Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Vascon Engineers Limited Q4 and 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 from 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, 2024. Today, joining me on the call is Mr. Somnath, our CFO; and our Investor Relations team, Sella investors. I hope you have gone through the Q4 and full year results and the presentations uploaded on the stock exchange and the company's website. During the year, our overall revenue remained flat as compared to the previous financial year, which we have already mentioned in our past calls as well, which was largely on account of real estate division by most of the projects were completed in the first half of last year. The new projects are work-in-progress and expected to contribute in the current fiscal. However, on the EPC front, the execution momentum continued its increased pace with revenue growth of about 9% year-on-year and 14% year-on-year in Q4 FY '24. Our outlook for the EPC segment business to stand strong, backed by a strong order book of INR 3,365 crores, which is about 5x our EPC revenue for the last year. Out of these orders, INR 2,838 crores are external EPC orders [Technical Difficulty]

I'm so sorry, sir. Your voice is breaking. Should I reconnect you, sir, again?

Yes, please.

Yes.

I'll start again from the previous sentence I was talking about. Our outlook for the EPC segment continues to stand strong backed by a strong order book of INR 3,365 crores, which is 5x the current EPC revenue. Out of these orders, INR 2,838 crores are external EPC orders, while the remaining INR 527 crores are internal. About 80% of these orders are from government projects, ensuring quicker execution and steady cash flows. In terms of order intake, we have won EPC orders worth INR 1,800 crores in this year, which is the highest ever for the company. This comprises of about INR 200 crores from Bridge And Roof Company India at Kanker, Chhattisgarh; about INR 299 crores from Jharkhand State Building Corporation for a hospital at Koderma; order of INR 514 crores from Bihar Medical Services for a medical college and hospital at Supaul. From PMC, for construction of a [ hospital building at Moshi ] of INR 357 crores; and also a Capgemini order for construction of an IT Park in Chennai of INR 416 crores. our bank guarantee limits have increased in the last fiscal, led by our strong balance sheet and financials. And with this, we are looking forward to continuing growth in the EPC division. Coming to the real estate segment, market is looking promising for us with several of our projects now complete. We are optimistic about our business prospects in the coming years. In addition to our primary real estate business, we are in the process of forming partnerships with A-grade top realtors based in Pune, Mumbai and Coimbatore, aiming to establish a steady stream of new property and project launches in the coming year. Within the real estate sector, we have effectively rolled out 1 redevelopment project in FY 2024 and we are currently preparing to introduce 2 additional projects in the coming months. New sales booking in FY '24 stood at 108,578 square feet with a total sales value of INR 100 crores and a total collection of INR 127 crores this year. During FY '24, our real estate revenue sales stood at INR 57 crores and an EBITDA of INR 21 crores. Gross margin came in at 66%, while EBITDA margin was 36%. We are very optimistic about sustaining the positive movement in the real estate sector, given the promising pipeline of projects ahead. Lastly, coming to the GMP business. GMP continues to deliver improved performance throughout the year, and we expect this momentum to continue in the coming quarters. Revenue of INR 289 crores in FY '24, which is up 15% year-on-year and [indiscernible] gross margin of 28%. The EBITDA was INR 21 crores and the -- with 7% EBITDA margin in FY '24. The status on our debt. This fiscal year, we have seen our total debt go up because we are involved in new real estate joint ventures, and we have put money and bid on commitments and earn up money deposits for new EPC orders. As a result, our net debt has risen to INR 86 crores. Even with this increase, we are committed to careful financial management and are focused on sustainable growth and creating value. As I mentioned about the rating upgrade throughout FY '24, I would like to reiterate again that our company's -- CRISIL has upgraded our credit rating to CRISIL BBB+ for long term and CRISIL A2 for short-term facilities. This upgrade has played a crucial role in negotiating favorable interest rates in the company is favor. We are also hopeful to continue this increase in rating as we go forward this year. Coming to the financial performance of the company in Q4 FY '24. Let me start with stand-alone during Q4 FY '24, the company reported a total income of INR 241 crores as against INR 251 crores in the corresponding quarter last year. EBITDA stood at INR 26 crores as against INR 46 crores in the corresponding quarter last year. The EBITDA margin was at 11%, and we reported a net profit of INR 15 crores in Q4 FY '24 as against INR 41 crores in Q4 FY '23. At a consolidated level, the Q4 FY '24, the company reported total income of INR 350 crores as against INR 335 crores last year with a year-on-year 4% growth. The EBITDA stood at INR 32 crores, with the EBITDA margin was at 9% against INR 58 crores in Q4 FY '23 and the net profit of INR 17 crores in Q4 FY '24 as against INR 50 crores in Q4 FY '23. To summarize our strategic initiatives at dividing growth, we have made significant progress on our key projects. Our strong order backlog, real estate backlog and solid financial position, reinforce our confidence in achieving our goals for the rest of the year. Looking ahead, we remain committed to delivering excellence and creating value for our shareholders, clients and employees. We are excited about the opportunities in the market, and we are well positioned to capitalize on them with our innovative positions and dedicated team. With this, we can now open up the floor for question and answers.

[Operator Instructions] The first question is from the line of [ Rishabh Shah ] from [indiscernible] PMS.

I have a few questions. In case of Building Management System, there has been quite good growth in the revenues of nearly 15%, but the profitability has taken a big hit. Can you explain what led to it? And secondly, we are seeing commodity prices are skyrocketing. So what impact would it have on the business?

Yes. See commodity prices in GMP business, what happens is, it's a very short-term turnover business. So in the interim short term, if there is an increase in commodity prices, it definitely directly affects the profit. And sometimes we get the reverse cycle also where it depends on the date we have taken the contract. On those days if the price drop, temporarily for a while, also, we gain profit because they have to execute and finish their contracts within a period of 2 to 3 months, they normally do not have clauses protecting them for these rates.

Okay, what about the profitability which has taken a big hit?

So we have been -- EBITDA level for the company has been sort of consistent over the [Audio Gap] year. It's not a major efffect as such, I would say. We are still talking of the GMP EBITDA -- yes, so from INR 25 crores, it has come down to INR 21 crores, so -- the EBITDA of the company.

Okay. So my second question is the inflation is becoming sticky, and eventually, the cost of labor will also increase and some projects will get delayed, which is the nature of the EPC business. So how are you preparing for future risks, which never gets spoken off in good times, but at bad times, would it have a very big impact?

You're right. I mean, see at the end of the day, it's a very [Audio Gap] risk on a daily basis. Every risk cannot be 100% mitigated. There is a price with the competition in the market, [indiscernible]. Having said that, see, we focus on government projects where the escalation is factored in based on incentives. So in such projects it happens given most of those projects even the labor index is covered because there is a formula for every rupee that is spent. So there is a formula to cover for the major materials like steel and cement and then there is a formula to cover for miscellaneous things, and there's also a formula to cover labor. So generally, we will get covered get paid over a long period and labor prices go up during the period, there is a cover that we get in government projects. In private project, for example, the Capgemini project that we have currently taken, we have cover -- and the subcontracting like the MEP work, but we do not have a direct cover for labor escalation. We are supposed to execute the job within 24, 30 months. If there is a delay from the client side which leads us to prolong this beyond the scheduled contract period, I'm sure we will have to put it up and negotiate with the client at that time. It is not contractually available today. But if we finish this within 2, 2.5, we have factored in the kind of escalations we expect in labor during this period.

Okay. And my last question, then I'll join back in the queue. So any thoughts on taking only those projects, which we have high confidence that we'll be -- that they will get completed in less than 3 years only? Or we can avoid which take more than 3 years for completion?

No, absolutely. I mean that is what our endeavor always is by choosing the kind of projects and clients. For example, if you look at our order book that we've taken, we're taking hospitals from the government. Hospitals generally have their funds allocated. Now these are all in the range of 300 crores, INR 400 crores, INR 500 crores. So these are not huge projects whereby the government initiates these projects without having a full view on the funding. They generally set aside the fund for this and then float the tender. So we are aware that most of [Technical Difficulty]

Sir, your line is flaking, sir.

I'm I audible?

Now it's audible, sir.

Sir, can you please repeat what you said, your line got...

Yes, sure. So I'm saying, we try to choose our clients to avoid -- of a project getting installed in between. We, for example, taken hospital projects from government and these projects are less than INR 500 crores. So at this level, we have seen that the government generally doesn't wait for various meetings to allocate budgets in interim format. They generally allocate the entire budget in one meeting and then the project is floated. So most of these projects that we have taken, we are aware through our sources internally that the funding is available. And therefore, they are generally not linked to even political risks or funding risk as they're projects. Similarly, Capgemini, for example, they are only going to see revenue coming out of this facility when it is completed. So when they have finally decided to make a CapEx on this, they have definitely set aside the funds. They will be in a hurry to finish it and so we do not see any reason why the project should get stalled from their side in terms of funding. So we are very careful to try and see the quality of the project of the clientele to ensure that hopefully, we don't have a project risk of it getting stalled.

The next question is from the line of [indiscernible] from NAS Capital.

I wanted to understand -- and I'm referring to the Capgemini deal that we bagged for INR 416 crores. There are reports which says that almost 500-plus GCCs are slated to come to India in the next 2 years. From a business development perspective, is this a sector that we are targeting? And are we approaching this sector where we can set up plug-and-play offices for some of these GCCs coming to India?

Yes, 100%. So we've been maintaining that we want a good mix of private and government. We have been a bit too skewed towards government off late, which has been good for us. But at the same time, as we rightly said, in good days, everything is good. We should be prepared with a good diversified portfolio when we approach the next few years. And it is our endeavor to have at least 30%, 35% exposure to private, if not more, maybe 60-40 mix is our target over the next 2 years. Now in private, the best kind of clients we would have [indiscernible] who are, again, building hospitals or building institutes because again, they have your funding in place, or industries because, again, they are -- if the CapEx and their revenue will only start after completion, or IT parks or corporate offices like we have done for Capgemini, and as you rightly mentioned, the MNCs and GCCs that are going to be putting up in India or data centers. These are all projects where once the company decides to invest, they will be after our back to finish it ASAP because they are going to earn revenue from it only after it is completed. And I think those are the kind of private projects we would want to be focused on. And so yes, to answer your question, we would definitely be looking at this Capgemini project to restart our private order book growth.

Sure, sure. I appreciate that. My next question was, I think there's a big data center boom happening in India at this juncture, right? And if I have to carry that point with our land of almost 150 acres that we have. And I believe 70 acres is [indiscernible]. Are we looking at monetizing that land parcel with any data center projects? Or either we tie up with the project experts or selling the land? So what is your thought on the Thane land given it's the boom period right now for data centers and Mumbai happens to be the data center capital of India?

So see, the Thane land, every possible real estate that you think of will work on that Thane land. It's not just data centers. Warehousing can work, residential can work. It's at a very good location. And so there is no dearth of real estate options to explore on that land. As we've been saying at the current stage, there is a separate team that is working on it to see how best we can monetize in bits and pieces? How best we can amalgamate? We are starting to fence certain areas of that land and start trying to generate revenue. As I said, a good portion of it is also part of the corridor the government is planning to build, and so we will have to give our land off, which is also not a bad deal. They will be giving us seasoned prices better than the [indiscernible]. So all of these things are happening there. It's a good parcel. We can do data centers plus residential plus warehousing plus sell some to the government as well. But it was, again, not a very short-term thing. It's a medium-term target for the company to milk the 70 acres that we hold over there.

Sure. And my last question, sir. I think last 2023-'24, probably saw the biggest year from a real estate stock point of view. And I think there were multiple listed players who came out with record numbers for the residential projects, which came out and it sold like hotcakes. Have we missed out on this big [indiscernible] from the residential perspective? I Think too focused on the government project EPC side. And are we -- and what are our plans at least in the near future to kind of galvanize and play [indiscernible]?

So I'll answer in 2 parts. Have you missed out on this opportunity? Yes, definitely. If we had more projects in hand and our real estate growth story was 2 years ahead of what it is, we would have had a lot more square foot. We've only sold 110,000 square feet last year, which is a very small amount for our brand, and we could have sold a lot more if we had those kind of inventory lined up, which we didn't. So have we missed out? Yes, definitely. Is this because of your focus on government EPC? No, because we have 2 separate divisions. The growth of the EPC division is not at the cost of the growth of the real estate division. We have separate bandwidth, separate teams focusing on both of these. EPC was easier to trigger off over the last 3, 4 years because it's less capital intensive. And we have our prequalifications in place. We've got our bank limit growing. And so it has been easier to sort of push the EPC story ahead first. The real estate story is a bit capital intensive, and it takes time. gestation periods are there, approval periods are there for these projects. So I would say that we are at a very high level of potential that we are now enticing on the real estate side, which we will see in the next few years. So have you missed out on the last year's fantastic real estate numbers that many of our peers have given? Yes. Unfortunately, yes, because we didn't have enough inventory.

All right. I appreciate your honest responses and wishing you all the best for the coming year.

The next question is from the line of Nitin Gandhi from Inoquest Advisors Private Limited.

Sir, in the presentation somewhere, it stated that you have the capability to do 8 million square foot. And right now, you're operating at 3.7 million square foot and which is at 90% capacity. So can you explain that?

Yes. So for the last 3 years, that the capability in terms of top management as well as assets that we hold, our internal company bandwidth to deliver about INR 1,000 crores of EPC. And we were doing INR 300 crores 2 years ago, then we've jumped to INR 600 crores, INR 700 crores levels currently. So we are performing at 70%. We will touch NR1,000 crores in the coming year, which will be our current potential in terms of CapEx requirements for asset and senior level bandwidth. After the next year, we will grow. We will have to -- I mean, there is no reason why we can't grow beyond that. It is just that we will have to incur certain CapEx to augment assets.

Can we translate this INR 1,000 crores in million square feet?

Yes, you can -- see, I mean, you can divide it by, I think, 2000 -- what happens is each project of ours is a different scope. Some of them are only the concrete shell scope. It can -- it will be worth about INR 1,200 a square feet. Some projects are, like the hospital projects are including all the MEP works, the Capgemini project is including everything. So these projects even go to INR 4,000, INR 5,000 a square feet. So the entire spectrum of work that we do can range between INR 1,000 to INR 5,000 a square feet in terms of EPC. So we can do INR 1,000 crores. On an average, if you take INR 2,500 as the average price per square feet, then you can calculate the square feet potential.

So when we say that 3.7 million square feet is under operation, approximately INR 1,000 crores is under execution at this standard.

Currently, our order backlog is INR 3,500 crores. So all of that is under execution.

No, I'm referring one slide where it is stated that currently operating at 3.7 million square feet.

Yes -- referring to [indiscernible] what you are talking about probably, there is some kind of [indiscernible] in the language or some kind of communication understanding. What we are talking about, whatever the current asset base we are having. We have the equipment, land [indiscernible] and all these things. Whatever the current asset base we are having, that is operating at 90% level, which translates to close to 3.7. So these assets basis capable of doing 4 million square feet per year. So in terms of the -- but what we are talking about our bandwidth, senior management bandwidth and other bandwidth is very capable -- double it up. But for that, we need additional CapEx, additional fixed assets to be infused in the system. But there, we don't need -- additional management bandwidth is not required. So that is the communication we want to make it. So obviously, there will be good amount of CapEx will be required to scale up to 8 million. But with this bandwidth, we can scale up to that level. So that is the point we try to make it.

But can you tell me the CapEx amount needs to be spend?

Sorry?

What would be the CapEx amount?

This year, we do not need CapEx in that sense. Next year, for the additional growth beyond INR 1,000 crores, if you're looking to do INR 250 crores additional, which would be a target for next year, we would need about -- you can say about 8% to 10% of that as a CapEx investment. So about INR 20 crores would be the estimate of CapEx required next year, not this fiscal.

Okay. Now coming to the question on the rating upgrade. What is the likely reduction in interest rate? Is it likely to be 20, 25 bps? And when will it be start [ flowing ]? Will it start [ flowing ] from Q2?

It's very difficult to -- RBI policy and also it keeps on swinging ups and downs. So bank is also following the same policy. But currently, we are more or less very much in the optimal level. I cannot say that we are at the optimal level, but very close to the optimal level, what we are operating. But depending on the banking policy was a 0.2 basis point ups and downs, it will keep on impacting our cost of capital. But we are not seeing a significant drop in the cost of EBITDA, to be very honest with you.

Okay. Now the next question is, any enhancement in BG limit, which will enable us to bid more -- what is the expectation for intake for the current year linked to BG limitations?

Yes, we have [indiscernible].

Sir, sorry to interrupt you sir, your voice is breaking, sir. Can you just repeat, please?

Can you hear me now clearly?

I can.

Yes, yes.

So basically, if you look in last assessment also, our BG limit has been augmented by almost [ INR 100 crores ] consortium. And beyond consortium, we also got a sanction of INR 200 crores [indiscernible] multiple banking. So we are clearly placed in terms of the BG requirement for next year growth as such that. But yes, we are continuing this enhancement within the consortium, outside the consortium. Sometimes it is happening the deal of the -- deal is much better outside consortium rather than being in the consortium. So we are working in tandem, which is the better mix for us. So we are opting both the options. Enhancement within the consortium and enhancement outside consortium also.

So the last question what is bidding pipeline and what your expected intake targeted this year?

So for this year, we are currently at INR 3,500 crores, roughly order backlog, and we intend to extinguish of about INR 1,000 crores of that, which will break us down to INR 2,500 crores as an order backlog that would remain. And we want to start April 2025 with an order backlog of INR 4,000 crores. Only that will keep our growth story alive. So for that, the mathematics says that we have an order booking target of about INR 1,500 crores by April 2025. And we are confident that we'll be able to achieve that. As Somnath said, the bank guarantee limits for that are more or less in play. So now it is a matter of waiting for the elections to pan through and then pick and choose projects where we can bid and hopefully achieve the target.

And with the current cost escalation, anything, any impact on order book margin? Or will it remain above 11%, 12% as we had initially bided for?

The order book margin should remain the same. As I said, most of our escalations are covered for us contractually. So -- and whatever little bit is not covered, we have factored into our costing. So in general, small inflation, regular inflation should not eat into our order book -- into our profitability. So I think we have safe on that front at this point of time.

So fairly sustainable.