Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Vascon Engineers Limited Q2 and H1 FY '24 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 second quarter and half year ended September 30, 2023. Today joining with 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 Q2 H1 FY '24 financial results and results presentations uploaded on the stock exchanges and on the company's website. During the first half of FY 2024, company saw a steady momentum for the overall business. Our EPC witnessed a flattish revenue growth. A few of the EPC projects have been completed during the quarter, and we expect pickup in growth momentum for Q3 FY '24 onwards, as the company has won new orders amounting to INR 1,034 crores in Q2 FY '24. In terms of profitability. Stand-alone EBITDA margin has been maintained at a healthy 14% in Q2 FY '24. Our outlook for the EPC segment remained strong backed by the strong order book of INR 2,854 crores. With an order book at over 4.3x of FY '23 revenue, a strong balance sheet, high efficiency of all business segments and our overall improved financial position extended BG limits and having received new orders during the quarter, we believe we are well positioned to continue this growth trajectory in the coming quarters. Let me take a few minutes to restate our recent development, which had built a strong foundation for the company to grow on. Improved credit rating. In July 2023, CRISIL upgraded with credit rating to CRISIL BBB+ from BBB for long-term facilities and CRISIL A2 from A3+ for short-term facilities and with the upgraded rating, our BG limit has been increased during the quarter, which allows us to grow our order book position and continue the EPC execution run rate. The company has received the sanction letter from Karnataka Bank for INR 50 crores working capital limits and expect to increase the working capital limit to INR 480 crores by the end of FY '24, from INR 303 crores currently. The ratings have also helped us negotiate better interest rates. EPC execution and order book. During the quarter, EPC revenue increased marginally by 1% year-on-year to INR 157 crores in Q2 FY '24. A few of our EPC projects got completed during the quarter. However, we have received some new orders through the execution [indiscernible] and we expect Q3 FY '24 onwards, the execution run rate to regain its growth momentum. A quick update on our order book position. We started the year with an order book of INR 2,172 crores, executed order book worth INR 302 crores in H1 FY '24. And we have won new orders worth INR 1,034 crores in H2 FY '24. Recently released orders include a letter of acceptance of INR 513 crores for construction of Lohia Medical College and Hospital, including hospital and residential building at Suphal in Bihar. We've also received an LOI for INR 222 crores from [indiscernible] Company India, which is a Government of India enterprise, for construction of government medical college at Kanker District, Chhattisgarh. We also received an LOI for INR 299 crores from the Jharkhand State Building Construction Corporation for construction of the remaining work of medical college and upgradation of district hospital at Koderma. Our total order book as on 30th September '23 stands at INR 2,854 crore, which forms almost 4.3x FY '23 revenues, providing strong visibility of EPC revenue growth for the next 2 to 3 years. Of the total orders, external EPC orders are INR 2,476 crores and the balance INR 378 crores from internal order. Further, almost 87% of the order book is towards 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 mentioned earlier, the nature of the bookkeeping treatments in terms of Ind AS requirement means there can be some timing differences between booking of expenses and booking of revenues. Now that a large part of our real estate project portfolio is completed, we will start seeing a positive reflection on the results from our real estate business segment from next year onwards. New sales booking in H1 FY '24 stood at 84,821 square feet area for a total sales value of INR 74 crores. During H1 FY '24, our real estate revenue stood at INR 78 crores and an EBITDA of INR 26 crores. Gross margin came in at 45%, while EBITDA margin was 34% in H1 FY '24. We are hopeful for maintaining the momentum and real estate segment, considering the good pipeline ahead. We are also tying up with realtors based in Pune, Mumbai and Coimbatore. In our Real Estate segment, we have already launched 1 project in FY '24, and we are currently in the process of launching 2 more projects this year. However, current year declining real estate revenue will be compensated by EPC sales for the year so that the total top line will be maintained compared to the previous year. Lastly, the GMP businesses has started looking healthier and performance now, and it has continued to deliver sustainable performance in the past quarter as well. Revenue of INR 114 crores for H1 FY '24 and healthy gross margins of 32% with an EBITDA at INR 8 crores with 7% margin in H1 FY '24. The debt position. The company has been repaying a significant amount of the high cost debt over the last 30 months, and this has helped the company bring down its finance costs substantially during the year. We are happy to report that over the past 30 months, we have reduced our total gross debt by INR 38 crores to INR 177 crores as on September 30, 2023, as against INR 214 crores as on March 31, 2021. However, during the half year, gross debt has increased by INR 40 crores, majorly on account of entering into new joint venture for real estate as well as certain amounts being utilized at bid bond money [indiscernible] new orders won by the company, where [indiscernible]. This has led to increase in our net debt to INR 73 crores as on September 30, 2023. Before going through our financial performance, a little update on the overall industry. As per the industry process, India is becoming a favored destination for foreign direct investments in the infrastructure sector and Government of India has provided supportive measures. [indiscernible] such as National Infrastructure Pipeline, Gati Shakti, SagarMala, Bharatmala, Udaan and Maritime India Vision 2030, among others, have created a lot of opportunities in the infrastructure sector. It also reflects the potential revenue on investments in India rapidly growing infrastructure industry. As per the CRISIL, India is expected to double its infrastructure investment in the upcoming 7 fiscal years ahead of 2030 to reach over INR 143 lakh crores compared to the approximately INR 67 lakh crores invested between the fiscal year 2017 and 2023. This is a significant increase. An outstanding amount of this investment almost INR 37 lakh crores is designated for greenfield project. This is a 5-fold increase over the last 7 fiscal years. This is underlying with an order to sustain India's strong infrastructure investment merited over the long run, consistent policies and strong regulatory measures are required. Larger projects and more mega scale initiatives will characterize India's infrastructure development of the future, necessitating the active participation of all stakeholders. In the recent reports, the real estate consultancies reiterated that India's residential market has displayed a robust growth trajectory in the real estate market and seen a 12% year-on-year growth, an increase in demand for residential units. With the mid-and premium categories reflecting a majority of revenue and affordable category witnessing of all-in volume, the fundamental structure of the industry has undergone a significant alteration. Coming to the financial performance of the company in Q1 FY '24 -- Q2 FY '24. On the overall financial performance, let me start with the stand-alone numbers. During Q2 FY '24, the company reported a total income of INR 176 crores as against INR 183 crores in Q2 FY '23, we saw a degrowth of 3% year-on-year. In Q2 FY '24, EBITDA stood at INR 25 crores as against INR 26 crores with a marginal degrowth of 4% in the corresponding period last year. EBITDA margin was at 14%, and we reported a net profit of INR 20 crores in Q2 FY '24 as against INR 22 crores in Q2 FY '23. On a consolidated basis in Q2 FY '24, the company reported total income of INR 235 crores as against INR 235 crores in Q2 FY '23, a flattish growth year-on-year. The EBITDA stood at INR 29 crores with EBITDA margin of 12% against INR 29 crores in Q1 FY '23, and the net profit of INR 21 crores as against INR 23 crores in Q2 FY '23. 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 all enhance profitability. With this, we can now open the floor for question and answers. Thank you.

[Operator Instructions] The first question is from the line of Mr. Himanshu Upadhyay from o3 Portfolio Management Services.

Congrats on a good set of numbers. My first question was, in the previous quarter, we said that GMP is expected to grow by 10% to 15% in top line and 20% in bottom line in FY '24. But in first half, we have not seen any growth. We also said that there is a sufficient order book and hence, we expect good growth. Can you elaborate what happened there in the first half? And why it is not the growth which we expected is not happening?

See, basically, if you look at the year-on-year basis, definitely GMP will have a growth of 15%, 20% growth, what we have already projected and that is very much on the cards, but Q2 is always [indiscernible] for the GMP also, which previously also observed for couple of times. But currently, GMP is having a significant order book [indiscernible] order book in their hand, and it is mostly [indiscernible] of 6 to 9 months period. So we are not seeing any major changes in terms of Q3 and Q4 to get that kind of growth what we have projected. So we are very much on the track both on the top line and bottom line.

And 1 more thing. We have seen the loans from NBFCs have again increased by INR 50 crores something, okay? So should we assume that all these are for residential land payment in the residential business? Or...

As we have already mentioned, it has been utilized for the growth capital. If you have gone through the presentation given by Dr. Santosh, it's clearly mentioned that the growth capital both for [indiscernible] into the real estate as well as bid bond money and growth capital for EPC for the new [indiscernible] for that it has been used.

Your voice was not clear. Can you just repeat it?

It has been -- if you have gone through the presentation given by Dr. Santosh, it is clearly mentioned that the money has been utilized for the growth capital for both real estate and EPC. We entered into couple of joint ventures for real estate and already bagged INR 1,000 crore order. For that, we have increased some of the working capital as well as this bid money. All this thing has been utilized. [indiscernible] moving ahead.

For working capital, we can get the finance from banks, so...

See, for that, we need bank assessment which is underway. So whatever the existing assessment that working capital has been fully utilized. So our revised assessment is underway. So we are expecting almost INR 200 crore growth in the working capital limits, both in [indiscernible] put together.

The next question is from the line of Mr. [ Rajendar ], who's an individual investor.

Yes. Am I audible?

Yes.

I'm [ Rajendar ]. I have 2 quick questions. My first question is, in your recent EPC order gains, you got a few medical colleges and hospital contracts. Is that a conscious attempt from the management to build medical colleges and hospitals? And is there any relation to the Cleanroom company, GMP Technical Solutions? What I'm getting at is, are you getting better margins in hospital projects that I want to know? And second is -- second question is regarding the Kalyani Nagar projects. What is the status of the projects?

Yes. It is a bit coincidental that we are [indiscernible] more hospitals. It is not necessarily a very conscious attempt that we can only have that hospital projects. The government -- both state and center seem to be focusing on quite a few hospital projects and so we are now -- and quite a few of them around EPC mode, and so we are confident of adding value and ensuring our profitability is intact, so we are participating in some of these. But having said that, your point is very valid [indiscernible] which we have been reporting so far, the scope of GMP in hospitals in terms of equipment and in terms of Cleanroom insulation, those are not included in the -- from the orders and therefore, we will not be able to do [indiscernible] GMP. However, we are now in the process of integrating GMP to these clients and consultants so that they get themselves in these departments so that they can participate in those bids when those bids come. And hopefully, we will be able to [indiscernible] because all these [indiscernible] will come down the road. The second question in terms of the Kalyani Nagar land. We are discussing with a couple of big single clients, which were very open space to be declaring anything that we are hopeful of closing [indiscernible] building for at least half the projects about 5 lakh square feet in the next few months. If that happens, [indiscernible] residential over there, which will then be put into action.

Dr. Sundararajan, sorry to interrupt right now. But the audio from your side is coming completely muffled. So if it is okay, I'll disconnect this line and then call you back again on the same line.

Sure. Can you just call that maybe on Mr. Somnath's mobile, maybe it will be clearer?

I'll do that, sir. [Operator Instructions] So we take the next question from the line of Mr. [ Mahesh Shah ], who is an individual investor. [Operator Instructions] So the next question is from the line of Mr. [ Mahesh Shah ] who is an individual investor.

Yes. So I just wanted to know, can you like provide some guidance on the real estate segment for the remaining half of the financial year?

So we've been maintaining -- we do not really have -- from a revenue recognition or a P&L balance sheet point of view, we do not really have much this year that will see completion. So going forward for the next 2 quarters also, we expect real estate this year to be bleak just like it has been in the first 2 quarters in terms of top line. The margins, of course, are always healthy in real estate, but [indiscernible] would not be compared to last year's [indiscernible] we've been giving a guideline over the last few quarters. Next year, we expect to see completions of projects, and we expect to see the top line being in as far as real estate is concerned. However launching 2 more projects this year, we are actively increasing our real estate order book both in Pune and in Mumbai. In Mumbai, we are hopeful to be closing at least 1 more redevelopment. So we will be launching 1 more project before the end of the year. And so the pipeline in terms of growth of real estate, the order booking is all happening at good pace. The revenues will start coming to our book from next year onwards.

Okay. And so when are we expecting that the Powai project will start?

We do hope to launch the Powai project if possible in this year, but otherwise, it might go to early part of next financial year. We are in the process of taking the approval [indiscernible].

Okay. Okay. And 1 last final question that how much order are we bidding in the second half of the financial year?

We will be continuing to bid. We were enhancing our bidding limits. And so that gives us confidence to continue to bid and try for many more projects. We are, in fact, very hopeful of at least bagging another INR 800 crores to 1,000 crores within the next few months itself, the project we have already bid for, and we are in final stage of negotiation or probably we are L1 and waiting for the LOI from the authorities. So that part is pretty much in hand for another INR 800 crores of order booking. Beyond that before [indiscernible] we would try to keep the order booking on, although we have already exceeded [indiscernible] beginning of the year we will be almost equal of that. But if the BG limits [indiscernible] good news, then we will continue to [indiscernible]we don't want to put brakes on that. If we are able to bag even more by March, then as we say, we always look at [Technical Difficulty].

Sorry to interrupt, again. Well, sir, there is a lot of disturbance which is coming from your side and your voice is breaking a lot.

Am I audible?

Yes, sir.

Yes. So as I said, we hope to be booking another INR 800 crores, for sure, and then we'll be continuing to take targets to book even more before March. So hopefully, we want to start the next financial year with close to upwards of INR 3,500 crores order backlog in hand.

[Operator Instructions] The next question is from the line of Mr. Himanshu Upadhyay from o3 Portfolio Management Services.

Yes. Am I audible?

Yes. Yes.

Yes. See, my 1 question was a few quarters back, we stated that we have a team which is focusing on private sector also, okay -- the private sector, EPC contracts, okay? Can you elaborate what is the progress on that? And what are the challenges you are facing in that business? And -- is there something more to be done to get the business? Or do you think the type of contracts which you are interested in are not coming and hence, the business is not coming up or scaling of whatever we can see?

Yes, you are right. It's a valid point. See, our strategies on government sector and private sector are quite different. In the private sector, we are being extremely, extremely choosy. So when we start filtering the quality of the client, the quality of the project, the finances of the project all of these. And then the profitability when we put all these factors and want to strike a deal which sticks for us on all these factors, it does become extremely difficult. So -- but at the same time, we are not desperate to just bag an order from the private sector, just to say that we have done that. Having said that, we have been bidding for at least 3 or 4 good projects, which we would be happy to take. And we are hopeful that at least 1 of them will translate in the next couple of months. So we will be hopefully having good news on this front before the next call because that team, as you said, is working on this. But the intake might be slower than it will be in the government for the time being because of our own decision to be [indiscernible] we do not want to accept all the terms that the client puts on us and we negotiate on many of those terms. So sometimes we just back off because we are not success in those negotiations.

Okay. And can you give any idea on business development in the residential side of the business with not just launches, but any new projects are you thinking about? And any sales target or anything you have in the mind on that business? Because the environment is very good or what we understand from so what are we doing to maximize out of what is happening in the market?

Yes, you're right. The environment for real estate [Technical Difficulty]. Unfortunately, we do not have so many projects with unsold inventory at this point of time to extinguish [Technical Difficulty] slow and steady. The rest of it, whatever we have launched at [Technical Difficulty].

Sir, the audio is not clear. We are not able to hear you what you are saying.

Is it better now?

Yes. But we missed what you were saying.

Yes. So I'm saying, yes, the scenario in the market for residential sales has been very good overall. And unfortunately, we have only Forest Edge and Coimbatore as projects where we had unsold inventory, which we have almost managed to sell in this period. And we are now hoping to launch, as I said, in Pune, 1 more project [Technical Difficulty] trying to tie up more projects as quickly as we can so that by next year, we can have a series of launches.

And have you seen a price increases for wherever the inventories and how -- what type of price increase we have seen in last 6 to 1 year?

Yes. Now the price has started increasing. We have seen about almost a 15%, 20% rise in the price in good locations in the last 1 year.

Okay. Okay. See, I could not hear the answer last time on this question of what you stated. Initially, the voice was very unclear. What you were saying on your incremental loans from NBFCs, I was not able to hear that.

No, we said -- see, we've taken about INR 30-odd crores of debt over this period, primarily for 2 reasons. One is real estate, to launch a couple of projects in real estate, the initial approval costs and all of that. And the second is, as we have taken up new orders in EPC, there is an initial investment needed in terms of initial expenses on these projects, bid bonds, et cetera. We did not want to use most of our BG limits and draw down on our advances available from 1 or 2 clients as a strategy because we want to save our BG limits for bagging more projects. And even the cost of using the BG limits to draw down advances is also pretty similar because most of these advances come at a cost. We felt that it is better to keep BG limits [indiscernible] which we will then be under pressure to extinguish fast. So that's the reason we have used these resources to -- from debt.

And our credit rating improved to BBB+ from BBB. You also mentioned it. But has it started -- or has it given us any benefits in the loans what we are getting from NBFCs or the new loans? I understand there is interest rates also which have risen. But overall, how is the cost of capital move for us in the last...

See, there is a -- to answer your question, there is a 2-way benefit what you are envisaging -- what you are experiencing right now? One, despite of the increase in the lending rate, still our rate is very competitive what you are getting from NBFC. The comfort from NBFCs and banks are hugely increased. Secondly, what we are expecting that assessment, which is underway with [indiscernible] with State Bank of India, with a much more better terms of what we are already seen as on to date. So that result is expected by another month or so. The reverse assessment is underway. So obviously, the banking scenario, the attraction has increased substantially. The rate is also much more stabilized. We're in a better position to negotiate rates and do the [Technical Difficulty] has significantly changed over the last couple of months or maybe something more than also. So a lot of positive benefits we are now experiencing.

[Operator Instructions] As there are no questions, I would now like to hand the conference over to Dr. Santosh Sundararajan for closing comments.

Yes. Thank you, everyone, for actively participating and showing interest in the company. And these 2 quarters and the year after that, definitely looked much more promising than these 2 quarters. So we are seeing a huge amount of uptick on all numbers going forward, and I'm looking forward to that and wish all of you a very safe and happy Diwali and see you next quarter. Thank you.

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