operation and Maintenance business has also been repeating benefits for us, securing 2 projects under the One City One Operator scheme for the city of Agra and Ghaziabad, the first of its kind in India. Our focus on developing a long-term O&M business through HAM and DBO projects have also been showing up in our order backlog with O&M contributing over 30% in the order backlog today. Our business is about ESG, Environment, Social and Governance. It is a unique opportunity for us to contribute positively to the environment as we further our objectives of value engagement for all our stakeholders. These are only a few examples of our successful business strategy. Thus, our focus on industrial and international business, multilaterally funded projects, high technology desalination and recycle and reuse plants, asset-light capital projects approach, cash accretive O&M business, continued focus on emerging geographies has enabled to improve margins and cash flows, enhanced quality of order book delivered consistent profitable growth, enhance shareholders and stakeholders value, become a globally respected water leader and contribute positively and responsibly to the environment. Now let's move on to the key order intakes for this quarter. This quarter, we have secured 2 large new orders in desalination segment. The first one, 50 MLD Seawater RO Plant in Senegal, which marks our entering into the country and enhances our global leadership position in desalination segment. This consortium order, which is funded by JICA and being built by SONES, The National Water Company of Senegal is worth about EUR 146 million, is to be executed in a consortium with Toyota Japan and Eiffage, France. Wabag will play the role of technology and system integrator, while Eiffage will be responsible for construction work and Toyota will comanage the project. Scope of Wabag under this order will be engineering and procurement and operation and maintenance, which is worth about 1/3 of the total consortium order value. Wabag's EP scope includes design, engineering and supply of electromechanical equipment, supervision of installation and commissioning, followed by a 2-year operation and maintenance of the plant. The plant will be based on seawater reverse technology with very advanced compact systems, considering the availability of large and challenging terrain. Second desalination order was from Reliance Industries, Gujarat, which is one of our key customers towards engineering, procurement, construction for a 53 MLD desalination plant at Jamnagar, Gujarat worth about INR 430 crores. The scope of this project includes design, engineering, procurement, supply, construction, erection, precommissioning, commissioning and performance guaranteed trial runs of the seawater reverse osmosis plant slated to be built in the premises of RIL's world-class refinery at Jamnagar, Gujarat. It's worth noting that Wabag has executed a 24 MLD seawater RO plant in the same premises. This plant will employ state-of-art pretreatment in the form of lamella clarification, followed by filtration and ultrafiltration and then followed by reverse osmosis technology to convert seawater into process water. We also continued our foray into the Russian Federation market with a new engineering and procurement order worth about EUR 18 million, about INR 149 crores from Daelim, Korea towards a water treatment package for EuroChem Methanol Production facility in Kingston, Russia -- sorry, Kingisepp, Russia. Our scope includes design, engineering and supply installation, commissioning and startup of the plant and is scheduled to be completed over a 15-month period. The project will employ softening, ultrafiltration, Reverse Osmosis technology to treat brine water which will be reused as process water in the facility. This order includes adequate payment securities, which derisks us from any geopolitical uncertainties. Ordering activities started resuming pace, both in India and internationally, and this is reflective in our order booking for this quarter. We will continue our focus on technology-driven international orders and enhancing our presence in the industrial water space while continuing our delivery of best-in-class municipal water solutions. We are confident that Wabag will continue to remain a forefront runner in the oil and gas segment, reuse and recycle of water and desalination solutions with our Marquee references across the world. Coming to some of the key business of bids. As you are aware, we secured an engineering and procurement order worth USD 165 million, which is about INR 1,200 crores from Amur Gas Chemical Complex LLC in Russia in H1 of FY '22. AGCC is a joint venture of SIBUR Holding, Russia and China Petroleum and Chemical Corporation Sinopec, China, owing to the current geopolitical uncertainties in the region, customer had communicated a suspension of further activities of the project in April 2022. We are now happy to inform you that customer has now issued a notice of work to resume this project, which was communicated to the stock exchange immediately also. We have started remobilizing our resources and very soon the pace of work on this project will reach the presuspension level. Russia is seen as a big opportunity market for us as there is a space created by the European companies, which are walking out of Russia, which is leaving a great opportunity for Wabag to replace them and complete the projects. So in the coming quarters and the years, we see Russia to be a good market for us to execute water projects. At our 300 MLD Independent Sewage Treatment Plant at New Jeddah Airport in Kingdom of Saudi Arabia, which is being built with the state-of-the-art NEREDA installation activities have started, and the plant is on track to start recommissioning activities towards end of FY '23. In our KfW-funded Zarat project, Seawater Reverse Osmosis plant Of 50 MLD capacity, expandable to 100 MLD, being executed for SONEDE in Tunisia. Mechanical and piping installation is currently underway. The project is progressing towards a start of precommissioning in FY '23 itself. In our 187 MLD Sewage Treatment Plant being built in Bally, Baranagar and Arupara in Kolkata for KMDA under the HAM model we have crossed 70% of project execution phase, and the project is progressing well. Equipment deliveries have commenced, and we expect the project to get mechanically completed within this fiscal year. In our HAM project for BUIDCo at Digha and Kankarbagh effective date has been announced and we have accordingly commenced our activities. It is important to note that DBO portion of the project has already been progressing well. Our core business, which is water technology business remains intact and continues to grow profitably. With a very high quality order book of over INR 10,000 crores and a strong order pipeline visibility, we are confident of continuing to generate value for our stakeholders in our growth journey in the years to come. I would like to take this opportunity to express my sincere thanks to our direct and indirect employees and all the stakeholders for their continued support. Now we can move to the financial highlights, and I would request Skanda to take you through the same. Over to you, Skanda.

Thank you, Mr. Mittal. Good evening, friends. Trust you had an opportunity to look at the results update presentation as circulated and uploaded on our website. Let me take you through the financial highlights for the quarter ended 30th June 2022. Our consolidated revenues stood at INR 632 crores. And on a stand-alone basis, revenue from operations was INR 485 crores. The consolidated EBITDA for the period stood at INR 52 crores, which was up by 30% year-over-year, and the stand-alone EBITDA for the period stood at INR 46 crores, up by 75% year-over-year. We have delivered another quarter of profitable growth, which is our PAT growing faster than the rate our top line has been growing. The profit after tax attributable to owners stood at INR 30 crores on a consolidated basis up by about 98% year-over-year. On a stand-alone basis, the profit after tax stood at INR 25 crores, up by about 145% year-over-year. A look at the core metrics for the quarter, as we usually do. Core EBITDA stood at 11.5%, double-digit EBITDA margins as we have been indicating over our interactions earlier. Core PAT at 7.8%, demonstrating our continued control over finance cost to constant cash and debt management focus. Core return on capital employed, that is ROCE, was 21.4%, in line with our asset-light model and technology-focused approach. Mr. Mittal has already given a brief outline of our business strategy and our numbers in this quarter are also reflective of the same. International business has been growing. In the quarter, 46% of our revenue was delivered from rest of the world and 54% was from India, in line with our strategy to remain a global player. Our order backlog stands at over INR 10,000 crores with almost half of it coming from overseas geographies. Order book quality has enhanced -- the quality of order book is enhanced with a majority mix of multilateral and central government-funded projects, industrial projects backed by adequate payment securities, largely in desalination, waste water treatment, including recycle and reuse and effluent treatment space. Over 30% of the order backlog today comes from cash-accretive operation and maintenance business. Profitable growth. For the quarter, EBITDA grows by 30% and PAT by 98% on a consolidated basis. Our asset-light approach continues with a 20% plus core ROCE consistently, and even in this quarter. In summary, we are a global leader in the high-technology water treatment business. We have grown profitably and consistently so, and we have a strong revenue visibility from a quality order book of over INR 10,000 crores. We express our heartfelt thanks to our bankers, investors, fellow Wabagites and all other stakeholders for the continued support extended to us. With this, we now open the floor for question and answer.

[Operator Instructions] We take the first question from the line of Manish Maheshwari from [ Embark ] Capital.

Sir, is my voice reaching you?

Yes, it is. A little bit louder, if you speak, better, but we can hear you.

Is it better now?

Yes, please continue.

Sir, there is an other income component of INR 33 crores reported for this particular quarter. Can you give us -- can you give me a segregation or a breakup? Last quarter, it was INR 10 crores and last 2 quarter...

As we said, we are basically a global company. We export lot of our things, as we discussed, almost 50% of our income comes from rest of the world geographies and 50% from India. One of the income comes is all export-related income, which are all in the fashion which government is giving us various duty drawbacks and export-related benefits. So other is the finance income, which we have financial income because of various fixed deposits and the cash we have in the banks. And the last is the ForEx income because we have our contracts in foreign exchange in dollars and euros. As we bill and then we receive, the difference in that goes into the other income. So these are the nature of other incomes.

Can you quantify the 3 items that you have mentioned over?

All as you know, as I told you, I can quantify there is no problem, my colleague will me the numbers. But these are all operative incomes. These are all coming from the operation because we are a global player. These are not nonoperation or investment incomes. These are all related to our business incomes.

Okay. But...

See even if we take as our business. If we export anything, if we don't have an income in dollars, we will have to hedge it. At the rate we hedge the dollar, that is the rate at which we will take our income, and that portion will not appear in other income. But as per the accounting policy when we get without hedging, we get this income, we put it in other operating income. Hence, I think this -- we should not spend too much time. It is only classified just from the accounting standard perspective, but it should be treated as an operating income.

Okay. Sir, what is the net debt as on 30th June?

Just 1 minute, we'll give you.

And what was the net debt for March FY '22?

31st March FY '22 was about INR 10 crores positive, and net debt as of 30th June '22 is about INR 70 crores negative. We have a net debt in June.

And the FY '22 -- March FY '22 what was it?

It was net cash, INR 10 crores.

Okay. Sir, could you help -- could you give us a forward-looking number in terms of a guidance for the next quarter or maybe the second half?

In terms of what?

Guidance in terms of your revenues?

Generally, in the last 2 years since the onset COVID, we have refrained from giving guidances. But I'm sure if you are an investor with us you know how our first quarter comes. On that basis, we can always predict the rest of the year and the future quarters also. You know that the first year -- the first quarter is always low quarter. As we go along, our second, third quarter will be more than that, and second half will be more than first half. This has been the trend in the country for so many years.

And how about the working capital cycle right now?

[Operator Instructions]

So Manish, I will answer this question. The working capital cycle is under control. It is similar to what we were in March, we've not had much of variation from March. We are largely at levels similar to March, and it is under control.

And sir, last question, if you will. Since we're gung-ho on Russia and Europe, and we have -- I mean we have sizable amount of order that we are executing, I think, there was an order which got canceled and the order was again kind of...

I'll just correct it here. We will not use the word cancel, we will use the word suspended. So It was suspended for a couple of months. As I said in my speech, we got an intimation last month to restart, and now it's over a month that we are remobilizing and starting the complete order.

So sir, how -- I mean, what is the game plan for sailing through markets like Russia and Europe, given the uncertainty?

Uncertainty remains everywhere. We are basically an emerging market player. Emerging markets will never be as certain as the developed markets. But there's a way of doing business, and we have been doing business. We know that if we go into this kind of markets, how to make the payment securities. Like in this market, we always do business with either a prepayment or with a letter of credit. And that policy will continue to happen as long as we have a prepayment or a letter of credit, we'll take this order. We -- if we have a deferred payment, we will not accept those orders. That has been an internal discipline and we are continuing with that.

[Operator Instructions] We take the next question from the line of Manish Jain, an Individual Investor.

What is the revenue guidance for FY '22, FY '23, sir?

Manish, [indiscernible]. There is a lot of disturbance... [Technical Difficulty]

Manish, [indiscernible].

Yes, I'll try again. Manish, as I told to the earlier participant, now in the last couple of years, we have not been giving any guidance, but we have been saying that we have been growing year-to-year. So this growth will continue keeping all the conditions favorable, no COVID-related lockdowns and all. Our growth generally will continue, and it will be always positive from this last year to this year.

Sir, at least there should be at least a double-digit revenue growth?

Yes, it's not far off from what we have internal targets.

Sir, double digits, sir, come from 10 to 20. So what?

You asked for it, I didn't -- you said double digit. So -- yes, you are in that range.

But with this kind of order book and this kind of opportunity, I think you should grow a little bit more and with this kind of a leadership position.

True. You feel that, we also feel that. Obviously, we'll grow because the team has been working hard, and we excel in execution. Today, we have most of them are EP orders, which is not so much construction-related. So yes, I -- we also would expect that we have a good order book, and these are executable order book. We don't have order book, which is not executable, and all our HAM projects have also come on stream with announcement of effective date. So we expect that this year will be a good year.

With improved margin, sir?

Of course, that goes without saying, as my colleague, our CFO mentioned, we only work for profitable growth. Our margins will be higher than the -- percentage growth in margins will be higher than the percentage growth in our top line.

Sir, any important orders, which are in the pipeline, sir?

Yes. As I said, we have a very solid, concrete pipeline. I also mentioned a number of times, the Chennai desal large project has been discussed in this conf call. I mentioned and gave you an update that, yes, we have submitted the bid of the Chennai desal plant, and we are one of the key bidders, we can see our chances, but we'll get to know in the next couple of quarters.

[Operator Instructions] We take the next question from the line of Anurag Patil from Roha Asset Managers.

Sir, if we look at your EBITDA margins excluding the other income, then it has actually declined compared to earlier quarters. So how should we look at this going forward?

Why you say it is declined and why you say you have to exclude the other income. Just now I explained to an earlier participant, our earlier income is completely operational income. Is it a crime to go abroad and do business in U.S. dollar. We are bringing into the country ForEx exchange. And luckily the foreign exchange has grown for us, the Indian rupee has depreciated, it's very much part of our strategy of doing an international business. And if we do exports, and the government of India gives us the export benefit. What is wrong with it? We calculate that in our margins when we take the order, why first we should exclude operating income, I would like to know from you Anurag.

Yes, sir, I understand that part, but I wanted to understand if we include other income then whether these kind of income over margins are sustainable directionally?

Why do we not -- suppose, now we had closed the June quarter at whatever INR 79 or $79 or something. Now suppose, Anurag, this dollar will come down to INR 77, INR 2 I will lose in dollar. Would you tell me to exclude this from my EBITDA because that will be sunk into. This will not be shown as other losses in my total income because as per the accounting policy, that I will have to book it as a part of my cost. And then my EBITDA, will I be allowed to drop my EBITDA if I have a ForEx exchange loss?

No, no, sir, I understand that part. I'm not asking to exclude that. I'm just saying the ForEx part can be volatile. So just to understand, excluding that, how our expenses can pan out? That part I wanted to understand.

Even if you for just theoretical purpose, you want to exclude all this -- other income. Still, we have positively grown on EBITDA, excluding the so-called other income. There has been a positive growth . It is about 300 bps we have grown on stand-alone and 200 bps we have grown on consol and the contribution margin. And if you want to take on the EBITDA basis, about 100 bps on consol and 200 bps on stand-alone.

We take the next question from the line of Kaushik Poddar from KB Capital Markets Private Limited.

Yes. See, this time, what we see is that your finance cost is down. And -- basically finance cost is down, so can you please explain that?

Very simple. I think, as my colleague said, we have reduced our debt, number one. The other thing is we have also reduced our borrowings. And on top of it, we have been able to discuss with the banks to reduce the interest cost and the bank guarantee cost. And this has enabled us to get some of the bank guarantees back also from the market for the completed projects. So the bank guarantees, which were open in the previous quarter, some of them have got returned because the projects were completed. So hence, the cost has come down. So hence, our net interest cost for borrowing the money has come down. And also the bank charges for BG and LC, which are nonfund items have also some down, both have come down.

Okay. And this LC and bank guarantee charges, has it come down on a sustainable basis? Or is it a one-off?

It is -- normally, we would expect that this will keep coming down. But if we get new contracts, if we get new orders, then we'll have to give fresh bank guarantees and fresh LCs have to be opened to complete the supply. But if we don't have orders, then also this will keep coming down. But we hope and we -- in the business, we always think that we will get new orders and some more bank guarantees will be required as going forward.

Okay. And the last question, in all these years, the business was not doing well with the oil prices at what they are, hopefully, there will be a much bigger opportunity. How strong are you in the Middle East?

I think very good question Kaushik. One, I will definitely answer how strong we are in Middle East, definitely. But with oil prices going up Generally, the oil and gas sector, globally, we'll see a traction, both on the refining business as well as the petrochemical business, which is downstream of refinery. We are not only in India, the largest player in oil and gas, we are one of the very few large players globally doing oil and gas. You know we do regularly business with Reliance. You know we have done business with Aramco in Saudi Arabia...

And also Petronas, I guess.

Yes. We have done business with OMV, Austria. We have done business for Petronas. We have completed 2 years back in Malaysia. Now we are doing business with SIBUR in Russia. So I think we are extremely strong when it comes to oil and gas sector. So if oil prices are going, the affordability of oil companies will go up and also, we will see a good order intake into this oil and sector, not only in Middle East, but globally. But this also not only in oil and gas because the governments, especially in Middle East, will have a higher affordability because of the oil prices, they will also invest money into the infrastructure. Hence, the desalination and sewage treatment plant, it will also see a big traction there because their affordability will be high to invest into the infrastructure space.

Okay. And please try to upload the transcript of this conf call as soon as possible. Right now, for example, I have to cut off, so that I can read whatever in the transcript is.