Welspun Enterprises Limited (WELENT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Welspun Enterprises Limited Q3 and 9 months FY '20 Earnings Conference Call hosted by Anand Rathi Share and Stock Brokers. [Operator Instructions] I now hand the conference over to Mr. Rachit Kamath from Anand Rathi Share and Stock Brokers. Thank you, and over to you, sir.

Thank you, Sakal. Good morning to all the participants for Welspun Enterprises Q3 and 9-month FY '20 earnings conference call. Today, we shall start with an update from the management for the past quarter and then proceed to the Q&A session. From the management, we have Mr. Sandeep Garg, Managing Director; Mr. Akhil Jindal, Group CFO and Head, Strategy; and Mr. Jitendra Jain, President, Finance. Thank you. And without any further ado, I hand over the call to the management.

Thank you. Good day, ladies and gentlemen. On behalf of Welspun Enterprises Limited, I welcome you all for Q3 FY 2020 results analyst con call. Before we go into financial details, let me start with the key highlights of the quarter. During the quarter, the company focused on execution excellence on various ongoing projects. Significant progress has been made in projects like CGRG, GSY, CTHPL, AM2, and the details of which will be shared with you a bit later on the call. During the quarter, we have availed top-up loans on the Delhi-Meerut Expressway project post in-principle approval by NHAI at a very competitive rate of 8.52%. Despite challenging banking environment, we have managed to down-sell debt of many of our projects by introducing new lenders. In a nutshell, Q3 FY '20 was another quarter of steady growth for Welspun Enterprise Limited, both in terms of operational and financial performance. Now coming to our project updates on our road portfolio. As you may be knowing, current portfolio stands at 7 projects. Our total value of more than INR 8,500 crores for the [ balance sheet ]. The current unexecuted portion of the order book on EPC stands at about INR 4,100 crores. As you all are aware, this year, the country has seen, in most of the parts, an extended and heavy monsoon, which has affected the progress of our company, practically on the cost. Our post October, once the monsoon had subsided, the pace of progress has picked up and more notably on the projects, AM2 and CTHPL, which are running ahead of schedule. Coming to each individual project, Delhi-Meerut Expressway Package 1, it has received its third annuity in the month of January 2020, within the stipulated time from NHAI. As I had mentioned earlier, the outstanding loan for this project has been refinanced and also a top-up loan taking post-approval from NHAI. Gagalheri-Saharanpur-Yamunanagar, our GSY project, at the end of Q3 FY '20 stands the progress -- physical progress stands at 87%, and as of 31st January, at about 89.5%. For this project, the fourth payment milestone was hit and the payment received for same in October 2019. That is the 75% milestone from NHAI. The other projects, Chutmalpur-Ganeshpur & Roorkee-Chutmalpur-Gagalheri projects or CGRG. The physical progress at the end of Q3 fiscal year 2020 was 84%, and at the end of 31st January, it is 86.5% approximately. Even for this project, the fourth milestone payment from NHAI of 75% progress was received in the month of October 2019. Aunta-Simaria, the project achieved 18% of physical progress by the end of Q3 FY 2020. As on 31st January, the progress stands at approximately 20%. For the -- this project, the first milestone payment has been received from NHAI, which is at 10%. Chikhali-Tarsod, a project in Maharashtra, the physical progress for the project stands -- stood at 47% at the end of Q3 FY '20. And at the end of January, it stands at about 50.5%. For this project also the payment for the second milestone from NHAI that is at 40% was received in the month of January 2020. Amravati, Package AM2, within [ Hybrid Annuity ] Maharashtra project. At the end of Q3 FY 2020, the physical progress was -- stood at 32%. At the end of January, the physical progress stood at 36.25%. The payment has been received from the PWD the first milestone that is 10% completion. The second milestone of 30%, the bill has been submitted to the client in the month of January 2020. Sattanathapuram-Nagapattinam project of NHAI. This project has been awaiting appointed date. And as I had spoken in the last con call, we expected the appointed date to be taking place in the month of January 2020. However, on the 8th January 2020, Honorable High Court of Madras passed an order to put on hold on the widening of this project, which is the [ hold up input ] from the larger portion for the -- our current project, it is a very small portion of that complete order. And the order speaks about NHAI to take -- undertake EIA studies, or environmental impact study, and also obtain environmental clearance. And wherever there is an application, the approval to be taken from the CRZ or CRMZA as the case may be. Now important point about -- from this order are also that they have clearly stated -- the order clearly states that the project expansion of the group NH-45A shall -- needs not be shelved and the concession agreements already agreed into not to be canceled, and the land acquisition proceedings should not be dropped. As I stated, in our case, the CRZ clearance is required only for 650 meters of the road length out of 53 kilometers, and hence it can either be [ restored ] or realigned very easily. The confidence of both the NHAI and us is reflected that we entered into a supplementary agreement with NHAI in this quarter, which -- in which NHAI has stated that they will satisfy their CPs and the appointed date for same will be achieved in the March 2020. And this agreement has been signed, post this order from Madras High Court. So this agreement takes into account the impact of this order of Madras High Court. Coming to Water [ infra ]. The -- one of the projects which is ongoing is Dewas Water, the commercial operations for the same started on 30th April 2019. The year-to-date revenue stands at about INR 5.8 crores, and the EBITDA for the same is INR 2.8 crores. The last operational element of the company is oil and gas, which is -- we're in the last stage in the development, That's for exploration and production of oil and gas, alongside with Adani through a JV company, wherein we hold 35% and 65% is held by Adani. And for us, there are 4 relevant blocks. The -- there is 1 block in Kutch, which we call GK-1. The operator for same is ONGC, and there has been [ assigned ] another block and ONGC is preparing the field development plan to be submitted to the Director General of -- [ Director of Hydro Plants ]. The other discovered small field, which is a small field that we got called B-9. It is already a discovered field. And hence, it is only the approving and exploration that needs to be done, and we are planning to drill the first oil -- well during the monsoon period. The other block adjoining to this B-9, which is an old block under the PSC regime, is Mumbai block or MB/OSN/2005/2. We have got the approval for entry into Phase 2, and the drilling for same will start post the drilling in B-9 because these 2 blocks are adjacent to each other. We are planning a joint exploration cum production wells in these blocks. The overall gross of gas in the blocks -- in place volumes of gas in these 4 blocks stands at 0.9 Tcf and these are primarily gas-bearing blocks. And this overall [ GIIP ] has been peer-reviewed by our respected oil and gas company of India. The expected EUR, or estimated ultimate recovery, is approximately 70% of the [ GIIP ]. I am not talking about in detail about [ Palace block ], which is also a block of interest because it is still under litigation. And we will appraise you once the litigation comes to conclusion. Talking about the outlook of the industry, NHAI at this point in time is expected to bid out approximately 2,500 kilometers of roads amounting to their estimated price of about INR 45,000 crores during the FY 2020. And this number is only for Hybrid Annuity model, which we are focused player of. The momentum of bidding has taken up in the last few weeks, and we expect it to continue this way until the end of FY 2020. The government's strong focus towards highway as well as water sector as part of the infrastructure development [ brings ] excellent business opportunity for us. At least for the next few years, the visibility is clear. And as a company, we will continue to selectively target the projects to exploit this business opportunity, while preserving our threshold return expectations. In terms of our preference for road, we prefer HAM projects or projects which are of development in nature and where risk and reward mechanics is balanced. However, our go-to-market strategy for water includes both developmental projects under HAM model or equivalent models as well as EPC projects. Our focus in water sector will be mainly sewage treatment plant, desalination and bulk water transmission projects. The company will continue to explore inorganic growth opportunities through acquisition of projects through a measured evaluation of risk and return parameters. The company will also continue to pursue the asset-light model and continue to focus on operational excellence and prudent risk management. We will also be looking for unlocking the value in the investments made in [ Hybrid Annuity HAM ] projects through either divestments or refinancing of the projects so as to maintain the liquidity at the company level for growth -- future growth of the company. With these words, I would want to hand over the call to Mr. Akhil Jindal for the financial highlights.

Thank you, Sandeep. Good morning to everyone. The numbers were sent to you yesterday, so I'm sure the hard copy of the press release and other things are available with you. I'm just trying to keep it short and focusing on the -- on some more information that we couldn't cover in the release. So just for a quick summary. The revenue was up by 13%. And this revenue of 13% up INR 490 crores was mainly contributed by the 5 HAM projects. Our EBITDA was up by almost 7%, and operating EBITDA stands at 11.2% on account of that. So these are the 2 key financial numbers. Then, of course, our EBITDA overall was up 33%, including the other income, and that it stands at INR 69 crores. Cash PAT, which is an important element for us to evaluate the cash generation of the company, is also up by 52%, and that stands at INR 47 crores. The last point on the cash balance, which is an important element, again for the commitment that we have on the HAM side and the oil and gas side, so we have maintained a healthy cash balance all throughout. Even as on 31st December, there is a cash balance of INR 308 crores, which is absolutely free cash invested into our mutual funds and [indiscernible] government securities, government PSC bonds and other things. And to that extent, the equity commitment is only restricted [ to INR 278 crores ]. So we have further to invest in HAM at INR 163 crores, and our oil and gas commitment is INR 115 crores. So if I consider the earning potential of this company on the base of the order book that Sandeep just mentioned, this cash balance would be far more higher. Plus, we have given us a short-term loan of almost INR 106 crores in [ 2 of our subsidiaries ], which are also supported -- the short-term loans that we have taken are also adequately supported by net current assets and long-term loan of INR 42 crores are again supported by net fixed assets that the company has. So all in all, it's a very healthy balance sheet, with significant amount of cash balance and all the commitments that we have made in terms of the HAM or oil and gas are fully, fully funded by virtue of this cash balance. I will not dwell further into the income statement and other things which are available with you. I would only say that from a liquidity perspective, clearly, the top-up loan is one element of liquidity, which, as you go along, the company is generating. As Sandeep mentioned, we have already done a liquidity top-up loan of almost INR 65 crores from one of our key projects, which have completed almost 1 -- 1.5 year back. The Delhi-Meerut is one project where we got a loan from one of the large Indian banks at a very competitive rate, 8.52%, and I'm -- with the further reduction that they have done, it could be 8.42% from March onwards. Plus, we have -- 2 of our other projects are getting complete, both MBL projects in UP/Uttarakhand area. We are also becoming a candidate for the refinancing and also for the securitization, and we have started approaching some of the Indian banks to start evaluating so that by the time the project achieved the PCOD and the COD, the refinancing can be done again in a very cost-effective manner. So all of this will further add to the liquidity, plus the exits of some of the assets that we are planning, which are -- which, of course, Sandeep also mentioned in the opening remarks, will add up to liquidity. So I think as a company, we're in a fairly comfortable position. And to that extent, we will keep our borrowings at check. We don't want to borrow extensively at a holdco level. Our borrowings are currently limited to the -- to some element of CC and some elements of CP. So my estimate is that it will not be in excess of more than INR 300 crore as we have [ got a sanction ] limit. And to that extent I think the liquidity position of the company will remain a key element for us to watch, and we will be very, very cautious and conservative in terms of for deploying it in any future projects. So with this, I hand over the floor to the questions -- I mean, to the various participants for any questions that they may have. And as a management team, we will try and address it to the best of our abilities. Thank you.

[Operator Instructions] The first question is from the line of Mohit Kumar from IDFC Securities.

Congratulations on a decent set of numbers. Sir, firstly, in our order book of INR 41 billion, is it [ an amount ] Sattanathapuram-Nagapattinam is included? And if not, when do you expect the appointed date for this project now?

So the -- to answer your question, this order book includes the SNRP projects order book. The order book emanating from SNRP is approximately INR 1,700 crores. And the expectation as per the -- as I said, we signed up a supplementary agreement with NHAI wherein they are representing that they will be able to meet their CPs by March 2020. So we expect the appointed date to take place in March 2020.

Okay. And secondly, sir, as far as the NHAI bid-buy is concerned, you mentioned there are around 2,500-kilometer road projects expected to bid out through HAM model. And is it possible to share this in terms of value? What is the value and the bid size? I think there are a lot of HAM already getting order as we speak now. How much of the order we have -- what we have already put in our bids? What's your expectation for the full year for the order inflow? And secondly, as I want more clarity on the order inflow, there's one [ other ] project, I believe, where we were L1. It has still not come to us is -- why there's a delay? Haven't we expected to be -- to get part of our order book?

So to address the last question portion of the question first, the project where we were L1, it has -- the bidding process has been channeled by the client after we were L1, and hence that project is not expected to come right now. Now coming to the first part of the question that, yes, the HAM activity has started; it is true. And that is what I've said in my opening statement, and that's a good sign. We expect almost like about 50-odd projects, which these are yet to be bidded out, and the list is in front of me. And the total project cost is in excess of about INR 45,000 crores, which are already identified for future bidding between 17th of February to end of March. These projects are slated to be bid out.

Okay. So INR 45,000 crores [ one before this ] is still pending for the -- to be bid out.

That is correct. And that one's only on the HAM side of the business. I am not considering the EPC side of the business.

Understood, sir. Sir, one last question, the water segment. Haven't seen any movement of the sewage treatment plant and the -- or desalination, or bulk water transmission projects in the -- which you expect to win or to be bid out in the next 6 months?

Yes. So we are -- as I -- we had bidded out some projects on desalination on Dewas, our [ major ] sector. No, we will not be any one bidder for those. We had bid out for the sewage treatment plant where the [ MCG ] had decided to handle the process. There are currently, as we speak, 2 projects of about -- 2 projects which are under bidding stage by [ MCG ] for sewage treatment plant, which we are looking at. If the bids go forward, which are -- which is expected by the end of February, we would bid for those. We are also bidding for some INR 15,000 crores of projects which have been announced by Madhya Pradesh. We are bidding for those -- few of those projects as well.

What is [ by the way ] CGM project? Do you still...

It's a sewage treatment plant. The average of the current 2 projects which are under bidding stage are very substantial sizes, which are 500 MLD and 450 MLD capacity plants. I would refrain from talking about the numbers on this because it is under bidding stage.

The next question is from the line of Neil Shah from GC Holdings.

Congrats on a decent set of numbers. Sir, I have a few questions. Firstly, sir, what is the scheduled completion date for GSY and CGRG?

So the -- contractually, the scheduled completion dates were in the month of January for GSY and February for CGRG. For both these 2 projects the IE has recommended an extension of time for 160 days and about 65 days to NHAI because of the defaults on part of NHAI. [ Strong ] force-majeure situations like nonavailability of [ tree cutting ] approvals are shifting [ off year ] base.

So CGRG, the revised would be April, and GSY should be somewhere around June, July.

That is correct. That's the extension of time. However, our forecast is that we will hit the PCOD by the March for both these 2 projects.

Okay. And sir, any particular reason why the execution during the quarter was slow because I see the revenue contribution drawn? It's largely coming from the Maharashtra projects. And even in January when we completed 2.5% for CGRG, which was the run rate which we achieved in the Q3 on a monthly run rate. Any...

So as I said, the reason is very simple. As I said, there has been an extended monsoon. So in Q3, also almost like after end of October, there was a heavy monsoon in that area. And secondly, if you see that the projects are now almost close to 90%, so whatever [ funds ] were available, we have already dealt with them. Right now, we are dealing with the funds which are -- were not made available for reasons which we are getting with the extension of time. So it is a job being done in small portions of work. The continuity of work is not there. So we expect this run rate to be low on these 2 projects going forward as well.

Got it. And sir, on the Tamil Nadu project, what is the quantum of land acquired already by NHAI?

I think the land acquisition for the -- is about 70% for SNRP at this point in time, and we need to hit the 80% for us to get the appointed date.

And there -- should there be any material reduction in the -- from the descoping of the project if at all -- I mean if...

No, I don't expect any material reduction at this point in time. So whatever conversation we have had with NHAI, there is no reason for us to be available. There may be minor changes, but there is -- we don't expect any substantial changes.

And sir, just lastly, I mean, how much loan have we given to support -- I mean, to the SPVs? Is it INR 325 crores or INR 196 crores?

I think INR 196 crores is what we -- was just temporary for the funding we had drawn. However, the loans -- temporary loans to the SPV stands at INR 325 crores.

Okay. And the top-up loan is part of this gross debt and net -- I mean, debt and cash balance?

Yes, INR 300 crores. That's right. INR 65 crores that we received as a part of the cash balance, yes.

The next question is from the line of [ Addit Munzl ] from Nippon Mutual Funds.

Just a couple of questions. One, on the top-up loan for Delhi-Meerut, I understand, was upwards of INR 90 crores. So we've availed INR 65 crores. The balance is yet to be availed?

Yes, the total approval of Axis Bank, which is one of the lenders or rather the lender in this project, was INR 94 crores, as you rightly said. But please understand that we have also got INR 300 payment received and all in time. So by virtue of all the things -- at the beginning of the project, it would have been INR 94 crores, but after the INR 300, the eligibility that NHAI was downwards INR 76 crores. And out of INR 76, we have drawn INR 65, so there's INR 11 we are free to draw at any point of time.

And what would be the debt on the holdco level in terms of working capital and your term loans?

INR 196 is what the figure was as of December number. Between the CC and CP, it was total INR 196.

Okay. And term?

Term loan was INR 60 -- 1 second. Term loan was INR 42 crores, and these are well supported by the asset of more than INR 62 crores. And these are, of course -- let me just also add, these are also just [ perfect ] financing that we have done on behalf of our suppliers. So once the project reaches the commission stage, we are in the process of transferring these assets back to the supplier, and to that extent, the loan -- long-term loan will also be repaid. So practically, this is just asset financing; otherwise, we have no intention of taking any long-term loan relationship.

The next question is from the line of Rohit Natarajan from Antique Stockbroking Ltd.

Sir, with this 9-month performance, what do we expect in revenue to end within FY '20? Would we be sticking with our earlier guidance?

I think my current guidance would be approximately INR 2,000 crores for 2 reasons. Number one, there has been an extended monsoon, so certain turnover has been lost. And another thing is that SNRP, which was expected to be reaching its appointed date by January, will reach by about March. So there -- it's not going to contribute to any turnover. So expect a drop of about INR 200 crores because of these 2 reasons. So my guidance would be approximately INR 2,000 crores.

So essentially, if I understand, it will be largely from Aunta-Simaria, Chikhali-Tarsod. These are the areas where you will actually have a slow -- an execution in comparison to the remaining 2 projects like GS and CGRG, which you are expecting anyway to conclude it before FY '20.

So the way it will be, so there's engines chugging at this point in time to my best of understanding is that we will be getting maximum turnovers from Amravati project and the CTHPL project. These will be the 2 engines which are going to give the maximum turnover, to some extent, supported by CGRG and GSY and Aunta-Simaria as I said, but SNRP will not contribute at all.

Okay. And sir, with this existing order backlog, when we move on to the next year, assuming -- let's assume SN project comes along through at the beginning of the next year's fiscal starting order backlog, what will be our execution portion on SN project? What is the pipeline ahead for those numbers to clock in?

So the question is how much of next year's turnover will come up from the current projects in hand, assuming SNRP will be achieving its appointed date by March '20. My expectation from the existing projects would be in the ranges of about [ INR 500 ] to INR 1,300 crores from the existing projects. And as I said, we are expecting CGRG, GSY to achieve their peak [indiscernible] by March 2020. There will be certain turnovers which will go into the FY '21 as well.

And let's assume even if you win some INR 2,000 crore to INR 2,500-odd crore projects, what position -- what kind of execution do you expect next year? Maybe could you want to throw some next year's ballpark guidance, something like that?

Sir, I -- well, obviously, it depends upon the order booking status, but I expect the growth to be moderate in the tune of 25% or there around for the year-on-year growth of the revenue from the existing projects and future projects put together.

Okay. Sir, if I understand, I look at these finance charges that has gone to a large extent. So I am trying to figure out what exactly is the reason for it.

Yes. I think I will want my -- [indiscernible] will give -- move more into detail to respond to this question.

So finance charge has increased close to INR 3 crores. Now mainly it is due to 2 reasons. One is increasing borrowing, to some extent, like around INR 70-odd crores as compared to September. And secondly, there are some interest on LCs, which we have discounted and sort of recovered it. So to that extent, you will see that INR 1.7-odd crores into finance cost, which is also bearing in other income because that is something which we recovered from SPVs. So it's a grossing-up entry on both sides, income and expense.

The next question is from the line of Santosh Hiredesai from SBICAP Securities.

Sir, you mentioned in your opening remarks about monetization plans of your HAM project. So is there any movement on that? Any status that you can share with us?

So as we speak, we are in very active dialogue for having a platform-level of understanding with a large player. And secondly, we are also exchanging term sheets for the completed projects as we speak. Now one interesting thing that I would want to add here is, if you all have -- must have noticed, that in the recent budget, the government has announced certain benefits for investment into the infrastructure projects for the [ solvent ] bond funds, which makes the investments very lucrative for these funds in the Indian infrastructure because of 0 taxation on interest, dividend and capital gain. So I think the time is right for us to right now target a bargain deal with the prospective investors in Indian infrastructure.

Sure. So right now, there's nothing concrete that -- as in which can be shared, but you're saying it is under process as well.

So we will -- as a listed entity, we would not want to declare anything which is not declared already to the stock exchange and we will come back to you when we -- once we are ready to [ think in ] the term sheet. But all I can say is that we are in advanced stages of that -- of -- for these processes.

Sure, sir. So secondly, in terms of some of the recent HAM projects a bit sort of open, I understand that you also had put in bids. How do you see the competitive intensity? And I understand there's a huge pipeline as well. So how are you looking at that bid right now?

So 2 questions in 1 question that you've asked. Number one, how do we see the competitive intensity? The competitive intensity, since at the value of the projects -- so it will be -- the project values are somewhere or any close in the ranges of INR 500 crores to about INR 1,000 crores, the competitive intensity is a different level. It could be anything between 10 to 7, 6 competitive effects. And so they can move to a level of INR 1,200 crores and plus, the competitive intensities become between 3 to 5. So there is an inflection point that comes in. And secondly, that's also depending upon geography, and the competitive intensity varies. So it is not something that I can give a general remark about. Now in terms of the responses from the competitors, if these are both -- if these are small players, we see normal claims happening more from a perspective that the HAM model has been [ related ] to almost 1.5 years. So there is a knee-jerk reaction on picking of whatever comes our way. I think the appetites of people will get satisfied very soon, and we believe that the competitive intensities will ease off as we move forward, so...

The next question is from the line of [ Sagar Parekh ] from [ Deep Finance ].

Sir, just one question. You mentioned, for next year, you're targeting 25% top line growth. Did I hear it right?

I said depending upon the acquisition of the projects, I could expect the top line to grow somewhere around 25%.

So basically on INR 2,000 crores, 25% means another addition of INR 500-odd crores.