Azure Power Global Ltd (AZRE) 2018 Q2 法說會逐字稿

Hello, and welcome to the Azure Power Fiscal Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I now would like to turn the conference over to Nathan Judge. Please go ahead, sir.

Thank you, and good morning, everyone, and thank you for joining us. After the close on Thursday, the company issued a press release announcing its financial results for the second fiscal quarter of 2018 ended September 30, 2017.

A copy of the press release and the presentation are available in the Investors section of Azure Power's website at azurepower.com.

With me today are Inderpreet Singh Wadhwa, Founder, Chairman and Chief Executive Officer; Sushil Bhagat, our newly appointed 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 Sushil will discuss our fiscal second -- third quarter financial performance and reiterate our guidance for fiscal year 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 are available on our website. These statements are important and integral to all our remarks. There are risks and uncertainties that could 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 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 reconciled to the most comparable GAAP measures, and those reconciliations are also available on our website, in the press release and presentation materials.

It is now my pleasure to hand it over to Inderpreet Singh Wadhwa, Founder, Chairman and Chief Executive Officer.

Thank you, Nathan, and good morning, everyone. Slide 4 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. This is not the same as having the lowest selling price of power in the world. Core to our culture as company are 4 values: excellence, honesty, social responsibility and entrepreneurship. We strive to uphold every one of these values in everything we do.

We've made significant amount of progress during the second quarter. We have exceeded internal targets across several metrics in this period. We added a significant number of new contracts. We've launched Azure MPower Solution for village electrification, commissioned 31 megawatts of new projects, enhanced our management debt and governance through appointment of new independent director and completed the financing of domestic debt with the INR 500 million proceeds from the first-ever solar green born out of India.

We won the total of 581 megawatts of PPAs since last quarter, the most ever in a month period in the history of the company, which grew our portfolio by over 50% to now being 1,631 megawatts, in terms of operating and committed and under construction projects. All of the new PPAs are for 25 years, and all have fixed tariffs, which is to say, they are not exposed to variable commodity risks. With these wins, our already stellar counterparty profile improved even further. Nearly 3/4 of our customers now have A-rated credit rating or higher, up from 62% in the prior quarter. Almost 54% of our portfolio is now with Government of India entities.

We're also very excited to announce the launch of Azure MPower, which will offer reliable and affordable electrification solutions in villages across India. These micro and mini-grid systems will enable sustainable economic development, while expanding our addressable growth market to include the 30 million households without electricity in India.

With the launch of Azure MPower for electrification of villages across India, we are delighted to make a contribution towards the realization of our honorable prime minister's commitment towards 24/7 power for all in India.

Also during the quarter, we commissioned 31 megawatts bringing our total operating megawatts to 803 at the end of the quarter.

We are excited to have Dr. RP Singh join our Board of Directors as the sixth nonexecutive independent director out of 8 total directors. Dr. Singh is known for his contributions in the Indian power sector, particularly the establishment of the National Power Transmission Grid and modern load dispatch centers. During his tenure as the Chairman and Managing Director of Power Grid Corporation of India, he was responsible for establishing several high-profile projects, especially building a 2100-kilometer transmission system in under 33 months with an investment of INR 33 billion, which was completed well ahead of schedule and under budget.

We have also completed the refinancing of our domestic debt from the proceeds of our solar green bond.

As mentioned previously, we have been very successful in winning new PPAs recently. One of the drivers of our ability to capture a large market share of auctions we choose to participate in, is because we have a long track record of strong execution in the India solar market. As was the case with our 260-megawatt Gujarat project, Azure Power developed and is operating India's first megawatt-scale distributed solar rooftop project in Gujarat State Capital City of Gandhinagar. And our long history of superior solar power operations in Gujarat, right from the inception of Gujrat Solar Policy 2009, has contributed to our success of procuring, in the second quarter of 2018, the largest solar power contract auctioned by Gujarat to-date.

Another example of our success is our long history of superior operations for NTPC Vidyut Vyapar Nigam or NVVN, right from the inception of the National Solar Mission, which has contributed to our success in procuring one of the largest solar power contracts auctioned by NTPC, the 250-megawatt contract. With this win, we will become the largest providers of solar power to the domestically AAA rated NTPC and its subsidiaries of which NVVN is a part.

All of the projects we won are expected to have attractive returns and well above our cost of capital. For the recently won projects, our financing, construction and development costs have come down meaningfully. Our recent issuance of India's first ever solar green bond was done at 5.5%, which is now trading at a much tighter yield of 4.6%, which allows us to access international bond markets at attractive financing rates.

We further believe the credit strength of AA and AAA counterparties for these recently won projects will allow us to further lower the financing costs for these projects.

We continue to see significant reduction in project costs for both module and balance of system. Over the last 7 years, we have seen 85% reduction in these costs. While we see module prices stabilizing at this time, our committed projects are to be expected to be delivered in the calendar fourth quarter of 2018 and in the calendar first quarter of 2019, which allows us additional time to introduce further optimization in balance of system costs and yield improvement through new technology deployment.

Further, 2 of the largest committed projects totaling 510 megawatts are to be developed outside of solar parks, which is our competitive strength and allows us to retain high development margins compared to government-sponsored solar parks, which have higher cost of land and higher O&M expenses over the life of the contract.

On the industry front, we continue to be excited about the outlook for solar energy in India. The recently announced INR 2.5 billion government plan called Saubhagya, reinvigorates efforts to electrify the 260 million individual households currently without power. One of the analysts estimated that this could add to significant more electricity demand over the next 2 years. Most of the demand growth is likely to occur during peak hours, the time when India's electricity capacity shortage is the greatest and very expensive and polluting diesel backup generators are used most. But this is also when solar has the greatest advantage, reaching peak generation during peak hours at prices that are cheaper than any other source of generation.

The attractiveness of solar compared to other generation is clear, as solar capacity additions have outpaced every other type of new electricity capacity addition, so far this fiscal year and will likely to capture market share, going forward.

We are very excited to have Sushil Bhagat join us as our CFO. He has over 30 years of experience of working in corporate and investment banking and then transitioning to Hindustan Power Projects Limited, where he worked extensively on fundraising and inorganic growth opportunities. As a previous investment banker, he has raised over $12 billion of funds and led complex advisory merger and acquisition assignments across all infrastructure sectors. Subsequently, he has headed finance, commercial and strategies functions at coastal projects and helped it to achieve an enterprise value of over $4 billion in 6 years. Sushil has supervised over 1,200 megawatts of thermal and over 400 megawatts of solar power assets, while at Hindustan Power Projects. He has also served in various corporate leadership roles at Coastal Projects, Wachovia, Axis Bank and State Bank Group.

Before I hand the call over to Sushil, I want to take a moment to thank SK Gupta, former CFO of Azure Power, for his contributions, who has been appointed Executive Vice President of Operations and Maintenance to manage the company's fast-growing fleet of assets. Our fleet of operating assets is now sizable and growing quickly, and SK Gupta will bring a wealth of experience to this role and ensure the best operations.

With that, over to you, Sushil.

Thank you, Inderpreet, and good morning, everyone. Turning to our second fiscal quarter performance, we continue to record a strong growth with our operating megawatts more than doubling to 803 as on September 30, 2017. We had 1,631 of operating and committed megawatts as on October 16, 2017, which is more than 50% of megawatts that we had on September, end of '16 -- 2016, which is second fiscal FY '17.

During our second fiscal quarter 2018, the revenue grew by 104% to around $28 million over the corresponding quarter of the last year, as we commissioned new projects. We continue to deliver EBITDA expansion and reported adjusted EBITDA growth of 167% compared to 104% growth in revenues in the quarter. As we leverage our platform and realize economies of scale, we continue to expect, that we'll be able to expand our EBITDA margin and grow cash flow at a faster pace than the revenues.

Our interest expense during the quarter included $19.5 million of one-time charges, relating to the one-time write-off of unamortized deferred financing cost and prepayment finance or debt financing related to the first ever Indian green solar bond. Excluding these, the net interest expense was $16.7 million, which is an increase of 81% from the same period in the prior fiscal year, principally due to increased borrowing for the new projects.

With regard to the taxes, we recognized a noncash income tax benefit of $2 million during the quarter. Our balance sheet continues to grow, as we add new projects to our portfolio.

Property, plant and equipment increased to $749 million and net debt was $540 million as on September 30, 2017.

Our liquidity position continues to remain very strong. We ended the quarter with $282 million of cash and cash equivalents, including restricted cash. We had undrawn project debt facilities of $82 million at the end of the quarter. We also have $107 million of working capital facilities that can draw on if necessary.

In addition, as a result of reducing our loan balances at domestic banks following the issuance of our green bond, we believe our borrowing capacity at these banks has increased.

Beyond these sources of immediate liquidity, we continue to have support of our large shareholder, CDPQ, which has a ROFO on our assets, where we can grow our portfolio by bringing in CDPQ as a minority equity investor in our projects without existing shareholder dilution.

With this, we confirm our fiscal year '18 revenue guidance of $118 million to $125 million. In addition, we remain on track to have 1000 to 1200 megawatts of operational capacity by the end of the fiscal year ending March, 2018.

With this, we can take questions.

(Operator Instructions) And the first question comes from Philip Shen with Roth Capital Partners.

Wanted to start off with the pipeline. Congrats on the large wins that you've had over the past few months. And I wanted to see if we can, perhaps, (inaudible) possible economics of what that pipeline looks like? As you know, the tariffs are lower, but I'm imagining your cost structure can come down as well. So if you, can kind of, give us a little bit of color on that, in terms of what you expect relative to what you guys are delivering today for investors? That would be very helpful.

Sure. So thanks, Phil, for that question. I think, generally, we believe that the projects are in line with what we have consistently said to the market, and I would, sort of, reemphasize that cost of building these projects is lot lower than what returns they are delivering. And as the development progresses, we'll be able to share more metrics formally, as we have in the past for these projects. But if you look at the cost of building projects have come down significantly over the last several years. And not just that, the cost of equity and cost of debt has moved lower, and the technology yield has gone up. So the best, sort of, guidance that we can give you at this point, is looking at the historical reductions you have seen in our project cost and capital cost and trying to, sort of, extrapolate those for these projects, where the industry is likely to be in the next 18 months, will give you a sense of where the economics are. In terms of the specific projects on our scripted comments, we've talked about the Gujarat project is commissioned in calendar Q1 2019. The tariff there is $0.04. The NVVN project is commissioning in Quarter 4, calendar 2018. The tariff there is $0.05. Gives you a sense of where the cost structures are likely to be in that period, from here on. We've talked about the cost structure of $0.78 in this quarter. That includes domestic modules, if you, sort of, extrapolate that to imported modules. And I think, one of the earlier quarters, we have talked about a number of about $0.67. And then you couple that with our bond trading at about 4.6%, 4.7%, will give you enough parameters to build your own model and see where the returns are.

Great, that's helpful. In terms of your outlook for fiscal '19, I know, you may not be in a position to provide official guidance, but was wondering, if you -- in -- given the backdrop of all the wins that you've had, that NVVN project is slated for COD in the back half of calendar 2018, can you talk about, what the volume of CODs or project additions might look like for fiscal '19 relative to fiscal '18?

Yes, I think, at this point, the best guidance is what we've included in the appendix in the presentation. All the projects with their respective commissioning schedules are in there. So that's, sort of, the best information that we are able to share now. But as you also know that we are looking at close to 4,500 megawatts of new auctions, which we hope will conclude between now and end of this financial year. And given our historical track record on winning auctions can give you a little bit more color on what potentially is out there for us to add to the existing backlog. And as we get closer towards the end of this fiscal year, we'll be able to give you a more firm guidance on next fiscal.

Great. And that track-down is exciting with that large auction -- set of auctions coming online. One last one for us here. In terms of your new announcement about MPower, can you share with us, how many megawatts the JREDA project might be, and then what the timeframe of completion could be, as well as the average tariff for that project?

Yes. So I think the key announcement that we are making really is that, historically, we've been a large-scale utility energy provider. And then, I think, we accelerated our presence in commercial and industrial rooftop in 2016. And this year, we are embarking on the third, so to speak, product line, which is MPower for electrification of villages, which is a substantial opportunity for growth, going forward. So at this point, we are focused on small incremental implementations. This big project is 86 kilowatt project. It's a relatively very small project. But it does give up access to about 11 villages in the state of Jharkhand, and we intend to execute this project within this financial year. The business model is still evolving in this space. For this particular project, it is a model where we build the project. However, the CapEx will be funded by the government as part of the Saubhagya scheme that the government has announced. With us doing an O&M in addition to building the projects for the 5-year period. And if you look at the economics of those projects, it's -- roughly the CapEx is at about $4 a watt, is the CapEx that we collect from the government, approximately. And then the O&M is about $20 a kilowatt, is what we charge in O&M per year. But if you now add this up into a large-scale deployment, you will see the economic returns would be better than some of the low-bid projects in the country. So in terms of our expectations, we believe that the micro and mini-grid development will ultimately deliver much higher shareholder value compared to the large-scale projects. What we have already demonstrated, that in commercial and industrial projects, we're able to deliver better returns than large-scale development. But the key would be scaling up in size and aggregating these projects, and that's something we'll continue to work with the government as we proceed in execution of this project.

And the next question comes from Maheep Mandloi with Crédit Suisse.

Just on MPower, could you throw (inaudible) on why you have started with Jharkhand, and what are your plans for expanding it to other states in the country?

Yes. So I think the thought process there, Maheep, is to really look for areas where you have a sizable market. I mean, when we talk about across the country, we believe about 30 million households need to be electrified. And out of those 30 million, almost 10% is in Jharkhand. And then, of course, there's a sizable opportunity in UP and Bihar. And we have seen relatively less penetration of mini-grids than micro-grids in Jharkhand. We've already seen some work done in the other 2 states. So we feel there's an opportunity for us to be a pioneer in Jharkhand and do a lot of work on the ground very quickly. And the fact that this auction that we participated in was open and transparent and rolled out by the government of Jharkhand, sort of, made it interesting for us to take the initial project in that state. But we will continue to look at other states as well, that come up with open and transparent auctions in this space.

Got that. And just to understand it correctly, it isn't PPA where you receive the $4 per watt CapEx and the $20 per kilowatt O&M in the form of subsidies or incentives from the government for the project, is that correct?

Yes. So I wouldn't use the words, PPA. I think it's a slightly different contract. So it's a contract to build and operate for a 5-year period. And at the end of 5 years, the operations are turned back either to the local community or to the government, the way the government wishes to do. That as we work with the government, we may be able to evolve a structure that might work better for us as well. But for now, this is the current structure.

Got that. Now just transitioning to the broader utility-scale auctions in the country, we recently saw a news article claiming that the government might auction 20 gigawatts of projects in a single auction or something like that. Could you throw some more light on that, if you have learned anything from your talks with the ministry or with the government on that?

Yes. So Maheep, that article probably came out a few hours ago and I would really appreciate your level of alertness on the news coming out of India. So the key of that message is that the capacities are there. The development will continue, and the pipeline will continue to get bigger. The specifics of the -- what they are talking about as ultra, mega solar power projects have not been worked out yet, have not been shared with the industry so far. But there is a lot of discussion, internally happening within the government, what is the right way to roll out large-scale opportunity in the country. And you probably know, there's a new minister this year for renewable energy. And he has openly talked about large-capacity allocations. So it's all very constructive. It's all very positive. And we continue to track the specific bids we talked about, about 4500 megawatts. And these projects will be likely after that. So maybe, in my view, this will move out into sometimes next year. But again, this is based on limited information that has come out so far.

Got that. And just one last question on modeling. Your G&A expense declined significantly, at least compared to the last quarter-end versus our estimates. So could you just talk about what drove that reduction, and how do you -- how should we model that, going forward?

Yes. I think -- I wouldn't necessarily change anything significant from a modeling standpoint. I think some of this is related to the expenses we had because of the IPO in the same quarter, previous year. And then, of course, there are some efficiencies in terms of economies of scale. But I would not move a significant needle in terms of where we are. So if you had a little bit of growth in their own expenses, I'd still keep that. Because we feel that if we continue to develop more projects, that you anticipate, the G&A would probably grow in line with that increased capacity. So I think I recall looking at some of the assumptions there, that you may have assumed fewer megawatts will be delivered. But we believe we are exceeding that plan in terms of new projects. So that might increase our G&A going forward as well accordingly.

And the next question comes from [Praveet] from (inaudible).

I have 2. The first one is, this quarter, I saw an increase in the receivables and a reduction in the payables, which the combination of these 2 probably led to the operating cash flow coming in negative. So if you can just help us understand the reason for this, working capital increase this quarter?

I (inaudible) largely a function of how the projects get commissioned and when the receivables are realized. And there are some projects that were commissioned. And you're -- I believe, you're comparing these also with the end of our fiscal last year. And a lot of projects would have come online in that period, and that can create some differences in the short-term basis. And on the payable side would be, again, a function of payables to the EPC contractor, which, in our case, is our holding company. So there could be some mismatch in terms of when they were supposed to be paid versus when they were paid. And some LCs that we open for delivery of modules as well. Nothing unusual. It's just a small movement period-over-period.

Got it. And my second question is just on leverage. I just wanted to understand that, given that you're winning on several large-sized projects, obviously, you have to incur some amount of debt to build these projects. So is there a leverage, a ratio target that you have in mind, I mean, an internal target to keep leverage below a certain limit?

Right. So I think long term, if you think about, I mean, we've talked about our debt equity being 75, 25, when we start the project. And some of the projects are amortizing, some of the projects are nonamortizing. But generally, that's the principle we follow in terms of leverage across the projects.

And if you follow the bond that we've issued, we've talked about, over time, getting to 5.5x on EBITDA for the bond. And we believe that the similar discipline will apply to projects outside the bond, in terms of medium to long-term leverage.

And the next question comes from Pravita (inaudible) from IFC.

I have a question from the bond lease. So regarding how much cash was actually released as a result of the refinancing in the bond lease?

While we don't have specific disclosure on that in our quarterly results, but we hope that that would be available when we file our restricted group financials for the bond in due course of time. Roughly, I can tell you that our debt for the projects that we included in the bond was in the $440 million to $450 million range. And then, of course, there is a little bit of overlap between when the bond came in and when the projects were repaid, and then there were some one-time charges associated with the refinancing. So I think if you just, roughly do the math on that and look at the $500 million number, the difference would be the additional free cash from that transaction.

Okay. Second question was, regarding the terms of the ROFO, I understand, this has been in the presentations since last 2 quarters, I never got the chance to ask, on the ROFO, regarding CDPQ infusion of equity at project levels. So what are the...

That's correct.

If any valuation. I mean, is this at par, or what is the formula agreed on valuation?

So the construct is that, if we wish to divest minority stakes in our assets, we would give CDPQ a preference on that. But we expect that to be done at arm's length based on market conditions. There are no pre-agreed terms in our existing contract. So as and when we look at projects, and we do something with them, then those terms will be decided and agreed as per market norms at the time and of course, would be disclosed as appropriate.

Okay. The third question I had was regarding the -- any plans in growing the restricted group? I understand, new project capacity would become operational by the end of this fiscal year. Is there a plan to transfer those new projects also into the restricted group and grow the size? Or that -- I mean, that isn't part out, at the moment?

Yes. I think the key is, we've created an optionality for doing so. Having said that, there is no current plan. And if we end up doing something, we will make appropriate disclosures for that.

Okay. The last question on the Mpower and the micro-grid project you mentioned. Was this project you won under some auction? Is this regular scheme by the government? Could you just throw light on that?

Yes, So this is -- this was auctioned by the State of Jharkhand.

Okay. And were there any other players apart from you, which participated in this auction?

Yes. I believe there are 4 or 5 players that participated. I don't have the details handy with me.

Okay. And then finally, the last question was only on the project cost regarding -- on the DCR category versus Make In India category versus open category. I understand, the Gujarat project is under the open category. You guys have imported modules for that, and the NVVN 250 megawatt, this has restrictions. Can you comment on the difference in project costs at an overall level?

Yes. So, Pravita, we don't forecast the project cost. So we'll be able to disclose these when the projects are completed. But historically, we've seen $0.06 to $0.07 differential. But that is also a function of the base rate.

And the next question comes from Onur Goker with Global Infrastructure Fund.

Just a couple of quick questions. On the bond issuance, including the onetime charges and this swap from U.S. dollar to rupees, what is the blended cost of financing of this 500 million in rupees?

Thanks for asking that question. So we are looking at somewhere between 9.2% to 9.3% in rupee terms.

In rupee terms, okay. And should they, obviously you've won quite a bit of new projects over the second quarter. How much -- how many of these projects have their debts financed? And how -- which projects will require debt financing versus being fully financed on the debt side?

So all the new projects that we have announced in this period, we have to go and raise debt for these projects. All the projects that were in the pipeline prior to this period, we've already closed the debt financing for those projects.

Okay. So second quarter, and then the most recent bids -- most recent win after the second quarter will need debt-financing.

That's correct.

And on the equity side, you've grown the pipeline, but the debt issuance has allowed you to release some amount of capital. Are you fully financed to your full pipeline? So you had 828 megawatts of under construction and awarded projects at this point. Are you fully equity financed for those?

Yes, we are well capitalized.

Okay. Final question is, would it be possible to talk about plant load factor in the second quarter of this year?

So Onur, historically, we've not published the quarterly plant load factors. We do that annually, because we believe, I mean, this is the annual business. And -- so we don't have color on that. But we are slightly ahead of our forecast, as would be evident from the revenue that we've generated, is slightly more than what was in the consensus. So the plants are generally tracking to plan.

And as that was the last question, this concludes both the question-and-answer session as well as the Q&A. Thank you so much for attending today's presentation. You may now disconnect your lines.