Azure Power Global Ltd (AZRE) 2019 Q3 法說會逐字稿

Good morning, and welcome to the Azure Power Fiscal Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

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

Thank you, and good morning, everyone, and thank you for joining us. After last night's close, the company issued a press release announcing its financial results for the third fiscal quarter of 2019 ended December 31, 2018. 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; and Sushil Bhagat, Chief Financial Officer. Inderpreet will provide a business update, and Sushil will discuss our fiscal third quarter financial performance. Inderpreet will finish our prepared remarks by reiterating our fiscal 2019 guidance and providing fiscal 2020 outlook. 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 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 in 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 these reconciliations are also available on our website and in the press release and presentation materials.

It's now my pleasure to hand it over to Inderpreet Singh Wadhwa, founder, Chairman and Chief Executive Officer.

Thank you, Nathan, and a very good morning, everyone. I'm pleased to report that our fiscal third quarter is yet our best quarter ever. We have delivered results well ahead of expectations. Our revenues in local currency terms were significantly above our expectations as we are constructing facilities in record time, well ahead of contract deadlines.

Our 1.9 gigawatt pipeline had a tariff, which is 18% above the lowest bid in the Indian solar market at a time when solar panel prices have plummeted over 40%, thus giving us returns much higher than hurdle rates. We are setting new benchmarks for lowering costs and our interest expense continues to be less than originally planned.

We were profitable this quarter and now expect that we will be profitable on a full year basis this year, excluding any foreign currency exchange fluctuations. We have eliminated the contract risk as every project in our pipeline has a contract in hand and most have already secured critical interconnection approvals that should allow us to build projects ahead of schedule.

We have approximately over $330 million of cash on the balance sheet that when coupled with long-term project finance options will provide us adequate liquidity to complete every project in our pipeline. This is during a time when the macroeconomic environment has seen some turbulence, although the outlook is improving.

On every operational metric, we are doing extremely well. However, we are disappointed that the share price is not reflective of our strong operations and high rate of return on operational and under construction projects. We will continue to evaluate and pursue options that will create long-term shareholder value, strong operational cash flows and drive the share price closer towards our fair value. We will remain highly disciplined and will always pursue the highest returns for our shareholders.

Slide 4 summarizes our mission and core values, which are critical to our long-term success. Our mission continues to be to be the lowest cost power producer in the world. This is again not the same as having the lowest selling price of power in the world.

Core to our culture as a company are 4 core values: Excellence, honesty, social responsibility and entrepreneurship. And we strive to uphold every one of these values in everything we do.

The business continues to perform well. The portfolio of 3,059 megawatts is a leading solar portfolio in India with fixed price contracts for 25 years with one of the most diverse and strongest counterparty profiles in the Indian solar market.

We are pleased with the performance in the third fiscal quarter that have exceeded our internal plans. The portfolio is nearly double from this time last year. Our balance sheet is the strongest it has ever been. And to complete the pipeline of contracted assets, we do not anticipate a need to access public equity markets.

For the first time ever in India, we were able to create the first financing warehouse of $135 million for our rooftop projects. This structure should bring numerous benefits, including accelerating completion time lines for future rooftop projects and create a strong differentiator for Azure in the market.

The financing backdrop continues to improve as well. The yield on our green bond has tightened approximately 80 basis point since fiscal second quarter '19 and currently stands at about 5.8%. We have begun to see a more accommodative monetary policy in India as well. The Reserve Bank of India reduced the repo rate by 25 basis points, the first cut in almost 17 months.

In addition, they adopted a neutral policy stance from calibrating tightening. This will bode well with regards to us raising additional debt for projects in the pipeline.

On construction front, we continue to set new standards of excellence with completion of 95 megawatts of our projects in Gujarat, almost 5 months ahead of schedule, which we believe is the fastest time to finish a large utility scale project anywhere in the world. Several other projects under construction are generally ahead of schedule, which could lead to a strong first quarter fiscal for FY '20.

Since the IPO, we brought down our cost of operations, G&A and interest expense significantly. The issuance of the fixed rate green bond is paying dividends during a rising rate environment and which has led to EBITDA margin expansion and an EPS of $0.05 per share this quarter, and we expect to be profitable for this year as well barring any fluctuations in the foreign exchange rates. This, to us, is a milestone and a record of our efforts to increase revenues, while at the same time containing our costs to deliver profitable results.

As we look back at 2018, we wanted to share with you some accomplishments that provide shareholders superior returns on projects, where we are able to develop land much cheaper than government solar parks, thus leading to higher returns. 84% of our pipeline is located outside solar parks. We have secured an industry-leading interconnection of 1.3 gigawatts with central grid transmission authority ahead of schedule.

With land and interconnection placed before project financing, we expect to negotiate better financing rates and tighter spreads with our lenders. Our project costs are down year-on-year as we are able to deliver continued productivity enhancements. Since inception, our balance of system costs, which are costs we have direct control over, have declined by 86%. Our excellence continues through to operations as we find new ways of reducing operating costs.

Our DC plant load factor continued to be among the highest in the Indian solar industry. We have doubled our committed pipeline year-over-year to 1.9 gigawatts. 85% of those projects are with very strong credit off-takers rated A to AAA domestically and almost 64% of our contracts in the pipeline are with Government of India sovereign entities, which give us the highest possible credit in India for infrastructure projects. These projects have a blended tariff, which is 18% above the lowest bid in the market, which illustrates our ability to consistently add additional value for shareholders through disciplined and value-accretive bidding strategy.

Every project in our portfolio now has a letter of award in place, which we believe eliminates the contracting risk of our portfolio and improves visibility for our shareholders.

We continue to make good progress with our rooftop business, which focuses on large-scale government, commercial and industrial customers. As the roof power now has 86 megawatts under operations, up 160% from last year, our rooftop portfolio stands at about 211 megawatts, which we believe is one of the largest in India. And our rooftop pipeline has a weighted average tariff of almost 100% higher than the lowest solar power bid in the market.

The scale and breadth of operations in this business is impressive with construction occurring on over 2,000 roofs across the country simultaneously. And our newly created financing warehouse of $135 million, the first of its kind in India, provides us with even greater differentiation to our competitors and should speed the construction time frame for new projects.

All ground-mount projects under construction remain on time and on budget with several projects running ahead of schedule. Our decade-long experience in the Indian solar market is paying off. As an example of that is our project in Gujarat where we have a wealth of experience and brought 95 megawatts online what we believe to be a record time for a large utility scale project for any company.

Our 100-megawatt project in Karnataka, 200-megawatt project in Rajasthan are in advanced stages of construction and ahead of schedule, and this would lead to a strong fiscal first quarter in 2020. This would not be possible without our integrated business model and our culture of excellence.

As outlined in our mission statement, environmental, social and governance principles are core to our business. As one of the largest solar companies in India, we are helping to offset the worsening air quality throughout the country. Already through our operating projects, we have avoided almost 3 million tons of carbon avoidance, which is equivalent to planting almost 40 million trees.

We have reduced our water consumption by over 40% this year through innovative patent-pending operating techniques. We strive to enrich and enhance the quality of life in villages where we operate. We have built water purification facilities that give access to clean drinking water to over 60,000 people. We have constructed and donated infrastructure for schools and have created almost 4,000 jobs in 2018.

Our governance is strong, in line with some of the most (inaudible) requirements globally, and our HR policy is in line with the World Bank equality principles.

Looking at the industry and regulatory news, solar continues to be the lowest cost source of electricity in India and the preferred new source of supply. Last year, 54% of all new capacity additions were solar. And if you look over the past 2 years, solar capacity additions have risen almost 318% compared to 37% for wind and a decline of 87% for coal.

In fact, a recent report from S&P Global highlighted that approximately 50,000 megawatts of coal power projects may be canceled in the coming months. Currently, there are 25 gigawatts, roughly, operational for solar projects, another 17 gigawatts under development. We are actively tracking about 38 gigawatts of auctions in process this financial year and we expect additional wins given our strong development expertise and access to capital. We do want to stress that we will remain disciplined and only invest if the returns are above our cost of capital.

On the regulatory front, there have been some positive developments recently. In Assam, where we are building the largest solar plant in the Northeast portion of India has adopted new land development policies conducive for solar project development. Also regulations regarding rooftop access continue to evolve. And recently, the size of projects that qualify for net metering was increased to 2 megawatts, up from 1 megawatts, which should enhance the potential market opportunity for this fast-growing business for us.

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On the regulatory front, there have been some positive developments recently. In the state of Assam, where we are building the largest solar power in the Northeast portion of India, has adapted new land regulatory policies conducive for solar projects. Also regulations regarding rooftop access continue to evolve, wherein net metering was increased to 2 megawatts, up from 1 megawatt, which could enhance the provincial market opportunity for this fast-growing business.

On the GST front, the regulator has approved the fastest growth GST taxes for various projects through the industry, including some of ours. And we continue to expect that our projects have strong (inaudible) protection that will help us manage any change in such provisions, and we do not expect any material impact to the business on this front.

With that, I would like to pass the call over to our CFO, Mr. Sushil Bhagat, who will review our third fiscal quarter performance. Over to you, Sushil.

Thank you, Inderpreet. Turning to our fiscal third quarter of 2019 performance. We continue to record strong growth with the number of operating and committed megawatts increasing to 3,059 or 94% from the prior year fiscal third quarter. We also had 1,169 megawatts under operation as of fiscal third quarter 2019 or about 45% more than what we had at fiscal third quarter of 2018.

Our fiscal third quarter 2019 revenue was $34.9 million, which was a 40% increase from the prior period. The G&A expenses increased only 6% compared to 40% increase in revenues as we captured economies of scale of our platform, while EBITDA rose [50] % year-on-year.

During the quarter, we changed our estimate of useful life for many of our utility scale projects. Based on various technical evaluations and tests, we now estimate that our solar modules will continue to generate power for at least 35 years at high efficiency levels and have concluded that most of our utility scale projects will continue to have a useful life of at least 35 years, up from 25 years previously.

Our interest expense during the quarter was about $16 million, which compared to the last year was about flat despite significantly more megawatts added, reflecting lower realized interest rates.

On our balance sheet, cash and equivalents ended the quarter at $251 million, which includes the cash raised during our follow-on in October. The property, plant and equipment increased to about $1 billion, a 24% increase from the prior comparable period and as we brought new facilities online.

Net debt was $721 million as of December 31, 2018.

Our balance sheet remains very strong. At the end of the quarter, we had $612 million of liquidity, which included $330 million of cash, $178 million of undrawn project debt facilities and $104 million of working capital that we can draw on.

I will now pass it over to Inderpreet to discuss guidance.

Thank you, Sushil. With regards to our guidance, we continue to reiterate our guidance for FY '19 and continue to expect to have between 1,300 to 1,400 megawatts operational by March 31, 2019. We expect that revenues in Indian rupee terms will meet or exceed our original expectations. However, as our results are converted into U.S. dollars for the convenience of the reader, we expect U.S. dollar revenue guidance for the year ending March 31, 2019, to be at the lower end of the guidance range. The Indian rupee has depreciated 9% from INR 63.83 to INR 69.58 for every U.S. dollar since our original guidance.

With the robust pipeline and strong execution capabilities, we expect to continue to deliver high growth in the next fiscal year ended March 31, 2020. For the fiscal year ending March 31, 2020, the company expects to have 1,800 to 1,900 megawatts operational. In addition, the company expects revenues to be between INR 12.8 billion and INR 13.4 billion, which at the December 31, 2018, exchange rate of INR 69.58 for every U.S. dollar (inaudible) $184 million to $192 million.

With this, we will now take questions.

(Operator Instructions) Today's first question comes from Philip Shen of Roth Capital Partners.

First question is on your guidance for fiscal 2020. I think it implies about 400 to 600 megawatts of installations in FY '20. This compares, we believe, with your 890 megawatts of CODs that you had previously expecting for that time frame. Can you talk about why the guidance might be a bit lower than the COD dates? And how much conservatism might be built in there?

I think what we've seen is the contracting time for some of the projects from winning the auction to getting a letter of award to getting into a PPA is going a little bit longer than what it used to be, and which is all right because the capacity of the projects or the size of the projects is also substantially increased in the market. And earlier, we used to have a 100-megawatt project or a 50-megawatt project and now we're talking about 300 megawatts and 600 megawatts. So that is accounted for. And if you recall what we do in our elections, the schedule for completion of these projects is based on the estimates of when we believe all these contracts would be in place. And we continue to update every quarter as we make progress from winning the auction to getting an LoA to getting the PPA in place. So largely, it's a reflection of that. We also believe that we'll have an opportunity to pull in some of these projects earlier because as we have seen this year on some the projects in Gujarat we have done earlier, but that would be our decision and a trade-off we'll have to make from a cost benefit standpoint if we expect the cost of technology or the efficiency of technology that is better in the following fiscal year. We may continue with the plan as per the contracted commissioning of these projects. And if we don't feel there is a significant benefit of doing so, we may pull some of those projects in. But we are quite confident of achieving the numbers that we put forward.

Great, Inderpreet, shifting over to the PLF for FQ3, we estimate that you guys came in with an 18.2% PLF. I think your year ago period was 15.8%. Are we in the right ballpark with our calculations? If not, maybe help us understand what the number is in the quarter. And then, can you talk -- if we are in the right ballpark, can you talk about what drove the year-over-year improvement? And how might be -- what it might be due to? Was it weather conditions, increase in overloading, higher efficiency modules, et cetera?

Yes. So I think quarter-over-quarter, definitely, the numbers are clear. And as you know, we don't break out the PLF for a quarter. There is a certain amount of estimation there, but what is more meaningful number is the annual number that we published. And that number is largely going to be higher on account of 2 factors. One is, a lot of our projects are coming online in high installation areas of Gujarat and Rajasthan and Karnataka. And we are now doing additional overloading on these projects because of the technology improvements. So those are the 2 reasons for the increases in the plant load factors.

Okay. And then looking ahead for the rest of this calendar year, should we continue to expect the PLF to be a little bit better than expected?

You should expect the PLF better than the last fiscal year for full fiscal year. In this full fiscal -- when we talk about the next quarter, you'll actually get the annual numbers as well. And again, we expect them higher for precisely the 2 reasons we mentioned to you.

Okay. Inderpreet, on the call, I think you guys talked about 38 gigawatts of auctions that you guys have line of sight too. I think in the prior quarter, that number was 24 gigawatts next year to 2 years. Can you just give us more detail on the upcoming auctions? How many -- or what percentage of that you might be expecting to bid into? And we have your history of win rates, but any update on what you expect in terms of win rates on the 38 gigawatts would be great.

We generally don't focus that information for competitive reasons, which one we'll participate and conversion rates and stuff. But what we've said in the past and I reiterate that today is we will generally grow in line with the market. And more important aspect of our growth is discipline and returns that are above the cost of our capital. So not just for the sake of market share in wind projects. So we will be very cautious. And in fact, we believe that we are in a very strong position, both execution and capital in the market compared to many peers in the industry that should give us an opportunity to win projects at much better hurdle rates. And we will be very selective in which contracts we pick.

And our next question comes from Joseph Osha of JMP.

I wanted to return to your comment about the green bond and the spread that had tightened there. What does that imply for your future thoughts about funding? Because you said you're also getting better spreads from your domestic lenders. Which route might we see you take going forward?

Yes. I think we will continue to be a mix of project finance and bonds. And the process we follow there is once the assets are built, they are fairly mature and markets are receptive, we will issue green bonds. And when the projects are in development, under construction, we will tap local project finance or construction finance options. And all of these will be somewhat driven by the external market conditions and the rates, which we can negotiate and the spreads we can negotiate with various counterparties. But the good news is that we are probably the most diversified in terms of both domestic project finance lenders, overseas project finance lenders as well as public institutional capital from the green bond market. So we will evaluate all of these options project by project and continue to do, which is the most cost-effective strategy for the business. And as we're seeing the results of that in this quarter and next quarter, that our finance costs or our interest costs continue to show a downward trend even when there is turbulence at the macro level.

So -- I guess that kind of -- to be clear then, we might actually see you back in the green bond market again. And your sense is that even with the turbulence you referred to and the fact that I'm going to assume that hedging that out back to rupee is going to be more expensive than it was. Is that still a viable option for you guys?

So we will, of course, pursue the most effective option. And I presume your question relates to refinancing of the green bond. And when that comes out, we still have ways out 2022, I believe. And we will continue to evaluate both the rupee and dollar options. And when we do our financing in dollar, we know we don't keep it open, we hedge it out. So whichever way we go, we'll pick the most cost-effective option for the company. And my thesis on that has always been, when you have an asset, which has been running for 6, 7, 8 years, the risk on that asset is fairly negligible from an operational standpoint. And we should be able to negotiate very effective and tight spreads on those financings down the road.

Okay. But to be clear, you're not contemplating at this point a situation where some of the projects that you got the green bond on, you would end up with amortizing debt. You believe you can refinance.

We are not contemplating moving our green bond into amortizing debt at this point.

Okay. All right. Shifting gears, it's an election year. Don't know when yet. But typically, you get into these election cycles and there's a lot of talk about rural electrification and policy proposals and stuff like this. I'm wondering how you all see this year? And how the political environment might reflect on your business?

Yes. So the good news for solar is that it is not relying on any subsidy from the government anymore. And it is the cheapest source of energy. And in election years, it's extremely important for the government to demonstrate the development on the infrastructure side and they have to ensure availability of power, they have to ensure cost-effective availability of power and that's where you'll continue to see a lot more development of solar in the market. And we believe that post election, if the government changes, the opposition is also a strong believer of solar. In fact, the National Solar Mission was set up in the year 2010 under a different government's regime. And the new government accelerated from 20,000 megawatt to 100,000 megawatt goal for solar energy. So whichever way you look at it, we'll see a net positive for solar in this election year. Having said that, during the time of the elections, of course, there won't be a lot of bidding activity, so we may expect some of these bids either to happen prior or post the elections. So there might be a bit of a lumpiness in the allocation of new projects, which is typical of an election year.

Yes. That makes sense. And final question from me, just on current projects and your rate of overbuild. I believe, Phil talked a little bit about this as well. How you're thinking about the economics of overbuild a bit and how far you might go with that in terms of how that affects your capacity factor on new projects?

Yes. I think that the new projects that would result in (inaudible), we have seen (inaudible) on the new designs in terms of plant load factor. But we have to realize that the portfolio is operating at 18%, 19%. So unless all of the new build is up and running for full financial year, you will not see that significant uptick on the plant load factors for the entire portfolio. It would be an incremental movement as these projects come online.

Okay. So to be clear, new projects, you were breaking up a bit there. I heard high 20s. And that high 20s would include an overbuild, correct?

That's correct.

And our next question today comes from Maheep Mandloi of Cr?dit Suisse.

With regards to the import tariffs on modules in India, which expires by mid-2020, are you seeing any impact on either your project completions or new auction activity in the market right now?

Not at all, Maheep. In fact, the new projects have roughly 2 years build. So -- like if you bid for a project today, it takes somewhere between 60 to 90 days to get a contract and then your clock starts from there. So that means most of the module procurement will actually happen after the duty period. So we don't see any significant impact on new auctions on that front.

Got that. And just on the module availability and module pricing, can you just talk about whether you're seeing any tightening in the market or stabilizing prices or rising prices in the market? And specifically, if -- for the 1.9 gigawatts under construction, how many megawatts have you already procured? And how many you still need to?

I -- as I talk about the total 3-gigawatt portfolio, we probably have like contracted 1.6, 1.7 gigawatts of the 3 gigawatt. So (inaudible) so that's in terms of the breakup. And then, in terms of the pricing, we continue to do every new contract at a lower value than the previous contract. There are -- when (inaudible) stabilization and stuff, we still feel there's a big gap between supply and demand. There may be an instance where one supplier may not be able to fill the entire capacity at (inaudible). We spread it across a couple of suppliers. We have not seen any increase in pricing for the contracts we've done in the last quarter.

Sorry, you were breaking up earlier. So around 1.6 gigawatts procured, right, of the 3 gigawatts. That's what you said?

Yes. About 1.6 to 1.7 gigawatts is closed. And 1.3 is open. And we don't expect any increase in pricing and we're able to negotiate contracts at the old prices than what we have been forecast.

Awesome. And just 1 last question from me. On the G&A side, could you just talk about directionally, either as a percentage of revenues or dollar terms, how should we think about it for next year?

Yes. I think the percentage of revenue that you see for the last 12 months is a good benchmark, and we've just adjusted for inflation. It is what I've guided to.

The next question today comes from Moses Sutton of Barclays.

Can you update on forward CapEx expectations dollar per watt basis? I think last you said was around $0.80, $0.82. And also, just note if that's including the DC/AC overloading of around 50%?

Yes. So Moses, I think we don't give forward-looking numbers on CapEx. So what you would see in our financials for this quarter, we were at about, I believe, $0.64 on this quarter. And we expect something... sorry?

For the trailing 9 months?

Yes. This is just for the quarter, the $0.64. And then we actually are increasing our overbuild, our overloading on these projects. So there might be some effect of that in the following quarters. But at the same time, we are continuing to reduce our total build cost, so I think that's a good way to look at where we are at now.

Got it. And regarding the depreciation change, the 35 years from 25, anything in particular you could add? Any additional color there? Did you do a study around those assets or in general? And do you expect to have any higher taxes going forward, given the lower depreciation?

I think first of all on the taxes perspective, so this is like there's an accounting depreciation and there's a tax depreciation. So we will not change anything on the tax depreciation side. So we do not expect any change to the taxation going forward, at least for the foreseeable future. And then, in terms of additional color, I think we just tried to explain that the projects that we have are using all Tier 1 equipment. I mean, we've got a lot of solar in our portfolio, we've got a lot of (inaudible) ourselves in our portfolio. And we've done a lot of tests, a lot of studies, both outside of India, in India and the warranties that back strong warranties. And clearly, most of these panels are at about 80% efficiency at the end of 25 years. We've done a lot of work in that place to make sure that the asset life is rightfully extended to 35 years. We've also seen some power be 30 years. We've seen Tesla be 35 years. So we've taken, what I would call from an Indian standpoint, a leading industry position, but not something that hasn't been done globally before.

Very helpful. And last one from me, you discussed some of this already with Phil's question on the COD dates and projects. Can you confirm that it's Maharashtra 2 and Assam 1 that were pushed out a few quarters? And then, just in terms, you also mentioned of you could pull some projects earlier. Maybe can you point to any particular ones that might be the best candidates for actually completing earlier, similar to Gujarat 2?

Yes. I'd probably answer that first. I think there's a project we are building in Karnataka. We may be able to pull that in a little bit earlier than the scheduled date. That's going really well. And then, in terms of the 2 projects you mentioned, Assam and Maharashtra ones are out and that the details are there in the appendix on where they are. And if you look at the appendix from the previous quarters' earnings, you'll be able to get the exact difference, but largely on account of contracting delays.

And ladies and gentlemen, this concludes today's question-and-answer session and today's conference call. I want to thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.