Azure Power Global Ltd (AZRE) 2017 Q4 法說會逐字稿

Good morning and welcome to the Azure Power fiscal fourth quarter and year end March 31, 2017 earnings conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Nathan Judge, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us. Today the Company issued a press release announcing its financial results for the fourth fiscal quarter and full year of 2017 ended March 31. A copy of the press release and the presentation are available on the Investors section of Azure Power's website at AzurePower.com.

With me today are Inderpreet Singh Wadhwa, Founder, Chairman, and Chief Executive Officer; SK Gupta, Chief Financial Officer; and Bob Kelly, Director on Azure Power's Board and the former Chief Financial Officer of SolarCity. Inderpreet will provide a business update and SK will discuss our fiscal fourth-quarter financial performance. Inderpreet will then wrap up by highlighting steps the Company is taking to enhance shareholder value and provide our guidance for fiscal 2018. After this, we will open up the call for questions.

Please note: our Safe Harbor statements are contained within our press release, presentation materials, and available on our website. These statements are important and integral to all our remarks. There are risks and uncertainties that can cause our results to differ materially from those expressed or implied by such forward-looking statements. So we encourage you to review the press release we furnished today with our Form 6-K and presentation on our website for a more complete description.

Also contained in our press release and presentation materials are certain non-GAAP measures that we reconcile to the most likely comparable GAAP measures. And those reconciliations are also available on our website and in the press release and presentation materials. It is now my pleasure to introduce Inderpreet Singh Wadhwa, Founder, Chairman, and Chief Executive Officer. Over to you, Inderpreet.

Thank you, Nathan. And good morning, everyone. Starting from slide 4, it summarizes our mission and core values which are critical to our long-term success. Our mission is to be the lowest cost power producer in the world and this is not the same thing as having the lowest selling price of power in the world.

Core to our culture as a Company are our core values: encompassing excellence, honesty, social responsibility, and entrepreneurship. We strive to uphold every one of these things in everything we do. We work closely with our local communities and our projects create several local jobs and provide a sizable amount of discretionary cash flow for these communities.

The Company has a portfolio of 1,069 megawatts of high quality operating and committed solar assets, with 651 megawatts operational at the year end March 31. However, today we have 771 megawatts operational. Our contracts are with the strongest utility counterparties in India. 52% of our portfolio are from government of India entities, like NTPC and Solar Energy Corporation of India, which have been AAA and AA+ debt ratings by domestic rating companies of S&P and Moody's.

As a direct result of our careful selection of our counterparties, we are pleased to share that there have not been any curtailment on any of our plants. We would note that all of our PPAs are performing with strong payment history with no challenges to our PPA rates.

Most of our customer contracts are for a tenant of 25 years at fixed prices, which is to say that our tariffs are not subject to variable commodity prices. In some cases, the contract prices are at or below prevailing alternatives for our customers, thus making solar power an economic choice for our customers.

We continue to have ready access to the capital markets and are pleased to announce that all of our committed and under construction projects are planned. We also recently announced that we received a loan from the State Bank of India and World Bank under the Grid Connected Rooftop Solar PV Program to help fund our growth in the Azure Roof Power platform.

This loan that we received is for a 15 tenor and an interest rate of 8.35% per annum in rupee terms, which we believe is one of the lowest interest rates [availed] by a solar power company in India. The World Bank has allocated over $625 million overall for rooftop projects in India to help the country achieve a 40 gigawatt rooftop goal by 2022.

Turning to our fourth fiscal quarter performance, we commissioned 139 megawatts including our large 130 megawatt project in Karnataka. And since the end of the quarter, we have commissioned another 120 megawatts, including a 100 megawatt (inaudible) project.

We continue to be excited about our commercial and industrial rooftop business, as we believe our integrated business model provides us with competitive advantages in this segment over our peers. In addition, the returns are usually above the utility [groundwork] segment in these projects.

This quarter we have introduced the brand Azure Roof Power, which will be the brand for our offering to commercial, industrial, government, and institutional rooftop customers. With over 100 megawatts of high quality operating and committed solar assets across 14 states as of June 2017, Azure Roof Power is one of the largest rooftop portfolios in India. Azure Roof Power customers include large commercial real estate companies, leading global chain of premium hotels, distribution companies in smart cities, warehouse owners, train corporations, and water supply companies.

During the fourth fiscal quarter, Azure Roof Power's portfolio nearly doubled from the previous quarter with the signing of a 46 megawatt project with Indian Railways. This project power purchase agreement has a 25-year fixed fee agreement with a tariff of INR4.63 per unit. After considering the available capital subsidy on this project, the levelized tariff over a 25-year works out to be about INR6.19 or roughly USD0.095.

We won this project around the same time India saw new low tariff in one of the solar parks at approximately USD0.04. Based on our analysis our terms on the Indian [build on] this project are significantly higher than what we would've achieved with the lowest solar park option price.

We believe solar power has a significant advantage in India with great potential for growth. It is now at a price that is lower than average spot price of coal power in India and that's the cheapest source of power in India. In fact, we saw over 13 gigawatts of land coal fired power plants canceled in May of this year. Solar brings so many advantages, including greater flexibility and reliability and it's clean and sustainable.

India in particular is well-suited for solar, given the high solar radiation levels and matching of seasonal demand peaks. And importantly solar does not need long stretches of expensive transmission. We can deliver solar where it is needed. And not only do we see the opportunity to participate in the 100 gigawatts of new solar capacity that the government has planned to be implemented by 2022, but also the much larger opportunity of 365 gigawatts of capacity that India needs in the long-term.

There are still over 230 million people without power in India and with India's commitment to electrification of every household in the country, in our opinion, we believe that the majority of new megawatts that we will be built in India going forward will be using solar energy.

On the industry front, recently there have been new rules set for solar power PP tariffs in India in a few solar park options. We see increased global interest in the solar power sector in India and consistent contract quantity improvements. We continue to be disciplined about our approach to winning new projects and playing to our core strengths of local development.

We are sustainably winning high return projects and our integrated business model gives us a competitive edge. Most of our peers are global and the cost of capital is what they bring to the table. But development is local. We have been in the Indian solar market since the beginning and over this time we have put together a leading team that provides us with a skill set that many of our peers do not have.

We have better local development expertise and speedier execution. At the moment there are over 3 gigawatts of new capacity bids being across India and there are more auctions to come. 20 gigawatts of total solar capacity is expected to be auctioned in the country by 2018.

There are several other tailwinds that are supporting our growth including the strengthening of the Indian rupee versus other global currencies. In the last 12 months the Indian rupee has appreciated 2% compared to the US dollar, which is the strongest move in seven years.

Not only does a stronger India rupee make our projects cheaper and more competitive to other domestically sourced fuels, but it also makes our equity more attractive to foreign investors. We have seen stronger inflows into emerging market funds and an increased amount of foreign direct investment into India.

India is also on track to simplify their sales tax rules and has announced details of the new goods and service tax better known as GST. The GST rate on solar modules has been set at 5%. Other items are still under evaluation and we expect the GST to be applicable on or around July 1 this year.

Overall we do not expect GST to have a material impact on our business. Further all our PPAs for under construction projects allow for the pass-through of any impact of GST to our customers and we expect that future auctions will take into consideration the impact of GST.

On India's domestic content requirements, in February of this year, WTO rejected India's final appeal and upheld its previous ruling against domestic content requirement provisions for solar projects in India for private procurement. Solar Energy Corporation of India, or SECI, canceled tenders that have DCR. Thus SECI did not sign the PPA for (inaudible) a 50 megawatt project which had a DCF content requirements.

We did not incur any material costs related to this project. We believe that these DCR projects will be re-auctioned without any technology restrictions.

Further, the Indian solar manufacturing associations have sought [imposition] of anti-dumping duty on solar panels imported from China, Malaysia, and Taiwan. The Indian solar manufacturers have sought anti-dumping duties a few years ago and the Finance Ministry of Government of India did not implement any duties. We will continue to monitor the situation, but we do not expect any impact on our business from this matter at this time.

Going forward in the current fiscal year, we will be adopting already the updated tax accounting standard under ASC 740. We believe with early adoption, our tax expense is expected to be lower and accordingly our profit after tax is likely to increase as it will result in recognition of deferred tax assets on intra-entity transfer of assets which is likely to be higher than the prepaid taxes we would have recognized earlier.

And this pertains to our expenses that are incurred on account of taxes from engineering procurement and construction services in the Company. Generally though our tax expense may vary significantly between quarters and it will be impacted by deferred taxes and timing of accelerated depreciation among other things.

So, moving to our full fiscal year 2017 results, the Company continues with strong execution track record and nearly doubled our operating megawatts to 651 megawatts as at March 31, 2017. We had 1,069 megawatts of operating and committed projects as of March 31, 2017, 31% more than the same date in the prior fiscal year.

The increase in capacity has helped us achieve a higher revenue of $64.5 million for the full fiscal year, an increase of 59% over the prior fiscal year. We were also able to increase our adjusted EBITDA higher by 71% for the fiscal year ending March 31, 2017, compared to the prior fiscal year.

We generated 618 million units of energy in fiscal year 2017, which is 69% higher than the same period last year. And we estimate that if our entire portfolio was operational today that it would provide us annual revenues of approximately $170 million.

I will now turn the call over to SK Gupta, our CFO, to discuss the financial performance of our fourth fiscal quarter.

Thank you, Inderpreet, and good morning to all of you. During our fourth fiscal quarter of 2017 revenue grew by 72% to USD20 million over the corresponding quarter of last year as we commissioned new capacities. We continue to deliver EBITDA expansion and reported a distributable term growth of 90% compared to a 72% growth in revenue during the period.

Looking further, we continue to expect that we will be able to expand our EBITDA margins and grow cash flows at a faster pace than revenue by controlling costs and [combining] the benefit of scale on an integrated platform.

Our interest expense during the quarter fell 6% from the same period in the prior fiscal year principally due to the conversion of CCDs which occurred when the Company completed its initial public offering in October 2016. Not only did the conversion lower interest expense and debt, it increased the amount of liquidity on the balance sheet.

With regard to taxes, recognizing contract expense of USD9.9 million during the quarter, which is higher than the (inaudible) in the quarter. In the fiscal year 2017, our (inaudible) taxable income on profit [led] by our subsidiaries that provided engineering, procurement, and construction services and a delay of (inaudible) [deposition] that benefit from the fourth quarter -- fourth fiscal quarter, which appear to the first fiscal quarter of 2018. We expect that our cash tax level in fiscal year 2018 will be lower than fiscal year 2017 as we recognize the benefit of accelerated disposition in fiscal year 2018.

Our balance sheet continues to grow as we add new projects to our portfolio. Property, plant, and equipment and fees to USD631 million and a net debt of USD407 million as at March 31, 2017.

Our liquidity has remained strong. We ended the quarter with USD[220] million of cash and cash equivalent at the end of the quarter, once restricted cash is included. This compared to USD74 million in March 31, 2016. The Company has undrawn project debt commitment of USD250 million at the end of the quarter. We also have USD108 million of working capital liquidity that we can draw if necessary.

We also believe our strong partnership with CDPQ differentiates us from our peers. CDPQ (inaudible) on our assets that we can grow our portfolio by bringing in CDPQ (inaudible) for the partner in our [London] projects without any (inaudible) dilutions.

We have also (inaudible) financing for all our committed and under construction projects for the calendar year 2018. Now I [hand] back to Inderpreet regarding our fiscal 2018 initiatives, to enhance shareholder's value, and our fiscal 2018 guidance. Inderpreet?

Thank you, SK. We have many initiatives in 2018 that we believe will announce shareholder value. As we have shared before, we utilize four main levers to improve returns and enable sustainable growth. And here are some of the highlights of the actions we are taking in the current fiscal year in each of these categories.

As mentioned before, we are excited about the rooftop and distributed generation opportunity in India. We have recently announced our Azure Roof Power program for commercial and industrial customers and we will scale up this business. This growth segment provides diversification and offers superior returns. We believe that we have strong competitive advantages in this segment of the market and expect that this segment will provide strong growth in the coming months and years.

Next we have reduced our balance of system costs by 84% since inception of the Company through value engineering. In fiscal year 2018 we are going to further improve our balance of plant system costs for larger block implementations, new material implementations, and capacity optimizations.

We currently have four patents being reviewed, including our proprietary [NOx] system which provides us real-time information and allows us to maintain over 99% availability for our plants. Further with our superior asset quality, strong counterparties and as financing for Indian solar continues to mature, we are seeing better and better financing costs. We are taking advantage of lower rates through refinancing.

We also believe we can grow our portfolio by bringing in minority interest investors at a project level without diluting current shareholders. We will continue to bring down the cost of financing in both our new and operating projects this year.

We have discussed the advantages of our O&M platform in our earlier updates. By having our O&M capability in house we can implement improvements in our systems sooner than our peers who rely on third parties. We have developed the proprietary cleaning technology that is providing a step function improvement in the throughput of the plants while using 50% less water with fewer man-hours than manual cleaning.

We plan a broader rollout this year of this patent pending technology. Our recent adoption of the (inaudible) technology allows us to better find and fix problems in our projects and we also expect broader adoption of this technology in all our projects this year. These are some of the key highlights of the initiatives that are planned this year to improve the shareholder value.

Moving on to our guidance for the current fiscal year, we are issuing the FY18 revenue guidance of $118 million on the lower end, to $125 million, on the higher end in terms of million dollars of revenue. The midpoint of this range would be about 88% higher than the fiscal year that has just ended.

In addition, we remain on track to have operating capacity between 950 to 1,050 megawatts by the end of calendar year 2017. We now also expect that we will have 1,000 to 1,200 megawatts operational by end of fiscal year March 2018. With this our formal comments end and we will now take questions.

(Operator Instructions). William Griffin, Barclays.

Just have a question on the guidance. I think the revenue guidance is a little bit lower than I would've expected given what you guys are targeting as far as operating assets by the end of the year. Could you just talk a little bit about what your assumptions are going into that revenue number as far as average portfolio tariff, capacity factor, etc.?

Sure. So I think in terms of the tariffs, we have published in the appendix of the presentation all the projects that are under construction and will be operational in the timeframe we are talking about. So tariff guidance is very clear and it's in there for the projects that are in the pipe.

In terms of the plant load factor, you have the historical numbers where we were not doing the capacity optimization on these projects. But the projects that we are constructing now we expect capacity optimization of at least 18% to 20% or what we have done historically.

And then what we have discussed in a previous update is that there is a stabilization period of roughly one quarter where you would start realizing the full potential of the generation. And that's why we sort of guide to the portfolio run rate as well. So some of these projects come in on line during the year as we progress, but the full potential of their revenue you will realize a quarter later.

Got it. Thank you. And then my second question is just wondering if you could give us an update on what you guys are thinking as far as refinancing some of the floating-rate debt with green bonds and if you've made any progress there?

So we continue to evaluate these opportunities very actively. But there's no formal announcement to be made at this point. What we have disclosed in our 20-F filings you will see progressively that the interest rates on projects have come down, so that should give you a sense of where we are moving.

I think we have seen closer to 10% in the projects that we have recently refinanced and I think those disclosures are available in the 20-F as well. And we see continued improvement in the interest rates for these projects going forward as well.

Great. Thanks, guys. That's all I had.

Philip Shen, ROTH Capital.

Thanks for the questions. In terms of the PPAs, we know that there are -- these numbers out there which highlight the low end of the PPAs being one, call it, USD0.04 per kilowatt hour. And we know that you guys consistently bid higher than that. So was wondering if you could comment on where your bids are coming in these days with PPAs.

And then also how do you expect your project returns to evolve in spite of being better than the low end. As we get through fiscal 2018 and then fiscal 2019, how do you expect your IRRs to evolve with the lower PPAs coming online?

So I think what we have said earlier as well, Phil, is that we continue to be extremely disciplined about our portfolio and our returns. And which you have seen again in the last quarter, the projects that we have won with railways is closer to $0.09 whereas you mentioned the lowest are at $0.04.

So, on projects like these we're actually exceeding the returns that we have seen in some of our early projects last year as well. So we continue to take advantage of our local development platform and where the advantages of those platforms are.

What you are seeing, the lower end of the spectrum on the bidding is in the solar parks where foreign investors who don't have the local development capability would be willing to do projects at relatively lower returns. And we don't intend to follow that model and we are very clear and we will continue to do that.

But what we are also continuing to see is significant reduction in CapEx costs, both on our balance of plants as well as on the modules. And you probably know better than most folks out there how the manufacturers are moving their ASPs in the market. And we see that trend continuing as well.

So in the last 12 months we have seen close to 29% reduction on module prices and we have seen 1.5% to 2% improvement in efficiency as well. So it's not just that the costs are going down, we also see the efficiencies are moving up. And we will continue to maintain that sort of drop that our costs will fall steeper than our tariffs as we have done in the past. And I think we will continue to see the same trend in this year.

Can you put some numbers on that last point, Inderpreet, in terms of your costs could fall faster than the tariffs? Perhaps remind us where your overall system cost structure is at the end of the fiscal year that you just reported. And then how much lower could it go as we hit the end of fiscal 2018.

Right. So I think for obvious reasons we don't talk about our forward-looking cost numbers, but we can tell you where we ended up. I think we were at about $0.76 for the previous fiscal year, which I believe, if I'm not wrong -- I don't want to speculate. You can calculate. We mentioned both the numbers in our prospective and 20-year findings. But it's about maybe 17%, 18% or so for a year-over-year reduction in our overall costs.

And tariffs actually -- I mean, if you look at the project we won in the last quarter at $0.09 is relatively higher than where the tariffs were in that project at the beginning of the year. So our tariffs are slightly, if you look at that particular contract, have gone up while our costs continue to move. But even if you do the weighted-average math on the portfolio, you will see that our tariffs have not come down in the same ratio as our cost structure has.

Great. One more for me. In April I believe [Herrion] announced that they would partner with you to develop about 118 megawatts in India and they would take a 45% interest in the JV. We have seen you do this in the past, which is work with certain suppliers. Can you talk about this relationship and then how do you expect it to evolve?

I don't think Azure has made any announcements to that effect, so we really don't have anything to add to that. But we continue to evaluate our partnerships and relationships on a regular basis. And as and when we do something of that sort, we would make the announcement.

Okay, great. Thanks, I'll pass it on. I'll pass it on.

Maheep Mandloi, Credit Suisse.

Thanks for taking our questions. Just needed clarification on the impact of sales taxes. Does it mean that the PPAs allow you the flexibility to pass along the higher taxes, if any, [with every] contractor?

That's correct, Maheep. So on the contracts we have under construction we have that provision that protects us from that change in taxes. So, while the effect is quite minimal, but we do have the provision to pass that on.

Got that. And I know it's probably too early to talk anything about the petition by the Indian manufacturers, but just for us to understand, how many megawatts of modules are yet to be purchased for projects which would be constructed in the next year? Can you give any color on that?

For Azure?

Yes, for Azure.

We don't break it down in that detail. But I'd say majority of the deployment is done. So we don't anticipate any significant risks to our current portfolio. And like I said, if there's anything that does come into play later that would, again, be a context for either in under construction projects under [change in law] provisions which are very strong with our strong counterparties. Or if there are new auctions, then those would take that into consideration. So we don't carry a risk which is open.

Okay. And in terms of the outlook for 2018 of 1 to 1.2 gigawatts, could you just talk to what is driving the upside on that guidance? And would it be more of a rooftop project or a utility scale project?

Yes. I think it it's a little bit of both. So, we are actively developing on both fronts. So we do see a clear visibility on some of those projects that we believe can be executed in this financial year. So the key is the execution in the financial year versus just passing the threshold to the next -- or the first quarter of next fiscal so we have some line of sight on the additional contracts.

Thanks for taking the questions.

(Operator Instructions). [Omar Gokur], [ISC Asset Management].

Thanks a lot for the presentation. Just a quick clarifying question. Looking at the fiscal year third-quarter results, the presentation you gave investors at that time for December. And the project cost per megawatt was [INR]0.65 million and now we're talking about [INR]0.76 million for the full fiscal year. So it seems like the project cost per megawatt has actually gone up, not down. What is that due to?

Thanks for that question. And I think what we said earlier is we are an annual business and not a quarterly business. So what you do see there is that the projects that we would have capitalized in the last quarter of the year had some domestic content in them and the domestic content modules are priced higher than the open category as well.

And then the other thing we noticed in the third quarter was that there was a significant drop in the prices of panels in China and we were able to take advantage of that drop in that particular quarter as well.

So if you look at the cost that we have now talked about in the fourth quarter, this is a cumulative number, not just a quarter only number. So some of those projects with domestic content were still under construction. But the key is year-over-year the cost is coming down.

Thank you for that. And the second question is these numbers, just for clarity, exclude EPC margins, is that correct?

That is correct.

And what are the EPC margins you're observing in your latest projects?

So, we don't break down the margins by projects in the Company. But we have given some guidance during the road show of being somewhere in the 18% range. And we believe we continue to maintain that or in some cases even better.

Thank you. That was all he had.

This concludes our question-and-answer session and also concludes our conference. Thank you for attending today's presentation. You may now disconnect.