Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

And one thing. So for a project where the project has been sold, okay? And the cash flows, which will be coming from that project in, let's say, residential real estate, what is the cost of funding if we have a, let's say, INR 100 sales done, and this is going to be a correction over, let's say, next 3 years when the project gets completed and half will go to construction, but the rest half is -- so what type of cost will it be? And is there a significant arbitrage if we have construction with real estate projects we have, and we can hypothecate the cash flows? Any thoughts on that? Means we may not have to take that 18% cost of debt. So just trying to understand what is your experience and can it be a possibility in the future?

I think -- see, we are getting unnecessarily swayed by the NCD that is part of this Board meeting, which is only an INR 10 crore NCD for a specific purpose, as I mentioned. And so our intention is not to be taking debt at 18% in these numbers because of specific purpose, short-term, unsecured debt, which is quickly available, we needed it in very short term. We did not have time to go through bank procedures. And we intend to extinguish it also fast. This is specifically for EPC. Now on the real estate side, our strategy is to be doing joint ventures or redevelopments. Therefore, we will not be having land in our books, we will not, therefore, be needing any capital to procure land, which would majorly funded by equity or debt. And so our borrowing would be limited to a little bit of construction finance. What we would have to invest is a little bit of marketing cost initially to launch the project for an approval extensive for Phase 1. And then we will be getting construction finance at a very reasonable rates to tie up. And those will be very small amounts, project specific, which will again be extinguished within the tenure of the project within a year or 2 as we move along on the project. We do not get to recognize revenue till the project is completed due to Ind AS. However, we do get to collect cash flow and utilize those cash flows. So normally, as long as land is not in our books, and we are not funding land to become cash positive on these projects is not at all difficult. Even if we achieve 30%, 40% sales, 50% sale, the cash flow collections that come based on the stages of collection, they will ensure that we are cash flow positive. So we -- I don't think there's a concern of having to borrow at high cost to fund real estate.

And one thing, the JD, JV's what we do, okay? What is the risk of inflation in these projects, okay? And how do we minimize that risk because you give area share, and with the cost of construction goes up the profitability. This may be a novice question, but just your thoughts on how do you generally structure the JD's/JV's?

So you're right. I mean the JV is either a revenue share or an area share. Normally, we prefer a revenue share model because I mean the landowners generally prefers the revenue share model because he doesn't have the wherewithal to sell. So we have a metro account whereby the stipulated percentage of collection goes towards the landowner and the balance comes to us. The risk of inflation is there, the only saving grace for us is that we do not end up selling everything on day 1 and then construct for 2.5 years. we do have stock in hand, we do sell as we go along. And generally, as you know, every real estate player in the country, we do get a bit greedy for the last few phases. Once we have secured our basic cash flows to ensure that the project will run smoothly, we do hold back a bit of the stock to be sold at a later date towards completion because the prices that you can get towards completion is always better than what you will get at launch when the product is almost delivered. There are quite a few customers who want to get their house within 2 months. and not wait for 3 years. So -- and the price increases. So we do always hold some stock towards the end. So that is sort of a buffer to help us in case there's been too much inflation, then we can sell those obviously at higher prices because the market would have gone up. But having said that, inflation is also covered by us in our costing assumptions when we consider our construction costs that we will be considering over a 2-year period and therefore, 5% to 6% per year, about 12% will be the cost of inflation that is considered in our costing before we launch the -- or start selling.

And one last thing, this GMP technical solutions, which we want to hive off, and we have made our intentions clear for a pretty long period of time on this. What is the progress? And any change in your views or we are very clear? And any time frame we want to have on this business of hiving off or whatever structure you want to do?

So there is no change in plan. We will definitely want to take an exit, it's a noncore activity for us. The management of Vascon are all civil engineers, and we have huge experience in building a brand in real estate, in Pune and in turnkey contracting across India. This is what we understand. This is what we are good at. And this is what we will back ourselves to be doing, and we will not be bringing to the shareholders any other expertise because this is what we have on the table. So we do not want to be answerable on holding of hotels or holding out GMP where we are not experts. So there's no difference in the strategy. You are right. The strategy has been made clear more than 5 years ago. And in line with that, we have step-by-step exited whatever else we had, we have exited from a couple of hotels, we exited from a few landholding parcels. Now primarily, what remains is Thane land, which we can utilize within our expertise of real estate and what remains with GMP. These are 2 big assets. These are big, big elephants in our balance sheet, which we do not want to be in a hurry or in a desperation to this hive off box because that's our strategy. We will definitely exit these, but at the right valuation. As far as GMP is concerned, the technocrats running the company are definitely incentivized themselves and are focusing on ensuring that there is a steady -- just like they have been doing on EPC in Vascon over the last 8, 10 quarters, you will see the steady top line increase, we have steady bottom line increase. So we want to achieve the same graph for GMP so that when we go to a suitor and there is credibility when we project a graph that this is what the EBITDA can increase to. So once we achieve those -- and we are on track. GMP has been doing well over the last 5, 6 quarters, maybe another 3, 4 quarters if they continue that graph and we have a credible growth story, which is backed by 10 quarters of what we have achieved, then we will take the story out and see what valuation, good valuation we can get, and we will look to get out of that.

[Operator Instructions] We will take the next question from the line of Bajrang Bafna from Sunidhi Securities.

Congratulations for good set of numbers. So my first question pertains to, you have already clarified the kind of order intake that you're looking at. Just to broaden that sense, what sort of critical threshold of margins that we are targeting because in last time, if I recall it right, you said that we are looking for projects which can have 10% sort of margins. So any broad sense that the projects that we are looking at because we have, let's say, the BG limits, which are not available. So we have to take some sort of cost element in terms of higher cost debt which we are doing right now. So considering all those aspects, if you could guide us what segments especially into this building side that we are looking at where we can generate 10% or maybe slightly higher margins? That is my first question, sir.

Yes. So that has always been an endeavor that we want to be selective and ensure that we take a project on day 1, which we see there are margins because once we've committed to a project, our resources, our bandwidth, everything gets committed for a period of 2 to 3 years. And if the margins are very low, then we are wasting our resources, our top management time on not adding value to shareholders. So we're very careful that we try and enter projects which we see margins. One way we always do this is by focusing on design and build projects because our strength is in design. And when we have a design and build project, we are able to use our design expertise in all engineering aspects and see if we can make an optimized solution that squeezes out 2 or 3 percentage points more of margin for us. So the government is also now very happy to be floating tenders in this mode. A lot of departments are floating tenders on a design and build basis. So we focus on these to try to back orders in this mode of construction, which is our expertise. So that way we are able to sort of protect the margins that we want. But having said that, we are up against competition. We might want to have double-digit margins and that will definitely be the goal as we increase our top line. Hopefully, our PPP will reach that 10% on the EPC segment next year. For that, we will have to be at 15% gross at the project level, which is what we aim, so far we've been fairly successful in doing this is what I could say.

Okay. And sir, I hope that this year, we are going to close the year on EPC side close to INR 600 crores kind of run rate for this year, what sort of guidance that you could put in because you already indicated that the closing order book could be to the tune of INR 1,800 crores to, let's say, INR 2,000 crores. . And can we expect the number to substantially go up next year? Because if we go through the budget documents also, which is putting a lot of thrust on the infrastructure side where the huge sum has been allocated. And I am genuinely seeing most of the -- one side, the government is indicating huge, huge budgets. But the people like you and even I would not name, but I know a lot of your competitors who are doing the similar business are also struggling for these BG limits. It's not only you who is struggling right now. I can name 10 people who are struggling for the same problem right now. So what is that, which is prohibiting these banks because this is really I need to understand because it's not a problem of Vascon. It is a problem of all those EPC contractors who are struggling to get BG limits from banks right now. So that is really something which is you people should come together and fight with the system because that is not your alone problem. And because of this, I'm seeing that all of you are just handling back your hands to go aggressively and bid for orders and work good for the country. So this is something which is really -- I'm not able to understand and appreciate that one side, there is a huge push, which is coming from the government. And on the other side, banks are blocking their hands and not lending to the sector so that this can perish. So how this game will be accomplished? So if you could just throw some sense because since you are a veteran in this industry, could help us to understand that?

So I would -- I'm very happy to hear what you said because you've got it spot on. It's not that the contractors do not meet and discuss this. You've got it absolutely spot on. The government wants to push, they announced in every budget, and there is intention from so many governments and so many divisions to construct. But barring a couple of extremely big business houses who are able to secure their BG limits through various assets that they have, most of the mid-level contractors are struggling to get BG limits from the banks because the banks view EPC as a negative sector for whatever reason, they've also gone through their own set of trouble with this sector in the past 2 years, there have been encashments. And so the bank has made it much tougher. They want huge margins. They are not ready to give easy limits, and they want huge collateral. Now whether to view this as a good or a bad is something which we are also confused on because let me be very clear. The BG papers are always a risk on my balance sheet and the bank's balance sheet at the cost of the client. Now I am not very happy putting these BGs up either. Why do I have to put so many papers up to a client just to take a clause from him, whether he's a government or a private client. And these papers seem like easy paper to put up on day 1. But end of the day, they are a huge work for me, they are a huge risk for the bank. So if there is -- the whole game has to -- for example, 2 years ago, due to the pandemic and due to struggle, the government did come up with a scheme that instead of 5% performance bank guarantee, they will reduce to 3%. That was a good relief. We got quite a few projects where we were able to only keep 3% of performance bank guarantee. Now they have lifted those limits back to 5%. This, exactly what you said, is happening, this will -- the government will realize that contractors are not able to participate the way they want to participate in the growth story because of these funding blocks. Something will -- either the bank will have to make it a bit easier for us to procure these limits or the clients would have to expect lesser guarantees on these projects because otherwise, the story that is -- it will not be able -- it will not happen, what the government wants will not happen. So you're absolutely right, something has to give in this. I hope the client that is the government sector generally doesn't ask for so many guarantees because that will make it easier. Because if the banks give it easily, it will sort out all the short-term things, but the risk remains on my balance sheet.

Got it. Because just a 10%, 11%, 12% margin business, around that so much of struggle ...

Exactly, exactly.

And the cost that gets built up, where the true companies will earn money. So that's really sad. And I recently heard L&T con call also where they're talking about they moved out of bidding from road projects because we don't see any margin threshold, which is there in that entire business, and our country is saying we'll build highest ever routes. So if the builder is not getting what he deserves, then how can we expect the quality to come through? That's really sad.

Absolutely. That is there. I mean, see I think -- but having said that, there are a few -- I mean the government keeps learning step-by-step. And if there is an intent, I think step-by-step problems will get addressed. Like I said, in COVID they immediately realized and they brought down the limits to 3%, now they have made it 5, but I think sooner or later, the government will realize that the kind of bank guarantees for advances and performance that they expect projects will not get grounded. Secondly, one good thing, as I said, is the government has been giving a lot of projects on design and build mode. So I think there is a learning there that design and build is where they are able to get the best price for the tax payers and the best quality for the tax payers and they're able to incentivize the contractor to probably use good skills and make some money as well. So it is a win-win position with more than the private I am seeing the government has learned and the government is floating tenders in this mode. So this is encouraging. So hopefully, government will react fast enough to sort of address this BD issue. As I said, I mean, one way to address it is for them to talk to the banks and say help the EPC sector out. But I would -- rather they address it by saying, okay, let's ask for lesser guarantees in the first place. Why put so much up -- so let me -- but in the meantime, we are too small to [indiscernible]. So we keep putting up in all forums that this is the problem for -- at the country level. But in the meantime, we are hoping to secure INR 50 crores, INR 70 crores of BG limits so that we continue to keep our 20% growth story alive.

Yes. Yes. Got it, sir. And the only reason we are looking at your company is that there are hardly any balance sheets which are having this kind of debts. You are almost virtually debt-free and if we talk about the Thane land and the land bank that you are holding, it's a surplus probably the paper liquidity right now, but once you monetize it will be a net liquidity to the company. That is the whole purpose to look at from that perspective that you have got a lot of inner end value, which will be realized over a period of time. So just to get a sense on my question, which I asked on the first part, next year kind of the growth that you are looking at broadly and as per your -- I'm not saying that give us the exact number, but the kind of some ballpark indication 20% growth or 30% growth that you are looking at for next year would be really helpful? And on a console level, what sort of margin that you are looking at? I got a sense on the EPC side, but the other real estate is hopefully on the higher margin side and again, your GMP is on a lower margin side. So console, what is the ballpark target that we are putting for next year, if you could guide us, it will be helpful?

Sure. So yes, I appreciate you highlighted that our debt is very low. We have worked very hard on that over the last 3, 4 years in spite of corona to ensure we come to close to 0 debt level. We were quite high 3 years ago. And so we're very happy that in spite of tough times, we have reached here, this helps us even with bottom line because the interest cost is now drastically low. But having said that, while that is from a balance sheet point of view, a very good reason to hold our thought, let me also reiterate to you, we are at a position where we are not a very big company, so it is still easy for us to keep our growth story alive. And secondly, as I said, design, build mode of contracting is becoming more and more popular from the client side. And that is where our strength is. We are in the top 3, 4 contractors in the country who can offer competitive bids on a design and build. And so we are very bullish that to keep our growth story alive and deliver and keep making the double-digit margin for our shareholders is not going to be a big challenge. The only small challenge as of now is the BG, which as we already discussed, to hopefully pan out in our favor soon. And so -- and to answer your second question, guidance for next year, so what we've been growing this quarter -- this year was, of course, abnormal growth, I would say, compared to last year because all the pent-up growth that was pending from corona and all that has got unleashed now. We were to be doing INR 500 crores last year, we didn't, and now finally we will be doing close to INR 600 crores or plus INR 600 crores this year. And then from next year, my guideline would be in the range of 20%. We should target to continue our growth story for the next year at least. And then we will provide our outlook for the year after that, depending on the BG limits. Because if the BG limits are sorted and I have INR 100 crores extra BG limits, then even I can look at 30% growth also by booking a bit more because of our capacity to deliver is in the upwards of INR 1,000 crores. So we are still performing under our capacity in terms of assets and senior staff bandwidth. So we will reach there very soon, and then we'll take it forward from there.

Okay. And putting real estate together because I hope that this year will be close to all put together INR 1,000 crores on a console basis. So how that is going to look like next year broadly on the -- including real estate side? Because that is how we are aware that what we're going to deliver next year on real estate side.

So all 3 -- so I tell you, real estate over the next 3, 4 years is set to grow, like EPC has suddenly grown, real estate we have a separate team fully focused on ensuring that real estate grows in a cautious manner without -- obviously without buying land in the next 3, 4 years. So we are working on lining up projects, there are at least 4, 5 new projects that are being lined up. But the real estate revenue recognition will always come with a lag. So you can expect that in the next 4 years, we will have on an average at least INR 200 crores, INR 250 crores of real estate recognition impact -- total real estate recognition in our book over the next 4 years on average. But what exactly will come next year depends on project completion. We've had 3 or 4 completions this year. So we have some revenue recognition. Next year the real estate revenue recognition might take a back seat, but it will come the year after. So if you were to plot it out over the next 4 years, we will definitely have easily on an average, INR 250 crores to INR 300 crores of real estate per year. ECP will continue to grow at 20%, and GMP will also continue to grow at 20%. So yes, INR 1,000 crores this year should look at 1,200 next year and so on and so forth. But as I said, the only qualification I would like to make is because of rates, real estate might not come on to the books, then so this projection might look off. But in general, it will be happening.

Got it. Got it. Got it, sir. And all the very best for your good performance going ahead.

[Operator Instructions] We take the next question from the line of Rahul Shah, individual investor.

My question was on the line of the margins as well, and I believe sir has explained that very well. So I would not like to repeat. Thank you, and good luck.

I would also like to just give this plan since we are discussing margins to point out that these 3 quarters and we don't expect anything in the fourth quarter as well, this year, whatever PBT, PAT, EBITDA, whatever we see is entirely operational, not a single crore out of that has come from one-off sales because the case last year, our profit last year was by way of selling an asset. This year, whatever we see is from both real estate, GMP and EPC, from all the divisions, the hard work profit coming from operating margins.

That's quite helpful. Thank you.

We take the next question from the line of Mr. Tushar Sarda from Athena Investments.

I wanted to understand how you look at the profitability of real estate business? Because what I see is your annual sales rate is around INR 100 crores and quarterly overhead seems to be around INR 5 crores, INR 6 crores. So how does one look at profitability of this business if you can explain.

Yes, it's a good [indiscernible] ...

Your pipeline is good, but ...

You're right, you're right. I'm very glad you asked ...

Your current business seems to be very high.

You're right, you've got the numbers right, we were at about INR 20 crores per year overhead directly and therefore, INR 100 crores is only a breakeven top line for real estate. This was where EPC was stuck at INR 300 crores 3 years ago. If we do INR 300 crores in EPC, we do breakeven. When we do INR 600 crores, we see the EPC. Similarly, real estate will only see the profits when they cross INR 200 crores of top line. So that's why I said, we're working very hard to ensure that we are well above INR 200 crore of top line delivery in real estate sector alone, then that will more than cover for these overheads. Otherwise, we are breaking even at INR 100 crores, breaking even in real estate. So you got it bang on. The second point, to answer your question, we are looking at real estate as glorified EPC. In EPC, we are looking to get 15% gross profit, it will translate to 9%, 10% PBT. In real estate, we look to get 25% gross profit, which will therefore hopefully translate to 15% PBT down the road when we do INR 200 crores to INR 250 crores per year. So that is the only difference. It is still harnessing our construction and design strength, adding a little bit of sales and marketing. We are not looking at huge financing costs because those will be on either through partnership from someone, if there is equity from someone or we're not even looking at land cost because that share is to the landowner. So what we are focusing on is 1/3 of the real estate story which is construction, design, build, marketing, sales. That is the story we are focusing on. So in that setting, I think 25% gross profit is what we could expect, yes, in the hope we will translate to about 15% ...

What would be your sales guidance for next 2, 3 years in real estate, what kind of run rate for the next year and the year after?

Yes, if we take a 4-year period starting from next year, then definitely, we will do more than INR 1,000 crores in that period. How much of it is on quarter-on-quarter is very difficult to predict at this point because we're lining up new projects. To be honest, next year, we might not be finishing many projects. This year, we are finishing at least 3 of our old projects, which means next year, we might not have any completion certificate coming in, except maybe 1 or 2 small projects. And therefore, while we will be doing our hard work collecting a lot of real estate cash flows as well, but we will not be seeing revenue recognized. But if you look at a 4-year period, we will definitely do more than INR 1,000 crores. I'm giving a conservative estimate here. We will do more than INR 1,000 crores of real estate revenue to Vascon. And over a 4-year period, that translates to on an average INR 250 crores per year. And if you do INR 250 crores per year, we will definitely see the PBT from the real estate division.

[Operator Instructions] As there no further questions from the participants I would now like to hand the conference over to the management for closing comments. Thank you, and over to you, sir.

Yes, I'd like to thank everyone for participating and taking interest in our company. And I'll see you again next quarter with hopefully even a better set of results. Thank you.

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