Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Vascon Engineers Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Dr. Sundararajan. Thank you, and over to you, sir.

Thank you. Good morning, everyone. I welcome you all to the earnings conference call of Vascon Engineers for the quarter ended December 31, 2020. Joining me on the call is Mr. Rajesh Mhatre, our CEO of the Real Estate division; and Mr. Somnath Biswas, our CFO. I believe you have gone through the Q3 FY '21 financial results and the results presentation uploaded on the stock exchanges and on the company's website. To begin with, I would like to wish everyone on this call a very happy new year. The year 2021 has started on a positive note with the rollout of vaccines for coronavirus creating positive sentiments across all businesses. For us, the recovery from the lows that started in the previous quarter itself and Q3 has been able to build on it strongly, and our quarterly performance reflects the same. We are happy to share that our revenues have reached back to pre-COVID levels on the back of accelerated execution aided by the healthy order book. During the quarter, our focus has been on further ramping up the execution. We have witnessed month-on-month improvement in the execution levels. Our execution run rate has reached back to 80% of pre-COVID levels and execution has commenced across all the project sites, and all the projects are progressing well without any hurdles. Only our MMRCL Mumbai Metro Rail project has witnessed some delay in commencement of execution with the delay in necessary approvals that they had to obtain. But they have acquired all necessary approvals currently and work should commence soon. In this quarter, we have received an order from Transcon-Sheth Creators Private Limited worth INR 38 crores for construction of composite sale building #3, as we had Malad, Mumbai with execution period of 27 months. With this, we have received orders worth INR 69 crores during the financial year 2021. As a strategy, we are not going for aggressive bidding of projects and have adopted a cautious approach towards project selection. Our focus is on accelerating the execution of order book, which will lead to better capacity utilization, translating into improved top line and margins. Our current order book stands at INR 1,740 crores, which includes external EPC orders of INR 1,642 crores and internal orders from our real estate launches of INR 98 crores. Forming a healthy order book of 6.3x FY '20 EPC revenues, thus 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. Coming to the Real Estate division. As you all know, real estate sales are significantly impacted due to COVID-19. Government has taken various steps like reduction of stamp duty, reduction of constructions paid by builders at 50%, lower interest rate, among others, to provide much required risk to the sector. It's heartening to see that these measures aided in Pune real estate sales reaching back to normalcy with the minor improvement in average prices. Also, inventory is the lowest in 6 years in both absolute and percentage terms. The projects launched in the premium plus and luxury segments are witnessing uptick. As mentioned on previous calls, due to the lower inventory, we did not record significant uptick in our real estate sales. In 9 months FY '21, we did a new sales booking of 71,984 square feet, amounting to a total sales value of INR 76 crores. Our ongoing luxury project, Windermere, registered the uptick in sales inquiry. Furthermore, this positive development in the Pune real estate market provides a conducive environment for our new launches. At the current market situation, we maintain a cautious stance over new launches. Commenting on the liquidity, as you all are aware, over the last few years, our continued focus has been towards debt reduction. We are pleased to share that during the quarter, we made debt repayment of INR 20 crores. With this, now, our total gross debt as on 31 December 2020 stands at INR 233 crores. We continue to be committed towards reducing the debt significantly with incremental cash flow generated from noncore asset sales and Windermere apartment sales. Our liquidity position continues to remain adequate to run operations smoothly. Moving on to industry updates. Infrastructure being the priority sector for growth revival. This is a major push from the government and the union budget 2021. Infrastructure sector, received a capital outlay of INR 5.5 lakh crore for FY '21/'22, an unprecedented increase of 34.5% year-on-year to push growth by our infrastructure peers. As a part of the infrastructure push, the government announced to launch PM Atmanirbhar Swasth Bharat Yojana with a capital outlay of INR 64,180 crores over a period of 6 years, to developing capacities of primary, secondary and tertiary care health systems, strengthening existing national institutions and to create new institutions. It has announced plans to build 7 integrated textile parts for the next 3 years to boost the textile sector. Also, the government plans to set up new educational institutions and has announced to build 100 new sainik schools. Additionally, the railways were allocated almost 15 billion for spending on infrastructure during the coming financial year. Coming to affordable housing. The government exhibited a continuous commitment towards affordable housing by extending the time line for availing additional tax benefits for both buyers and developers by 1 year till March '22. Further, the government is committed to promote supply of affordable rental housing for migrant workers. For this, the government allows tax exemption for notified affordable rental housing projects. We believe these steps to garner growth in the affordable housing sector. Overall steps of government will provide a huge opportunity of growth in the near-term are visible. At that point, we are well placed to capitalize on that aim. Now let me take you through the financial performance. Let me start with the stand-alone numbers. During Q3 FY '21, the company reported a total income of INR 105 crores as against INR 104 crores in Q3 FY '20. EBITDA was at INR 8.4 crores with a margin of 8% and reported net profit of INR 0.2 crores. On a consolidated basis, during Q3 FY '21, the company reported a total income of INR 158 crores as against INR 146 crores in Q3 FY '20. EBITDA stood at INR 15 crores with a margin of 10%, and profit after tax was at INR 5 crores. With this, we can open the floor for question and answer. Thank you very much.

[Operator Instructions] The first question is from the line of Viral Shah from Prabhudas Lilladher.

To begin with, sir, in terms of going forward, because our order book is in excess of 6x. Sir, what is our plan for bidding? We will continue to bid? Or what is the strategy going for that in that sense, sir?

Mr. Shah, we will continue to bid. We are bidding. While we are cautious, it doesn't mean we are staying away from order booking or we're being extra cautious. When we say we are cautious, we are not desperate for order bookings. But at the same time, at normal margins that are in the market, we are continuing to bid. And we do hope to book some more orders in the next 6 months. So yes, we want to keep this order book above INR 2,000 crores going forward so that there's always a visibility for the next 2, 3 years. So yes, we have a bidding limit in place also, we will be bidding. We will be bagging more orders in the near term.

And sir, in terms of bid pipeline, what kind of projects are you bidding for? Are you bidding for institutions, hospitals? Because there are a huge number of projects coming in hospitals as well. So are we keen for going that segment? What kind of areas we are focusing upon, commercial, residential?

Yes. So our focus still remains primarily government projects and any kind of building. So hospitals, we have a lot of experience and prequalifications for hospitals as well. So definitely, we will be participating in all the health care projects that the government is rolling out through various entities. And also the educational projects have started coming. Tenders for schools have started coming. Each school tends to be of a smaller value. But nevertheless, we are keen on picking up a few schools. So yes, there are a lot of government projects that are in the pipeline from various state and central agencies. And we would be bidding for any kind of building, whether it's commercial, residential, industrial, IT Park or health or any kind of institutional building, educational. All of them are in our radar.

Fair enough, sir. But largely, it will be government funded, right? That is what we are aiming?

Yes, largely, it will be government. So there's a lot of metro and airports as well, which are coming. Those are also on our radar.

Okay. And what was the typical margins we are looking at? Has the margin improved or it is in the range of around 10% to 11% or between the both?

See on an average with all various projects, each project is plus/minus 2% or 3% here and there. But the average margin would be in that range. Our EBITDA should -- we are hoping to maintain an EBITDA in the range of close to 20% -- 17%, 18%, 19%, 20%, that's the range we would have our gross margin, sorry.

Sir, last 2 questions from my end. In terms of -- when you look at in terms of capability and visibility. So in the current bandwidth and the system what we have, so what is the top line we are very comfortable with at the gross book? What we are continuing to? And in terms of CapEx addition going forward, what will that be?

So with the current CapEx that we have and the senior level staffing that we have, we've always maintained that we can easily execute more than double of what we've been executing. We can easily execute up to INR 800 crores without adding stress to the current system in terms of staffing as well as machinery. We are well below that mark. Even in the coming year, we will not be touching INR 800 crores for sure. So we have 2 years to go before we face the hurdle of having to expand through additional CapEx and additional staffing. So that -- we're still not up to our capacity utilization in that term, but we are now improving at a good pace.

Fair enough, sir. And sir, lastly, what percentage of our order book will be on ground execution will be started? Because -- and in terms of guidance for next year, if you could give some, that would be great.

So out of the INR 1,750 crore order book, the Mumbai Metro Rail project, which is INR 130 crores has not yet started. That is expected to start in March because -- there were some approvals that we had to get, which they have recently obtained. So -- but it has not yet started. But other than that INR 130 crores, everything else is on track.

[Operator Instructions] The next question is from the line of Rachit Kamath from Anand Rathi Share and Stock Brokers.

So my first question actually pertains to the fact that you had this -- a healthy order backlog in terms when you look at it from a TTM revenue assurance basis, like we have 6x kind of order backlog as of now. And we've been stuck at INR 300 crores -- INR 360 crores, INR 370 crores kind of on revenue range for the past few years. So just looking ahead, like what stops us from scaling the INR 360 crores a year, call like yearly revenues to, say, INR 600 crores, INR 700 crores next year. Given the fact that especially considering that the majority of the order backlog is already in execution.

Yes. In short, the answer is nothing. Nothing stops us actually now. Because the order book is in hand, and as I said, out of INR 1,750 crores, only INR 130 crores has not yet started the execution at site, which is also expected to start in March. So when we start April, literally our INR 1,750 crore of order book will be in action. You will notice from our results that this quarter, we have done INR 93 crores of EPC -- third-party EPC execution, which is the highest that the company has done in the last 12 quarters. So that number has been steadily increasing. Of course, corona took us back for a while. But now that number is going up. So if we have done INR 93 crores this year and if we project -- if one more project starts and in fourth quarter, we should hopefully be crossing INR 100 crores. And then next year, as you're saying. I mean INR 600 crores, I don't want to predict a number of INR 600 crores. But definitely, we're doing much better in terms of top line than the last 2, 3 years. So we've been started those INR 300-odd crores level for 3, 4 years, which is a fair enough right observation. But definitely, next year is going to be a big one.

Okay. So basically, we are not seeing, no similar factor we can reach INR 800 crores kind of revenue in say in the next 2 to -- 2, 3 years kind of the time line?

Yes. So we always maintained -- typically, if things go well, 30% of your order book can trend to revenue. Now if we have -- if we start the year with about INR 1,700 crores, INR 1,800 crores, so you're right about INR 600 crores. Could be a target anywhere between INR 500 crores and INR 600 crores. If we want to achieve INR 800 crores, we should have an order backlog to start the year of close to INR 2,500 crores. Then we can achieve or hope to achieve INR 800 crores of third-party revenue for the year. So maybe next year, as I said, we are continuing to have an order book target for ourselves. We want that order book to remain upwards of INR 2,000 crores. So it has -- it was more than INR 2,000 crores, it has got executed and come down to INR 1,750 crores level. We haven't backed any big orders in the last -- in this financial year as yet. But we are on the job and now orders are coming out from the government sector in a big way, and we will definitely bag a few more orders and keep that order book healthy about INR 2,000 crores.

Actually, my second question actually is pertaining in this direction itself, wherein, what kind of competitive intensity are you looking at in terms of inflows, especially in the light that government has been allowing contractors to lower the prequalification limits in certain cases entirely? In case in the bank guarantees for certain projects, that earlier requirement of 10%. But now anybody who has 3% kind of capacity can also come and bid for projects. So just wanted to understand your take. And what will be the average order size that you're eyeing from say, even if you're looking at health care project or something, what kind of a ticket size like for per project you are looking at?

That's a very good question. You're absolutely right. We've already started seeing that -- the moment government has relaxed -- the government has given 2 major relaxations. One is that the performance guarantee that needs to be furnished once you get a job is 3%, it usually is 3%, 5%. The second, more important thing that the government has done is earnest money deposits have been raked off in most projects. Now -- that I don't know whether it's a really good thing or not. Because as you said, what happens now is earlier, there are only 4 or 5 people coming for certain tenders, people who are cautious, people could not even ask -- we could not be filling all the tenders. Because every time we fill a tender, you have to put up some money to express your seriousness. Now that, that is good, all of us are filling many tenders. And therefore, the entry to other competition, especially the not-so organized competition has opened up. So having said that, at the INR 100 crores level, INR 150 crores level, we see that a lot of people are putting in their bids. A lot of new contractors, smaller contractors who are more aggressive, are putting in their bids. But at the INR 300 crores and upwards where we do qualify, we do INR 300 crores and INR 600 crores. Over there, a lot of the smaller guys, the newer guys, do not get their qualification. So I think that's a comfortable ticket where we will be able to get good quality competition. And therefore, we will be able to keep bidding at our expected margins and hopefully bag one contract, once in a while.

Okay. So basically, we'll be targeting for orders in the range of INR 300 crores to INR 600 crores?

Yes. I think that seems to be a sweet spot where the regular composition, in fact, might say, sort of prevails out, and then we are left to its good competition.

And sir, in the construction side of the business, what kind of EBITDA margins will you be targeting, like, for construction EPC?

So on EPC, we traditionally had gross margins upwards of 23%, 24%. I've always maintained that there was because 2, 3 projects were extremely healthy projects, which was giving us a lot of top lines in the last 2, 3 years. That is expected to come down. And as you can see, it is coming down. But we will -- the way we bid, we expect to keep our gross profit margin between 15% and 20%, somewhere 17%, 18% is what we would like to keep our average gross profit, sir.

Okay. So gross profit seems 15%, 18%. And then by the time it transits your EBITDA margins, I think it will be somewhere in the range of 10% to 11% or 9% to 11%?

Yes. Again, we -- so some gross profit to EBITDA would be a huge function of what top lines we achieve. So the more we do, the higher -- the healthier the EBITDA will look.

Sure. Sure, sir. Sir, if I have some time, on the real estate side of the business. I think you said, during you're doing opening statement that you are cautious about new launches. So could you show some light on that fact as to what measures you're cautious.

Yes, I'll just hand that over to Rajesh.

Yes. Given the fact, we are at a low time -- we have lowering inventory firstly.

Correct -- in fact, this year, fortunately, in fact, the focus obviously was more on collections and on doing sales in the existing projects rather than taking a bet and launching newer projects before the market stabilizes. With the government impetus, yes, in fact, we have seen sustained activity. Hopefully, this activity should remain. Only time will tell whether it's just a time bound thing or whether this strong demand is going to persist and sustain as you proceed ahead. So in fact, from a collections perspective, in fact, we have done very, very well. In fact, in terms of collections, we are almost near about to the same collection level -- to the money that we collected, in fact, in the previous years. The sales definitely from the booking value perspective, 9 months last year as compared to 9 months this year, we are lower by around 10%, 15%. Going forward, in fact, we have around 4 projects in the pipeline, which have -- all these projects are in the approval stages. We are hopeful that we should be receiving approvals, in fact, in the coming years. And this 4 odd projects would be good for launch also. The expected top line from this project is close to INR 800 crores being joint ventures. The top line that would come to -- in fact, our company will be close to INR 500 crores and this will have margins in excess of INR 150 crores. So considering that, in fact, we have a very, very good pipeline. We have thought about these projects, planned them very, very well, considering the micro market demands overall. In fact, what the absorption in the market is the locations are great. Therefore, we don't see -- we don't want to leave any element of doubt before we launch this project so that, in fact, whatever we launch, we launch it successfully and execute them well. So that has been our strategy. And fully, in fact, we should be successful in the coming year.

Sure. Well, I think my second question is basically pertaining to -- based on present in terms of the Pune market. So how you look like in the recent time, I think, in terms of some of the larger players, where the likes of Godrej or [indiscernible] or some of the other players like Mahindra. They've also been eyeing a bigger share of -- in terms of their own growth, they're looking at Pune real estate market in a big way. And they are also trying to come and enter this market. So in this separate case then, how do we see ourselves spanning up in this -- in this business in terms of just scaling up the real estate side of the business? Because essentially, you aim to get to JV deals so in that sense also I was speaking. Yes. I mean I'm not the started yet, we are searching only the unlisted speaker, there are some bigger names like a Puranik Builders or something. They are also coming up in this market. So everybody's eyeing Pune as a piece of pie, wherein they want to grow. So my question pertains on that side.

No, correct. So this is actually a very, very good development that is happening. A lot of organized developers are in the Pune market. Now you should also understand the demographics. Overall, yes, in fact, the Pune market has been great. The office demand is going to remain strong. And therefore, you know the ancillary demand for real estate is only going to be stronger. So Pune is extremely strong. As far as for the entire -- if you see from a macro point of view, Pune is close to INR 25,000 crores to INR 30,000 crores market. In that, the amount of pie that we are targeting is very, very less. So in terms of overall macro factors, if you say, it's not going to affect that much. That is point number one. Second is, in fact, if you see most of the larger developers, okay, like Godrej is. In fact, they operate on very, very larger land parcels. Now these larger land parcels typically are located in the outskirts of city, in fact, within the city. In fact, it's very, very difficult to find a sizable amount of sensible size of the projects. So because of this, what happens is typically, if the top line is less than INR 200 crores to INR 300 crores larger players won't be interested. With the new unified guidelines, what has happened is the amount of FSI has increased. Now this has changed strategic dimensions in this city, if you see. What has happened is the stock in the city has increased. So therefore, one question every buyer would typically ask is whether we really need to travel outskirts of the city. If it is getting the same product closer to the city.

Yes, within the city limits. I think I got your point, sir.

Clearly, in fact, what we are doing is we are targeting locations, which are within the city. So because we are not targeting any projects which have a top line of INR 1,000 crores. Our projects typically are in the range of INR 250 crores to INR 300 crores. Typically, predominantly, more micro market dependent rather than macro market. We don't really have to bother about catering the demand from Mumbai or any outskirts or NRIs. So the location itself generates sufficient amount of demand. We give a quality product. Our pricing is perfect. We launch and we get out of the project. So for us, if you see, considering the present dynamics, whatever developments have happened have been good. In fact, and we -- and we should be performing well.

Sure, sir. So -- okay, sir. I say my last question was pertaining on debt, right, if I can take some time. So basically taking on monetizing certain noncore asset. I think there was this hotel, I think in Goa, there were some land parcel which you should speak about in Coimbatore terms taking. So these assets we are always looking in monetizing these assets to kind of lower our debt -- lower the gearing on those books. So could you just throw some light as to what would be the time lines or what kind of realizations that you are expecting?

See only, our noncore program has always been strong. Santosh had been mentioning on the previous calls also that the low-hanging fruits, we have done with. In fact, now the difficult road we are traversing now. So if you see the gross debt -- and this quarter also stands -- reduced to INR 233 crores. In fact, this trajectory is going to continue considering that our focus is on Windermere and we are seeing some positive developments over there. So we should see some additional reduction in the coming quarter, too. With the other noncore assets, yes, in fact, there are discussions. There are certain credible discussions. But we don't want to speculate on those at this point of time.

So basically, only the driving target for deleveraging the immediate horizon would be the conditions of the Windermere? Will that be correct?

Yes, yes, yes.

Have you seen any kind of benefit in terms of interest costs because a lot of -- for a lot of people, the blended cost volumes has come down over the period of COVID because of the reduction in the statutory rates from the RBI.

Yes, yes. So bank rates have reduced, the bank -- banks have also given some additional COVID related facilities, which are coming at interest rate of closer to 8%, 8.5%, and we have taken advantage of that. Despite taking advantage of all those factors, we have reduced debt on the entire -- if you see from the start of the financial year to the current where our debt stands. So overall, yes, the interest rates have reduced, but we will continue on our debt reduction part.

So basically what was the blended cost of volume as of now, if you have any figures handy?

It should be 4%...

14%.

14%.

14%. Sure, sir.

The next question is from the line of Manish Goyal from Enam Holdings.

And sir, I just have a couple of questions. You mentioned that Windermere luxury product is seeing uptick in sales. So in Q2 also, we had seen certain sales. And Q3, I believe, also would have happened. So if you can throw more light as to how much sales happened in Q3 -- Q2 and Q3? And what is the inventory available for us?

See, this year, in fact, we have sold INR 51 crores worth of sales in minimum. In fact, Windermere has been our focus areas and one of the largest contributors of current year sales. As far as the inventory in Windermere is concerned, we have close to roughly INR 250-odd crores in Windermere to be sold, which is ours and JV partners combined.

And what would be our share now in this?

It will be close to around INR 100 crores, INR 100-odd crores.

And can you give me a number for Q3, sir, how much we would have sold?

Q3, we have sold around INR 20-odd crores.

Okay. And I believe in last call, you had mentioned that the impact on the margins was also because sales realization was a little lower than expected. So how has been the case in the current quarter, sir, Q3 quarter?

See Windermere sales will take a hit on margins. So more or less, in this quarter, we are targeting that the impact should be close to 0.

So you're referring to Q4 or Q3, sir?

I mean Q3, yes.