Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

Good evening, everyone. I welcome you all to the earnings conference call of Vascon Engineers for the quarter ended September 30, 2020. Joining me on the call is Mr. Rajesh Mhatre, our CEO of Real Estate; and Mr. Somnath Biswas, our CFO. I believe you would have gone through the Q2 FY '21 financial results and the results presentation uploaded on the stock exchanges and on the company's website. Given the nature of the times we are in, I hope everyone, and their families are doing well. Let me begin with the company's business operating for the quarter ended September 2020. During the quarter, our focus has been on resumption and gradual ramping up of the operations. Our business operation witnessed significant improvement compared to Q1 FY '21 -- FY '20. Our construction activities and labor availability have reached to 60% at the end of September 2020, and we have started operations at all our project sites. We are witnessing month-on-month improvement in the execution levels. However, extended monsoon, social distancing norms and other COVID related guidelines, to some extent, limit our performance. With increasing availability of labor and flattening of the COVID-19 curve, we expect execution to accelerate during the second half of the year to make up for the shortfall in the first half. In this quarter, we have received an order from Epicons Consultants Private Limited worth INR 32 crores for the construction of new academic building for South Indian Education Society at TTC Industrial area, Navi Mumbai, with the execution period of 12 months. With this, our current total order book stands at INR 1,972 crores, which includes external EPC orders of INR 1,871 crores and internal orders from our real estate launches of INR 101 crores, providing comfortable and strong visibility of the EPC revenue for the next 2, 3 years. Government orders comprised 75% of our total order book, which provides visibility of faster execution while ensuring uninterrupted cash flows. Our focus is on accelerating the execution of order books, which will lead to better capacity utilization and improved margins. Commenting on the liquidity position, our provision is adequate to carry out operations smoothly, and we do not foresee any liquidity concern in the near term. Coming to the Real Estate division. As you all are aware, over the last few years, the real estate sector is reeling under pressure, which caused further impacted due to COVID-19 ensued lockdown. To provide the much-required push, the sector -- for the sector, the Maharashtra government has reduced stamp duty from 5% to 2%, which has translated into improvement in the demand. We are witnessing uptick in the sales inquiries of our ongoing projects, including in Windermere. In H1 FY '21, we did a new sales booking of 42,142 square feet, amounting to a total sales value of INR 39 crores. For new launches, we continue to assess the situation, and we would adopt a cautious approach by launching new projects. Let me take you through the financial performance. Let me start with the stand-alone numbers. During Q2 FY '21, the company reported a total income of INR 93 crores, growth of 18% year-on-year over INR 79 crores in Q2 FY '20. The company reported an EBITDA loss of INR 2 crores and a net loss of INR 10 crores in Q2 FY '21. On consolidated basis, during Q2 FY '21, the company reported a total income of INR 123 crores and an EBITDA loss of INR 1 crores and a profit after tax loss of INR 11 crores in Q2 FY '21. Total gross debt as on September 30, 2020 is INR 252 crores. We continue to focus on reducing the debt significantly in the next few quarters with incremental cash flow generated from asset sales and Windermere apartment sales. With this, we can now open the floor for questions. Thank you very much.

[Operator Instructions] We take the first question from the line of [ Hiyam ] Patel from [ Pendulum ] Investments.

Sir, just 1 question on the operational numbers, sir. So basically, if I see the cost of material as a percentage too, the revenue has gone up significantly. So can you please explain, is this because of COVID? And do we see this trend continuing going forward?

No. So yes, the reason primarily is not COVID. So on the EPC side, the gross profit, as I have explained in previous calls also, would fluctuate a little bit, but it is still pretty much intact. On the Real Estate side, this time, we sold a few apartments in Windermere, which are, at cost, we do not have much profits coming from sales in Windermere. And I think that's why at an overall level, the gross profit is coming lower this quarter, but the cost of sales seems to be higher. But this is a one-off because of a couple of apartment sales in Windermere.

Okay. So basically, this has been impacted by the real estate business and not the EPC business is what I understand, probably?

Right. That's right. EPC business is having very marginal impact because of COVID, as we said, a little bit of labor cost increase and a little bit of safety procedures at site, which is leading to a little bit of inefficiency. But I think these are very temporary. The impact of all this on the profits for the company would be very minor. And in fact, we are in discussion with our clients to reimburse the fee of these costs as claims. And as that goes [ live ], we should -- and I think that from next quarter, these COVID related costs would also come down. So I don't think that's a major concern for the EPC business.

Okay. Sir, on the industry front, if I see on the Real Estate side, so basically what we see that from the pre-COVID levels, and if we compare now, the real estate sales in Pune has picked up in a good range. So is this trend visible in our numbers too going forward?

What you're saying is absolutely right. See Pune has seen a visible -- very, very visible traction. In fact, Pune is showing traction in segments where traditionally Pune has not seen in those levels, particularly in the apartments, which are priced INR 1 crore and above. Having said that, with regard to our overall inventory, if you see in the portfolio is very, very less. So we have inventory in GoodLife, which is an affordable project and affordable segment is definitely hit by COVID-19. So this is the segment which is hit by this particular issue. Which is not is, projects like Forest County, which are in INR 90 lakh bracket typically, which are selling very, very well. But we hardly have any inventory. Most of these projects are in excess of 90% sold. In the super luxury segment, Windermere saw a lot of traction. So in the last quarter, we did -- sales were INR 27 crores. So -- and this sales are coupled by obviously reduction in price. We are also trying to take the opportunity of COVID and the sentiment and the renewed interest of people who are looking for deals, which consequently is seen in margins. But from a cash flow point of view, it is going very, very well. So the idea, as far as Windermere is concerned, is typically to sell fast and to decrease the debt on that particular project. So overall, if you ask from a trend perspective, yes, Pune is seeing a lot of traction. We don't have so much inventory now to literally capitalize on that trend. As far as Windermere is concerned, yes, we are seeing the traction. We have capitalized, and this quarter also, we would like to continue the same.

Okay. So sir, any specific campaigns on the sale or the marketing side we are doing for the festive season?

See, from the marketing front, in fact, we are not -- we are not spending much. In fact, the overall market has changed. So we are not front-ending any spend. We are trying to back end spend by maybe incentivizing the channel partners, so that in case the deal happens, then can only we get to know the payout. But upfront, we are not spending.

Okay. Sir, last question from my end, like, sir, for this year, so I won't ask for this, this year. But next year, sir, any guidance which you can give us which is the field which you have in the business currently?

So on the EPC side, I've always maintained in all calls that typically about 1/3 or 30% of our order book historically has been what we execute. This year, of course, so we had an order book of about INR 2,000 crores even at the start of this year. But because of COVID, we will not be achieving that 1/3 target. Again, we do have INR 2,000 crores in hand. We are expecting to book an order or 2 more before March. If that happens, then as I said, 1/3 of our order book, which should be upwards of INR 600 crores or something as a top line of EPC, which we can hope for next year. Real Estate depends on project completion. So Real Estate is very difficult to predict year-on-year or even quarter-on-quarter. We do expect to finish 2 projects end of this year or mid of next year. So those would give revenues to real estate and then real estate could also do upwards of INR 100 crores next year. But EPC is fairly linear in its prediction. We should be able to do more than INR 600 crores next year.

We'll move on to the next question, that is from the line of Rohit Natarajan from Antique.

So if I understand it correctly, currently, we have an external order backlog of [ 18 billion ], of which government is contributing close to 75%. But if we could further step down to how much is the slow-moving orders or maybe some color on the top projects like the Maharashtra Police Housing project or the PWD Raipur project, some color on -- some qualitative flavor as well as some quantitative numbers on it.

Sure. It's a good question. See out of the INR 1,900 crores order book post COVID and post all the floods that has happened over the last 4, 5 months, we are today at this position, like you rightly said, Raipur had started even pre COVID and was doing well. It took a little bit of a break, and it's now back to peak levels. We're doing more than INR 10 crores a month at Raipur project itself. So I would say it's already in fifth gear, running at full speed. Police Housing, we're waiting for certain approvals, tree cutting, environmental, all of them have come. We've got commencement to start work. We've started work at site, in fact, and raised our first bill this month in Q3. And so we expect -- and that project will also pick up. It's a big project. So the velocity of work month-on-month for the next 6-8 months will continue to pick up at that project. So we should also reach good levels of billing by year-end on Police Housing. The MMRCL project we have got in South Bombay has not yet started. We're waiting for the last set of clearances from the government in terms of -- some road clearance that is needed. We are expecting it by end of November, and we are ready to start work in December. Goa Airport, we have started work. There are 2 phases to Goa Airport, there's an existing building and a greenfield project. The existing building, we've already started work and raised our first bill. The greenfield project, the environmental clearance is again expected by November end and December first week. And then work will start. All our drawings, designs and approvals are all ready. So that project will also be scheduled to start in December. Recent project in Pune for government housing is well underway. It is also at fifth gear. We're doing more than INR 4 crores, INR 5 crores of work there. That's only INR 120 crore job. So that's about the rate at which work will happen, we've reached those levels already. And Lucknow is also at full swing. Adampur Airport is in full swing. So all the government projects, there is no hiccup, touch wood, at this point of time. The private projects that we were doing for a couple of builders, [ Godrej one ] we've already sold out and we were at the backend. So in spite of COVID, I don't think it is having an effect on the completion time line. So that is going on fine. Couple of other projects in Bombay with builders, yes, it has slowed down, but this was expected and anticipated by us in our projections also. So I would say out of INR 1,900 crores, not more than INR 200 crores has slowed down; the rest are doing well.

Sure. I missed out on the Metro Rail Depot of Bangalore, what exactly is...

That is also doing well. That has also reached, I would say, both at their fifth gear. We're doing more than INR 3 crores, INR 4 crores a month over there. And in fact, that will go up over the next few months. So that project is also well on track.

Okay, sir. Then coming on to the order inflow part, I see the peer group. I mean there's a lot of opportunity within the buildings and factory space as such. We have seen traction in urban infrastructure as well as these commercial buildings and buildings space. Not a lot, of course, happening on that front. Are we missing out something on that front? Or is there something big in pipeline ahead?

So we have always maintained we have a little bit of a restriction in terms of our BG limits. Now we do have INR 25 crores of unutilized BG limit. We are trying to be as efficient as possible. See, the moment we -- to be honest, grabbing an order is not too difficult. Like you rightly said, there are orders, there are government tenders coming up regularly. To order book another INR 500 crores is not a difficult target to take at this point of time. But we would like to be a little bit truthy in terms of the level of profit we would desire from these orders. Because once we put up our BG limits and we have [ bound ] them for the year or so, again, we might not be having enough BG limits to keep order booking. So we're not being greedy on top line. We are being cautious to ensure that we have our desired margin. Like you said, we are working on 2 projects where we think we should be able to strike gold in the next couple of months. So hopefully, we'll have some good news before the year-end.

So if I understand it correctly, we have -- what is the unutilized BG limits, the non-funded leverage that you have in hand?

At this point, INR 22 crores.

Okay. That means you can roughly split somewhere around 70, 80 -- maybe additional INR 80-odd crores kind of order inflow?

No, no, no, you can bid 20x. I mean 5% is the requirement of nonfund limits for guarantees. So typically, we can bid up to about INR 400 crores, INR 500 crores based -- INR 400 crores based on a INR 20 crores...

But there is something that you have to give against [ to mobilize your advances ]. You have to give a bank guarantee. That is [ 10% on ] the order backlog.

So you're right. So those things too, what happens is a little bit of our CC and a little bit of [ rolling ]. We have assets in place. So when we get a new project, we don't necessarily need to spend good amounts to buy assets. The asset purchase even if needed for shuttering comes only after the second or third bill because the first 2, 3 bills go for design and excavation and mobilization. So far, we've managed -- again, as you rightly said, this is a tricky thing for us. If we start putting up our BG limits to draw down advances, we can actually utilize it better to keep our CC limits even lower and bring down the interest cost a little bit because we do have advances available from our clients upon presentation of a BG. But we are not utilizing all of -- drawing down all of those advances because again, it blocks the BG limit, and that's even more detrimental to growth of business because then, I can't order book further. So the gain of BG is a little bit tricky and we need to be cautious how we up our BG and for what purpose they are utilizing it. So like you said, if it's purely for performance that I put up INR 20 crores, I can back order INR 400 crore order or I can pick up INR 300 crore order and then take a little bit of INR 5 crore, INR 7 crore advance to kick start these orders. So yes, at least INR 300 crores, I can definitely order book with this balance. Also, before March, another 24 of BGs are scheduled to be returned or expire from our various other projects. So we would have 20 plus 20, 40. Based on that target of upwards of INR 500 crores, INR 600 crores of order booking is what is possible and what we have taken.

Okay. On the retention money part, we have seen in the industry across that government is making some proportionate reduction to the extent of [ amount that you quoted ]. So are you not beneficiary of that? I mean have you not booked any other government orders where some retention money release, something of that sort has come to you?

Yes, it has happened. In one of the projects, we did manage to -- based on the government directives, we have written to all our government. We had 3 projects which were at the -- closer to completion of more than 50%, 60% completed, whereby these clauses -- this directive could be used. We've written to all those clients. One client has responded positively and in fact, given the lease of bank guarantee of ours and as commented to release a bit more in the next month, which is what I banked on for further order booking. Couple of other clients, although they are government client and although they are aware of the directives, are a little bit slow in moving, but it is positive, and I think we will benefit from it in the next couple of months.

Okay. So you have [ affected ] these numbers within that INR 20 crores, INR 25 cores of additional BG limits?

Yes, yes, yes.

Okay. Okay. Okay. So then coming on to that monetization part, I mean is there any thought process? I understand it's very difficult at this juncture. But noncore assets, what is the situation over there?

So look, the low-hanging fruits have already been monetized a year ago. So as of now, we only have a few tough moving bigger noncore assets which are on the block. As you rightly said, this is -- we were working hard on them. We would have seen some growth had COVID not happened. Now it's not really a time where we have a hotel in Goa, which we do intend to sell. But again, the hotel industry has to sort of revive a bit. And so yes, so we're working on -- so there's a land in Aurangabad, which we are also working on. There is a building in Bombay, which we are working on. So hopefully, we have the noncore -- we have a separate team, we have a sales team, which is working only on the noncore assets, sorting the mandate and hopefully, again, by year-end, hopefully, when you might have a good news on that as well.

[Operator Instructions] The next question is from the line of from [ Bharat Sanghvi ] of Sanghvi Associates.

I just wanted to know after the reopening of the economy, where we are seeing the increase in the demand from the real estate point of view as well and from the EPC point of view as well?

Where have you seen the demand, did you say?

Yes.

So I'll answer for the EPC start first. You see, we have -- even before COVID, we were not very bullish on taking huge exposure to private real estate. We're still waiting for their norms to consolidate. And I think private real estate is a very good space to be as a contractor, but a couple of years ahead, whereby now the shock of COVID is absorbed and then the discipline with which we are expected to operate becomes a norm among all builders. And then I think contractors will definitely face a much better working environment or a much better safety net while working in the private real estate space. As of now, it is still a phase we would like to be very cautious about or stay a little bit away if we can on the EPC side. So even if we approach any of these jobs, we make sure we do not put up the company's guarantee limit or bank guarantees to any private player and we ensure that we negotiate and get our payment terms and advances sorted before we take any such exposure. Also, we operate from a clear escrow account as at any point of time, there will never be any cash outflow from the company towards that project. If it's a private project, we would never take that call. On the government side, there are orders coming. There are various government agencies who keep floating, building orders. And so as I said, for our order book target of whatever we have for the year based on our BG limit, we can be cautious and try to grab good quality orders rather than being hurried up to take any target that is available in front of us. Rajesh will talk about the real estate.