Azure Power Global Ltd (AZRE) 2019 Q4 法說會逐字稿

Hello, and welcome to the Azure Power Fiscal Fourth Quarter and Year-end 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is now -- is being recorded.

I would now like to turn the conference over to your host today, Nathan Judge. 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 fourth fiscal quarter of 2019 ended March 31, 2019. 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 CEO; and Pawan Kumar Agrawal, Chief Financial Officer. Inderpreet will provide a business update, and Pawan will discuss our fiscal fourth quarter financial performance and the financial prepared remarks by reiterating our fiscal 2020 guidance. 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 material.

Also, on May 3, 2019, we announced the retirement of our Chairman and CEO, Inderpreet Singh Wadhwa, for personal reasons. He will continue as Chairman and CEO until a new successor is named or December 31, 2019, whichever is earlier. Even after the new CEO joins, Inderpreet will continue to work in capacity as an adviser until December 31, 2019. A long transition period is to ensure leadership consistency at the top and to ensure there are no impacts to the business and all our stakeholders. There's no -- there are no changes to our business plan and strategy, we remain committed to our plans. We will continue to operate with the same level of diligence and high-execution standards that we have upheld since our inception. We are one of the leading solar power companies in India with a well-diversified portfolio and strong counterparty credit uptake across 24 states. We remain available to answer any questions you may have, and we assure you of our continued commitment to our mission, vision and our relationship with our stakeholders.

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

Thank you, Nathan, and a very good morning, everyone. For the first time since our inception, we have reported profit on full year basis. Our portfolio of 3,356 megawatts is one of the largest solar portfolios in India, with fixed price contracts for 25 years with one of the most diverse and strongest counterparty profiles in the Indian solar market.

I am pleased to report that we exceeded the top end of our megawatt operating guidance by approximately 3%. This is a testament of our strong execution on the ground. We also made another record this year by installing 95 megawatts of our 260 megawatt Gujarat project, almost 5 months ahead of the commercial operations date in our Power Purchase Agreement, owing to our integrated development, EPC, finance and operations platform, and several innovations that we have done and rolled out in our development and construction techniques.

We were operating cumulative capacity of 1,441 megawatts at the end of the fiscal year and then completed another 150 megawatts in the month of April, bringing our total operating capacity of projects to 1,591 megawatts as of today.

We have commissioned approximately 422 megawatts since the beginning of this calendar year, the most we have ever commissioned in a 5-month period, and all of these were ahead of schedule. As a result of our strongest execution ever, our annual fiscal revenues in local currency terms were significantly higher. The translated revenue was at USD 143.5 million at the fiscal year-end closing exchange rate of INR 69.16 to $1, and we met our market guidance on revenues. We have also reported our first profitable fiscal year with EPS of $0.03. Regarding our portfolio expansion, we won 1,485 megawatts during the fiscal year, a healthy 79% growth over the prior year. Our total portfolio stands at approximately 3.3 gigawatts, and our contracted 1.8 gigawatt pipeline has a tariff which is 10% weighted-average terms above the lowest bid in the Indian solar market. Tariffs in the last 2 years in India have ranged between USD 0.035 to USD 0.048 and seem to have stabilized as solar is now the cheapest source of energy for new projects in India. We do not see any significant drop in tariffs at this time. And in the same timeframe, we believe that solar panel prices continue to drop and have fallen almost 30% in this period where the tariffs have been largely stable for our projects in India, thus, giving us an opportunity to make higher returns than our hurdle rates.

We remain well-funded for our project equity from our last equity raise and do not anticipate additional fundraise from public equity markets to complete our contracted pipeline. Once our entire contracted pipeline is completed, we expect the annual run rate revenue will be approximately $375 million or so, and we have materially de-risked the portfolio as every project in our pipeline has now a contract in hand, and most have already secured critical interconnection approvals that should allow us to build projects ahead of schedules.

We continue to benefit from economies of scale of our platform and are driving operating costs lower as well as significant reduction in our interest costs, thus ensuring meaningful expansion of our EBITDA and our cash flows. Specifically, our annual operations and module cost or megawatt are down almost 22% over the last 2 years. Our focus on cost control and operational efficiency gains has resulted in 155% increase in our EBITDA over the same period.

On the construction front, we have completed 680 megawatts at 14 different sites. Over nearly 900 rooftops have been commissioned across 17 states since the beginning of our fiscal year 2019. This is the most we have completed in approximately a year, thus, demonstrating the scale of our operations as the portfolio has grown.

Looking at the industry and regulatory news, we have received several reaffirmations of pass through of both Safeguard Duties and GST taxes. Recently a state regulator approved Safeguard Duty relief for 2 of our projects. The Central Electricity Regulatory Commission has given favorable orders allowing us to pass through GST for 4 of our contracts. There is likely to be some mismatch in the timing between when these duties are incurred and claims are processed. However, we continue to believe that this will not have a material impact on our results.

Further, this past month in India, we witnessed one of the largest democratic mandates bestowed on BGP and India government through their reelection. Now the continuity of the government ensures that we do not expect any change in the country's strategy or commitment to the 100 gigawatts on the plan. This is certainly a positive for our business.

We continue to see a more accommodative monitory policy in India as well. The Reserve Bank of India has reduced the repo rate 3x now over the past several months and most recently, in the last couple of days, a 25 basis point reduction was seen. This bodes well with regards to us raising additional debt at lower cost for projects in the pipeline.

As a premium solar developer in India, we are one of the few companies that have a fully integrated business model, which develop projects from beginning to end. This allows us to earn superior returns, while at the same time, lowering risk for our stakeholders. Over 90% of our contracted pipeline projects are outside government solar parks. This competitive advantage is well positioned to take advantage of the increasing trend of projects being bid outside government solar parks in India. In fact, in the 2019 fiscal year, only about 17% of capacity allocated were in government solar parks and the rest was outside, thus, allowing us a much larger pool of projects to pick from.

On the projects we bid for, we have a consistent track record of winning projects at tariff above our peers. In FY '19, we were able to capture a 10% premium to the lowest bid in the market on a weighted-average terms on the portfolio that is yet to be constructed. We were able to do this through our propriety bidding technology that gives us superior competitive bidding intelligence.

Even though we win projects with some of the highest tariffs in the industry, the credit profile of our customer contracts is better than most of the industry. Of the 1.5 gigawatt projects won in fiscal 2019, 85% of our projects are with counterparties that are domestically rated as investment grade. We continue to see stable tariffs as solar continues to be the lowest cost of source of electricity in India. We were able to accomplish this assisted by an improvement in module costs of over 30% since the end of 2017. With that, I would like to pass the call over to our CFO, Pawan, who will review our fourth fiscal quarter performance and our guidance of fiscal year 2020. Over to you, Pawan.

Thank you, Inderpreet. Regarding our fiscal fourth quarter and fiscal year 2019 performance, our effective strategy and strong execution resulted in our first-ever GAAP profitable year since our inception in 2008. We reported a profit of USD 3.2 million for the quarter or EPS of USD 0.08, and USD 1.3 million or EPS of USD 0.03 for the full year.

We had 1,441 megawatts in operations as of March 31, 2019, or about 58% more than what we had at the end of fiscal year 2018. This was above our guidance range of 1,300 to 1,400 megawatts, demonstrating our strong development expertise.

We commissioned 272 megawatts during the fourth quarter, the most that we had ever done in a 3-month period. Our total contracted portfolio increased to 3,356 megawatts, which was a 79% increase from the end of the prior fiscal year.

Our fiscal year 2019 revenue was USD 143.5 million, which was a 29% increase from fiscal year 2018. The increase was on account of commissioning of plants during the current fiscal and the full year impact of the revenue from plants, which was commissioned during the previous fiscal. However, this strong performance has, somehow, demonstrated by a fixed percent depreciation in the rupee versus the U.S. dollar, and we ended up reporting USD 143.5 million, which compares to our guidance range of $143 million to $151 million.

Our yearly FY '19 revenue could have been USD 152 million or above the high end of our guidance, had the Forex rate remained stable at March 31, 2018, at levels of 65.1.

We reported earnings per share of $0.08 for the fourth fiscal quarter and $0.03 for fiscal year 2019. In the fiscal year 2019, we had quite a minority interest in one of our projects. For the current fiscal year, we attributed profit amounting to USD 1.5 million towards the noncontrolling interest. Excluding the impact of the profit attributed to the noncontrolling interest, our EPS for the last fiscal year would have been $0.08.

Electricity generation during the year ending March 31, 2019, increased by 497 million kilowatt hour or 40% to 1,733 million kilowatt hour compared to the year ended 2018, reflecting addition megawatts commissioned.

Project cost per megawatt operating for the year ended March 31, 2019, decreased by 12% to USD 590,000, reflecting a decline in solar modular prices and efficiency gains.

Our portfolio revenue run rate, which is the revenue that the contracted portfolio should generate once operational for 1 full year increased by $147 million or 64% to $375 million as of March 31, 2019, as compared to March 31, 2018. We continue to drive better margins, reflecting our ability to capture economies of scale as renewables have performed. Even though our revenue rose 29% year-on-year, our cost of operations rose only 26% and our general and administrative expenses interest increased only 7%.

Full year EBITDA increased 33% from the prior year. Our interest expenses during the year was about USD 70 million, which was about 6% lower than last year, reflecting lower interest rate and the expense of costs related to the expense of our solar green bond in the prior year.

An improving cost of debt has been achieved by tapping lower cost of debt in foreign markets and garnering the benefits of tightening spread from domestic lending for solar projects as the market matures.

On our balance sheet, cash and equivalents ended up the quarter at $142 million. Including short-term restricted cash, which is primarily designated for new projects as well as working capital facilities and undrawn debt, our total liquidity was USD 410 million.

Property, plant and equipment increased to about $1.2 billion, a 47% increase from the prior comparable period as we brought new facilities online. Net debt was USD 853 million as of March 31, 2019.

Now regarding guidance, we are reiterating our guidance for fiscal year ending March 31, 2020, and the company expects to have between 1,800 to 1,900 megawatts operational by the end of fiscal year. In addition, the company continues to expect revenues to be between INR 12.8 billion and INR 13.4 billion, which will translate to USD 185 million to USD 193 million using the March 31, 2019 exchange rate of INR 69.16 for every U.S. dollar. With this, we'll be happy to take questions.

(Operator Instructions) And the first question comes from Maheep Mandloi with Crédit Suisse.

Maheep Mandloi from Crédit Suisse. Just on the G&A and cost of operations, we saw some increase in the quarter somewhat similar to what we saw last year on a seasonality basis. But could you touch upon the operating leverage, which you expect for the firm just on these costs?

Maheep, thanks for the question. I think we'd actually sort of even last time around talked about this a little bit as -- because there are certain year-end provisions that come in, in the last quarter, you see a bit of a bump that is partly on account of that. But the way to look at this on a go-forward basis is if you look at the annual number and assume a certain increase based on what we have done historically. And the G&A is not linear to our revenue growth, you've noticed that. And we don't sort of give specific guidance on G&A for the next year, we believe that it'll continue to be less than what it has been historically in terms of growth. And EBITDA expansion should continue based on the trends we've seen in the past. So I think that's really what it is, and I think, we continue to believe our business is more annual in nature because of the 12- to 18-month development cycle we have for our projects' completion. And very hard to give quarterly estimates on G&A because some of these things are more lumpy in nature.

Got that. And just switching on just on financing. I know you two spoke about the RBI and whatnot -- the plans to reduce the rates, but in terms of the visibility which you're seeing out there today, what terms are you -- do you see out there for new project that -- with either domestic banks or with green bonds out there? And just wanted to really compare it with the prior green bonds, which -- the prior green bond you showed at the 9%, 9.2%. And how should we think from that perspective?

Sure. I think to be clear, what I'm going to share with you is the statistics at the moment, but that doesn't necessarily reflect that we are drawing down our financing today, especially, when it comes to the green bonds. So we issued our last bond at 5.5%. We believe that some of the recent bonds issued by our peers are in the 6.5% range, but to me, those are not really apples-to-apples comparison because the asset quality is very different on what they have issued and there's also an element of other renewable energy contracts like wind in there. We believe we'll continue to benefit from even stronger balance sheet and the stronger credit of our counterparties because on an overall basis our mix of sovereign contracts has actually gone up. And as I mentioned in my remarks that almost 85% of our pipeline is with domestically investment grade. We believe that even though the interest rates may have moved from when we issued the last green bond, the strength of our contract quality will help us compress the strengths against the existing interest rates, so we should continue to be in the 5.5% to 6% range when we look at green bond financing for our projects. Domestic lending rates are getting better. I think in the last 12 to 18 months we've seen almost 75 bps reduction. But if you sort of go back like 2, 3 years, we also saw some increase in domestic interest cost that's why we had actually tapped the green bonds as well. So there's always some movement on the positive and negative, but net-net, I think we'd still be in the effective interest rate in the domestic markets between 9% to 10%.

Our operational assets, because there's also construction finance, which may be slightly more expensive.

And the next question comes from Philip Shen with Roth Capital Partners.

I think last year you guys won just under 1.5 gigawatts in auctions for fiscal '19. Looking to fiscal '20, what kind of potential do you see in terms of gigawatts additions and additional projects to your committed pipeline? Can you talk about some of the upcoming tenders you plan on participating in and discuss the potential for cancellations after auctions are completed as well?

Yes. So I think as you -- thanks for the question, Philip, and I'll probably just take the questions in reverse order of how you asked them, the effect of tender cancellations and so forth. I think the governments have gotten used to a certain tariff level, which I also had in my remarks, between USD 0.035 to, let's say, USD 0.045. So anything that's sort of upside of that band, there will be resistance from the counterparties and they have always, historically, had this provision to cancel a contract if it's not signed. And I shouldn't say, cancel a contract, cancel a tender. The contracts are not canceled they're generally binding. So what we have seen is cancellation of tenders after the price discovery, and that's a right that the customer has always had these years but we've seen a little bit more of that. But also that was sort of adequately compensated with the number of auctions that happened, and despite that, we were able to demonstrate a very high win on the projects in the last fiscal.

In terms of growth, the fact that, that same government has come back into office and the same set of people are driving the renewable energy and solar agenda, we don't expect any slowdown on that process. I mean, as we speak, the auctions are coming in, the tenders are coming in. I think formerly, in our presentation, we have mentioned some numbers that we are tracking, but we've been very disciplined about picking projects that give us the highest credit and highest returns, way above our cost of capital. We'll continue to follow that model. We've shied away from giving any megawatt guidance on a go-forward basis of portfolio. We always talk about operational assets, and -- which is, again, a factor of the discipline we follow, right? We're not going to be chasing megawatts, we are going to be chasing meaningful growth. And if that number happens to be better than last year, we'll do better than last year. If the numbers come out to be below where we were last year, we'd be happy with that as well. So we have enough work to do, but historically, we've seen ourselves in the 5% range of the overall market, and we'll continue to be in line with market growth.

Okay. Thanks, Inderpreet, for that color. As it relates to CapEx, apologies if I missed it, for FY '19, can you share your overall annual CapEx number? And we'll be able to back into the CapEx per watt, but perhaps talk about kind of where you guys were in fiscal '19, total CapEx and CapEx per watt? And then what that -- those expectations are for fiscal '20 on a unit basis as well as total CapEx level?

Yes. I think we sort of published the number on the project cost per megawatt at the fiscal and exchange rate, we were at roughly $0.59 a watt on project CapEx. Now I don't think I have the number handy with me, it'll be somewhere in the 20F and we can circle back with you on the exact numbers with the team, on how much we actually incurred during the fiscal year, the total amount. But that total amount will include both, we would have incurred some on development and then, of course, somewhat capitalize on projects that got completed so we can sort of give you those details separately. In terms of -- I think going forward we believe that there is still some reduction on the cost of panels, but we also believe that reduction will probably be offset with the duties and taxes that have come into play for the projects that get built by July of next year. So pretty much anything we build from here on till the end of the fiscal year, the projects will have the element of duty. So from a CapEx standpoint, we don't see a significant variance between the 2 years, but that doesn't change the fact that our economics will be better because the duties are a pass through. So we will get the additional cash flow from those duties once the claims are processed.

Okay. Just -- you mentioned you expect module pricing to come down. Where is pricing today? And we saw the 30% drop from May 31 last year through end of the year, but I think module prices are pretty stable at this point globally. Correct me if I am wrong for the Indian market, but do you expect module pricing from today forward to drop some meaningful amount? And if so, why? And then shifting to a bit of a technology question as well. Do you expect to embrace mono PERC technology at all? Or do you still expect to focus on multi-crystalline panels?

Sure. Yes, I think my comment still regarding the module pricing was more in comparison with the 2 fiscal years rather than sort of specifically month-over-month or quarter-over-quarter. So what we installed in the last fiscal was contracted several months ago. And what we are contracting now or have contracted recently that we'll be deploying now. So there's a meaningful drop between those numbers that I think is really where my comment was coming in. So we've seen year-over-year, roughly about 10% to 15% drop in the contracts that we are doing. In terms of technology, we absolutely would want more mono PERC and even CD6 for that matter, for obvious reasons on improvement in efficiency. But we believe that the overall production of mono PERC and CD6 allows for the suppliers to supply in markets that are willing to pay a premium for that high efficiency. And as we've said before, India is not a market that pays premium, so we see largely projects in India continue to be with the multi-crystalline technology at the moment and the projects that we are doing this year are all likely to be on multi-crystalline technology. But we continue to watch as the supplies increase, as the suppliers switch more and more of their lines to the new technology and high efficiency technology. We will be able to do those installations as and when they make economic return sets for our projects.

And as there are no more questions, this concludes both the question-and-answer session as well as the call itself. Thank you so much for attending today's presentation. You may now disconnect your lines.