Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Vascon Engineers Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Dr. Santosh Sundararajan from Vascon Engineers Limited. Thank you, and over to you.

Thank you. Good morning, everyone. I welcome you all to the earnings conference call of Vascon Engineers for the quarter ended December 31, 2019. Joining me on this call, Mr. Rajesh Mhatre, our Real Estate CEO; Mr. Somnath Biswas, our CFO. I'm sure you must have gone through the Q3 and 9-month FY '20 financial results and the results presentation uploaded on the stock exchanges and on the company's website. To start with, I would initially brief you on the company's performance during the quarter followed by the industry opportunities. We're pleased to share that in line with our strategy of improving liquidity, we have successfully monetized a land parcel measuring approximately 8 acres situated at Kharadi for a gross consideration of INR 170 crores to an SPV of Mapletree Investments. The transaction has been executed through Ajanta Enterprise, a joint venture firm, where we hold 50% share. The entire consideration of the transaction has been received, and the net cash flow post expenses and tax to Vascon is about INR 53 crores. We believe this is a significant achievement for the company as the proceeds will be utilized partly towards deleveraging our balance sheet and business operations, which will enhance company's operating performance going forward. After the sale of this land parcel, Ajanta Enterprises has left with developable area of about 8 lakhs square feet, having a sale value of INR 550 crores in Kharadi, Pune. Out of this, around 4 lakhs square feet of Forest Edge and Forest County are under development. Ajanta Enterprises also have [ TDRs ], which will be monetized going forward. Moving on to our EPC business. During the quarter, we have received an order of INR 133 crores from the Airports Authority of India for the extension of the existing terminal at Goa Airport, Dabolim. With this, our total order intake in the current financial year has reached INR 1,540 crores, leading to be highest ever order intake by the company. As we discussed in the earlier con call before start of the current financial year, we had set a target of INR 1,000 crores for order intake for this year. We're happy that we have successfully crossed this target significantly. We believe with increase in bank guarantee limits, we will be able to continue bidding for new orders in the coming period as well. Our current total order book stands at INR 2,091 crores, out of which the external order book is INR 1,975 crores and the internal order book is INR 116 crores. With the huge order inflow in the current fiscal year, our business is getting back on the high-growth trajectory. The current order book has given us strong visibility of EPC revenue growth for the next couple of years. We're confident that the execution of new orders within stipulated time and cost will lead to better capacity utilization and better margin for EPC going forward. Coming to Real Estate division. We have identified various launches of around 1.3 million square feet amounting to a total sales value of INR 730 crores to be launched in the next couple of years. The new projects will be launched in Coimbatore, Madurai and Pune, and we are confident our strong real estate sales and marketing team will help in successful launch of these projects. We would like to inform you that all our launches made in the recent past are progressing well. Also, we've witnessed a fair uptake in Windermere and Goodlife in this quarter. In 9-month FY '20, the company did new sale bookings of almost 1 lakh -- more than 1 lakh square feet, amounting to a total sales value of INR 85 crores. Moving on to the industry updates. In the Union Budget 2020, government announced various measures, which will aid to boost the real estate and the construction sector. The government has proposed a new tax slab format. We believe the amended tax slabs will ensure more disposable income in the hands of people. This could lead to reviving the consumption cycle of real estate and kick-start the economy. Extended the support of affordable housing. Tax benefit for affordable homebuyers under Section 80 EEA has extended till March 31, 2021, which is expected to positively impact demand in the affordable housing segment as well. Guarantee scheme for NBFC and HFCs. Government has proposed to further enhance the credit guarantee schemes for NBFCs and HFCs. This is expected to provide some respite to the market. Impetus on urban development. Key urban development schemes, such as AMRUT, Smart Cities, PMAY and Metro-MRTS projects saw higher funding. The government has announced it will develop 100 more airports by 2025 to support Udaan scheme, also to redevelop 4 stations with the help of the private sector. For health care sector, government has allocated INR 68,000 crores, 10% higher from last year. Government has approved NITI Aayog proposal to link district hospital with private medical colleges on a PPP mode for setting up medical colleges in existing district hospitals. Also, the government proposes to develop 5 new Smart Cities in collaboration with states in PPP model. This provides a huge opportunity for our sector. We believe these steps will help us garner growth. Let me take you through our financial performance. Let me start with the stand-alone numbers. During 9-month FY '20, the company reported a total income of INR 289 crores as against INR 270 crores for the same period last year. EBITDA for 9-month FY '20 stood at INR 63 crores with the EBITDA margin of 22%. Profit after tax saw a multifold growth with a profit of INR 38 crore in 9-month FY '20 as against INR 8 crore in the corresponding period last year. PAT margin stood at 13%. On a consolidated basis, during 9-month FY '20, the company reported a total income of INR 411 crores. EBITDA grew by 130% to INR 73 crores with EBITDA margin of 18%. Profit after tax stood at INR 41 crores in 9-month FY '20 as against INR 4 crores in the same period last year. PAT margins are at 10%. Total gross debt as on December 31, 2019, is INR 253 crores. We intend to reduce the debt significantly in a few quarters with incremental cash flow generated from asset sale and Windermere apartment sales. We would like to reiterate that continuous efforts of our team are reaping results. The cash flow generated from land sale should act like a catalyst to fuel the growth in both EPC and Real Estate segments of the company. With efficient execution capabilities, we trust to maintain the momentum going forward, supported by the strong order book and strong pipeline of project launches in real estate. The business growth in coming years looks quite promising. With this, we can open the floor for question and answers. Thank you very much.

[Operator Instructions] The first question is from the line of Rohit Natarajan from Antique Stockbroking.

I congratulate for the noncore asset monetization. Just wanted to know, with this monetization that you have in hand, this Caledonia monetization, you have mentioned somewhere that INR 57-odd crore is a kind of cash flow that you expect from this. Plus, there were -- initially, you guided in the past, in fact, in the last quarter, that you were in talks with some banks to increase the BG limits. So are we really in a position to double up our EPC revenue in the next year?

So just a small correction, it's not from Caledonia that we have monetized, it is from a land in Kharadi. So we've got INR 53 crores of cash flow from that. And you're right, so with this cash flow infusion as well as with our BG limits getting increased, we are at an advanced stage with a couple of banks, and by March, we target to enhance our BG limits further. We already have an assessment from SBI. With both these things in place, yes, doubling the top line of EPC execution next year is definitely a target we've taken. I would definitely say somewhere between INR 500 crores and INR 600 crores is what we would do next year as third-party EPC revenue.

Okay. Sir, in terms of the projects that you are targeting in EPC, the big ticket projects are, obviously, the Maharashtra State Police Housing, PWD Raipur. And then you have a private order of Tycoon, if I'm not mistaken, then followed up BMRC. These are the chunky orders, if I go by that number. The Maharashtra State Police Housing and PWD, Raipur, could you throw some light where exactly the current stage of this project is? Is everything there in the place to get the execution done?

So at Raipur, the work has started. We've been -- we already have close to 1,000 labor at site. Work is happening at full swing for the last 2 months. And we've already raised a couple of bills. So it's gearing up every month. Our billing value is increasing. So Raipur, everything is in place. Police housing, we have not yet broken ground. We were waiting for environmental clearance approval, certain tree-cutting approvals and certain letters from PWD. There are some existing structures which had to be demolished. There were some people staying there. So the current status is that the people who are staying there have all moved out. We've got permission to demolish. So demolition will start probably next week itself. And we are hoping that maximum by March, we will be able to start work on police housing. They've got their clearances. They've got all the approvals needed.

And sir, if you could also touch upon something on Tycoon and BMRC project?

BMRC in Bengaluru is INR 170 crore order for Metro shed. The work has started. We've already started billing. We've raised our first invoice. So work is progressing and, in fact, the client is now raising pressure on us to do more work month-on-month. So I think that's going well. Goa Airport, we've had a couple of meetings. We've not yet broken ground there, but they're also waiting for an approval, which they expect that they will get in March. So I think April would be a fair estimate where we will really start work on the Goa Airport. Tycoon was also going slow because of certain financial issues at the client side, financial closures that he was working on. But he has also finished his financial closures, and we expect that the work -- we're already working there, but we're working at a slow pace. We expect that the pace of work there will increase again starting March/April onwards.

Is the situation similar with Adhiraj also, Adhiraj project?

Adhiraj, we have about an INR 80 crore, INR 90 crore order back, like INR 80 crore, I would say, and work is happening at a steady pace already.

Okay. And sir, in one of the noncore assets classification, you have mentioned GMP Technical Solutions, too. So is that asset on block now? What is -- is there any conversation that is happening with some of the new investors or strategic investors or new buyers, by any chance? Would you want to articulate something on that?

No. So we are not actively floating a mandate and looking for buyers in this market currently. We feel that GMP -- we've done a lot of cleanup at GMP, and they are also on their way up in terms of improving their EBITDA. We expect them to do very well next year. And at that time, we'll probably then revive actively to find a suitor. But in the meantime, we're also -- we've got a good order from Tata, and that order is kicking off. So we're waiting for all those to reflect on the balance sheet next year and then, hopefully, we'll find a suitor.

Okay. Just my last question. And this margin profile for the incremental booking in EPC, how would it be looking like? Would it be similar to the current 16% kind of EBITDA margin that you make? Or would it look different?

So I expect the EBITDA or the gross profit that we are currently having in EPC to come down marginally, maybe a couple of percentage points. The scale would help. Scale helps in one way, but at the same time, some of these projects -- the earlier projects that we were having had a little bit of extra margin because of certain structures of the contract. The current projects, I think -- but EBITDA of 16% might come down to maybe 15% or 14%. That would be my...

The next question is from the line of Vikram Kotak from Ace Lansdowne Limited.

I have a little long-term question that we moved from a lot of debt trouble in the past to the very much improved situation right now. So what are the key areas to focus for the next 3 years for the company in terms of, like, you mentioned about airport project, you mentioned about the low-cost housing, other stuff, so how are you going to -- because you might get order book full or you may get much more orders. But how do you manage your risk side of it? How do you manage your liquidity? So if I see from today to 3 years, where do you see the company moving to? And what are we going to be -- how Vascon will be recognized as in 3 years' time? What's your vision?

Yes, that's a heavy question, I would say. See, we are very clear in our focus. Going forward, debt reduction in the next 15 to 18 months is a big target we've taken. We're already working on it. There are 2 [ debts ] we have: one is on the real estate side, on a Windermere project; the other is a CC limit for the EPC side. Now the CC limit is not something we're worried about, it's just INR 73 crores. It can be easily serviced by our EPC division. And in fact, with the growth in EPC, we would probably maintain that CC limit, whereas the INR 100 crore exposure that we have on the real estate side is something we want to kill within the next 15 months. That's a target we have taken internally. So we'll get done with that. Post that, you would have very -- the debt would come down to very manageable level. So that's one target. Secondly, in terms of growth for the next 3 years, we do hope to keep our order intake on the EPC side at almost -- of course, I mentioned last time also we were extra lucky -- more lucky than we thought we would be in this year so far, and we've already taken INR 1,500 crores, when our target itself for the entire year was INR 1,000 crores. We might not be that lucky always, but I would still say our target of INR 1,000 crores for the next year as well would remain intact. We are working on the BG limit. This will get solved within the next couple of months. So by March '21, we hope that we add another INR 1,000 crores of order to our book. And again, another number I always say is 30% of your order backlog is what you would execute in a year. Going by that, we should already be executing INR 700 crores next year because our order backlog is close to INR 2,100 crores currently. But since police housing and some of these big projects are just about starting, they haven't reached their full monthly billing. And so I'm expecting -- so that's why I'm projecting on the conservative side somewhere between INR 500 crores and INR 600 crores, but this could -- if things go our way, this could well be crossing INR 600 crores next year itself. But 2 years from now, we should be definitely crossing INR 700 crores with the added order book in hand. So that's where we're looking for the EPC top line. On the Real Estate side, we are also very clear in our strategy. We will not be investing in land. We are not going to be buying land even if at all cash flows permit us at any point of time. We are focusing clearly on tie-ups, whereby we liquidate our inventory fast. It's sort of a glorified contracting where we do not play the long-term real estate game of tying up a huge parcel and being stuck in a single location for 10 years. We will just launch projects as much as we can chew. And once it's launched, we are very clear that we sell and finish and get out within 3 years. So it's as good as EPC. There's a slightly better gross profit margin. So that's the strategy going forward.

What's our net worth as on today?

What's the net worth exactly?

As on December?

More than INR 600 crores.

Okay. And what will be your peak borrowing target, including bank guarantees and including the debt? So where do you want to see your debt equity ratio max going to even if you have more projects coming in -- so -- in the next 1 year, 1 to 2 years?

See, the CC limit on EPC is at INR 75 crores. I don't -- even for the next 2 years, I don't expect it to go beyond INR 100 crores. I mean that's definitely a target. We will not increase our CC drastically. We're able to manage most of these projects through accrual from the projects itself. On the Real Estate side, if you bring down our Windermere debt and the target is to bring it down to 0, so once that is done, again, I think depending on which project, we take a little bit of construction funding maybe. So I don't see our debt levels ever going more than INR 100 crores, INR 150 crores max, in that range, even for the next 3 years.

So you say INR 150 crores is a debt and INR 100 crores is a BG -- sorry -- CC and BG combined how much? CC I understood INR 100 crores, INR 150 crores. What about the other guarantees and all that? Because then also, in a way, is a contingent liability for you, right?

The BG limits will go up because, I mean, unfortunately or fortunately, there's no way you can take jobs in the government sector without putting BGs on the line currently. BG limits will go up. We are currently having BG limits close to about INR 200 crores?

INR 160 crores.

INR 160 crores. And this -- we've already assessed for another INR 100 crores, which we're planning to tie up. So this will go to INR 260 crores. Close to about INR 300 crores the BG limit -- BG would be consumed over the next 3 years.

Fair point. And where do you want to -- so we're going to see you as a real estate player and the airport and the EPC player? That's what our vision is for the next 3 years? How -- so question is how selective are you in getting the project? Because there are so many projects available, which we all know, but what's the selection process now?

So we have 2, 3 strategies in place. One is design and build. There is a mode of contracting, which is design and build, and there is the other popular mode, which is unit rate. We feel we add a lot of value when design is in our scope. We have a huge strength in all kind of engineering designs coming from our real estate experience. So we have in-house architects, we have in-house MEP designers, we have an in-house control on the structural design company. We have all the backward integration to offer a design-and-build solution. So we normally try and look for projects and, fortunately, the government has also started moving in this direction of late. And many of the departments, including the airports we have picked up, including the police housing project, they have all been awarded on a lump sum model, whereby we can influence the design. So our first target is to -- even on the private and the government side is to try and look for design-and-build projects where we can add value, we can probably, hopefully, keep our gross profits intact throughout -- till the end of the projects. That is one. Second, we are focusing on the government sector, of course, on departments like AAI and state government police housing, where they already have the funding in place, and they are not dependent on funds to be coming from various government departments over a period of time. So we do our research to find out if they have the funds in place. That is one. On the private side, we are very cautious. On the private side with private builders, we've been very cautious of late. We are trying to expand our reach towards more corporate and industrial work on the private side target for the year. So that is -- and also on the private side, we do not put up our bank guarantees -- on the government side, we don't have a choice, but on the private side, we do negotiate with our clients on these terms. So that's how we are assessing our risks actually.

[Operator Instructions] The next question is from the line of [ Tushar Sarda ] from Athena Investment.

Thanks for a very detailed answer in the previous question. My question was on your real estate strategy because you have a big team of real estate and a fairly large overhead. So what is the plan there? I mean are you planning to concentrate on a few cities or go all over the place? Because you're doing projects in Pune and then in a couple of cities in South India. So if you can take me through that, that would be helpful. And second is on the EPC. What is the working capital requirement? As you ramp up, how much working capital will be required in terms of number of days? And third question is, what are your targets for revenue and profits in FY '22 or '23?

Yes. First, we'll start with the real estate strategy. The couple of projects that we have in South India are the legacy projects, one in Coimbatore, the project which we are going ahead and launching because we already have a successful sale of Phase 1 and Phase 2 of that particular project. And we also have a very good visibility by the initial demand from the existing society itself. So therefore, the strategy is to go ahead and launch that particular project because we are quite confident of the success of that particular project. And Madurai, again, is another legacy project that we have. It's an old joint venture. We did a detailed research, and we found out that, that project is very, very feasible. It again comes in that affordable segment where we would be launching, and we are quite confident that we would have good success over there. Barring these 2 projects, we don't have any plan to spread ourselves again in those geographies or entering into any other geography. Our primary focus will always be Pune. As far as overall pipeline is concerned of the existing projects and the launches that -- or the projects that we would be doing in the next couple of years, we have a total visibility of close to INR 110 crores -- INR 1,100 crores. This INR 1,100 crores should be recognized over the next [Audio Gap]

So regarding the question on the EPC working capital, see, we have a INR 75 crore tie-up right now. Even when we go to performance levels of INR 700 crores for the year, which we are hoping to do maybe the year after next, monthly, that will translate to about INR 50 crores, INR 60 crores of billing per month, and we don't need a working capital of more than 2 months normally. So that's about INR 100 crores, INR 120 crores. We also do get some credit from our vendors, which will help us manage the working capital. So with this CC limit in place and with credit from our vendors, I think we more or less sorted to handle our working capital issues. As I said, at the max, the INR 75 crores drawdown we might augment to INR 100 crores if we feel. So I don't see it going beyond that. So we more or less have it sorted. Your second question on projections for '22 and '23, we would stay clear of actually projecting a number. As I said, EPC is definitely going to go more than INR 500 crores next year, which is like more than a 60%, 70% growth compared to this year, almost doubling. And from INR 500 crores plus, it would touch INR 700 crores alone, third-party EPC alone for the year after next. If we would continue to grow at normal 10%, 12% we could assume for the EPC. Real Estate, again, I think we've been doing about INR 150 crores. That would also -- we have about INR 700 crores of launches, out of which, I think, our share would be about INR 400 crores, INR 450 crores. If all of this gets done in another 3, 4 years, again, we're talking about INR 150 crores to INR 200 crores per year from real estate. So they all could add up to INR 1,000-odd crores, but yes, it's an estimate. And I would stay clear of projecting bottom line, please.

Okay. On real estate, you said INR 150 crores to INR 200 crores per annum. Is that the target?

Yes. With the existing launches that we have in hand and the projects that are running, for the next 2, 3 years, that would definitely be the...

Okay. And what are your fixed overheads in the Real Estate division?

Yes. So our employee is about INR 12 crores to INR 15 crores and other expenses. So not more than [ INR 20 crores ] other than the interest on Windermere. That's a separate topic. Hello?

Yes, I'm asking about employee and the other...

INR 20 crores for the entire year.

The next question is from the line of [ Nitin Ranjit ] from [ Capstocks ].

I've asked this question a few times in the past. So what exactly is our noncurrent receivables looking like, receivables which have been due for more than 1 year? And I hope you have the numbers with you.

What we'll do is, I'll just get -- we will get the number out before this call ends. I'll just report on that number in 5 minutes. Maybe I could take another question in the meantime.

Yes. Sure. And one more thing this -- okay. We have actually done this disinvestment from one of our subsidiaries. So are we planning to sell the remaining FSI which we have or will that be developed?

No. So as we -- as I reported in my briefing, see, we've sold one portion of the land. We still have another portion there, which we will be developing. We already have 4 buildings, which are under construction on that plot, which have to be finished and revenues are to be realized. And we have a TDR over there, which we will be eventually selling. So we won't be selling any more land. There's one parcel which we will launch, there is one parcel -- 2 parcels where we have already launched, and there is TDR. So that's what we have balance over there. So all of this would total up to a gross top line of INR 550 crores. Our share on the bottom line of all of that would be anywhere between INR 130 crores to INR 150 crores, the bottom line, gross profit.

Okay. Sure. And regarding my first question, my question was pertaining to EPC segment.

Correct, correct. We're just getting that data out. We'll -- I'll report it. Yes.

The next question is from the line of Mahesh Bendre from Stewart and Mackertich.

I joined the call a bit late. I just wanted to know what is your current debt on the book now?

Current debt?