Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Vascon Engineers Limited Q3 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, Group 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 third quarter and 9 months ended December 31, 2021. Joining me on the call is Mr. Somnath Biswas, our CFO; and our Investor Relations teams at our Investor Relations. I believe you would have gone through the Q3 FY 2022 financial results and results presentation uploaded on the stock exchanges and on the company's website. Vascon Engineers embarked to move towards trajectory. The company's proficient team and rigorous hard work has begun to show meaningful outcome in the company's performance. In the recent past, the company faced various headwinds, which were progressively resolved, thus heading towards achieving new heights. Our emphasis continues towards debt repayment and building a robust order book with reliable client time. Commenting on the industry, the budget for this year provides impetus on growth through various policies, laying the blueprint to steer the economy for the longer term. Capital expenditure budget increased by 35% to INR 7.5 trillion from INR 5.5 trillion. Infrastructure growth focus in various sectors outlined under the PM Gati Shakti scheme, including roads, railways, ports, airports, logistics and PM Awas Yojana, which focuses towards affordable housing. Government of India aimed to spend INR 10 lakh crores on infrastructure, creating strong visibility for the infrastructure sector. During the quarter, the company witnessed strong execution sequentially as well as on a yearly basis, backed by return of gradual normalcy. The successful mass vaccination drive by Government of India mitigated the impact of third wave, thus safeguarding from any material impact on regular business activities. In Q3 FY '22, all the projects were operating at optimum level, enabling faster project execution. We believe that the execution will continue to gather momentum going forward. I would like to throw some attention on debt repayment. As on December 2021, the net debt has come down to INR 75 crores from INR 187 crores in March 2020, a reduction of INR 112 crores. In addition, the company has received a rating upgrade during the quarter. The EPC segment during the quarter witnessed a fast-track execution of the projects. EPC segment revenue stood at INR 282 crores for 9 months FY '22 major projects, namely the Maharashtra State Police Housing, PWD Raipur, Hospitals at Kaushambi and Bijnor are running smoothly. Third wave of the COVID-19 pandemic had no material impact on our execution. The order book was close to INR 2,000 crores. We envisage the EPC segment to deliver strong performance going forward. The Real Estate segment, after various admin the recent past is gaining momentum. There is a gradual recovery in the demand as the economy moves towards normalcy. Our real estate revenue stood at INR 31 crores for 9 months FY '22. A quick update on the ongoing projects. Forest Edge B is 95% sold. Windermere 74% sold and Vascon Goodlife sold at 63%. The project is near pipeline in the near pipeline includes residential project at Coimbatore, Madurai, Ajanta and the aggregate sales value of INR 875 crores with Vascon share of INR 531 crores. Other launches include a residential project below, on commercial and relevant project at [indiscernible] Nagar with expected sale values of INR 2,000 crores. GMP business continues to deliver a sustainable performance with revenue of INR 125 crores, 9 months FY '22 and healthy gross margins of 33%. EBITDA stood at INR 7 crores and margin of 6% in 9 months FY '22. Company is relentlessly focusing towards deleveraging its balance sheet by repayment of high-cost debt. The total consolidated debt have been brought down by 30% as of December 2021 compared to March 2020. The net debt as on December 2021 stands at INR 75 crores compared to INR 175 crores in March 2020. Deleveraging will add towards efficient working capital management. We are continuously working towards liquidating the assets to generate additional cash flow. Coming to the order book. The current order book stands at INR 1,976 crores, of which INR 1,904 crores comprised of external orders. During the quarter, the company received an order of INR 199 crores from Vedanta Limited with the scope of construction of Cairn Oil & Gas Residential Complex at Barmer. Work is expected to commence in the current quarter. As per our strategy of building order book with trusted clients, 76% of our order book comprises of government projects. Governments pushed towards infrastructure, we envisage that the future order pipeline will be promising and our optimized leverage position will enable us to capitalize on the opportunities. On the strategy, the company is focused towards building a strong order book enabling the execution to continue at current levels. The EPC business will be the prime focus of the company going forward. Let me now take you through the financial performance. Let me start with the stand-alone numbers. During Q3 FY 2022, the company reported a total income of INR 166 crores as against INR 105 crores in Q3 FY 2021, a growth of 59% year-on-year. EBITDA stood at INR 37 crores as against INR 8 crores in the corresponding period last year. Reported net profit of INR 31 crores in Q3 FY 2022 against INR 0.4 crores in Q3 FY '21. On a consolidated basis, in Q3 FY 2022, the company reported a total income of INR 213 crores as against INR 158 crores in Q3 FY 2020 -- '21. EBITDA stood at INR 37 crores and net profit at INR 29 crores. With this, we can now open the floor for question and answers. Thank you.

[Operator Instructions] The first question is from the line of Shrey Gandhi from Arihant Capital Markets.

Congratulations on a good set of number. Sir, my question was like regarding the margins, how do you see the margin outlook going ahead for the coming quarters and for the year next coming years?

So there are 2 divisions, EPC and real estate. The EPC gross profit margins have stabilized in the range between 16% to 18% over the last few quarters. I think anywhere above 15% is a sustainable gross profit margin, which will continue going forward to the next year as well. As far as real estate is concerned, the gross profit is upwards of 20%, but revenue recognition comes depending on completion of the project. And so obviously, on a quarter basis, it's difficult to track that. But real estate margins, Windermere was the only project which is now getting extinguished where we have low margins. Once that is done, the balance projects in hand that we are launching are well above 20%, 25% gross profit margins in real estate.

[Operator Instructions] The next question is from the line of Monica Arora from Share Giant Wealth Advisors.

Sir, what the contribution we see for, say, FY '23 for real estate business, sir?

In FY '23, we expect 2, 3 things to happen. One is Katvi Phase 1 will get completed. So that will give us a revenue of almost INR 70 crores, INR 80 crores. We will also be having a sale of an asset in Ajanta, Kharadi, so that will also give us about INR 20 crores. So these 2 are targeted to get completed. The other things would only be launched and in progress. And Forest Edge B, yes, 1 more project will get completed, so yes about INR 150 crores of project revenue would get completed in the next financial year.

Okay. And what is the order book?

For EPC?

Yes.

The order book is about INR 1,95 -- close to INR 2,000 crores third-party order book is at hand.

Okay. And what is the order book target for the real estate business?

So the real estate, we are looking at tying up joint venture projects in Pune primarily. That is the focus of the Real Estate division. They really do not have a order book target per se, but we are looking to tie up at least 4 to 5 projects in Pune in prime city locations, that is the target. We already have 3 projects that we're going to be launching, we have Coimbatore and we have a housing project in Pune, which are already tied up to be launched next year. Both of these put together, plus the ones that I mentioned in Kalyani Nagar, all this put together the Vascon share of the project that we will be launching over the next 12 to 15 months, Vascon's share would be close to INR 1,000 crores. But then we would also be looking in the meantime to tie up new joint ventures, so that the year after that, we have new launches have to make.

Okay. Okay. And any progress on the Caledonian noncore asset sales?

No, nothing. We are still trying to monetize it.

Okay. Okay. And sir, one just last question. What are the segments you are exploring for EPC segment basically?

So in EPC, our company is focused on building division only. So far, we have not explored other forms of infrastructure like bridges, roads or ports or sewage treatment plans. But within buildings, every year, we are making an entry into a new segment of buildings. We were originally only into commercial and residential buildings. Currently, we are working with metro departments. We are also doing hospitals in a big way. We are also doing airports. So the intent of the company would be to continue to grow in various directions within the building industry.

[Operator Instructions] The next question is from the line of Manish Agarwal from Edison Group.

Congratulations on good set of numbers. I have a couple of questions. Sir, one of our noncore assets, which we are planning to realize is land parcel in Aurangabad. So could you give some details on the land parcel, like how much it is? And what could be the market value of the land parcel?

So this land parcel was acquired by us long ago. It was with an intent to develop an IT park in those days when this land was demanded by the government for IT development. However, we did not go forward at this point of time. As you rightly said, we are classifying it as a noncore asset, which we are trying to sell. We are having interest from people, and hopefully, we will close the deal soon on this. The value of the asset would be roughly INR 30 crores in the books and in the market as well. So we will not be realizing a big profit when we sell it, but it will help us deleverage and get some cash flows in.

Definitely, sir. My next question is, sir, the joint development projects which we do, basically, we have some -- we have some real estate projects in the pipeline like Coimbatore, Madurai. Like, what is the ratio of sharing in this could be in?

In Coimbatore, we have a 30-70 joint venture with our land owner, 30 to him, 70 to us. In Madurai, this is closer to about 22-78.

Okay. Like 78 ours and 22 land owners.

Yes.

Sir, my next question is like if you go through the quarterly results of December, we find that we are -- we have loss on the operating side. Then what could be the reason why we're at a loss in operating level?

So again, unfortunately, what I can -- and that's why we've given you -- it will be nice to see the segment-wise analysis that we add to our presentation. So you will see that what happens is that while EPC has been growing and EPC has reached a critical mass where it has turned profitable even at the operating level post the employee costs and other expenses. Real estate, however, we'll only see this in quarters where the sale is recognized. And in other quarters, the overheads and certain costs, which we cannot amortize like marketing sales cost, all of these continue to [indiscernible] quarter-on-quarter. And so in a quarter where we do not have any projects, it's not that Vascon has 20 projects in real estate going on. So in which case, every quarter, we would see some completion. Since we have lesser projects going on, the -- in 4 quarters, you might see 1 quarter where the completion happens. In other quarters, the completion doesn't happen and so we get to recognize no revenue, no significant revenue as such.

Sir, my last question -- sir, last question, sir, like we are seeing there's rise in metal price once again. And also there is a rise in other like cost also. So what kind of, like, projects we have in hand? Are we able to pass on this price rise to our consumers like our client?

So I'll be honest, it is not that it doesn't worry us at all. Everything is going up. You are absolutely right, diesel goes up, petrol goes up. Every cost has gone up quite a bit in the last -- post COVID in the last 18 months, not only metal. Now good amount of things are covered for us in most of our contracts, steel and concrete, which is bulk of our raw material cost or whether it is tiles. Most of these things are generally covered in our contract because they are base rated, so the client would have to bear those risks. But even in smaller things like labor and sand, metal, some of these things and some contracts are not covered contractually. And so there is no doubt that some of these hits are -- we're starting at some of that. We're seeing how to mitigate how to -- there are escalations in some contracts, which cover some of these things. In some contracts, some of these things are not covered and there is flags with us. So -- but because bulk, I mean, I would say 80-odd percent of all this escalation live with the client, it doesn't hit us. But there is a portion of it, which is definitely hitting us, and we are seeing how to mitigate that.

Okay, sir. Sir, can I ask just one more question?

Yes, please.

Sir, what are our deleveraging plans going forward, sir?

So you would see that we have been working very aggressively on getting down our debt.

Exactly.

And so that is the target we had set ourselves. The focus of the entire company was on that. We worked in a very disciplined manner in spite of COVID, derailing our plans over the last 18 months. We're still stuck the focus that we have to get the debt down. Maybe the order book could have improved, all the other things we will now focus on going forward in the next year. But the debt focus was the #1 focus for the company. You will see that we have come from almost INR 75 crores of net debt, given the gross debt numbers have come down significantly. Going forward, see, there is a CC limit with the EPC division to the tune of INR 60 crores to INR 70 crores, which is also backed up because of the bank guarantees that we take, which is also backed up been almost INR 45 crores, INR 47 crores of FD line with the bank. So effectively, it's only INR 15 crores, INR 20 crores, not more than that of net debt that we would have on the EPC division. The EPC division intends to grow. So maybe we will hopefully augment this CC limit going forward, not by much, maybe INR 10 crores, INR 15 crores over the next year. But on the other hand, the other debts, the real estate debts are continuously coming down. The Kotak debt is now only at INR 23 crores. We will hope to finish another INR 8 crores, INR 10 crores of it within this financial year. And within the first or second quarter of next year, we intend to finish this debt totally. So we would remain -- I would say that the net debt at INR 75 crores to INR 100 crores would be the range at which we will remain INR 75 crores over the next year or so.

The next question is from the line of Mohit Bansal from Ajinkya NPL.

My question has been answered. So my question was related to the sale of noncore assets, more or less you answered this. I just wanted to understand the execution run rate for the EPC projects? And what is the forecast on the order book?

So you will see that the last entire year, we had done about INR 280 crores in EPC. The year before that also, we had done around INR 280 crores, INR 290 crores in EPC. So last year, in spite of COVID, we achieved what we did in the year before that. This year, in 3 quarters already, we have done what we did last year. We are already upwards of INR 280 crores to INR 290 crores in EPC execution, third party. And the fourth quarter is also going strong. So we expect to cross INR 400 crores by a decent amount this year, which would be a significant growth compared to last year in terms of top line. Therefore -- and I've always maintained that moment we cross INR 400 crores on EPC revenue that is when we will be able to start seeing profits in the EPC division after all the costs below the line. And that is already happening this year. The EPC division is having a -- if you see the segment-wise analysis, you will see it already reached about 7% EBIT margin. Next year, this INR 400-plus crores, we will definitely achieve somewhere between INR 500 crores to INR 600 crores with the existing order book in hand. The other good news is that our rating has improved and our debt has come down and our balance sheet for the -- going to look, P&L and balance sheet this year is going to look much better than last year. With these numbers post March, we will then be approaching the banks for revised sanctions better terms and higher BG limits that we will be able to get from them. And then we can again refocus with a new target for this INR 2,000 crores -- our target within the next 15 years, you got this INR 2,000 crore order backlog that we carry should go closer to INR 3,000 crores. Then we will be able to look at INR 800 crores to INR 1,000 crores of execution in a couple of years from now.

Okay. Thanks. This is good news and all the best.

[Operator Instructions] The next question is from the line of Nitin Gandhi from KIFS Trade Capital.

What is the current cost of debt? And what do you expect post rating upgrade and revised terms, which you will submit with March paper?

The current cost of debt is about 15%, the SBI debt is at a lower mean debt that we intend to carry on with is that significantly lower, close to 10%. So we will be intending over the next year to knock off all other high-cost debt. And with the rating division, we're able to renegotiate. So we should be building this down with not only the debt. Also, the cost of debt of 15% should definitely come closer to 10% to 12% over the next year.

[Operator Instructions] The next question is from the line of Trupti Singh from Pearl Global.

I wanted to ask that what run rate the company will start reporting profit at EBITDA level?

So as I said, there are 2 divisions, EPC and real estate. The EPC division has already started reporting those profits at EBITDA level from this year at only continue to increase next year. Next year, we have, as I said, about INR 150 crores of real estate revenue to be recognized as well. So even if those 3 projects come in, which they will, those 3 completions come in, in the next year, then even real estate, real estate needs to do upwards of INR 125 crores to have that positive EBITDA, and that will happen next year and then from the year going forward, it will only increase.

And sir, what will be the sustainable gross margin for the company?

Again, for EPC division, the gross margin would be anywhere between 15% to 18% going forward. And that, I think, would be a reasonable number at which we have stabilized and we foresee the business being -- performing at those levels. For real estate, this margin could be anywhere between 20% and 30% going forward, depends on the kind of projects and the market intake, the velocity of sales, all of this put together, but it could be anywhere between 20% and 30% in the gross margin.

And sir, in your reported financials, I see that there is an other income of INR 44 crores. What is this other income? And excluding that, what will be our margins?

So for the margins for the various divisions, we have given a segment wise allocation. So what happened in real estate on a running basis, what happened in EPC, what happened in GMP and what was the other income that we had for the quarter? The other income primarily comes from the sale of our Goa hotel, which is about INR 42 crores. But we also had certain other expenses which we had to provide for. So that's about INR 11 crores. So the net profit from that sale comes to about INR 30 crores, INR 31 crores Yes, sorry, about INR 27 crores, INR 28 crores.

Okay. And in the recent budget, how did you find the budget and its possible impact on our business as we now see that the government is pushing too much towards the infra projects now? So do you see a possible impact on our business, any positive impact?

Yes, very much. I mean, see, finally, we are -- so infra generally reminds you of roads and rails and bridges, which we are not in, but all these infra projects do come up with significant building constructions will be ongoing work for metro. We are doing work for airports. So these are all part of the infra plan envisaged by the government. They have now increased the budget allocation for all of this. So we do expect more projects to be launched by the government in all these directions. And so we are excited. I mean, we're quite bullish that we will be able to now -- so we -- as I said, we need to keep getting our house in order. We've been working on it diligently over the last 2 years. Debt has come down. Things have improved our rating has improved. Next step, next year is to go and get us the better terms with the banks in terms of BG margins and keep ourselves in a position where we can order book quickly. There will be orders in the market. We will be able to pick and choose orders to our terms. So yes, the next 2 years definitely looks very promising and interesting.

[Operator Instructions] The next question is from the line of Nitin Gandhi from KIFS Trade Capital.

Any disinvestment plan or -- because I think that things are now turning reasonably okay?

Typically, if you look at GMPs also started showing that upward inclination. If you look at that, already this till Q3 GMP has done a business of INR 125 crores compared to INR 150 crore, what they did in the last year. And this year, we are even almost at least 15% to 20% growth we're expecting. But probably this year, GMP will not be able to have that kind of bottom line as because GMP, to some extent, is not protected with the still increase in the steel price. But at the same time, GMP has started bagging some good amount of new orders this current year. So already, they bagged some almost INR 50 crores to INR 60 crores a worth order and almost INR 20 crores to INR 30-odd crores domestic order as well as they are getting continuous inflow of the Mumbai metro rail that now orders, and some old orders is at the verge of renewal and all these things. So GMP next year, we are obviously expecting almost INR 200 crores plus top line. So GMP currently is on the right path, and there is a good amount of attraction is happening in terms of the overseas order also. And to answer your question, yes, there is one team which is working on -- continuously working on approaching potential interested parties who would want to invest. And those stocks are also going on by the side.

So it will break even this year?

Yes, it should be. Yes.

And next -- what's the breakeven point for the GMP?

GMP is already showing the profit. GMP is already showing the profit. But due to price escalation, there is a slight bit of shrinkage in margin this year, but make -- whatever the ongoing project and upcoming project, all protected from that impact. So GMP will show at least 10% kind of EBITDA kind of thing.

What's the general ladling effect next quarter for price escalation?

So GMP, one good thing about GMP is they do not have contracts that last 24 months and 36 months like Vascon. So whatever they have committed to generally gets extinguished well within 6 months. So even if they have a commitment, which is at prices which have gone up, all those orders will get extinguished within this year, any new orders that we are currently bagging would be based on the new prices of raw material. So unless the prices keep going up every 2 months, which I don't think will happen, they will then get projects at new rates. And hopefully, sometimes when the prices have gone up so much, the prices would even come down next year a little bit. If that happens, the profit margins would increase for GMP. So yes, let's see how this pans out.

And with the current fixed or operating structure, what is the potential revenue at maximum level?

For JV?

No, for EPC.

The current kind of CapEx and all these things, they have the potential to target turnover around INR 225 crores to INR 250 crores. For anything higher order, they need some kind of augmentation in the capital expenditure.

And same way, can you share for EPC also?

EPC have always maintained about INR 750 crores to INR 800 crores is a point where we have to start thinking of CapEx in terms of human resources as well as in terms of assets. But till then, which is the next 2 years, we do not see any major need for big CapEx.

We wish you all the best for FY '24 with that.

[Operator Instructions] The next question is from the line of Manish Agarwal from Edison Group.

Sir, my question is I can see that repeatedly, there is a decrease in promoter holding. Promoters are almost selling shares every quarter. So what is the reason behind that? Like why are promoters holding diluted?

No, I think you got it wrong. Promoters are not selling shares at all. No promoter has sold a share in the last so many years as I know it. It is this new -- we raised capital in the quarter before last, and so we diluted the overall debt of the company. We brought in INR 70 crores, in which also the promoter subscribed, but his subscription in that INR 70 crores was not to the same percentage that was holding predilution. And so there will be a marginal dilution because of this that you would see, but the promoters are definitely not selling.

But sir, that issue was in one of the quarters, but if I can say that in December 2020, the promoter holding was around 36%. Then in March, it went down to 35.7% to June; September, it came down to 34.95% and in December, it is 31.99%. But the issue was made at -- in one of the quarters, but I can see that the dilution every quarter.

So that is also because of the ESOPs.

ESOPs.

Yes. So there are 2 directions that happened. One is the ESOPs, which dilutes promoter and one is the capital we raised.

[Operator Instructions] As there are no further questions from the participants. I now hand the conference over to Dr. Santosh Sundararajan for closing comments.

Thank you all for participating. Thank you all for being interested in the company and backing us. We are looking at exciting times ahead. I do understand that our progress might have been a bit slow, but we have steady progress quarter-on-quarter to achieve our goals, and we will only be doing better each quarter. I'll see you again after next quarter's call. Thank you.

Thank you. On behalf of Vascon Engineers Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.