Welspun Enterprises Limited (WELENT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Welspun Enterprises Limited Q1 FY '21 Earnings Conference Call hosted by IDFC Securities Limited. Before we begin, I would like to state that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mohit Kumar from IDFC Securities Limited. Thank you, and over to you, sir.

Yes. Thank you, [ Azan ]. Good morning, and thank you for joining to the Welspun Enterprises Q1 FY 2021 Earnings Conference Call. From the management side, we have Mr. Sandeep Garg, MD and CEO; Mr. Akhil Jindal, Group CFO and Head of Strategy; Mr. Ved Mani Tiwari, Deputy CEO; and Mr. Sridhar Narasimhan, Chief Financial Officer. We will start with an update from the management for the past quarter and then proceed to the Q&A session. Thank you. And now I hand over the call to management for the opening comments. Over to you, sir.

Thank you, Mohit. Thank you, IDFC Securities. Good day, ladies and gentlemen. On behalf of Welspun Enterprises Limited, I welcome you all for Q1 FY '21 results con call. I hope that you, your family and colleagues are well and are taking the necessary safety measures. As has been informed, on this call, from the management side, we have myself, Sandeep Garg; Mr. Akhil Jindal, Group CFO; Mr. Sridhar Narasimhan, CFO, Welspun Enterprises; and Mr. Ved Mani Tiwari, Deputy CEO, Welspun Enterprises. I believe you would have already gone through the financial results published yesterday. Before we go into the details for this quarter, let me quickly start with key recent developments. Point number one, I would want to draw your attention to the process of regard -- I would want to draw your attention to the project Mukarba Chowk – Panipat, wherein the process of harmonious substitution was completed on 8th June 2020. It is a road, toll road, which is partially completed, and we have taken over the process of harmonious substitution. I would also want to draw your attention to a long-awaited project which we won in 2018, which is the SNRP, or Sattanathapuram-Nagapattinam Road project, which was stopped by a Madras High Court for further proceeding. I'm happy to inform that the honorable Supreme Court, with its order dated 13th of July, has granted an ad-interim relief stay on the honorable High Court's order, which is a very positive development for the project to see the appointed date. We expect the appointed date to take place in the month of August 2020. Also important to note is that the operations and financial results for the Q1 have been muted due to the lockdown. The results for the quarter are, therefore, not comparable with those for the previous quarter. However, we believe that we would be able to make up for the deferred revenue in the subsequent quarters. Therefore, we believe that we would be able to achieve our guidance of 20% year-on-year growth during the financial year. I would also want to brief you about the precautions that we are taking due to the situation of pandemic. We are extremely cautious and higher standards of hygiene and safety are being practiced by our staff across all our locations. And we are trying to create awareness amongst our employees, which is leading to additional effort on our part. Happy to inform that currently, at all our work sites, the workforce is approximately 75% and we expect that it will go up to 100% post-monsoon. In brief, I would want to also talk about the operational performance. As I said, it's been a muted quarter. On a macro level, our revenue for Q1 FY '21 stands at INR 174 crores. However, the good part is that we have been able to improve upon our EBITDA margin, which stands at 15%, a 131 bps growth year-on-year basis. Now I would want to update our project -- specifically on our projects. Coming to the road portfolio, as you are aware, our current HAM portfolio of 7 projects stands at approximately INR 10,000 crores. In addition, the BOT project of INR 2,100 crores has also been acquired through harmonious substitution. So the total value of the portfolio stands at over INR 12,000 crores. The current order book post-execution of Q1 stands at approximately INR 4,700 crores. Coming to specific projects, Delhi-Meerut Expressway package 1, which is the completed project of the company, we are pleased to inform you that we have received the fourth annuity in July '20 within the stipulated time from NHAI. You will recall that we refinanced the -- this project with a top-up loan of INR 65 crores at an interest rate of 8.17% per annum, which has further dropped down to about 8.02% in September. At approximately 8% cost, this will be one of the most cost-effective financing and help us bridge the gap between the NHAI interest rate, which is currently payable at 7.25%. Friends, you may recollect that sudden drop in the bank rate due to the intervention by RBI in 2 subsequent announcements in response to the pandemic has adversely impacted the entire industry dynamics. The government is not pleased with the current adverse effect and we believe that some solution will emerge quickly for the industry at large on this account. I would want to brief you for the next project, which is Chutmalpur-Ganeshpur & Roorkee-Chutmalpur-Gagalheri, or normally called CGRG. The payment for this -- for the last installment that is the fifth milestone has been received by the company. And as we speak, a supplementary agreement is likely to be signed between NHAI and the company shortly, at which point the PCOD shall be issued, which we expect in couple of days from now. The next project that I would want to brief you is about Gagalheri-Saharanpur-Yamunanagar, or GSY. The physical progress of this project stands at about 93% at the end of the quarter 1 FY '21. For this project also, we have received the payment of fifth milestone or the last milestone during the construction phase from NHAI in March 2020. And it is our endeavor to achieve the PCOD for this project also in the August [ recess ]. The third project that I would want to brief you -- or the fourth project that I would want to brief you about is Chikhali-Tarsod Road project in Maharashtra. The physical progress of this project stands at about 61% at the end of Q1 FY '21 or 30th June 2020. The project has received the payment for third milestone from NHAI. And we are likely to achieve the PCOD for this project also during the current calendar year. The fifth project that I would want to brief is about AM2 in Maharashtra Amravati. The physical progress for this project stands at 60% as of 30th June 2020. We have received part payment against the third milestone from the PWD against this project. We are likely to achieve PCOD for this project also during this calendar year. So just to recap, with these 5 projects, we will, by the year-end, have 5 operational projects out of the total 7. So approximately, INR 6,000-odd crores value of the portfolio of INR 10,000 crores would be completed by this calendar year. Coming to the balance portfolio. The project that I would want to brief is Aunta-Simaria. It's a bridge project over river Ganga with 8.7 kilometers total land. The physical progress for this project stands at about 22% as of 30th of June 2020. The first payment milestone at 10% has already been received from NHAI. The last project in the HAM portfolio is Sattanathapuram-Nagapattinam. As informed earlier, happy to share that the honorable Supreme Court has given relief to the NHAI by granting an ad-interim relief -- ad-interim stay against the honorable Madras High Court order. And the project is likely to receive appointed date in the month of August, subject to internal process completion at NHAI. Now coming to the recently acquired projects, BOT project, which is Mukarba Chowk – Panipat Toll project. We became the concessioner for this INR 2,122 crores project through a process of harmonious substitution. Out of this INR 2,122 crores, the balance works are relating to INR 1,593 crores to complete the project. We were -- we could get the substitution done by -- in the early part of June 2020. And now we are fully mobilized at site and the work is going on in full swing. It will be our endeavor to achieve the PCOD for this project in this financial year. Coming to the water infra, the operational Dewas Water project, which became operational from 30th April 2019, was operational during the pandemic as well. And during Q1 FY '21, the revenue stands at INR 2.3 crores and an EBITDA of INR 1 crore. Coming to Oil & Gas, there are 4 relevant projects. As you would recall, this is a joint venture operation with Adani, wherein we are only 35% partner. The first block is Kutch block or we normally call GK-1. ONGC is the operator for this block and they are in the process of submitting the Field Development Plan, which is expected to be submitted by September 2020. Because of the pandemic, there has been an extension granted to them to submit this FDP. The next block that I would want to talk about is the Mumbai block or MB/OSN/2005/2 block. We have been granted the permission to enter into Phase 2 of this project. And we are expecting to start drilling the 1-well program in this block post-monsoon. The third block that I would want to talk about is the discovered small field cluster of B9. We are targeting to drill 1 well in the B9 field of this cluster post the drilling of Mumbai block well. Of these 3 blocks, the overall GIIP is about 0.9 TCF, trillion cubic feet. And this is -- this resource has been verified by a peer review. We expect the EUR, or ultimate economic recovery (sic) [ expected ultimate recovery ], of about 70% of GIIP. The last block of interest for this operation is Palej block. As you will recall, this was -- determination notice for this block was issued by the Ministry because of the fraudulent act of [ Metro Gas ] India. We are making efforts to revive the block because it is already a find; it's a discovered field with oil present. And coming to the outlook. Post-June, NHAI bidding has started, and we are selectively participating in the bidding process while maintaining our threshold returns. As we speak, there are about 26 HAM projects of NHAI with total value of INR 27,000 crores, for which the bids have been announced. Apart from NHAI, we are selectively looking at evaluating HAM projects of frontline state and municipal agencies. The company will continue to explore inorganic growth opportunities through measured evaluation of risk-return parameters. In the Water segment, we are currently -- we are mainly focused on sewer treatment plant, desalination and bulk water transmission, either through EPC route or through HAM mode. WEL is well positioned for early financial closure of new project wins as and when it happens, given its healthy cash situation. You may recollect that we raised INR 375 crores by way of NCDs in Q1, which adds to our cash balance. The company will continue to pursue an asset-light model while focusing on operational excellence and prudent risk management. Now I will hand over this call to Mr. Sridhar Narasimhan for the financial highlights. Over to you, Narasimhan.

Thank you, Sandeep. Good morning, ladies and gentlemen. And as Sandeep said, this has been a muted quarter, with revenues being affected due to the pandemic situation. However, as our guidance goes, we will scale up to our guidance level during the subsequent quarters. So our revenue for quarter 1 stood at INR 174 crores; our operating EBITDA at INR 19 crores; and the margin was at around 15%, which is a healthy 130 bps over the corresponding quarter. Cash profit, considering the tax effective rate of around 19%, stands at around INR 17 crores. And as Sandeep said, we have adequate cash to take care of subsequent equity requirements and also for growth capital. We have worked a cash balance of around INR 520 crores -- INR 515 crores end of quarter ended June 2020. The additional equity requirement for our existing projects is around INR 350 crores, broadly into the existing operational HAM projects of around INR 130 crores; Oil & Gas INR 110 crores; and the recently acquired BOT project of INR 115 crores. So hence, we also have undrawn cash limits, which actually adds to our cash kitty and which is good enough for our -- any immediate equity requirements of -- for our growth prospects. The short-term loans of INR 74 crores, which is represented by commercial paper and equipment loans and the long-term loan of around INR 375 crores, is adequately supported by the current assets and fixed assets, and we have adequate security cover there. And Sandeep, back to you, in case, good.

Yes. With this, the -- our initial communication or presentation is over. And I would request IDFC to seek any questions that the investors may have.

[Operator Instructions] The first question is from the line of Rohit Natarajan from Antique Stockbroking.

Sir, my first question is more on the Sattanathapuram project.

Mr. Natarajan, sorry to interrupt you. The audio is not clear, sir, from your line. Please use the handset mode.

Can you hear me now?

Much better.

Yes. So my first question has more to do with Sattanathapuram project. Now that we have got already a relief from the Supreme Court, what do we make out of this relief? Can you quantify what amount of work could be descoped or what quantum of work could be lost from the potential backlog from that particular project?

So see, as I said, we don't know the answer as of now, because it has been a recent relief that has come from the -- there seems to be some...

No, no, I think the static noise is at their end. Continue, continue.

So as I said, it is a recent relief. However, the NHAI internal processes are yet not complete. So as soon as they are complete, we would know if there are -- there is a descoping that is taking place and to what extent. I do not expect any large amount of descoping, but it could be anything between 15% to 20% of the contract value.

I appreciate that, sir. My second question is more on the PCOD status for the 4 projects in this year, what we are targeting, CGRG, GSY, AM and CT. Now that we are already done a good progress in CGRG and GSY and even AM and CT should probably be ramped up, would you be initiating a conversation with prospect investors to monetize this particular bunch, whether it be [ 4 plus 1 ] in Delhi that you already have operational?

That is the intent, Mr. Natarajan, for sure, that we bring a size to this portfolio so that we can attract right investors into that portfolio.

I appreciate that, sir. Sir, also, you earlier hinted that there were some water projects available for bidding, close to some 300-odd billion was the conversation that we had last time, especially from [ MCG ], MP and Marathwada. Now that the states are not clearly in a good position to do finance all these projects, do you think this kind of prospect order inflow lies in water space?

I surely believe water is not an option, it is a necessity, and I do believe that the resources will be found for the water, irrespective of anything. So we are strongly committed to the water sector. And we believe that these agencies which are behind these projects, like MCGM, they are pretty liquid entities. So they can take on to these projects for sure.

Sure, sir. I appreciate that answer. Just finally, sir, on the labor availability part. You touched that already you have some 75% labor available. And post-monsoon, this will shoot up all the way to 100%. Sir, would you want to quantify some number that you have in mind, by 2Q, you will have maybe at 90% level or something close to 100%. Is that the way it should be seen? And will we be normalized by Q3?

So Mr. Natarajan, you would appreciate this is a forward-looking statement. The answer is we -- this is based on a situation that we believe that the pandemic will be dealt the way the current trend is. So it will be too difficult for us to say that it will -- what it will be at the end of Q2. But it is reasonably fair to expect that post-monsoon, there is definitely a push from the government as well as from the need from the workforce to come back to the work site. So we expect it to be in full strength post-monsoon.

[Operator Instructions] The next question is from the line of Manoj Kumar from IDFC Securities Limited.

Congratulations on the completion of [indiscernible]. I have 3 questions with me broadly in terms of the outlook that you gave. I believe you...

Mr. Kumar, sorry to interrupt you, this is the operator. Sir, the audio is not clear from your line. Sir, please increase the volume of your phone.

Yes, sorry. Sir, I have 3 broad questions with me. One, in terms of the outlook that you have provided. Maybe if you could touch upon on how you are working out internally to that 20% growth that you gave. That is one -- first question, and I'll take the next question afterwards.

Yes. So as you would notice that our current order backlog unexecuted stands at about INR 4,700 crores level. Now for us to have a 20% growth, we need a turnover of about INR 2,100 crores, which is 50% of -- less than 50% of our current unexecuted order book in hand. So we are reasonably confident that we will be able to execute this much of projects.

Okay. Sir, if I may ask more on this, what is the trend that you are seeing, like in Q2, Q3 and Q4 to ramp-up? How you're seeing with the labor force availability and then if you can also talk on these?

So I -- if you were to ask me that question, this is forward-looking. So I would put that caveat into it. However, the Q1 is known now. Q2, we expect to be almost at par with the past performances. It is the Q3 and Q4 which will be the real drivers when the full workforce will be present and we are fully mobilized on all our sites. So that is when we expect the revenues to really jump up.

Okay. Okay. Got it, sir. Second question is on like what are the upcoming broad opportunities that you're seeing, like or any other opportunities that you could see in terms of acquiring another [indiscernible]? And generally, what is the -- also on the same side, what is the general threshold level that your threshold level for margin that you see for that?

So as we speak, there are a couple of options that -- we get the options practically every month, a few options we get it, because of our financial capabilities. So we keep on looking at them, but we have our own threshold returns and as I said, which are definitely in the mid-teens and above.

Okay. Got it, sir. And in terms of the state and municipal projects, are you seeing any big projects? What is the size of the projects that you've been in the bid for?

Actually, we are looking at projects of -- in the ranges of INR 1,000 crores to some INR 6,000 crores as that -- that's the kind of numbers that are panning out within the canvas -- top canvas.

Okay. If possible, could you provide us any opportunities that are in the pipeline now?

Yes. If you could get in touch with the -- my team separately, they may be able to give you an idea of what are the projects we are looking. And obviously, you would appreciate that this would not be fair for us to tell you exact projects that we would be bidding for as that will give the competitors a competitive advantage against us.

[Operator Instructions] The next question is from the line of Rachit Kamath from Anand Rathi.

My first question pertains to some of our projects are still like around 60%, 70% kind of a level. And earlier, you said earlier, CGRG and GSY are around 93%. So -- and you're planning for getting a PCOD right now. So is it that the land is not available for this? And this is the final land that was there?

So Rachit, I'm not very clear, the question, but I will answer the question that I've understood. The question is, is there a land issue relating to these projects?

Yes, sir.

The answer is that there are land issues. However, as NHAI has taken a decision that they have -- they go ahead and issue the PCOD if they are not in a position to issue the -- to get the land transferred to concessionaire for execution. So all land issues are descoped or delinked as the case may be.

Okay. And sir, are you really willing to kind of say more for PCOD at this stage because there is an uncertainty on the -- with the interest rates issue right now. And given the fact that if you're able to delay the project in terms of obtaining a PCOD, we can push our annuity payments to that extent. Just wanted to -- what are your thoughts on this front?

I don't think pushing PCOD is in the best interest of the company because you are already running the interest on the debt as well as your equity is invested for much longer. It does not -- the swing of bank rate does not compensate for these items.

Yes. In any event, if the bank rate corrects what we are presuming, then it would be applicable to the next annuity. So there's no point in us pushing the PCOD out. They are 20% and it's -- the cost of PCOD pushing is far more higher than the advantage we would get out of it.

Sure, sir. So is there anything like a funding loss coming out from where you had the value for the annuity assets for the Delhi-Meerut in this quarter?

There is no funding loss. Because these annuities are well -- they are covering all our costs and everything. So there has never been a lost funding in the previous quarter as well. These are -- there might be a timing mismatch in terms of the cash flows and other things. But to that extent, I think there is a clear -- I mean the whole HAM principle -- the annuity principles are based on that, that they kind of...

So I realize that the timing of the cash flows are there, but then given the fact that we are paying and we are receiving interest at around 7.25%, but then we are paying at around 8.10% kind of a percentage interest rate. So on that account I was thinking was there any shortfall on that front?

Yes, but there is also the interest paid on our own equity portion and the annuity which covers our own annuity. If you add both of these, they more than account for the difference between the NHAI rate and the bank rate -- or the loan rate.

Sure, sir. I understand. Sir, 1 more question I have is pertaining to the Mukarba Chowk. I think in the press release that you've given out, it shows that you have included almost INR 43 crores kind of growth during the quarter, Q1 FY '21. So is my understanding correct?

That is correct. We have executed on that. Since we were planning for this project to be awarded soon, this was a harmonious substitution, we went ahead and started the work much earlier in view of the impending monsoon season.

Okay. Sir, I think you have had a kind of a good pace considering that we only were there for operational for almost [indiscernible] days and been done almost INR 43 crores there.

Yes.

And sir, I think, on Water side, I think there are a lot of opportunities coming in, in the [ states in Q3 ] and there are a lot of opportunities bid out recently. These were pertaining to bulk water suppliers, where we were kind of [ in pressure ] to winning. So were you participants in these projects?

So as I said, we are looking for projects where we are reasonably secure in our payments. So we first evaluate the payment histories of the states and then decide to take a plunge into it.

Okay. Sir, so what kind of geographies would we be interested in? Like [indiscernible], Maharashtra is a state that you are looking at?

Maharashtra, Gujarat, MP are a few of the states. We are looking some states in the north as well -- south as well. UP is definitely on radar as we speak.

Is there any kind of opportunity like the pipeline that -- like a number as well for the Water segment, sir?

So we would definitely want to get at least 1 project of about INR 1,000 crores in this Q1 -- in this financial year.