Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Vascon Engineers Limited Q4 and FY '23 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 for the fourth quarter and full year ended March 31, 2023. Today, joining me on this 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 '23 financial results and results presentation uploaded on the stock exchanges and on the company's website. Fiscal 2023 was an excellent year for the company and perhaps the continuation of a virtuous cycle that we have managed to create, with all elements of our businesses performing well. We have been, in our past calls, indicating that the management has been focusing on the basics of each of our segments; and this has yielded phenomenal results. Improved cash flow profile backed by sale of some of our noncore assets, better operational efficiencies in the EPC segment, picking up in real estate and GMP segments have helped us in lowering our debt. Reduction of this high-cost debt has allowed us to get decent credit ratings from credible rating agencies like CRISIL and Acuité. And it opens up avenues for the company to carry forward the growth cycle that has started in the year gone by. Over the last 8 to 10 quarters, you would have seen that we have been guiding for improving quarterly run rate, and this trend continued in Q4 FY '23. From FY '21, our total revenue has almost doubled from INR 518 crores toward [ record high ] of INR 1,030 crores in FY '23. Our profitability has improved significantly from a loss of INR 40 crores in FY '21 to the highest ever INR 100 crore profit in FY '23. On the balance sheet side, cash conversion cycle has also improved. And net debt brought down to a mere INR 12 crores as on March 31, 2023. With an order book at over 3x of FY '23 revenues, a strong balance sheet, high efficiency of all business segments and our overall improved financial position, we believe we are well positioned to continue this growth trajectory in the coming quarters. Let me take you through these developments in a little bit of detail. Improved funding position. As you would recollect, we have been informing you that our credit rating has been improving. And with Acuité's rating of BBB stable for long term and A3 stable for short-term facilities and CRISIL's rating of BBB stable for long term and A3+ for short-term rating, we had commenced supplying for enhanced BG limits. We are happy to report that we are in the final stages of getting those limits enhanced. And this will allow us to significantly increase our order book position and continue the EPC execution run rate. Currently, the company has a working capital of 243 crores as on FY of 2023 and expects to increase the working capital limit by 60 crores by end of this year. The ratings have also helped us negotiate better interest rates. EPC execution and order book. During the quarter as well as for the full year, EPC revenue increased by 53% year-on-year and 22% quarter-on-quarter to INR 203 crores in Q4 FY '23. And for FY 2023, revenue increased 58% year-on-year to 662 crores. Our EPC order book has been robust throughout the year. We started the year with an order book of INR 1,832 crores and won orders worth approximately INR 600 crores in the last 3 months. We had some large order book wins in the year gone by with some marquee projects, such as the tender from Maharashtra State Police department for construction of residential and Jila Karagar At Amethi works of worth about INR 450 crores in total and our first-ever redevelopment project of 225 crores in Bandra, Mumbai. We executed orders worth 700 crores and closed the year with a total order book that stands at 2,172 crores (sic) [ INR 2,127 crores ], which forms almost 3x of our FY '23 EPC revenue, providing strong visibility of EPC revenue growth for the next 2, 3 years. Of the total orders, external EPC orders are INR 1,739 crores. And the balance INR 388 crore are from internal orders. Further, almost 78% of the order book is toward government projects, which provides visibility of faster execution and uninterrupted cash flows. Real estate continues towards growth momentum. Coming to our real estate business: As we have been explaining for some time now, the nature of the bookkeeping treatment in terms of Ind AS requirements means that there can be some timing differences between booking of expenses and booking of revenues. Now that a large part of our real estate projects portfolio has completed, we will still -- we will start seeing positive reflection on the results of our real estate business segment. Our new sales bookings in FY '23 stood at 174,000 square feet, for a total sales value of INR 118 crore. During FY '23, our real estate revenue stood at 115 crores, and EBITDA at 39 crores. Gross margin came in at 49%, while EBITDA margin at 34%. We are hopeful of maintaining the momentum in the real estate segment as we complete projects and have a good pipeline ahead. We are also tying up with realtors based in Pune, Mumbai and [ Coimbatore ]. Lastly, the GMP business has started showing better performance now. And it has continued to deliver sustainable performance in the past quarter as well as the full year: revenue of 256 crore for FY '23 and healthy gross margins of 32%. The EBITDA stood at INR 25 crore with an EBITDA margin of 10% in FY '23. Debt repayment continues. The company has been repaying a significant amount of high-cost debt over the last 2 years, and this has helped the company bring down its finance costs substantially during the year. We are happy to report that, over the past 24 months, we have reduced our gross debt by INR 79 crores to INR 135 crore as on March 31, 2023, as against INR 214 crore as on March 31, 2021. This, along with the improved cash flow generation, has led to a net debt of only INR 12 crores as on March 31, 2023, as against INR 134 crores as on March 31, 2021. We will continue to pay our debt as our cash flows keep improving. Before going through our financial performance, a little update on the overall industry scenario. The Indian budget for FY '23, '24 has been showing positive signs for economic outlook; and is expected to grow at 7%, which is a robust growth rate as compared to the other major economies that are actually seeing a slowdown, with an increase in capital expenditure on infrastructure investments by 33% to 10 lakh crore for FY '23, '24, that significantly boosts the economy. Along with that, the real estate growth is predicted to coincide with the improvement of the domestic economy. This expansion is backed by the increased activities in the companies' stronger job market and higher income levels, all of which will undoubtedly lead to an increase in real estate demand. Affordable housing is still under focus for the Indian government through various schemes as Housing for All under the PM Awas Yojana by increasing the outlay by 66% to INR 79,000 crores. Apart from these initiatives, the government has been building and constructing infrastructure mega projects, including roadways, airports, metros and so on under the PM Awas Yojana. These components will encourage both qualitative and quantitative growth in real estate investments. Coming to the financial performance of the company in Q4 FY '23. On the overall financial performance, during Q4 FY '23, the company reported a total income of INR 251 crores, as against INR 153 crores in Q4 FY '22, a growth of 64% year-on-year. In Q4 FY '23, the EBITDA stood at INR 46 crores, as against INR 13 crore in the corresponding period last year. EBITDA margin was at 18%. We reported net profit of INR 41 crore in Q4 FY '23, as against INR 6 crore in Q4 FY '22. On a consolidated basis, in Q4 FY '23, the company reported a total income of INR 336 crore, as against INR 222 crore in Q4 FY '22, a growth of 51% year-on-year. The EBITDA stood at INR 58 crore with an EBITDA margin of 17%, against INR 24 crore in Q4 FY '22. And the net profit of INR 50 crore, as against INR 11 crores in Q4 FY '22. To conclude. We would like to reiterate that the company continues to be focused towards building a strong business with focus on execution of our projects, efficiently deploying our capital, increasing our order book while maintaining financial prudence, which will enhance profitability. With this, we can now open the floor for questions and answers. Thank you.

[Operator Instructions] The first question is from the line of Manish Ostwal from Nirmal Bang Securities.

My question, on the Slide #7 of our presentation. Sir, we have seen the growth in the revenue is around 55% on consolidated basis, whereas the employee cost and other expenses were flat on a Y-o-Y basis. Can you explain why the employee and other expense is flat despite the increase in the business volume -- business growth?

This is -- you're checking quarter-to-quarter once again...

Year-on-year.

[indiscernible] FY '23 versus FY '22, yearly numbers, not quarter-to-quarter.

All right. So yes, as I've been saying for some time, like our employee capital costs, including both our employee costs as well as asset costs, are capable of performing much more than they have been performing. So we really -- we will be now having a little bit of increased employee costs in the coming year, but in the previous year, we maintained our employee costs at those levels. And the growth in top line has happened because the projects finally got executed at the pace that they were to be executed.

The second question, on the, sir, tax expense side. We have a tax expense in the P&L. It's at INR 3.88 crores. And in the cash flow statement, it is tax paid is INR 10.51 crores. So tax rate is very low, so what should be the normalized tax rate for the FY '24 for -- at a consolidated level, sir?

We still -- this year, we had carryforward losses. That's why our tax rate is very low and our PAT is almost the same as our PBT. Going forward, we will then now -- carryforward losses are all extinguished, so from next year onwards, we will be paying taxes at normal corporate rates.

Okay. Sir, on one of the slides, we mentioned that selling of the noncore assets and asset monetization, so can you help us to understand? What is the potential value we can generate form that corporate action?

So we've been discussing these noncore assets over the last 2 years in all our calls, and we are happy to report we have sort of made progress in most of them. We've even struck a deal for Aurangabad land, which is at an advanced stage, so that will also get executed. That only leaves us with Caledonia. And at a bigger level, it leaves us with what we can do with GMP; and Thane land, part of Thane land, if we view it that way. So going forward, we'll be focusing on trying to get exit from these if we get the right valuations.

So based on the current market valuation, what is the potential of those assets which -- for balance sheet of Vascon basically?

So I wouldn't want to speculate on the valuation. See -- I mean you would know better than me. You can study the balance sheet of GMP. They have been doing well. They have turned around. This year, they've done very well, and they look at growing from year-on-year-on-year. So when and at what valuation we would exit, I wouldn't want to speculate on a call, but if we feel it's good for the company and we're getting the right price, then we will take a call.

Sure, sir. And then lastly, in terms of growth outlook for the core EPC business for the next year, what kind of -- what is your growth guidance for the business of EPC?

So EPC will continue to grow. See, this year, of course, we had much higher growth percentage from last year because there was a lag due to COVID and the projects had to get executed. We do not expect the same percentage of growth next year, but we will definitely grow somewhere between 15% to 20% from this year's numbers in top line and bottom line for EPC.

Right, sir. And one last question, on the slightly longer term in our real estate business. So from a 3- to 5-year perspective, real estate business contribution into the P&L and our strategy to grow that business. How do you see that business contribute at the consolidated level?

So real estate business will in proportion -- in the proportion that it brings to our balance sheet, year-on-year from here, you will see the real estate business will grow. So far, for example, this year, it has contributed about 100-odd crores. The thing with real estate, though, is that revenue recognition on balance sheet only comes in project completion, so it's very difficult to predict on an annual basis, but over the next 3, 4 years, we have a lot of projects lined up in real estate. We are lining up even more projects. We have a robust team that is now fully charged up and geared up. And so our focus is definitely there to grow the real estate division parallelly and, hopefully, a little bit faster than even the EPC division.

So can we see a similar growth rate in terms of volume in real estate business also, vis-à-vis the EPC business, in terms [indiscernible]?

Yes. In fact -- yes, yes, definitely. You can see that growth rate impact probably better, but as I keep saying, in real estate, we'll have to average these things over 3-year periods, not year-on-year, because we do not have enough projects to be completing projects every year. So basically on the balance sheet you'll see those dips and rises, but if you average out for the next 3, 4 years, yes, you will see much more growth than what even EPC see.

The next question is from the line of Dhananjay [ Kumar ] Mishra from Sunidhi Securities.

Congrats on very strong operating performance. I just wanted to know, I mean, if you could give some color in terms of bid pipeline in EPC segment and which area you are looking in terms of bid pipeline. And you said that 60 crore limit will increase, so what kind of project you can bid, I mean, like, bid -- in FY '24?

Yes. See, we are looking to continue our emphasis on the government sector, but at the same time, we are also now actively looking for projects in AAA-rated private sector as well, so going forward, we have -- we will be looking at both directions. We already bagged about 600 crores in the last 3 months. Primarily a good portion of it was a 300-odd crore order from the Pune police housing and also an order from the UP government. Going forward, we will hopefully -- next year, our target is to increase our private sector exposure because, as of now, it's extremely low.

Okay, okay. So I mean -- and which area are you looking? I mean you are also looking in railway segment or this redevelopment railway stations project which is coming up [ at very big ] from the government push, so are you looking in those areas as well?

Yes, yes. We will look at any kind of building. So even railway stations do qualify as buildings for us, so we will be participating. There are many tenders. There are many departments and there are a huge number of tenders that get floated, so we need to pick and choose at any point of time given our limitations [ of disposals ], our limitations of guarantees and bandwidth, but yes, railway stations are definitely [ on our process ].

Okay. And the 60 crore limit, when do you expect to be [indiscernible]...

Hopefully, within the next -- hopefully, before our next call.

Okay, okay. And the second question, with respect to real estate. So if you could give some number in terms of what was the total delivery in this financial year for which we have booked about 140 crore revenue -- and recognized 140 crore revenue. And what is the delivery schedule for the FY '24? Because I -- you said that if going -- this year also, delivery will be very good and the P&L number will look good. So what is the delivery schedule in FY '24?

No. So in FY '23, we had completions from about 3 or 4 real estate projects. And that is why those revenues have reflected on the balance sheet. And the bottom lines are also reflecting. Going forward, in FY '24, we do not foresee us completing any bigger projects because most of them have just started, including Coimbatore and Kharadi. And so these projects will not be completed in the coming year. They will get completed in the year after that, so again, a good chunk of revenue recognition, we foresee to be happening in FY '25 and not in FY '24 for real estate.

Okay, so FY '25 will be good in terms of the P&L, right...

FY '24 for real estate would be a little bit...

'25.

Yes, '25 will be good, yes.

Okay. So FY '24 will be slightly softer or maybe some decline in terms of...

Yes. That's what we foresee, yes.

And in terms of these 5 projects we will have in terms of launch pipeline. So do you expect to launch at least 2 or 3 of them in FY '24?

Yes. We expect to launch at least 3 projects in FY '24...

Which one, this Powai, Kharadi and...

Powai, Kharadi. And Santacruz, we'll also be launching. And in fact, we are hopeful. We might even launch Baner before the end of the year.

The next question is from the line of Himanshu Upadhyay from o3 PMS.

Congrats on good set of results.

Thank you.

I was going through your historical calls also. It's the question is like this: Last time, the big issue was, when inflation came, cost of capital increased and projects started getting delayed. And higher input and labor costs made a lot of projects unprofitable for us. And some got even stuck, okay? How do you see this type of risk this time? And how do you minimize such a risk in orders which you may be taking now or your order book what you have? I -- this was a big issue in FY '12, '13 and '14, yes.

Yes, that's right. So I mean, see, from FY '12, '13, '14, we've learned quite a few lessons. So we have a lot of smaller things that we do within the company's discipline that we follow to minimize our risks or our exposures or to ensure that the amount of money that is lying outside with our client is minimized. This is to do with the kind of clients we pick, the kind of projects we take, the terms at -- which we take for different clients. For government sector, of course, you don't get -- negotiate terms. We cannot just choose which department we want to work with. In the private sector, we have strongly been negotiating terms in our favor and ensuring that we do not have [ assets lying ] on the other side of the table. Also, having said that, to do with inflation, there is only so much we can do in costing. If we can be -- cost for a project, we do provide for a little bit of inflation over the 2-, 3-year project period. You must note, however, that most of our key materials are generally covered by the contract either as a pass-through base rate or through PWD indexations. So therefore, we get -- the inflation on those items are covered for us. It's only very few items that do not get covered. We take a little bit of a buffer for those when we cost and bag the project, but yes, if something really unprecedented happens like it happened 3, 4 years ago. In COVID, for example, the prices shot through the roof within a 6- to 8-month period. That is when we feel the heat, but otherwise, generally the way our contracts are structured, we should not be feeling the burden of these inflations.

And so if I should understand that, the cash -- the critical difference between us today and in FY '13, '14 will be the cash lying in the -- or uncollected for the work we have done is much smaller than what used to be at that period of time [indiscernible]. And we would have slightly higher building inflation in most of the projects.

Yes; and more importantly, the terms we are having with each of the clients we choose. For example, private clients, bank guarantees or the assets that have to be funded for their projects, we get them to fund it. We do not put up performance guarantees. Also for example, earlier -- I mean the small things since you brought up the topic. There were -- we used to have our advanced guarantee line with the client. While we recovered the advance, there was still a guarantee line with him for even portions of the recovered advance. So now we give these guarantees in much smaller portions and keep taking back our guarantees for the amount recovered. So these are small housekeeping issues, which the lessons have been learned. And we are very careful on all these accounts.

And secondly, I mean, on the -- [ I mean to the subsidiaries that we want to sell ], but what will be the priorities? And what is the business looking like in FY '24, '25? Because generally, valuation will depend on future prospects of the business, okay, so...

Yes. If you see, in GMP, over the last 2, 3 years, they have also -- just like our EPC division, the growth has stabilized. They have come out of whatever issues we had. And the bottom line this time has also -- the percentage EBITDA has stabilized. We look -- going forward now, it is a matter of growing. And I think that we -- they are also predicting -- that division is also predicting to grow at -- same like our EPC division, to grow at about 15%, 20% year-on-year for the next 2, 3 years. And the bottom line percentage would only slightly improve with scale.

Okay, okay. And the orders, what they are taking, will it be significantly higher? What is -- will be at same time last year? Or anything you can give on the business traction on that company?

So they have -- if they are to grow at 15%, 20% year-on-year, obviously their order intake would also have to increase. See, for GMP, their orders are normally extinguished in a much shorter period than, say, for EPC. So in EPC, while we say we start the year with X and then we expect to do it by 3, for GMP it's totally different because their orders are -- they do not last such a long period. So it's seeing their order book at a particular point of time would not help. Seeing what exactly they bagged over a year would help us assess. And yes, definitely they'll be bagging more orders going forward to keep the growth.

And Himanshu, GMP is currently having order book [ with ] more than 200 crore lying with them. So this is [ time condition ], so -- as it's been said that the order keeps on coming every month every quarter. So GMP's growth is -- significant growth is expected next year also, is continued.

Okay. And lastly, as a company, in the top management -- the debt has been reduced to minimum, okay? So one of the priority targets has been achieved, okay, but let us say, for next 3 years, okay. What will be the top 3 priorities or targets you want to achieve? One is done, but now if we take a clean slate, how do you model the company and the targets you will be -- are setting for next 3 years, though?

Targeting...

So for the EPC business, see, we do not want -- so it will -- there is 3 different businesses, so each target and each criteria will be different. On the EPC side, we want to increase our working capital limits primarily for the non-fund-based. So our non-fund exposure will increase because there is no choice. It -- there is no way you can have growth without increasing your non-fund risks. So those will continue to increase. However, we will keep a cap on our CC limit and use it very prudently. Again it's a business call that sometimes we have advances available from clients at reasonable rates which help us tie along. At some times, it is better to use a little bit of your CC limit to keep the projects running, so we expect the CC limit to go up but -- or not too much, very marginally. On the real estate side, we will be funding our projects on a case-to-case project-to-project basis, so definitely we will be taking the construction finance or some nominal debt in the beginning of the project, if needed, case-to-case basis at the project level.

Okay, okay...

[indiscernible] -- see. Going forward, for this year, we would want to focus that on our -- improving our rating also by a notch or 2 and then renegotiating our terms with the banking consortium so that our terms are much more efficient. As of now, we still feel we are not getting the best of terms. [ We haven't backed ] performance for a while. Now that we have performance on our side, we would want to negotiate our terms with the bank this year.

[Operator Instructions] The next question is from the line of Rishith Shah from Nuvama Wealth.

Congrats for a great set of numbers. So firstly, continuing from what the previous participants already asked: So on the EPC side, when we said we have some filters while bidding for an order or similar. So can you kind of quantify? What are the filters? Is it some higher set limit or a target margin that we see while bidding for an order?

Yes. So see, the first thing is we continuously look for a design-and-build EPC mode project. So even the governments are coming up with this mode of contracting. The private sector can be receptive to it if we give them a competitive offer. What this mode of contracting does is it gives us some competitive advantage. We have a huge amount of in-house strength in architecture, engineering. And we are very confident to use these strengths and add design efficiencies, which creates a win-win situation for us and the client. And that sort of covers a couple of basis points of risk for other things that an item rate contract doesn't cover. So that is one thing which we'll keep doing as a focus point to increase our margins a little bit. The second thing is, as I said, it depends on the client. If we are now dealing with a, I mean, non-AAA private client, if I may say so, then we are very careful with the terms which we negotiate with them. So we do not put up our -- performance guarantees even if it means at the end we don't bag the order for that purpose. We are very careful, so we do not put up performance guarantees. We do not fund the capital acquisition in terms of aluminum shuttering or huge amount of equipment that needs to be funded for the project from our pockets, so we ensure that it is funded by the clients. It could be recovered from us over the project period, but the initial funding, we put it on the client side. So we -- as I said, in terms of retention bank guarantees or other bank guarantees, we give them in smaller pieces so that we can keep pulling out bank guarantees as and when they are due to us rather than leaving a big chunk with the client. And yes, on -- we ensure that our -- see, there's only so much you can do in terms of a rate because there is competition in the market. If I say I want 20% margin, I may not be in the game at all, so we do -- but at the same time, on the private sector, we do not cut rate to a point that it's below 15% gross profits or anything because we would rather then work on the government sector. There's enough projects, so we are not extremely aggressive or desperate, if I may say so, to bag projects from the private sector if our terms are not met.

Got it, got it. Makes sense. And secondly: So do we -- and kind of I know the concentration right now is on the building side or the civil side, so any plans to, I mean, kind of diversify into other segments?

As of now, in the immediate short term, no. I think there's enough work out there in the building. There are so many departments, so many kinds of buildings. And the private sector is again opening up. There is -- so there's a lot of work in the building sector across the country, so as of now, no active plan to deliberately diversify into non-building.

Right, great. And thirdly, on the real estate side. So basically we have a good-enough pipeline on hand right now, but I just wanted to understand the thought process in selecting a particular project or entering a particular area. I mean, how do you go about that? So what is the strategy behind selecting a particular project or a particular target audience or target city or the location that you select?

So as of now, our cities that we are working in are only Pune, Mumbai and Coimbatore. So in the immediate term, we do not have any intention to expand geographically and going into other cities. We'll be focusing on these 3 cities, where we've already established a brand name and we've delivered projects and we have recognition and strength. In Bombay, given the type of our company, we feel what's best suited for us is niche redevelopment projects like the one in Santacruz that we have bagged, so we will be looking for similar projects going forward. Those projects might be small in terms of square footage, but they'll be visible. They will be reasonable in terms of top line, bottom line for us. In Pune, we look for joint -- in Pune and in Coimbatore, we look for joint ventures. Again we are not now looking for huge parcels like we used to 10, 12 years ago, 50-acre township projects. We are now looking for not more than 4, 5 acres of land; not more than 1 million square feet in a project that we can deliver over a 3-, 4-year period and move on. So that is our strategy as of now to do with -- and as I said, we are not looking at land banking. We will be looking at joint ventures. So yes, that is the strategy for real estate.

The next question is from the line of [ Kunal Jain from Jain Securities ].

Congratulations on a good set of numbers, sir. I just had a couple of questions. Firstly, sir, I just wanted to understand. In the presentation, we had mentioned, for Forest County, that collections have been INR 56 crores, but no revenue has been recognized. If you could you -- explain, sir. I mean, how does this work, the revenue recognition for Forest County?

So this Forest County project comes through a company called Ajanta, where we are, I think, 50% stakeholders. So that is AOP. And so what happens is they are not able to -- we only get profit share that is recognized on our balance sheet. We do not get to recognize the revenue from there onto our balance sheet.

Okay, okay, okay. And sir, second question was regarding Ajanta Enterprises, sir. And you have mentioned that you've got a JV partner -- yes, you've got a JV partner, and hence there has been some agreement for sale of FSI, so can we just talk about that, sir?

Which company are you talking about?

Ajanta, Ajanta Enterprises. I think you had mentioned one of the JV ventures has entered in some sale of FSI through some party.

No. Sale -- so we sold -- last year, we did sell a portion of the land that was there in Ajanta. That was last year. And we did sell some TDR this year. It's not a joint venture. It is actually a profit-sharing partnership that we have in Ajanta where we have 50%. And there are 2 other partners in that company who hold the balance 50% and, yes -- but no other sale of assets in that -- I mean no other sale of land in that entity. There's a little bit more parcel that is available there which we intend to develop going forward.