Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Vascon Engineers Q4 FY '21 Earnings Conference Call, hosted by Arihant Capital Markets Ltd. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shrey Gandhi from Arihant Capital Markets Ltd. Thank you, and over to you, sir.

Good day, friends. This is Shrey Gandhi, and I welcome the management of Vascon Engineers Limited for the Q4 FY '21 results. And I now hand over the call to Mr. -- Dr. Santosh Sundararajan for his opening remarks.

Thank you, Mr. Gandhi. Good morning, everyone. I welcome you all to the earnings conference call of Vascon Engineers for the quarter and year ended March 31, 2021. Joining me on the call is Mr. Rajesh Mhatre, our CEO, Real Estate; Mr. Somnath Biswas, our CFO. I believe you would have gone through the Q4 FY '21 financial results and the results presentation uploaded on the stock exchanges and on the company's website. In the wake of the second wave of COVID-19, I hope you all and your families are healthy and safe. The fiscal 2021 was a challenging period for many businesses, I mean, bold measures by the government of India, like countrywide lockdown. However, a swift recovery was experienced during the second half on account of various measures undertaken by the government. During this period, we focused more on strengthening our balance sheet by repaying the high-cost debt and deleveraging to further improve the liquidity position of the company. We are pleased to share that during the financial year 2021, we have made a debt repayment of INR 41 crores. With this now, our total gross debt is at INR 214 crores as against INR 255 crores as on March 20. The repayment is majorly made towards high interest cost-bearing loans, which is reduced by INR 33 crores to INR 71 crores as against INR 104 crores as on March 20. This will aid us in bringing down our overall interest cost of the company. On the EPC front, the construction sector faced multiple headwinds, mostly in terms of labor unavailability due to COVID-19-induced disruption at the beginning of the year. Despite the challenging year, we've been able to maintain our execution momentum and efficiency, which has led to post satisfactory top line despite the tough initial quarters. In EPC business, through our relentless focus to register month-on-month improvement in execution levels, our execution run rate has improved from INR 93 crores in Q2 FY '21 to INR 105 crores in Q3 and INR 135 crores in Q4. This is our highest top line for the last 10 years. This has enabled us to cover the deficit incurred during first half of the fiscal and has aided us in delivering a top-line in line with last year. In FY '21, our total income stood at INR 368 crores and recorded a slight decline of 4% year-on-year. During this quarter, we have received 2 orders from UP Public Works Department worth INR 516 crores for establishment of new medical colleges in Bijnor and Kaushambi, UP, on a design-and-build lump-sum basis. The execution period for the project is 18 months. With this, we have received orders worth INR 584 crores third-party orders during the financial year. The current total order book stands at INR 2,109 crores, which includes external EPC orders of INR 2,019 crores and internal orders of INR 90 crores. This forms a healthy order book of 7x FY '21 EPC revenues. Over the last 2 years, we have made conscious efforts to increase the share of government orders in our total order book. The share of government orders has improved to 85% of the total order book as compared to only 15% 2 years ago. And this provides visibility of faster execution while ensuring uninterrupted cash flows. The order book of the company remains robust, providing strong visibility of EPC revenue growth for the next 2, 3 years. We have also secured a sanction of INR 40 crores additional BG limits from CSB this year. In the current fiscal, our focus will be on accelerating the execution of the order book, which will lead to better capacity utilization, resulting in improved margins for EPC business. We continue to adopt a cautious approach towards bidding for new projects. And as a strategy, we will be focusing on orders with higher margins. Coming to the real estate division. As the economy gradually marches towards recovery, the residential real estate sector also started witnessing positive momentum on the back of various measures taken by the government. Pune and Mumbai market registered a significant improvement in the second half of FY '21, primarily on account of stable prices, low interest rates, reduction in stamp duty and other government SOPs. In FY '21, we did a new sales booking of 1,20,613 square feet, amounting to a total sales value of INR 120 crores. The sales in our ongoing luxury project, Windermere, fared well this year owing to a reduction in stamp duty in the state. And we have registered a sale of INR 78 crores in FY '21 in that project. In FY '21, we have made a collection of INR 150 crores in comparison to INR 115 crores in FY '20. In the financial year 2022, our ongoing project Forest Edge, Tower A and B and Vascon Goodlife, 3 buildings in Phase 1, will achieve completion and occupancy certificate will be issued for both the projects. Under Ind AS 115, the revenue of both these projects amounting to INR 90 crores will be recognized in the current fiscal, and this will lead to significant improvement in the real estate business performance in FY '22, which was under pressure as the overhead costs continued to be debited to P&L while the revenue could not be recognized due to nonreceipt of OC as per Ind AS 115. On new launches front. As you all are aware, we have a robust launch pipeline of the real estate project. As per current market situation, we continue to maintain a cautious stance over new launches. We are monitoring the market very closely and would opt for launching new projects only when the market is conducive. On the GMP business front. In the past, we have taken a strategic call to discontinue the service division which has led to the underperformance of GMP segment. With our resilient effort, the GMP division has achieved an EBITDA positive during the last fiscal in spite of COVID, and the same has sustained during such a challenging period. Our GMP business is faring well. In FY '21, the revenue stood at INR 149 crores and the EBITDA of INR 11 crores with a margin of 7%. At Vascon, we are focused towards sustainable improvement and achievement of marquee projects, like those from Tata Group that show our ability and preparedness. We believe this margin will sustain and GMP division to further value add towards the profitability of the company. Let me take you through the financial performance. Let me start with stand-alone numbers. During Q4 FY '21, the company reported a total income of INR 135 crores as against INR 94 crores in Q4 FY '20, registering a growth of 43% year-on-year. EBITDA was at INR 8.8 crores with a margin of 6% and a reported net profit of INR 1.5 crore in Q4 FY '21. On a consolidated basis, in Q4 FY '21, total income grew by 50% to INR 192 crores as against INR 130 crores in Q4 FY '20. EBITDA stood at INR 11 crores with a margin of 6% and profit after tax was at INR 3 crores for Q4 FY '21. We would like to reiterate that with efficient execution capabilities, we strive to maintain the momentum going forward, supported by the strong order book and strong pipeline of project launches in real estate. We continue to remain committed towards strengthening our balance sheet and focus to enhance shareholders' value. With this, we can now open the floor for questions. Thank you very much.

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

So my first question will be more on the order backlog that right now we have basically, INR 21 billion order backlog. And even if we execute over the next the 2.5 to 3 years, we should be in a position to do INR 7 billion of execution in EPC works. But I understand that we have second wave and COVID lockdowns being more prominent. How do you see that number panning out in this fiscal? Also on -- if you can touch upon the raw material price hikes, what we have witnessed, in fact, t they have hardened. How will that impact -- labor availability also you can touch upon that? And a detail elaboration will be more -- will be helpful -- extremely helpful.

Yes. I'll take your first question on the impact of the second wave in this quarter. So we did INR 135 crores in Q4. So we were scaling up. We were on the rise in terms of our top line going up quarter-on-quarter. You are right, we do expect a slight hiccup in this quarter. It will not be anywhere near as bad as it was last year because construction sites have been operating through this period for the last 2 months. Labor has been available at site even if not at full capacity, the labor has been available to 70% to 80%. Labor did not return back to their hometowns this time around. Material delivery was also permitted by the government. And so even though there were delays and there were certain inefficiencies, certain materials not reaching site on time. But all in all, there has never been complete stoppage of work and therefore, construction has been going on, I would say, instead of year 5 and year 4, maybe. There has been a problem with lot of staff, lot of client personnel, lot of vendor personnel falling ill. And so every time important people who were necessary to keep the site progress on, a good proportion of them were on leave at home, recouping around quarantine. So we did -- definitely we would see some inefficiencies, but I would expect that this should not affect our run rate by more than 20%, 25%. We should still be able to achieve 75% of our run rate. There is one slight, I would say, stoppage of work at Raipur, which is a stall -- we've stalled the project for a couple of months. It is more of a political decision taken by the government. So our Raipur project, which was running at full speed at -- giving us more than about INR 10 crore a month has been stalled as of 15 days ago. So that will also affect the top line for this quarter. We expect it to restart next quarter. But all the other projects on the positive side, the Goa project, airport project has received a TC, so that is starting work. Police housing project in Bombay has got clearance to demolish the other buildings that were preventing us from going full swing. Those buildings are demolished and so we have all fronts available. MMRCL has also all funds available, and Pune housing is also going on at full pay, so in Bangalore. So other than Raipur, all of the projects have picked up speed, and we seem to be receiving payments, although a bit delayed due to COVID in the last 2 months. So I think the impact of the second wave will be there in the first quarter. Definitely, we will see a dip in top line. We will not see this curve rising as it was over the last 3 quarters. But we are sure that by second quarter, third quarter and fourth quarter, we will catch up and overtake this year's performance by far. In terms of labor availability, I said...

Sorry to interrupt you on that. Just to summarize what you are saying, let's say, INR 700 crores may not be the top line, but there will be a 25% mix. Maybe we can do at least INR 500 crores or so kind of number in EPC business. Is that reading right?

Yes, I think that would be a fair assumption to make for this year. And to answer your other questions. In terms of labor, there has not been significant labor escalations in cost. Labor availability, as I said, this quarter has not been too much of a trouble era. Anyway in the period of May, generally, they do go back, harvest period, they go back home and come back. So there is always a shortage in the period of May. So for us, coincidently, whether it was due to second wave or due to the normal annual trip that they make back to their hometown. May is generally a shortage month in terms of labor. We are expecting that June, the labor will be back in full swing and we should not have a labor issue for the year. Raw material prices, yes, steel, cement, quite a few prices have gone up. In almost 70% of the cases, we are protected by escalation clauses and we are protected by base rates in our contracts. So we are not majorly hit. Yes, there are a couple of contracts where the escalation formula does not cover the exact impact because suddenly steel prices have gone up by 25%, 30% over the last 2 months, and they haven't really dropped now. So we do have an impact of these in a couple of projects where we are negotiating with the client because the escalation formula doesn't cover the actual impact on ground. But at the company level, this is not significant. As I said, bulk of the cases, we have our base rates in place. So we are not affected.

So what will be the quantum of impact, if you could quantify, that will be more helpful, sir?

See, the impact is in probably 15% of our top line. And in that 15% of top line, the impact, because of this, would be -- I mean, totally our cost increase would be to the tune of maybe 2% to 3% in those projects alone, if at all we are not able to renegotiate with the client to pay us for these price hikes in this period. So at the company level, this will be much lesser than 0.5% for the full year.

So 17% gross margins that you regularly clock, maybe it may go down to 16%?

Correct. At best. I mean, at worst because of all this, yes.

And you will see a jump in EBITDA margins largely because the volume of work is anyway...

Absolutely.

So Any guidance that you want on EBITDA margins?

No. I think we'll just wait for the guidance. As you said on the top line -- so as I said, there is nothing really hampering our gross profit. With raw material price increase and a little bit of inefficiency in quarter 1, as you said, I mean, over the next 3 quarters, we will catch up. And because we will be doing a higher top line, these -- the EBITDA will also be much better than last year, and gross profit should not really drop much. So I think I'll leave the guidance at that.

Sure, sure. On GMP, what is the outlook for the next year, sir? So if you have -- I mean, would we be making the same INR 1.5 billion kind of revenue or maybe something more than that?

So GMP was again targeting to do a bit more than that. Again, COVID has impacted GMP this quarter more than it has impacted Vascon because I think Vascon, as construction activities was allowed, work at site and most of our projects are government projects. So none of them asked us to stop work. So things have been going fairly okay for us. But for GMP, quite a few projects have been -- not been functioning during this last 1.5 months. So they have been impacted in first quarter. So while we expected to do 10%, 15% more top line this year, I think now the revised target would be to achieve same INR 150 crores, INR 160 crores next year because they have a -- good thing for them is they -- this year, they are -- half their order book -- more than half their order book is from overseas projects. So -- and that should help them derisk from their exposure to COVID situation in India alone.

Sure. Sure. Finally, with non-fund-based limits, I suppose you were in conversations with SBI or some other banks to raise these limits. What happened? What is the status of these limits?

So we are in a decent position as far as our BG limits are concerned at this point of time. So we -- if you saw our March end results, you would see we had about INR 30 crore available limits with our existing sanctions from UBI and SBI. Further to that, in this first quarter, we have got a new sanction of INR 40 crores from CSB Bank. So as it stands today, roughly about INR 60 crores of available BG limits are there. Based on which then we do plan for this financial year to -- normally need 1/10 to -- of the limits -- of the top line that you can book -- order book that you can achieve. You need a 1/10 of that as BG limits. So I think if you have a INR 60 crore BG limit as of now, we can look at INR 600 crores, INR 700 crores of order booking for the year, which is our target. So that is in place.

Okay. And sir, if I may squeeze in one more question. In terms of order inflows, what is exactly the outlook for this year? I understand we have a very strong order backlog with exceptionally multiyear visibility, but in terms of an inflow, is there anything that we are actively looking out?

See the bare minimum that we want to target is that we will extinguish -- as you said, we will extinguish at least INR 500 crores of this order book that we have in hand. So that is a bare minimum we should top up, so that end of the year, our order backlog has not reduced. So we will be looking to top up a bit more towards INR 700 crores, INR 750 crores if not INR 1,000 crores as our booking target for the year, up to March '22. So yes, we will -- we continue to bid and we will hope to achieve that order booking.

Anything that is L1 in stage? Any particular order that you have in mind? Or is it like the overall view that you're looking at this point in time?

Yes. So overall, again, in last 2 months, most governments, state and center have been busy grappling with COVID. So most of the tenders that were supposed to have come up this quarter have not been put up for bid. So this quarter has been a silent period in terms of being able to bid for projects and negotiations and all of that. We've hardly bid for any project in April and May. And I don't think June will be any different. But once this COVID wave has settled, there are enough tenders that are supposed to be floated by various government departments. So we track everything. We are not necessarily picking any particular one because when you end up picking a particular one and get aggressive on that, invariably, you end up compromising on your margin. So we will be bidding for quite a few, and we will only take where we are lucky enough to get our desired margins.

The next question is from the line of [ Raju from Stellar.]

Hello?

Sorry for that. We'll move to the next question, which is from the line of Abishek Jain from Arihant Capital.

Sir, you said there has been some impact on your top line on the guidance which we have given it for EPC business of INR 700 crores. So -- but that impact is for this quarter only or the quarter that will have a long-term impact? Because you have -- from INR 700 crores EPC, you've now clocked about INR 500 crores. So can you throw some light on this, sir? My first question.

So see, there are 2 impacts. One is only for this quarter which is the COVID impact. I mean, we are assuming it's only for this quarter. Of course, we are assuming there's no third wave. We are assuming everything will be back to full swing next quarter. So far, it looks like our government clients have not diverted their funds which are reserved for these projects. So we have not gotten any indication that there will be any funding issue. The only other issue while we are talking of a slightly lower top line compared to what we probably guided earlier, is that Raipur has been stalled. We do not know when that Raipur project will start. We were expecting to do almost INR 150 crores of work in Raipur alone this year. And that project currently stands stalled for political issues. If it starts within the next 2, 3 months, then yes, we could relook at a different guidance next quarter. As of now, we're not able to project for the year end. I think the INR 700 crores was for a stand-alone, the real estate portion would also add to EPC. So INR 500 crores EPC plus what, about INR 100 crores coming from real estate will take us still to INR 600 crore. So it's not a revision from INR 700 crores to INR 500 crores, it's from INR 700 crores to INR 600-odd crores is what we have. And again, these are just projections. We really don't have any mathematics to sort of be strong on these numbers. These are just guidances, which might again be improved over next quarter if things go well.

Sir, what is the outlook on the real estate business?

Real estate, as we said, this year, 2 of our projects will get completions, OC. So the real estate business, as always, there is one thing which is the real business on ground, which is sales that is happening and projects that are getting launched. And the other thing, which is what comes on our balance sheet, which is to do with OC and Ind AS 115. So as far as balance sheet is concerned, this year, we will get completion of Forest Edge 1 tower and the first phase of Katvi GoodLife project that we've been doing. So both put together should get us INR 80 crores, INR 90 crores of top line on our balance sheet this year from real estate, plus a few Windermere sales that might happen. So real estate is set to touch INR 100 crores. There should not be a problem for them.

Sir, Windermere, what is the current scenario? How much is left in like -- what kind of inventory we are expecting to be cleaned out of sales we are expecting in this year?

See, one of the biggest, now what we can say, positive outcomes of this COVID has been a significant uptick as far as luxury units are concerned. In fact, we saw a huge INR 78 crore worth of luxury units that we sold in the last year. In fact, even during this COVID time, we have been seeing good, credible site visits being done at the Windermere site, which is much more than any other site, which is -- which was again surprising. I believe this strong momentum will continue. We should be in a position to close, definitely, some deals in the current quarter too, despite COVID restrictions as far as Windermere is concerned. So as far as the outlook is concerned, I believe we should with the momentum that we had caught last year as far as Windermere is concerned.

Okay. And out of 2019, the external order book of INR 2,019 crores, what is the time duration of execution?

We -- see, all these orders are anywhere between 24 months to 36 months, and they are all going at good pace as of now. But as I keep saying on all our calls, our experience has so far been that, see, now Raipur is stalled, a few months will go before it starts. So putting all these unpredictable factors, it always happens that we do about 30% of our order backlog. We never achieved more than that. While if we will extinguish it in 2 years, we should be doing 50%, but it never happens. So 30% of INR 2000 crores is still INR 700 crores. But as I said, because of this quarter -- and some of these like big INR 500 crores new order has just come in, it takes about 6 months for orders to start also. So that's why our guideline is in that range, INR 500 crores to INR 600 crores for EPC. If we are lucky, we might do a bit more. But these things will take 3 years, typically, 3 to 4 years to extinguish.

On the Raipur, any receivable stuck, sir?

No, nothing. Fortunately, no receivable stuck. There's no risk at Raipur. This is -- and in fact, the project being stalled is not really going to affect our bottom line or we are not under too much stress in those aspects. We've already written to the government and put in our claims also for the same for their abrupt decision. They have confirmed that they will look at it at an appropriate time, and we will get our claims also. It was purely a political call taken by them. So we are not worried about that affecting our bottom line or having any losses because of that decision. But the run rate of top line, definitely, is going to get affected.

[Operator Instructions] The next question is from the line of [ Piyush Chheda from SRDD Capital ].

Just wanted to understand a little more about our real estate business. Is this a focus area for us? Or it's sort of a legacy set of projects that we are working our way through? I mean, given that we are present in Pune and then we are present in Coimbatore, what's the thinking? What's the view on this business? Where do you want to take this business?

So see, you're right, part of it is legacy. What we have in Coimbatore and Madurai is legacy of old joint ventures that we have signed. In Coimbatore, we have delivered 2 phases already. We have to deliver and finish the third phase. Similarly, in Madurai, it's a long pending joint venture. Going forward, our strategy is not to get out of Pune for real estate. And the focus would be to execute small projects, niche projects in city, and we're not looking to now compete with the Godrejes where we look at 50-acre and 100-acre huge launches in the peripheries of city. We leave that to the other guys. Our focus would be on small prime acres in city on joint venture basis with landowner. We will not be putting our money on land. We will be focusing on our expertise, which is design, execution, sales, marketing and brand in Pune. So real estate would focus in that direction. The last 2 years, we have been very clear, this is a direction for us. We have JVs that we are in talks with in Pune, and we definitely are not talking or trying to line up anything outside Pune. So other than that, Coimbatore and Madurai, we will be focused in niche projects, profitable projects in Pune.

Great. That helps me a lot. Just as a thought. Real estate is for better or worse, a hugely mind and energy-consuming kind of a line. So why not just focus on EPC where you're very good, you have great capacities. The opportunity is also huge. And good real estate developers as that industry is getting more professional, are looking for high-quality EPC contractors. So why do something that is, in some sense, subscale and perhaps suboptimal for you?

You're absolutely right. So I'll tell you -- see, it's a good question you brought up. Let me tell you, we've been reiterating this to all our shareholders over the last 2, 3 years, that we look at ourselves as an EPC company much more than a real estate company. And we've been in the EPC space. Even now 70%, 80% of our top line is in the EPC, and EPC is set to grow. That's a separate engine. It is run by a separate team. And there's no mingling of bandwidth between real estate and EPC. So these are 2 separate topics. EPC, as you said, the market is there. You are right, there are developers with RERA and with organized construction coming in, with funding of projects coming in. Even the private sector is going to open up. So far, we are proud to say we are focusing on the government sector, and 80% of our order backlog is government sector. But the private sector will open up soon. Good projects will come up and they will need good contractors. So we are geared up for that. We are ready for that. We are waiting for that. So EPC will grow. There's no compromise on EPC because of real estate. On the real estate side also, we are not focusing on too big levels. And we, fortunately, I would say, not being -- having too much free cash flow or free capital in the last 4, 5 years to be purchasing land or looking at real estate as a traditional real estate business where you try to accumulate land and spend money on approvals and take it step by step. So we -- for us, real estate is still glorified EPC. We bring to the table our expertise in design where we have an excellent brand in Pune, which has been built over 30 years. And even today, you launched a project in Pune and prime location and it's a Vascon project. The sales happen at a premium to all other builders around us. So that's -- that part, there's no point just ignoring or forgetting that or putting it aside. So we know what we are doing, it's glorified EPC. We're not expecting to make 50% and 100% margins like we used to a few years ago. We are only looking at our focus area, which is design, execution, construction, sales, marketing. Finance and land accumulation is something which is not our expertise. So we will have partners for those. We're already on a joint venture with a landowner. We will bring in finance partners to fund the project. And so essentially, we will be a glorified EPC player. The margins will be better than doing EPC for someone else. And so that's -- so we have an excellent brand on the real estate in Pune. So there's no point in just looking at it totally negative. But we know exactly what our shortcomings are, we know where that industry is, we know what we are capable of and what we are not. And so the focus -- so I would say, we don't have an aggressive target on real estate that we want to achieve INR 500 crores and INR 1,000 crores next year. We go, we take projects which we like, which are good. And while the EPC will continue to have an aggression to grow, real estate is -- and it has always helped us to have been in both sides. So real estate will continue to grow at its own pace.

And just a point worth pondering, maybe you want to convert the real estate company into a separate subsidiary?

We've thought of that also. And we, anyway, function as a separate company. All our overhead costs, everything is separately divided, everything is tracked separately. That's why in our presentation, we also give you a segment-wise analysis. So we are very clear on what is EPC and what is real estate. Just that our market cap and price today doesn't warrant us to further split the company at this point of time. Somewhere down the future, maybe we will think of it.

The next question is from the line of Harsh Shah from Dimension Securities.

You mentioned about your Raipur project, which is sold. So what kind of capital have you invested there? And are -- have we received our dues or is it stuck?

So see, we have -- in fact, the good thing at Raipur is that we had taken about INR 10-odd crore advance and we have executed more than almost INR 140 crores, INR 150 crores of work so far, and that advance has been recovered by the client and our BGs have been returned. And we really do not have a big exposure there. What we mobilized has also been more or less recovered in that sense. And in any case, our equipment that are lying at side a few of them will -- we've documented the monthly cost of keeping those idle and the client has accepted that the entire reason for stalling the project is on their side. So there is no dispute on that. It was a simple letter from them. It's a pure political call by the government in Chhattisgarh state that during this time -- I think they are all aware they have been taking on the center for focusing on construction when they should be focusing on COVID. So I think in line with that, they have taken a call to stop this for a while. We are aware it's their call and whatever idling costs that we will accrue will be easily compensated by them. So we do not -- really, we do not expect any issue in terms of bottom line there. But in the meantime, the top line was running at good pace. So that, we will miss seeing those INR 10 crores plus billing happening at a single site for a while.

Sure, sure, sure. I understand it. And just a book keeping question. When I look at your segmental profit and loss, this Slide #7, the total revenue there comes out to be around INR 531 crore, whereas the net sales you report is somewhere around INR 509 crores. I would assume that difference is the internal EPC between real estate and EPC segment, right?

INR 531 crore revenue? Which one?

Yes, INR 531 crore on Slide #7. So when I add up the...