Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Vascon Engineers Limited Q4 and FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Dr. 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 for the Quarter and Financial Year ended March 31, 2022. Joining me on the call is Mr. Somnath Biswas, our CFO; and our Investor Relations team, Stellar investor relations. I believe you would have gone through the Q4 FY '22 financial results and the results presentation uploaded on the stock exchange and on the company's website. Key development in FY '22. The company has strengthened its balance sheet by raising INR 70 crores through issue of preferential shares with marquee clients, which has helped the company to be in a better position. The company has also reduced its debt by INR 98 crores over the past 2 fiscal year with our total gross debt standing at INR 157.2 crores as of March 2022 as against INR 255.3 crores as on March 2020. The debt equity ratio has also improved from 0.19x as of March 2022 from 0.35x as it was on March 2020. We are pleased to report that the credit rating for long-term bank facilities have been upgraded from BBB- to BBB. And for short term, bank facilities have been upgraded from A3 to A3+. During the last fiscal year, EPC revenues have increased by 38% year-on-year basis to INR 442.6 crores, which is despite the second wave of COVID-19 which occurred during the start of this fiscal year. Our EPC order book has been robust during the year, and the total order book stands at INR 1,832 crores, which also includes external EPC orders of INR 1,774 crores and internal orders of INR 58 crores. This forms a strong order book of 4.5x of FY '22 EPC revenue, providing strong visibility of EPC revenue growth for the next few years. Vascon has been concentrating its efforts on consistently monetizing its assets, including the sale of 43.44% of shares in Royal Orchid Hotel [indiscernible]. Vascon Engineers embarks to move towards growth 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 solved, thus heading towards achieving new heights. Our emphasis continues towards debt repayment and building a robust order book with reliable client times. Commenting on the industry. The budget for '22/'23 provides impetus on growth through various policies, laying the blueprint to [ share ] the economy for the long term. Capital expenditure budget increased by 35% to INR 7.5 trillion from INR 5.5 trillion. All the state governments are likely to play a larger role in various sectors such as urban infrastructure, health and education. To give a boost in the sector, GOI has significantly increased their outlay in FY '22/'23 to INR 19 crore, which is 6.5x higher than the previous year's budget. Housing is one of the crucial sectors in the budget, and [indiscernible] has allocated almost INR 48,000 crores under PMAY's huge market, which will be utilized on bringing transparency in the real estate sector as well as affordable housing for everyone, which will lead to a boost in the housing sector. The residential sector is set to expand dramatically with the central government intending to build 20 million affordable houses in metropolitan areas across the country under the Union Ministry of Housing and Urban Affairs ambitious Pradhan Mantri Awas Yojana scheme. The need for commercial and retail office space will rise as the number of housing units in metropolitan regions grow. By 2023, the commercial space is expected to reach 50 million square feet, driven by various sectors such as IT, pharma, engineering and manufacturing. Budget 2022 has been based on a vision of next 25 years, and that's focused mainly on the infrastructure development. Real estate sector has been filled with confidence as the economy of India has been promoting the economic -- economy uplifting by planning on bringing a paradigm shift towards business approach. In the Union budget, urban planning has taken the center stage, which will enhance the real estate industry by streaming the transition of Tier 2 and Tier 3 cities. The infrastructure growth focus in various sectors outlined under the PM [ Batiste ] scheme, including roads, railway ports, airports, logistics and PM [indiscernible] which focused towards affordable housing. From the people, India aimed to spend INR 5 crores on infrastructure, creating strong visibility for the infrastructure sector in the near future. During the quarter, the company witnessed strong execution across EPC projects as well as on yearly basis, backed by return of gradual normalcy. The successful mass vaccination drive by the government of India mitigated the impact of the third wave, thus safeguarding from any material impact on regular business activities. In Q4 FY '22, all the projects were operating at optimal 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 March 2020, the net debt has come down INR 58.7 crores from INR 134.1 crores before to March 2021, a reduction of INR 75.3 crores. In addition, the company has received a rating upgrade during the quarter from BBB- to BBB and A3 to A3+ on long-term and short-term bank facilities. More than 85% of the order book is from government projects, which will help faster execution and uninterrupted cash flow. The company is relentlessly focusing towards deleveraging its balance sheet by repayment of high-cost debt. The total consolidated gross debt has been brought down to almost INR 157 crores in the past 2 fiscals from INR 255 crores a couple of years ago. Deleveraging will aid towards efficient working capital management. We're continuously working towards liquidating assets to generate additional cash flow. The EPC segment during the quarter witnessed a fast-track execution of the project. EPC segment revenue stood at INR 442.6 crores for FY '22 with an EBITDA of INR 37.7 crores. The major projects, namely Maharashtra State Police Housing, PWD Raipur, hospitals at Kaushambi and Bijnor are [ nearly ] complete. The third wave of the COVID-19 pandemic has no material impact on our execution. With the order book of close to INR 1,832 crores, we envisage the EPC segment to deliver strong performance going forward. We are witnessing orders from segments [indiscernible] stock quotas, [indiscernible] in our EPC segment. Real Estate segment after various headwinds [indiscernible] is gaining momentum. There's a gradual [ increase ] in the demand as economy moves towards normalcy. Our real estate revenue stood at INR 75 crores for FY '22. A quick update on the ongoing projects. Forest Edge B, Windermere [ Bango ] is totally sold. Windermere [indiscernible] residential has sold 77%. Vascon Goodlife was sold 63%. The project in near pipeline includes residential projects at [ Coimbatore ], Madurai, Ajanta with aggregate sales revenue of INR 875 crores with Vascon share of INR 531 crores. Other launches include a residential project below one commercial and residential project at Caledonia with expected sale value of INR 880 crores. GMP business continues to deliver sustainable performance with revenues of INR 194.3 crores for FY '22 and a healthy gross margin of 33%. EBITDA stood at INR 16.7 crores of [Technical Difficulty]

Pardon, Director, but the last of your sentence was not audible. The sentence broke a bit.

GMP [indiscernible] with revenue of INR 194.3 crores for FY '22 and healthy gross margins of 33%. The EBITDA stood at INR 16.7 crores [indiscernible]. Coming to the order book, the current order book stands at INR 1,832 crores of which INR 1,774 crores comprises of external orders, which is a healthy 4.5x the EPC value for the user. The government [indiscernible] for the company for [indiscernible] building...

This is the operator. Sir, I'll just reconnect your connection because the audio is not very clear. Just give me a moment, please. Please proceed.

Can I go ahead?

Yes, sir. Please proceed.

Coming to the order book, the current order book stands at INR 1,832 crores, of which INR 1,774 crores comprises of external orders. The order book is at a healthy 4.5x the FY '22 EPC revenue. The government's push towards urban connectivity will create opportunity for the company. And as per our strategy of building order book with trusted clients, 85% of our order book currently comprises our government projects. With the government's push towards infrastructure, we envisage that the future order pipeline will be promising. On the Strategy 2.0, 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. We will continue to aim to reduce our gross debt levels. Let me now take you through the financial performance. Let me start with the stand-alone numbers. During Q4 FY 2022, the company reported a total income of INR 153.1 crores as against INR 135.3 crores in Q4 FY 2021, a growth of 13.2% year-on-year. In Q4 FY 2022, EBITDA stood at INR 13.2 crores as against INR 8.8 crores in the corresponding period last year. EBITDA margin was at 9%. Reported net profit of INR 6.3 crores in Q4 FY '20 as against INR 1.5 crores in Q4 FY 2021. On a consolidated basis, in Q4 FY 2022, the company reported a total income of INR 221.9 crores as against INR 191.8 crores in the corresponding quarter last year. EBITDA stood at INR 23.6 crores with a margin of 11% and net profit at INR 10.8 crores. With this, we are now open for questions and answers. Thank you.

[Operator Instructions] The first question is from the line of Nilesh Gandhi from Metadesign.

So thank you for the update and really appreciate the efforts that Vascon has been taking. I just wanted to understand, as you said EPC is going to be the focus for the company going forward. From the margin perspective, EPC offers what margins are in real estate development, as we said, we have a very nimble footprint there. But if you compare real estate development versus EPC, was there a rationale for focusing on EPC?

Yes. So big focus on EPC has been there over the last few years, and we are seeing the results. Our top line has increased by 35% this year, and we expect to continue that trend. So I would say the EPC house has been set in order in terms of the only focus is now on continuously enhancing our BG limits with the bank. We are in line to do that because of our rating improvement and our balance sheet and P&L improvement. So this year, we will hopefully augment our limits with the bank. So when we say we're focusing on EPC, I don't think we ever say we're not focusing on real estate. Real estate definitely will have higher margin than we can earn in EPC. Even if it is where we land is on someone else's balance sheet, and we're focusing on brand and sales and execution. So we are, the real estate team is currently tying up quite a few projects. There are quite a few inquiries. The market is looking up. There's a lot of optimism in the real estate market currently. And so we are tying up new joint ventures. We hope to increase our real estate order book in the next couple of years. But you will only see the results of them in numbers 2 years going down the line because it follows a completion method. And so what we tie up now will take 3 years to hit our balance sheet and P&L. But no, there is no diverging from focusing on real estate. There are 2 separate teams within the company, and real estate is set to grow very much.

So they are very deadly combination of [indiscernible].

I'm sorry, I'm not able to hear you.

I think we have a very deadly combination of EPC combined with real estate, which is, I think, adding substantial value and also as a brand, as one is a very good brand established in the market now.

That's right.

On the order book of EPC, what is our hit ratio and how many -- how much volume are we currently building?

So see the ratio is changing. Normally, itself, our hit ratio is very low compared to some of our peers because we are extremely cautious, and we do not set ourselves an unreasonable top line target just for the sake of bagging orders. We are also always constrained by BG limit, and so we do not want to be using our BG limits on a wrong project and then not having available limits when the right project comes along. To further add to this, in fact, the last few months, we're all aware of the inflation that has happened in the market. Prices have skyrocketed every element, things that are covered for us contractually and things that are not covered for us on practically everything has gone up. And so the cost of construction has gone up with a few other functions here of the contractors who are aware of these things are aware that the next project has to be bid at a higher price. But unfortunately, in the market, a lot of bidding is happening at rates which were fine a year or 2 ago but are not fine today. And so we've seen that over the last 6 months, wherever we are participating, what we expect to get is a good 10% away from where the contract is being bid by some of the competition. So we're staying clear I think till most -- till I think step by step, month-on-month, everybody is waking up to the actual inflation that has happened. Things don't seem to be coming down at the pace at which they went up. And so only when competition realize this, will we be in a position to bid fairly. Otherwise, the guys who realized it are staying away from bagging projects at the wrong prices and then struggling for the next 2 years. So last...

For critical material input items, we will be having the requisite escalation clauses and market-linked pricing for cement, steel, and stuff.

So you're right, we -- in fact, I used to always take a con call that most of our projects are covered by inflation clauses that we have, but the inflation is to the extent that it is currently happening, labor has gone up. Diesel has affected every transport cost to go up. So there is a good 25%, 30% of our execution value, which is not covered by contract, salaries, rent. Every other thing is not covered by contract. And so these overhead aspects itself are leading to a good increase at this point of time. In the existing contracts, we have escalation clauses covered by PWD and our base rates, then wherever we do not have certain cover for the other items, we are in negotiations with the client. And it looks like at some point of time, we will be getting certain benefits passed on by the clients in these aspects. But for new projects, we do not want to take a risk bidding low and then just banking that we will be able to push our way through later.

Would it be correct to say that like we have so much of government projects in hand, so Vascon has found its sweet spot because it takes a lot of effort, intervention in the government projects, handle the bureaucracy and manage the cash flows. So would it be correct if we say that we have a good knack of managing government projects now?

So see, I think 5, 7 years ago, we were focused primarily on private projects, then we -- after having burned our fingers in the last cycle, we then decided that government project, we cannot stay away from government projects, and so we have to learn the knack of handling the bureaucracy like you put it. And I think, yes, credit to us, we have ventured into that direction, and we have set up our name over there. Now most government bodies know us, and they trust us. And so yes, we have carved a mark for ourselves there. But I'll be honest, we will now want to also get back a little bit in the private sector with RERA and with certain payable clients now knowing what exactly they want to do in real estate and having their funds tied up. I think private sector is also presenting opportunities, and we would like to not stay away from private sector in totality like we have in the last few years.

And how about the cash flows in government projects? How are we improving the working cycle? Are we reducing that time frame of payments?

So the thing about government projects is monthly [ bill ] certifications and payments don't seem to be a problem in most of our projects, in fact, in all of our projects. And the issue comes in more of these escalations, the extra bill, the escalation where these sometimes extra items, these get -- take time to get certified because of the bureaucracy they need to pass very stable and they need to get cleared through various board meetings, et cetera. So those expenditures that we incur at site in terms of escalations and extra items, they remain up for a while, and they take a few months to get cleared. But we running [ bids ] do not have a problem.

Okay. One last question. How strong is our BMC team? I understand managing this, we will need a very strong and robust project management in-house team. So if you could just throw some light on to who are the people who are driving the projects on the ground.

So we have an excellent project management system. Our strength, I would dare say is our tracking system. We have excellent software. They've invested in all kind of software to ensure that all data from across the projects of [ every ] country is available on an hourly basis with us in head office. We have an audit team internally that goes and audits all these projects to ensure that data feeding -- I mean, software is one thing. Garbage in, garbage out was an issue for us a while ago. We have now educated all our stores and all our professionals working at site with the importance of data feeding and the activity of data feeding that they need to do on a daily basis. And so this generates all the reports and [indiscernible] that we need sitting in head of it as the management and then we're able to take calls. We're also fairly a small company in that sense. So it helps. We have monthly reviews with our top VPs and project managers who come down to Pune, and we stated all the numbers, and we reviewed the cost to completion and reviewed the profitability and any claims that need to be made, et cetera. So we have a very robust project tracking team.

[Operator Instructions] The next question is from the line of [ Rajat Kajartoff ] from -- individual investor.

So I have a couple of questions. My first question is, like in Q4 FY '22, execution continued strongly across the EPC projects. So can we experience the same kind of trend in the coming quarters?

Yes. So Q4 FY '22 was good. And we hope -- I mean, we expect to continue that trend going forward in this year. Normally, in our industry, Q2 is lower than Q1 and Q3 because of the rain that affect that period. So that is the standard thing that happens in our industry. But we hope to -- the average top line of quarter-on-quarter this year compared to last year for each quarter would definitely be significantly higher.

Okay. Okay. And also like in the previous call, you have mentioned that you received a new order from Vedanta on the construction of a residential complex. So I just wanted to know what is the status of that? And when are we expecting the project will be completed?

So that project had 18-month time line starting from January. The first 4 months, there were regular mobilization issues at site to do with 3 clearances from the clients, certain other clearances from [indiscernible]. It is in a remote location, so it has been tough for us to mobilize it. Took a month or so longer than we would normally do in other projects. There are local issues. So we sorted all of that. [indiscernible] The exploration and foundations have started as of now. So from here, we expect to finish it in 14 months.

Okay, 14 months?

Yes, 14, 15 months going forward from now, from May.

Okay. Okay, sir. And also by when the company is expecting to be debt free?

Sorry?

Debt free, like by when the company expects to be debt free?

So again, there are 2 divisions, real estate and EPC. What -- then we will start with a big debt, especially on the real estate sector over the last 3, 4 years that was not being serviced by the project it was taken for. And that was burdening our balance sheet and burdening our cash flows as a company as well. So we focused on bringing that down. That was also a high cost debt. So that is almost now coming close to 0, so we intend within the next -- by Diwali to extinguish that quota debt that we have. But we have a working capital limit with SBI for the EPC. And that gross debt, we do not actually intend to bring it down to 0. EPC would need a little bit of working capital. We do not want to increase it drastically, but I think it will remain -- also it is backed by the fact that we have a [ free ] line with the bank for our margin money that we need to put up for the bank guarantee. So the net debt in EPC would be very minimal close to 0 even at some point of time. But be glad that [ CC ] limit that we will have from SBI or the consortium of banks that we work with to the tune of about INR 70 crores, that would remain.

Okay. Okay, sir. And my one last question, like can you give some future guidance on the CapEx for next 2, 3 years? And what can be estimated like the order book for FY '23 and '24?

So this year, we fell short of our order booking target that we had taken at the beginning of the year. But over the last -- as I said, over the last 5, 6 months, it was pretty intentional. We do not want to just achieve the target for the sake of achieving. I think all of us know achieving a top line target or the order booking target is not difficult. But achieving the order booking target with the intended margin, that is difficult. And we didn't find those opportunities over the last 5, 6 months because of the inflated prices and our costing has gone up, whereas pure costing doesn't seem to have catching up -- caught up level. And so the clients are awarding at prices which we know is loss-making. Good luck to those projects, but we stay clear. Going forward, I think we stabilized, fiscally, everybody is now aware of the inflation and aware of the new costs. So this is already beginning to stabilize. So going forward in the next -- this year, we definitely will have to book at least 500, 600, if not more of order book so that we remain in line for growth going forward.

[Operator Instructions] The next question is from the line of [ SK Damani ] from SKT Consulting. Sir, if you can please proceed now.

Am I audible, sir? So should I continue?

Yes, you're audible now.

Sir, my question is regarding one fact that in view of the very steep rise in the prices of all raw materials related to construction industry, how we are placed and how we have planned to mitigate all the clauses in our contracts provide us for both security of the price escalation and how we are going to manage the cash flow in coming in view of this?

Yes. So this most -- this question has been asked over the previous calls, and I've always maintained that we have a pass-through on most of our costs. And therefore, this drastic escalation of steel and cement will not be passing through or rather it will pass through our balance sheet. It will not hit us. But we are also waking up to the fact that it is not just the 60%, 70% of the materials that are covered under the contract for us. Even the balance 30%, 40%, every other cost is rising at a very high pace. And we are definitely staring at a little bit of erosion in our gross profit level as it stands. Maybe a couple of basis points if nothing goes in our favor. We are staring at that. It would be wrong to say otherwise. But what we are doing is we are going back to our government clients and citing COVID as the reason for delay and the exorbitant price increases, which has affected us, and we are putting claims which are beyond the contract if you may say so in some ways. And most of the contractors are doing this. And so the government bodies are also waking up to the fact that they need to assist us in some ways. And so we are hopeful. It'll be a long process. It'll not be so easy. But we are hopeful that whatever I'm talking about several basis point erosion will come back to us by way of certain help from our clients because they're all waking up to this. Every contractor is facing this. So it's not only that comms issue. And I think the government bodies are step-by-step airport authority, metros, they're all realizing that they will not be able to just stick to contract, and they will have to find ways to offer stuff.

In continuation, I just want to know, I mean, has it not see any slowdown in the construction activity base, whereby our working capital interest and loan interest is going to be a burden [indiscernible]? And how about the private sector, where you are the [indiscernible]?

So there is no slowdown for us. In fact, we've done 50% more last year, and we will be doing the same growth rate for EPC this year. So there is no slowdown from our internal point of view because we do have the order book. The order book is fully active. All projects are running at good speed. So in spite of certain costs going up, it is in our interest to just push these projects at the highest pace that our overhead ratio has come down, and we might be able to mitigate a little bit of this inflation. So slowdown is definitely not a concern for us. What was your second question, sorry?

Yes, the private sector -- the government may become considered [indiscernible] that I'm aware, which are being applied to give some price rises. But sir, in case of a private, if we have taken a firm commitment, then there will not be any escalation there.

So we do not have much private sector order backlog. So I think hardly 10% of what we will execute this year would be from private sector. So that is not really much of a concern for us.

Okay. And next one is, realistically, [indiscernible] is concerned, are we at the close of most of the projects? Or are we starting the press? That is one question. And secondly, certain lines which are transferred to us in view of our giving them some certain shares, so are we planning to sell those lands which are taken at [indiscernible] or have you -- have we already sold it?

So real estate, you're right, real estate this year will also still not peak. All efforts are being made internally to revise real estate and put it back on a growth trajectory like EPC has already reached because we have an excellent brand. We have the team, and we have opportunities available in the market now in terms of joint venture. Currently, most projects that we have in hand are close to being started. There is inventory in [ Senegal ], a little bit in Windermere, but these are not a huge amount of effort from the sales team would not be needed here. So we're focusing on lining up new projects, and we will be coming back with a good amount of real estate order book going forward. That's the primary focus for the company, and the team is entirely working hard on it. And in terms of -- with regards to the Powai land, we have not sold it. We hold it in our books even now. And we are looking for both opportunities whether if we get an excellent sale price, then we're open to sales. But in the meantime, we are planning a project on it. And if the sale doesn't come through by the time the project planning and approvals are in place, we're open to launching a project in Powai and executing it.

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

Thank you, everyone. Thanks for your faith in the company and your interest in this call, and I'll see you again next quarter. Thank you.

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