Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Vascon Engineers Limited Q1 FY '22 earnings conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Dr. Santosh Sundararajan, CEO, Vascon Engineers Limited. 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 quarter ended June 30, 2021. I hope you all and your families are safe and healthy. Joining me on the call is Mr. Rajesh Mhatre, our CEO for Real Estate division; and Mr. Somnath Biswas, our CFO. I believe you would have gone through the Q1 FY '22 financial results and results presentation uploaded on the stock exchanges and on the company's website. The sentiment amongst the infrastructure sector has remained optimistic as construction activity fared better during the second wave of COVID-19 pandemic. But collectively less stringent lockdown and learning from the previous year has enabled the industry to better weather this situation. The availability of vaccine and an intensive vaccination campaign add to the sector's optimistic outlook. The real estate sector is also trading carefully and realizing that there is latent demand for both business and residential space, but the prolonged pandemic has hampered the sector. The housing sector's future remains bullish, owing to an optimistic EDP, record high FDI and foreign reserves, resurgent core sector indicators, trade availability to real estate developers and a growing employment rate, all of which contribute to a favorable development for future sentiments. Coming to our business performance. In Q1 FY '22, the rate of recovery was slowed by lockdown restrictions and labor mismatches, resulting in lower-than-expected execution across all project sites. However, the situation steadily improved beginning in June as COVID-19 instances began to decline. Due to the second wave, our revenues were impacted by almost INR 30 crores. With an improving overall situation, we continue to move forward with optimism while keeping in mind preparedness for the probable third wave of COVID-19. Additionally, our increased emphasis is on growth revival through accelerated execution across all the projects, efficient working capital management cycle and stringent cost control measures. This will aid in us delivering better performance going forward. The order book of the company remains robust, providing strong visibility of EPC revenue growth for the next 2, 3 years. The current order book is INR 2,024 crores, comprising external EPC contracts of INR 1,939 crores and internal orders worth INR 85 crores. The government orders account for 85% of total orders. As a result of the company's effort to improve customer quality, thus providing visibility of faster execution while ensuring uninterrupted cash flows. Our focus on the current fiscal year will be on accelerating the execution of the order book, which will lead to increased capacity utilization and better margin for the EPC business going forward. As a strategy, we will continue to take a cautious approach to bidding of new projects. Coming to the Real Estate division. As you all are aware, the second wave of COVID-19 has been more devastating than the first, with severe repercussions on the health care system all around. To curtail cases, there have been localized lockdowns across most of the top cities, and this has affected site visits and therefore, housing sales. However, the impact of second wave of COVID-19 was limited on the real estate as a sector was better prepared now and has already adapted to digital tools. With declining COVID-19 curve and as the economy gradually marches towards recovery, the residential real estate sector started witnessing positive momentum on the back of various measures taken by the government. During Q1 FY '22, we did new sales bookings of 11,249 square feet, amounting to a total sales value of INR 11.43 crores. As appraised you on the last earnings call, in the financial year 2022, our ongoing project, Forest Edge, Tower A & B; and Vascon Goodlife, 3 buildings in Phase 1, will achieve completion and occupancy certificate will be issued for all the projects. Under Ind AS 115, the revenue of the projects amounting INR 90 crores will be recognized in the current fiscal. This will lead to significant improvement in real estate business performance in FY '22. The company's launch pipeline to remain robust. Considering the current market condition, 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 for new launches. On GMP business front, our GMP business is faring well. In Q1 FY '22, the revenue stood at INR 36 crores and EBITDA of INR 2.5 crores, with margins of about 7%. We remain committed towards strengthening our balance sheet by repaying the high-cost debt and deleveraging to further improve the liquidity position of the company. Despite the challenging environment, we have made the debt repayment of INR 45 crores in the last 15 months, demonstrating our commitment to debt reduction. The total gross debt now is at INR 210 crores as against INR 255 crores as on March 20. The repayment is majorly made towards high-cost bearing loans. In accordance with this commitment, the company intends to raise INR 70 crores via a preferential share offering. The fund will be utilized towards repayment of high interest-bearing loans and financing of the incremental working capital requirements. Let me take you through the financial performance. Let me start with the stand-alone numbers. During Q1 FY '22, the company reported a total income of INR 78 crores as against INR 36 crores in Q1 FY '21. And reported net loss of INR 7 crores in Q1 FY '22. On a consolidated basis in Q1 FY '22, the company reported a total income of INR 114 crores as against INR 45 crores in Q1 FY '21 and reported a net loss of INR 7 crores in Q1 FY '22. With this, we can now open the floor for questions and answers. Thank you very much.

[Operator Instructions] The first question is from the line of Himanshu Upadhyay from PGIM India Mutual Fund.

Am I audible?

Yes, I can hear you.

Yes. Sir, this is -- I had 2 questions on the real estate business and then on the EPC business, okay? So this is related to some answers you gave in the last quarter. On the real state business and your thoughts on it, okay? So I was thinking on that, that you believe it's a glorified EPC business, okay, the real estate business. But the business where you can charge certain premium, you yourselves stated that we are able to get 10% premium to our competitors in those micro markets where we are presenting where, again, you can sell faster. Do you still believe it's an inferior business to an EPC where to win a business, you will be always need to be the cheapest cost producer or L1 bidder and you cannot increase the cost in between, okay, if labor cost or anything goes up. So why such a dichotomy because, sir, what we are seeing is the more consolidation is happening in real estate, regulations are becoming tighter and more clarity is there, cost of funding is also becoming lesser for the organized players. And we are already established player in some of the micro markets, especially, let's say, a Pune type of market where you stated. But still you believe it is lower or -- business than your EPC, would that mean -- I could not understand your -- the thought process with which you were coming, okay. So that was the first question.

Sure. So, I'll take that first. No, I think there is a misunderstanding in your understanding of what we intend when we say, "We look at real estate as glorified EPC." There is no doubt, it is not a lower form of business than EPC in any way, the margins are still higher than EPC and everything you said about real estate consolidating, about the playing field becoming better for good reputed builders like us. Everything is right. We do acknowledge and accept that. And we have a brand, we have a big brand in a place like Pune, and we intend to concentrate primarily in Pune on real estate. When we say -- see the only hitch in real estate, if you want to play the traditional way is investing, if it is capital intensive, if you want to start from land. So when we say as a policy in Vascon, we do not want to put capital on acquiring land. We would leave land ownership to landowners. We would probably raise a bit of finance from financial partners. And we will concentrate on our expertise, which is getting approvals, making a good design, using our brand, selling and then constructing a good quality product and commanding the premium, which we have always commanded. So we are working in that direction only on securing ourselves projects in Pune on a joint venture basis, where our investment would then be restricted to the cost of launching the project, cost of getting approvals. So with the same capital, we would look to launch a few more projects rather than buy land. So that's why we say we are happy to be looked at as glorified contractors in that we will keep land and a little bit of maybe -- a little bit of finance cost out of our purview and concentrate on the execution parts of real estate. But no, in no way are we saying that it is inferior to EPC or that our concentration is going to be more on EPC, and we are going to diminish our real estate or any such thing, we will be looking for opportunities in real estate. In fact, we will be setting targets to grow real estate within the Pune market. But on this basis of joint venture, where our exposure is to construction sales marketing.

Okay. And the second question was what we are hearing is because of COVID and the slowdown, what has happened in real estate, the expectations of land owners are much -- have at least reduced to what they were 3 or 4 years back, okay? And hence, it becomes more interesting to buy outright or do JVs, JVs when better projects are coming up, okay? So what is the situation in our primary market, Pune, where we are? And how do you see that market to grow and the business model, what we are trying to inculcate of being in niche markets where we can get a better premium, okay? So in those markets, what is the situation on land and getting JDs -- JVs? Can you give some insights on that?

Yes, you're right. See, the expectations in some pockets of land owners -- I mean, see, there are both sides. Some landowners haven't budged. They still have their skyrocketing expectations. Some landowners do bring down their expectations with time. And the FSI rules have changed with new policies coming in from the government with road width different now. Pune is able to construct a lot more on the same land than it was able to 5 years ago. So in most lands with good road frontage, the FSI utilization has been increased. So again, the landowner sometimes builds that into his expectations on a joint venture basis. So these supply-demand situations keep happening. We keep meeting landowners. We keep seeing good lands in niche markets. In prime lands within -- as close within the city boundary as possible, even if the project is small. And we will be shaking hands as and when we see the excel sheet making sense to both parties, we will definitely be signing up ventures. We are in talks with quite a few people currently.

Would it be right to say that the number of deals which we would be following currently would be higher than what would be 2 years back or 3 years back, we would be looking in those markets?

Definitely. See, again, even glorified contracting real estate still needs a little bit of capital, of course, much lesser than trying to invest in land, but we would still have to put in capital to start a project up to the extent of approval and launch. So there is still an investment unlike EPC, which is capital free, real estate would need capital approval costs have gone up, as I said, since FSIs and TDRs can get loaded, the buildability has increased. The cost of getting approvals upfront has also gone up. So there is a kitty needed to even start a project, even if you're not buying land. We have been focusing on utilizing all our cash flows over the last 2, 3 years in trying and reducing our existing debt. So actually pulled out cash flow to pay upfront money and invest on real estate projects in the last 3 years. Now with this preferential issue as well as with our current discipline and focus, we have already brought down our debt quite a bit. I think this financial year would be the last year where we are going to be only focusing on debt reduction. Hopefully, that as a target would be achieved. Not only hopefully, I think it will definitely be achieved this year. And then whatever cash flows our business is accruing, whether it is EPC, real estate or by sale of assets, further whatever cash flows we are able to generate, we will be only investing. As I said, EPC doesn't need huge investments of cash flows. So those cash flows will be invested in launching these kind of niche projects in Pune. And yes, so you can expect us to have more launches in the next 12, 15 months than we've had in the past or more tie-ups at least.

Okay. Okay. And one more thing. In one of the calls, you had stated that we are looking at EBITDA margins of 17% to 20%. So it is really blended at the company level or EPC, what type of margins we are trying to make because our margins have been very volatile. That's why the question is, okay. So generally, what orders we are getting? What type of margins we are wanting?

Sure. So see, our margins keep looking volatile quarter-on-quarter is because the -- our balance sheet reflects both RE and EPC together. And that's why we always, in our investor presentation for the last 3, 4 years, we've been sharing quarter-on-quarter the split between the 2 businesses. So if you take a look at that, you will see that the EPC business has been fairly stable, in that its gross profit or its EBITDA has been anywhere between 16% to 20% over the last few quarters. And so EPC currently, even this quarter, with a diminished performance of top line, the EPC gross profit margin has been 17%. Real estate quarter-on-quarter keeps changing because of the revenue recognition methods, you can only recognize it when completion happens. So it's extremely volatile, like you said, it's very difficult to plot some linearity to it. But if you analyze the business, when we take up real estate, even glorified contracting real estate that we talk about, will easily give you 25% to 28% or 30% returns, whereas EPC will give you only gross profits of between 15% and 20%. We are stabilizing around 17% and 18%. In EPC, we are fairly happy with that if we can maintain that and continue to steadily grow our top line. Those kind of EBITDA, I think we should be fairly well. In real estate, we haven't stabilized to those levels yet over the next couple of years as we take up new projects and launch them. I think this will stabilize.

Okay. Okay. And in the real estate small projects, how is the intensity of competition in the businesses, is the type of projects what we are trying to do? Can you give some sight on the competition and intensity of competition in those places?

See, real estate, as a market, has seen a huge amount of consolidation. So PAN-India, in fact, if you see the organized market or the share of organized developers has now crossed 20%, 22%. Pune, it will be in excess of 25%, 28%. So as far as competition is concerned, definitely, in fact, the larger developers are taking a greater pie, a lot of new developers are stepping into Pune because Pune definitely is one of the most kind of promising markets. If you see the inventory overhangs, the other macroeconomic factors, low interest rate, let's say, inventories is common across the country. But in terms of inventory, in terms of a robust IT sector, in fact, a robust employment scenario as far as Pune is concerned, definitely, this has attracted and the volumes, which Pune is showing. It has been stabilized on the pricing front, also, there is not much variation as far as the city is concerned. So definitely, this is attracting larger interest. And it is also seeing a lot of smaller developers diminishing from the market. If you see at one point of time, lesser than maybe 100 units, you had 2,500 projects. It will be less than 2,000 projects currently, in fact, at we speak. So smaller players slowly, slowly are being driven off the market and larger players will take a larger share. Having said that, in fact, we fall typically in the organized market, we focused -- our focus has always been city-centric projects. City-centric projects, in fact, because of the location and because of we having a strong brand presence. In fact, we will play on our strengths. And definitely, the plan that we have of -- and the existing projects at hand that we have, are in locations, which we are very, very confident that can be easily sourced. So selling typically will not be absolutely any issue as far as Vascon Engineers is concerned.

The next question is from the line of Rohit from Antique Stockbroking.

My question is more on the preferential issue. We have a debt of INR 138 crore. How much will be the preferential issue attached to that debt? And what will be the revised interest cost stand-alone we will be running at?

I will not be able to give you an exact number because this will be a decision taken by the Board closer to the date of availability of funds. But as we have stated in our outcome of the Board meeting as well as in the EGM notice that will be going out today, the primary purpose of raising this was primarily to reduce high-cost debt as well as a small portion of it to be used towards funding a little bit of growth of business. So the exact split, I wouldn't want to put a number here.

So let me ask this question in a different way. Do you incur anyway INR 25 crores on a stand-alone interest cost. And what will be the component of this interest out go? I think the amount addressed towards the debt portion as well as the finance charges that we will do typically for nonfund base limits and debt opportunities?

So let me put it this way, we have -- even today, we have an outstanding of about INR 65 crores towards -- Windermere INR 60 crores.

INR 64 crores. Currently, INR 58 crores as of June.

INR 58 crores. Yes, as of June, it was INR 64 crores of debt outstanding towards the Windermere project and a couple of other real estate projects. We will be looking at least by the end of the year, by way of utilization from preferential as well as by way of utilization from sales we make over the next 6 months, we will be bringing -- the target is to bring this debt down close to 0. So you can say we eliminate about INR 60 crores of debt. As we speak, from June and to now, we're already down to INR 58 crores. So we brought INR 64 crores down to INR 58 crores over there already. So we could assume this is our internal target that we will get done with this debt. That debt is currently at 15%. So INR 60 crores at 15%, even now is about INR 9 crores a year hitting our P&L. Next year, we should not have that.

Okay. That is great. Sir, my second question is on the EPC, where earlier, we were talking about INR 700 crores but considering that we are on a COVID wave, we have got that execution target for this year at INR 500 crores. Is that the target impact? I mean it should be possible, right? Do you see any slow-moving projects or do you see the risk of labor availability?

So I'll just -- currently the target is EPC plus real estate. So real estate will be contributing whatever INR 60 crores, INR 70 crores, INR 80 crores. So stand-alone target was what you mentioned. Yes, the stand-alone target of INR 500 crores is even now our target. I think we are in a position to achieve or exceed that a little bit. The first quarter, we've done INR 70-odd crores. That was also because not so much to do with labor availability. This time, COVID didn't throw us a labor challenge. I think the labor about smarter, they didn't run away, they stayed at work, they renew they gain nothing by going anywhere. I think that fear didn't spread to the labor. And in fact, fortunately, the disease didn't spread to the labor either. So most of our sites had their labor there and without COVID entering our labor camps. But the problem this time was more to do with payments coming because our exposure was to government clients. And while we are always normally happy about that fact that we are exposed to government clients in this period. But in this period of many government bodies had to hold their payments being made to projects when they were forced to look at emergency situations in terms of health care, whether it is state or central. So I think there were lags in payment starting from June, July, those have been set right now, things are back to normal. We've got paid for the work we've done in May and June. But for a while, the payments came late and therefore, our work also reduced. And Raipur project got stalled. I think I did it from this in the previous call that Raipur project -- as a measure from the state government was stopped, and that was giving us a good hit rate of more than INR 10 crores a month. So that top line disappeared for at least 2 months in the last quarter. So that is why we took the top line hit compared to our projections in the first quarter. But second quarter onwards, now the good news is this month onwards, Raipur has also given us a go head to restart works. And all of the projects have made their past payments, so the work has picked up. So we should not be seeing any kind of a dip going forward. Fingers crossed, third wave not affecting us that much. So I think, yes, we will be able to catch up given the situation today, we will be able to catch up on the lost ground of quarter 1 and in the next 2, 3 quarters. And by end of the year, INR 500 crores can still remain our target. We will achieve that.

Sir, just to touch on the receivable part. Is there -- what is the current receivables and overdue receivables that you have as of now?

So the overdue receivables, if I classify them as more than 3 months, so I think we'll get back on the exact numbers in terms of balance sheet. But from the existing projects, from the running projects, we do not have significant overdue receivables from any of the clients. That is also because whenever the receivable goes to beyond a month as a policy, if we were keeping our progress on in the month of June, we would have done INR 10 crores, INR 15 crores more of top line in the quarter. At the moment we realized that the government is not paying us for the work done in May, we deliberately slowed down. It has always been a policy that if we will not be funding any client, government or private, beyond 1.5 months of exposure. So we take that call to immediately slow down. We did that as well in line with our policy. And now we've again brought these projects back to track. So the outstanding does not pile up with this kind of a strategy. And even now, we do not have a huge outstanding in any live running projects.

Sure. Sir, my final question is on the nonfund base limits, I believe you have some 60-odd crores of nonfund base units, which can support INR 600-odd crore kind of execution. Is that my fair understanding? Or has it improved by this quarter, has any banks given you additional limits?

No, this quarter, we do not have any additional tie-ups. So the BG limits remain in that range, INR 50 crores to INR 60 crores unutilized BG limits will remain in that range. We've used a bit for our Lucknow project. We've got 2 projects in Lucknow, we've drawn down a bit of advance from there. But some old BGs are also coming back. So you are right in saying plus/minus on a general basis, we have that kind of a limit available, which will help us book that kind of an order book, INR 600 crores to INR 700 crores. So we will be taking that as a target going forward.

Just one more question, if I may squeeze in. It is on to do with the order inflow part, I mean I understand INR 500 crores to INR 600 crores, anyway given. That is the order inflow. Anything beyond that are we missing out, some big ticket numbers, big-ticket projects, anything strategically that we want to move to the next leg.

So strategically, one side, as we discussed on the real estate, we would like to tie up some projects in the next few months because we do see benefit there on the JV basis in Pune. On EPC, again, as our BG limits, we will be continuing to work with our consortium of bankers to get our terms in a better way with this preferential raising, we will first work on our rating. Hopefully, we will get an improvement in our rating. With that, we will be able to renegotiate with our consortium of bankers to give us more preferable terms in terms of the margin money they expect and in terms of the collateral they expect. So then we will be able to get a better assessment. Also, our top line will be increasing, unfortunately, because of COVID last year, we couldn't show an increase in top line or bottom line. This year, definitely, we will be able to achieve that. So these things happening, our bankers would revise, we would be able to get a better deal in terms of a higher assessment for nonfund limits. And once we get another INR 50 crore on nonfund limit tied up, we will be bullish on booking another INR 700 crores, INR 800 crores of orders. So it's a process. It's a chicken and egg. We get orders, then we go back to the banks, we keep augmenting our limits, then we keep getting orders. So yes, the process will continue and this will grow this whole sizing of our ability to book orders will grow.

So to summarize this portion, you keep on saying in your investor presentation that you were doing 3 million square feet and 8 million square feet as what you will seeing potential at. But the BG or demand fund base limits that is the binding factor to take you up to the next level?

So see, is it a combination of these. Your right in terms of execution, I still feel until we reach a level where we are executing INR 700 crores, INR 800 crores a year of work, third-party as well as our internal work in terms of execution. We have bandwidth for both machinery and staffing in place. So that is still not a constraint. I've mentioned this over the last 2, 3 years, we've still not reached that constraint yet. The constraint has still been -- actually the last year the constraint has been COVID more than anything else because we have orders in hand also. So we should have touched more than 500, 600 even with the orders in hand. But we didn't because of COVID. This year, we will at least push that limit upwards. And then the BG limits will open up, as I said. So even now we have INR 2,000 crores of order book, which even if you say is 3 years worth of orders, we should be able to do INR 600 crores, INR 700 crores. Again, COVID has hit us in the first quarter. But if all these orders pick up full pace, even without fresh order booking, I should be able to achieve more than INR 600 crores, INR 700 crores this year and next year, at least next year for sure. So BG limit is a constraint in taking more orders and accelerating growth. But as of now, I think orders in hand is sufficient for the next 2 years to focus on execution. And BG will [Foreign Language] will definitely grow, BG limits will grow.

[Operator Instructions] The next is question. The next question is from the line of Prinyanka Rao, an individual investor.

First of all, congratulations on the results and the preferential issue as well. So I just wanted to ask your outlook on the GMP business for the next fiscal year? And what kind of revenues we are looking at?

So GMP currently has an order book of INR 180 crores. So we would be looking -- we would also be looking to achieve similar kind of turnover for the year, somewhere in the range of anywhere between INR 160 crores and INR 200 crores for the year. And EBITDA should improve from last year. What was the EBITDA last year? I think we'd be looking to at least cross -- get into double-digit profit this year in GMP with that kind of a top line.