Vascon Engineers Limited (VASCONEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Vascon Engineers Limited Q1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Akhilesh Gandhi from Stellar Investor Relations. Thank you, and over to you, Mr. Gandhi.

Thank you, Vishakha. Good morning, everyone. I, Akhilesh Gandhi. On behalf of Stellar Investor Relations, welcome you all to Vascon Engineers Limited Quarter 1 FY '26 Earnings Conference Call. We shall be sharing the key operating and financial highlights for the first quarter ended on June 30, 2025. We have with us today the senior management team of Vascon Engineers Limited, Dr. Santos Sundararajan, he's the Group CEO. With him, we have Mr. Somnath Biswas, he's the Chief Financial Officer. Before we begin, I would like to state that this call may contain some of the forward-looking statements, which are completely based upon the company's beliefs, opinions and expectations as of today. The statements made in today's call are not a guarantee of future performance and also involve unforeseen risks and uncertainties. The company also undertakes no obligation to update any forward-looking statements to reflect development that occur after the statement is made. Documents relating to company's financial performance, including the investor presentation have already been uploaded on the stock exchanges. And I now invite Dr. Santosh Sundararajan to state his opening remarks on the company's performance for the first quarter ended on June 30, 2025. Post that, we will open the floor for question-and-answer session. Thank you, and over to you, sir.

Thanks, Akhilesh. Good morning, everyone. I warmly welcome you all to the earnings conference call of Vascon Engineers for the first quarter ended June 30, 2025. Thank you for taking the time to join us today. I hope you've had the chance to go through the Q1 FY '26 results as well as the investor presentation available on the stock exchange as well as the company's website. We would like to share that our overall revenue has been -- has seen a healthy improvement during the quarter, supported primarily by continued execution in our EPC segment. While early monsoons in certain regions presented logistical challenges, our project sites remained operational, and execution progressed in line with our internal plans. However, the weather-related disruptions did temper the pace of execution a bit, resulting in a modest year-on-year growth of 13% in Q1 FY '26. We believe this reflects the strength of our project pipeline and operational preparedness across sites. Coming to our segmental performance. Our EPC business continues to be on the cornerstone of our growth journey. Over the years, we have built a strong track record, having successfully completed more than 225 projects covering over 45 million square feet of construction across India. Our execution strength is backed by a team of over 500 skilled professionals across our project management and engineering functions. In addition, our in-house design and planning capabilities enable us to offer complete turnkey solutions covering architectural design, structural engineering and execution. This integrated approach reduces dependence on external agencies and speeds up decision-making and helps us maintain healthy margins. We continue to focus on large high-value civil construction contracts, especially from government bodies and reputed private players. Our strong track record of quality work and timely delivery has helped us build long-term relationships with marquee clients such as AIMS, NBCC, CIDCO, MMRDA, et cetera, and other leading institutions across health care, education, industrial and residential sectors. In Q1 FY '26, our EPC revenue stood at INR 204 crores, registering a year-on-year growth of 6.25%. This growth was achieved through timely and efficient project execution despite challenges posed by early monsoon disruptions across multiple regions, which tempered the overall pace of execution. As of June 30, 2025, our EPC order book stood at INR 2,902 crores, which is about 2.9x our FY '25 EPC revenue, offering strong visibility for the next 2 to 3 years. The breakup of our current order book is as follows, INR 2,469 crores from external EPC contracts and INR 433 crores from internal real estate projects. About 73% of the total orders are from government-backed projects, which ensure timely payments and strong cash flow visibility as of now. Looking ahead, our focus will remain on bidding for larger projects in the range of INR 600 crores to INR 700 crores and maintaining cash flow positive execution, further strengthening and working on our design and build model. We are confident of delivering 20% to 25% annual growth in our EPC segment in the coming years. Let me give you an update on the real estate segment. In Q1 FY '26, we continue to see steady progress across our ongoing projects. During the quarter, we achieved new sales booking worth of 40,500 square feet with a total booking value of INR 55 crores and a collection of INR 65 crores. While these numbers will reflect in the financial upon revenue recognition, the operational activity on ground has been very strong. We currently have 4 real estate projects under active development with a total salable area of 0.77 million square feet, of which 0.61 million square feet is attributable to Vascon. These include Tulip Phase III at Coimbatore, Goodlife at Talegaon, Tower of Ascend at Kharadi and the redevelopment project Orchids at Santacruz, Mumbai. So far, we have sold 0.44 million square feet and booked total sales worth INR 272 crores and collected INR 198 crores. INR 116 crores of revenue has already been recognized from Tulips and Goodlife. Looking ahead, our near-term real estate pipeline is strong and includes a JV residential project in Powai, 4-acre high-density housing project in Kharadi and a Tower of Future, a commercial project in Baner, Pashan, Prakash Housing Society, which is a redevelopment project in Santacruz. Together, these projects total up to 0.82 million square feet of saleable area attributable to Vascon, which is roughly an estimated top line of INR 1,100 crores of sales. With ongoing projects progressing well and a robust pipeline in place, we are confident about a meaningful and consistent contribution of the Real Estate segment from current year onwards. Coming to the financial performance of the company in Q1 FY '26. The company reported a consolidated total income of INR 242 crores in Q1 FY '26, a 22% year-on-year growth over INR 198 crores in Q1 FY '25, which includes profit from the sale of investment in Ascent Hotels Private Limited in Pune. EBITDA, excluding profit from the sale of investment in Ascent Hotels for the quarter stood at INR 16 crores compared to INR 18 crores in the same period last year. While the EPC EBITDA margin stood consistent at about 9%, 10%, the real estate EBITDA margins declined due to higher marketing costs incurred this quarter. Profit after tax is at INR 22 crores compared to INR 9 crores in Q1 FY '25. To conclude, our strong financial performance, robust order book in Equity segment and a healthier balance sheet gives us confidence for the future. We remain committed to delivering value through disciplined execution, innovation and a dedicated team. With that, we now welcome any questions. Thank you.

[Operator Instructions] The first question is from the line of Himanshu Upadhyay from Buglerock.

Am I audible?

Yes.

So my first question was on the profitability, okay? If we look at the Note 6, which states that the profit from sale is around INR 17.5 crores and which is included in other income. If we remove this other income, okay, and make it like-to-like, our PBT margins for the quarter went down to 3% on a stand-alone basis, okay? So that is the part one. And second, when we look at the segmental numbers, it seems that the profit on sale of this asset is included in EPC business. And if we remove this numbers from EPC business, then EPC was at a very nearly 0 profit type of numbers for the quarter. So why would this be the case? And why the margins have been -- seem to be so low on the EPC business? So, these are the...

See, in order to answer your question, that number one, if you remove that the sale of investment in [indiscernible], obviously, if you look apple to apple comparison, percentage-wise, slightly less as compared to last year. The reason will come back. We will get back to you after this thing. But if you're talking about the segmental, it has been clearly INR 17.5 crores clearly shows that it is unallocable. It is not [indiscernible] to EPC. And despite of this unallocable EPC is showing EBITDA of INR 19 crores.

I could not hear you. Can you just...

See if we remove -- if you look at the segmental report, which has been presented in the investor presentation, that INR 17.5 crores has been clearly sold as that investment on unallocable. So, it is not part of this thing. And if you look at that EPC, EPC is showing INR 19 crores EBITDA. So, what you are talking that EBITDA is 0, that is not the right picture.

There's an 8% EBIT margin. It is clearly shown in the Slide 8 of our presentation.

I'll tell you when we look at the Page 9 of what you have put on the result presentation, okay?

Page 8, I think you have to look at Page 8.

The segmental numbers, okay?

Yes, yes. If you look at the Page 8.

I'm not talking about the quarterly presentation. I was talking more on the press release, okay?

So, you are right. See, we are not -- in general, there is a reduction of a couple of basis points on the EPC margin. It's nowhere near 0. The EBIT is still at 8%. We would -- normally, it is normally in the range of 10%. We did have a write-down in one of our projects, Goa, whereby we consciously took a call along with the Board and auditors to not recognize revenue beyond a particular point on that because that project is under arbitration. And whenever the results of the arbitration are out, we will be getting a bonus recognition of revenue. But as a cautious measure, we have stopped recognizing further revenue from that project, except beyond what is accepted by the client at this stage. So that -- actually, we had to pull back about INR 4 crores to INR 5 crores this quarter in a reversal. So that is affecting our numbers in terms of profitability of the EPC segment, which is specific only to this quarter. But even then it's nowhere near 0, we are at about 8% EBIT. The PBT would be at around 6% to 7% this quarter. But we are confident that we can pull this towards 8% and 9% as the year goes on because anyway, this quarter is the lowest contributing quarter for the year, generally speaking. On the real estate side, there is a minor loss. So that also -- I mean, that is because of the revenue recognition AS 7 method. As we said, we've incurred marketing costs on our Bombay project this quarter, and we have achieved sales as well in line with those marketing costs. However, the sales don't come in, as we all know, as per AS 7, but those marketing costs have already come into the books. So, the real estate segmental, you will see is at a marginal loss of about 5% in EBIT. And the EPC is at about 8% in EBIT and the 17.5% is not included in this.

Okay. And one more thing. In last 1 year, our debt has reduced materially, okay, after sale of assets and everything. But if I look at our cost of finance or the finance costs last year versus this year, it is still increased by 17%, 18%, okay? So why would my finance cost increase so much when my debt has reduced significantly in last 1 year?

Himanshu, if you look at the gross debt remain upside only. If you are talking about the net debt, net debt has been substantially reduced. But if you look at the gross debt number, there is upside of the gross debt number as because some debt has been taken for the real estate project. So obviously, once the gross debt is increased, there will be some increase in incremental part of the finance cost will be there.

Okay. And I have one more question. So we have spoken about diversifying our order book in past. And we have some discussions on it on the call. But if we look at one of our peers, Northern peers, who also used to have a similar order book profile with nearly 80% to -- 80%, 85% from government and only 17%, 18% from private sector 3 years back has moved to 42% government order book and 58% from private, okay. But in our case, it is still predominantly government with 78% as of Q4, and I think INR 475 crores as of Q1 FY '26. We have not seen many orders won from the private sector and residential sector is the place where others have grown quite materially and institutions building, okay? And that has been a lagging point for us, okay. So what are the challenges? And how are we thinking of overcoming them and grow our business even on the private sector, okay? Because it seems very -- though we have won 1 order this quarter, significant INR 228 crores, but it has lagged the way the market has grown on the private side or we have lagged. So some thoughts on that will be helpful and what direction are we taking on that?

No, I agree with you. We are also pretty keen to increase the ratio of exposure to private sector. We do not want to be skewed towards one sector. Having said that, we have no complaints from the government sector at this point of time, the kind of projects we slot into in the INR 300 crores to INR 600 crores range and the hospitals that we are working on. We see that these are the kind of projects where there is no payment issues from government, even if it is state government, even if it is in the phase of elections or whatever. So we are pretty happy to be skewed towards the government even at this point of time. But however, as a prudent business call, we would want to be closer to 60% government, 40% private at least and not 75%, 78% government. So, we are working on that. We are looking for projects in the private sector. We've burned our fingers in the past in the private sector, especially with builders, especially residential projects. And therefore, we are still having very stringent terms when we sit across the table for negotiations with private builders in terms of the bank guarantees we are comfortable providing in terms of the terms of the contract, there are a lot of terms which have written us in the past. So those wounds haven't been forgotten. So, we are a bit sticky when it comes to negotiation on the private side. And we have let go of many tenders where the client is insistent on certain terms, which do not go in line with our mandate from the Board as well. But having said that, we are aggressively trying to increase our exposure on the private side also with no desperation but looking for good projects. And in the meantime, if a government project comes by, which is good and this ratio remains in this range for a short while, we are okay with it. We don't want to let go of government projects waiting for private projects. But we do have a separate business marketing sale we have put up now, which we are trying to aggressively set target for private side. So I take your point, and we will work on it.

Okay. And how big is the team, which is working on private side, the marketing team, private side?

So at this point of time, we are not looking aggressively for private projects in other zones, except in Maharashtra, Pune, Mumbai. We are not looking in NCR region also. We would prefer to stick to government in the North zone of India. In the South, in Bangalore, we are looking. In Chennai, we are looking and in Mumbai. So, in all these places, we have a couple of business management people headed by one central business management person placed out of our head office.

Who is working for private sector -- working for business private sector?

Yes. Correct.

The next question is from the line of Ganesh Shah from SR Capital.

Yes. Am I audible?

Yes.

Yes. So while the royal rights and other small wins like around INR 300 crores have been announced, the pace of new inflows seems slower than expected. Could you just elaborate on the current bidding pipeline and the expected conversion in Q2 and H2 FY '26?

Yes, that is -- I mean, if I may accept for everyone, that is definitely a short-term concern. We have not bagged any significant orders in the last 6 months, except that one order you mentioned. We have lost out on at least 3 projects of INR 700 crores, INR 650 crores, INR 750 crores size range by very small margins. We are realizing that the competition is intense in the market and the rates at which people are bagging these projects are a bit lower than what our expectation is. So we have always set a guideline for ourselves of about 15% gross profit on EPC projects so that we are able to get closer to about 9% to 10% PBT that we aim in this segment. But it looks like -- it's been 6, 8 months, and we are not desperate, but we are definitely a bit concerned, and we want to be bagging the order target for the year. So maybe a percentage point or 2%, we will bring down, and we will aggressively look at this. And hopefully, in the next 9 months, we will achieve our targets.

Okay. And the other question I have is there is a INR 440 crore land item in the balance sheet. So what exactly does this figure include, like how many land parcels are there? And where are they? What is their book value and all individually?

We can share the total breakup of it to you. If you -- I mean through Stellar, if you could just post call, give us an e-mail, we can send you the details. It primarily consists of our holding in the Thane land, and then we have a project in Kalyani Nagar, where we reflect this land, prime parcel over there where we hold the rights to construction and a few others. So we can send you the detailed breakup.

Sure, sure. No problem. Just one last thing that you mentioned that currently about 3.7 million square feet is being executed annually at 90% capacity utilization, right? So against the overall capacity of 8 million square feet per annum, this implies that the company is still significant at idle capacity, likely due to maybe limited order inflows. So -- if the order inflow improves meaningfully and you are able to use the full capacity, what would be the maximum annual revenue and potential that Vascon could achieve from this EPC segment?

So, that is a very complicated question. There's a short-term answer to it. There is a long-term answer to it. One is our execution capacity. We are quite comfortable at this point of time in terms of our senior management bandwidth or assets that we have, even if we have to -- we have almost utilized most of the assets that were aligning idle in our yard about 4, 5 years ago. But even augmenting assets is not a big problem with small CapEx that we might incur going forward for growth. We can carry on this growth story. There is another angle, which is the BG limit. The BG limits always sort of put another guideline to the growth that we can estimate. So BG limit won't double year-on-year. They will steadily grow based on our performance year-on-year and our relations with the bank. So we expect -- so with all these factors kept in mind, we have always projected for the last 1 year, I've been saying we want to grow at 20% to 25%, if possible, 25% year-on-year on the EPC side. We've done about INR 1,000 crores last year. Our target for this year is INR 1,200 crores, if not a bit more. And we still feel we are very much on track to achieve that. The first quarter, barring, as I said, a little bit of monsoons and one project that didn't take off in full speed. But we're still very positive that in the next 3 quarters, we will catch up and achieve the INR 1,200 crores target for this year. For next year, another 20% growth would mean to do INR 1,450 crores or close to INR 1,500 Again, the BG limits will grow. We -- for this year, the BG limits have already been tied up. For next year, we'll have to continue growing on the BG limits. As of now, the only little concern is that the order booking has to happen. Otherwise, the growth story will not pan out the way we are talking. So as rightly pointed out, and I think surely everybody would have that concern in mind that we are -- we haven't booked good orders in the last 6, 8 months. Hopefully, in the next 9 months, we'll be able to reverse that and start next year with close to upwards of INR 3,500 crore order backlog in hand. Then this growth story will definitely be achieved.

Okay. Yes. Just given the strong long-term opportunity, are there any plans to expand beyond even 8 million square feet or either by scaling up teams or adopting some kind of technology or into joint execution arrangements or something like that?

So as I said, at this point of time, see, I mean, to scale up beyond this organic target of 20% to 25%, which is purely based on internal accruals, which is purely based on performance year-on-year, improving the balance sheet, improving your relation with the bank. This is an organic target of 20% to 25%. If we want to set a higher target and expand exponentially or a bit much more than this 20%, 25%, one, we would need capital investment because BG limits, as I said, won't come through the business much faster than this. So, we would have to tie up much bigger BG limits for which we would need funding. And then technology, there are options. I mean we are always marrying new technology in every project that we do. That is not a -- I mean there is no choice on that even to grow at these rates we will have to look at technology. But yes, to diversify or to look at different streams to suddenly set ourselves a target of INR 2,000 crores instead of INR 1,400 crores the year after next would mean we would have to first look at infusion of capital. At this point, we are wary of taking debt on the EPC segment beyond the small BG limits that we carry. So, at this point of time, I would just like at a Board mandate also, we do not -- we are not looking to raise equity in the short term. So, I think we would stick to our organic growth target of 20% to 25% for at least the next 1 year.

The next question is from the line of Meeth Agarwal, an individual investor.

So just wanted to know that the company currently operates in Pune, Mumbai and Coimbatore. So, are there any new cities being evaluated for the future for the real estate?

At this point, no. We are happy to stick to these 3 cities at this point of time.

Got it. Just apart from that, one more thing. So your real estate model is largely asset-light through JVs and JDA structures. So how do you see this going ahead? So just wanted to know, so how do you decide between outright purchase JV or redevelopment? And how will this model look like going ahead?

Again, for the next 2, 3 years, as far as our discussions in our Board is concerned, at least we are pretty clear that we will be on the asset-light side, even if we have accrued capital coming in from the businesses. At this point, we do not intend to be purchasing land. We will rather do 2 or 3 projects using that capital on a JV basis rather than put money into purchasing land. That is the current mandate that we have at our management and Board level. So we will continue on this asset-light model, which is JV redevelopment in Pune, Mumbai and Coimbatore.

The next question is from the line of Vedant Joshi, an individual investor.

Am I audible?

Yes.