Azure Power Global Ltd (AZRE) 2021 Q3 法說會逐字稿

Good day, and welcome to Azure Power Q3 2021 Earnings Conference Call. (Operator Instructions)

Please note that this conference is being recorded. I now hand the conference over to Mr. Nathan Judge from Azure Power. Thank you, and over to you, sir.

Thank you, and good morning, everyone, and thank you for joining us. Last night, the company issued a press release announcing results for the third fiscal quarter of 2021, ended December 31, 2020. A copy of the press release and the presentation are available on the Investor section of Azure Power website at azurepower.com.

With me today are Ranjit Gupta; Murali Subramanian, COO; Pawan Kumar Agrawal, CFO. Ranjit will start the call by going through several key highlights, and then Murali will follow up with an update on our projects under construction, technological innovation and an industry update. Pawan will then provide an update on the quarter with additional discussion on the performance of the quarter, and then we will wrap up the call with Ranjit discussing fiscal year 2021 guidance, providing initial fiscal year '22 guidance and a discussion of our longer-term 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 the presentation on our website for a more complete description.

Also contained in our press release, presentation materials and annual report are certain non-GAAP measures that we reconcile to the most comparable GAAP measures, and these reconciliations are also available on our website in our press release, presentation materials and annual report.

And with that, it's now my pleasure to hand it over to Ranjit.

Thank you, Nathan, and a very good morning, everyone. It was around this year -- this time last year that COVID began spreading rapidly across the world. It has been truly unfortunate how this pandemic created so much pain and uncertainty. Fortunately, the light at the end of the tunnel is getting brighter with the vaccine being globally distributed as we speak. Here's to hoping that we can all claim victory over the virus on our next call.

Sustainability and ESG are key to the success of our business. At Azure, we start every meeting with a discussion of health and safety, which is of paramount importance. We would like to start this call by highlighting our ESG accomplishments this quarter.

We are very proud to announce that we obtained the ISO-45001 certification, which demonstrates Azure's focus on occupational health and safety. Given the remote locations of our projects, the extreme heat and difficult conditions for construction and operations as well as the inherent safety risks that come with the large-scale construction project, we believe this validates the additional efforts we make to our workplace safe for our team members and contractors.

In addition, in December, MSCI, a leading ESG rating agency, rated Azure Power as AA for ESG, which places us in the top quartile of all global utilities they cover. We believe that we will improve on this rating going forward as we work through some legacy issues that have improved this past year.

Despite the challenges faced during the pandemic, the company's operations have persevered. Today, we have 19% more megawatts operating than we did at the same time last year. Our operating assets have performed extremely well, and not only we have been able to continue collecting revenues, we even improved our collections with our DSO at 113 days at the end of the quarter compared to 119 days at the beginning of the pandemic. We have slashed costs, and our cash G&A, excluding stock compensation expenses, fell by 15% from the same quarter last year. We had promised to reduce our cash G&A expenses by 10% in FY '21 versus FY '20, and I'm happy to report that we are on track to deliver on our promise.

At the end of Q3 FY '21, we are operating with 25% fewer team members than a year ago. Growth and our actions to improve returns have resulted in a 26% year-on-year increase in EBITDA from operating assets and 142% increase in cash flow to equity from operating assets. Over the last 3 quarters, since we started reporting CFe, we have seen a steady improvement in this metric due to our focus on setting our assets, CapEx infusion and operating assets, reducing our costs, and collection of long outstanding dues.

Also, our CFe generation of [$67 million] over the past 12 months would have been around $75 million if installation in third quarter and year-to-date had not been about 5% lower than the 20-year average NASA Installation Data.

On the flip side, despite significant progress towards signing PPAs on our 4 gigawatts, for which we have a letter of award, but no PPAs, we have not much to report. We still remain optimistic that we will have positive news to deliver shortly as there is a definite movement towards the finish line. The fact that India beat its peak power demand record twice in the last month indicates a strong recovery is underway, which will enable DISCOMs to invest in buying power for their future needs.

As we announced before Christmas, we do expect a reduction in tariffs from what was discovered when we won the auction about 14 months ago. Frankly, costs have come down and productivity has risen significantly during this period.

The government continues its tremendous support to the renewable energy sector. The honorable Prime Minister has reiterated the Government of India's vision of having 450 gigawatts of renewable energy operational by 2030. Many structural changes are being proposed to the regulatory and policy framework to enable this growth.

In the recent budget, approximately USD 40 billion has been set aside for upgrading infrastructure and technology of distribution companies to make them more efficient and improve their fiscal positions. In a path-breaking change, the government has spoken of putting a framework in place whereby the consumer could be in position to choose their electricity supplier, which means there would be an opportunity for consumers to choose clean and lowest-cost renewable energy. With further infusion of equity in SECI, Solar Energy Corporation of India, the budget signaled the government's intent to strengthen its support for the RE business.

In my remarks exactly a year ago, I had spoken about 4 broad themes that we had started work on: strategy, transparency, efficiency and prudence. In the last 4 quarters, we have worked hard on all 4 themes. Our transparency has manifested itself in our disclosures, streamlining of reporting structures, elimination of EPC margins and our constant outreach to the investor and stakeholder community. Efficiency and prudence have been demonstrated through a reduction in our costs, pruning of our workforce, simplification of internal processes, focus on training and human resource.

We have executed our strategy, which primarily focused on discipline in capital allocation. As tariffs have plummeted to below USD 0.03 in an environment that model prices are holding firm, we have stayed away from bidding aggressively, patiently waiting for the right opportunities that will earn our shareholders a return higher than our cost of capital. We have, time and again, demonstrated our commitment to capital discipline by chasing returns over scale.

With interest in green hydrogen growing exponentially, storage costs continuing to decline and increasing efficiency of solar modules, the stage is set for the next quantum leap in acceptability of renewable energy across the world. These are exciting times. We continue to look for suggestions from our investors and stakeholders on how we can further improve our disclosures and make it easier for you to understand our business.

With that, I would like to turn it over to Murali.

Thank you, Ranjit. Good morning, everybody. On Pages 5 and 6, we provide an update on our projects under construction.

Whilst we have overcome many challenges and the level of construction activity has continued to increase, new supply constraints have arisen. High local demand for solar modules in the past 6 months or so in China coupled with a rising yuan and rising raw material costs has resulted in the inability of several module suppliers to honor their price and delivery commitments despite signed supply contracts. Having said that, we believe we have been able to navigate the potential delay by leveraging our size and large backlogs to secure modules better than many of our peers, but getting modules still remains a real challenge.

On top of this, we are still not at the level of construction activity we anticipated 3 months ago, when we last provided an update. This is related to delays. We had anticipated that by fiscal year-end, we would have 450-megawatt operational and the final 150-megawatt to be completed by May. As of today, we have finished 300-megawatt, but another 150-megawatt by fiscal end is an extremely difficult target. We do expect that an extension to the COD will be granted, and we will not owe any penalties for delays.

Project work in Assam has picked up after poor weather and COVID-related delays. We have sought the COD extension from the regulator and procurer, and expect to hear from them shortly.

Whilst there have been delays, we have also not lost sight of ways to continually improve our business. In this fiscal year, we increased our block sizes, reduced the amount of cable needed by using junction boxes and designed larger cable sizes with reduced spacing. We have seen our yields improve as we increase the adoption of string inverters and aluminum cables and implement dry cleaning robots to prevent dust buildup to improve our efficiency.

We were practically the first mover in India to adopt mono PERC modules in a big way. Continuing with our quest to drive efficiency, we are planning to test a pilot of bifacial modules combined with trackers. Worldwide industry has found as much as a 15% increase in yield compared to fixed-tilt mono PERC modules. We have already started deploying bifacial modules in our current Rajasthan 6 project, and about half of the modules in our Rajasthan 8 project are expected to be bifacial.

Over the last quarter, we have transitioned our operating projects to a new and powerful analytics platform. We continue to get all our data into a centralized monitoring station at head office, but the driver behind this new platform is the ability to monitor and analyze plant performance at the project site, which is a very powerful efficiency improvement tool.

Now the site teams have greater visibility of even minor plant failures, and various preset alarms allow them to spot not only failures, but even parts of the plant where performance is lower than expected. Installation of string inverters in 50% of Rajasthan 6 and 100% in Rajasthan 8 and 9 will further help this new analytics platform provide string-level data to spot localized failures. String inverters will not only prevent mismatch losses, but will also aid in faster failure rectification. This will help us in improving generation from each and every operating asset, and we hope to see the benefit accrue to us over the next fiscal year.

We're also planning to test battery storage and its integration in our ground-mount projects to be future-ready to satisfy DISCOM concerns on reliability and (inaudible) and to reduce deviation penalties. In anticipation of upcoming wind-solar storage tenders, we are working on development opportunities for hybrid projects such as solar plus wind.

We would like to provide also some highlights of our ESG accomplishments on Page 7. As Ranjit mentioned earlier, we did get a strong AA rating from MSCI for ESG, and we obtained ISO-45001 certification, which verifies that Azure Power provides a safe and healthy workplace. Our carbon-free generation has avoided about 2.4 million tonnes of CO2 equivalent, bringing the total to 8.9 million tonnes equivalent since inception. We remain net carbon neutral.

We have reduced our water consumption per unit of electricity generated by about 20% this fiscal versus calendar 2019, and about 2/3 from calendar 2018 levels. Another environmental focus this year is safe disposal, even recycling where possible of damaged modules, and we have made very good progress this fiscal on this.

On the social side, in addition to the ISO-45001 certification, we have provided about 175,000 people with assistance by delivering masks, food, facility support, purified water, power in the school, and job training. We also remain actively engaged with the communities in which we operate.

On the governance side, we have adopted many policies, including an enhanced health and safety policy and have increased gender diversity on our Board. We're not stopping here, and we'll continue to implement best practices to enhance our sustainability.

Looking at industry and regulatory developments on Page 8. There is a logjam of about 19 gigawatts of allocated solar projects with LOAs, but no power purchase agreement at the moment. In the last couple of quarters, DISCOMs have been -- sorry, DISCOMs have not been signing PSAs, which SECI, that's Solar Energy Corporation of India, needs in order to enter into PPAs with developers such as ourselves.

Clearly, the uncertainty around COVID has taken a toll on DISCOMs. Their reticence has been further exacerbated by the recent drop in tariffs discovered during the last couple of solar capacity auctions.

To explain further, during March of 2020, many solar auctions cleared in the range of USD 0.033 to USD 0.037 per kilowatt hour. However, in this past November and December, the discovered tariffs for a couple of auctions fell to record lows of about USD 0.0275 per kilowatt hour, a 20% drop.

On the positive side, however, India has set new records for power demand twice in the last month, which indicates a strong recovery after months of subdued industrial and commercial activity. We have gotten numerous questions from investors about our view of future tariff pricing. While we do not have a crystal ball, what we do know is that, over the next several years, there are more projects than there is development capacity and capital to finance it in India at the moment. History has shown that these are -- history has shown that there are periods where competition increases, but eventually, competition moderates. We have a leading platform with some of the lowest costs in the industry and that has some of the best and lowest cost access to capital. There will be many opportunities to add projects that create significant value in the future.

In addition, Azure is in a tremendously strong position with LOAs in place for a 4-gigawatt pipeline. We have a strong pipeline and do not have to chase growth. We will be patient and disciplined, and we will not do projects that do not have returns above our cost of capital.

With that, I will turn it to Pawan to discuss the quarterly results.

Thank you, Murali. Turning to Page 10. As of December 31, 2020, we were operating 1.987 gigawatts on a PPA or AC basis, which is 8% higher than what we were operating as of September 30, 2020. Our portfolio of 7.115-gigawatt remained stable from the previous quarter. Our construction costs continued to fall and were about 10% lower year-on-year.

On Page 11, when looking at the quarter, we faced reduced installation by around 4.6% compared to our expectations apart from weather. Had installations been as per the long-term average, our revenues would have been about $50 million or a 20% year-on-year increase. I will discuss the year in more detail in a few minutes -- in a few moments, but excluding stock compensation expenses, which lowered significantly due to the rising stock price, our (inaudible) have been about 15% lower than G&A in the same quarter last year after adjustments.

After adjusting for stock compensation expenses, our EBITDA would have been $39.4 million or a 21% increase from the same quarter in the prior year. And we'd have reported a net loss of about $2.7 million versus about $7.9 million loss after adjustments last year.

Turning back to G&A. On Page 12, cash costs were lower below our internal expectation, save for stock appreciation for SAR, which added about $18 million (inaudible).

We remain very focused on reducing our cost as we had outlined earlier this year. We are pleased to report that we're on track to deliver on our original target of about a 10% reduction in G&A, excluding stock compensation expenses, during FY '21 when compared to FY '20. One example of cost saving is the relocation of our head office, which is expected to save about $1 million every year. While looking out into FY 2022, we expect that cash G&As will rise about 10% from FY '21 level, reflecting inflation and an increase in megawatts operating.

We also have embarked on a refinancing initiative, and so far, we have been able to refinance about $73 million of debt, thereby saving us about 150 to 200 basis points on our interest cost. We are working on refinancing about USD 185 million loan. And I would highlight that our first green bond of USD 500 million that we issued in 2017 with a 5.5% coupon is now callable. Based on indicative rates in the market, we would expect to be able to realize savings once this is refinanced.

Turning to stock compensation expenses. As the share price rises, our stock compensation expenses will rise, inflating our G&A. To help with modeling, the impact of SAR expenses on our G&A is directly linked to the share price. For fourth quarter '21, we would incur about $2.5 million of additional SAR expenses if the share price remained at yesterday's close. Every $1 change in the stock price above and below the last night's close of $37.76 will have about $800,000 impact of G&A in that period, both positive and negative.

Given the uncertainty around collections when the pandemic first began, we are particularly proud of our ability to improve our DSO despite the challenges this year. Our third quarter '21 DSO was 113 days, which is better than the 119 days when the pandemic first began about a year ago. We continue to make progress in getting back payment and believe there will be further improvement in the future.

On Page 13, you can see that EBITDA from operating assets increased about 26% year-on-year and that cash flow to equity from operating assets rose about 142%. Net debt for operating assets was about $1.03 billion, and EBITDA for the last 12 months was about $172 million, resulting in a net debt to EBITDA ratio for our operating assets of about 6x. This ratio is much more reflective of our balance sheet than the net debt to EBITDA ratio for the overall company, which includes debt for the projects under construction as well or just recently commissioned projects, which are yet to produce their corresponding EBITDA.

This leads to a review of our balance sheet on Page 14. We had about $122 million of cash and cash equivalent, and our net debt stood at approximately $1.15 billion. As a reminder, for those that are calculating our debt ratio, the hedging assets included in the other assets on our balance sheet should be netted against our total debt, as this is directly linked to the foreign exchange hedges we put in place related to our green bonds.

Before I pass it over to Ranjit to discuss guidance, I would like to mention that Azure continues to gain traction, stock trading liquidity and visibility as a leader in the Indian solar industry. At December 31, 2020, Azure RE was a part of at least 25 stock indices compared to none at the middle of the year.

Now over to Ranjit to provide some commentary on FY '21 and long-term guidance.

Thank you, Pawan. In February 2020, when we had issued our guidance for fiscal year '21, I had mentioned the caveats of timely commissioning, normal weather and no curtailment. I'm happy to report that despite the pandemic, we have hardly seen any curtailment across our projects. Pandemic did impact timely commissioning and continues to impact construction.

On Page 15, as Murali noted, because of supply constraints and delays related to COVID, we now expect to be at the lower end of our previously provided range of 2,000 to 2,500 megawatts operational by March 31, 2021. Performance of our operating projects has improved significantly, but lower installation in the sec in this quarter, and in fact, the entire year-to-date, to the tune of about 5% compared to the 20-year average, has weighed on our performance, and we are now expecting to be at the lower end of our previously provided revenue guidance.

For fourth quarter '21, we expect revenue to be between INR 4.335 million and INR 4.435 million, and the PLF to be between 22% and 23%. We also provide initial guidance on our operating capacity and expected revenue generation for the next fiscal on Page 15.

Turning to Page 16, which is our long-term outlook, at the moment, due to uncertainty around the tariffs that will be realized for our 4-gigawatt pipeline, we are pulling our long-term outlook, which included our 4 gigawatts.

With this, we will be happy to take questions. Thank you.

(Operator Instructions) The first question is from the line of Philip Shen from ROTH Capital Partners.

I'd like to focus initially on the 4-gigawatt tender and the status there. So specifically, with that long-term outlook, Ranjit, that you were just highlighting, it looks like there's a 1-year delay. And so with this new timeline, what do you -- when do you need to sign the PPAs by to stay on schedule? And what is the visibility that you have now in terms of being able to sign a PPA at the first tranche -- or for the first tranche?

Thank you, Phil. It is perhaps the most important question that is in front of us. So Phil, the good thing is that a lot of progress has been made by SECI in trying to place the power, right? And like we had mentioned, the 4 gigawatts is going to be placed in tranches, most likely the first 1 gigawatt will be placed first, and then the 3 gigawatts will be placed later in this year. For the first gigawatt, there was very little traction as was mentioned by SECI in a letter to us, which we had mentioned in our 6-K filing towards the end of last year. But like I mentioned in my remarks just now, over the last year -- last month or so, we have seen that power demand has come back very strongly. And as we are in touch with SECI almost on a day-to-day basis, they are reporting that there is a renewal in sort of inquiries that they are getting from the distribution companies for signing power purchase agreements once again, which was very, very muted over the last couple of quarters. So that is heartening news.

And also the fact that SECI is still insisting on signing our megawatts first before signing the megawatts of projects that were auctioned post the manufacturing bid, right? So therefore, they are not sort of bypassing us. They are saying that, yes, they will sign our power purchase agreements first, and only then they will sign the remaining power purchase agreements, which is good news for us, so -- because then we will be first in line. So I am very positive. We had in the last earnings call mentioned that we expect the power purchase agreement for the first tranche to be signed in January, February. February is gone one-third, and we still have 3 weeks left. I don't know whether we'll have something signed in 3 weeks, but I would think that we are fairly close to signing some power purchase agreements over the next, I would think, 6 to 8 weeks. So it's no longer next quarter or next to next quarter or within the next 2 quarters kind of a thing. I feel the way things are going at the moment that we should see some progress this quarter.

As far as the delay is concerned, Phil, under normal circumstances, these power purchase agreements would have been signed in the month of -- around the month of June, July of 2020. Of course, COVID has caused a delay between 6 to 9 months anyway on project commissioning of almost all projects across India. So if you look at it from that perspective, if you assume that COVID has caused a 6- to 9-month delay, then if we sign our power purchase agreement by March of this year, then we will probably be almost on time compared to what we had originally scheduled for, as far as our earlier projects were to be commissioned, and then there were supposed to be a gap, and then we were supposed to commission the manufacturing gigawatts. So there won't be that big a gap really in our original plan versus this plan, assuming that the whole plan has been shifted by 6 to 9 months owing to the pandemic.

Great. You highlighted just now that SECI is still insisting on prioritizing your award and PPA ahead of the others. Can you talk about why you think they're prioritizing you?

So the reason why they are prioritizing us is twofold, Phil. One is, of course, that this is a very prestigious tender for the government, so they do want to make this tender successful. And secondly, because of the fact that realizing that the costs have reduced, right, and module efficiencies have improved. Overall, the cost of energy for us to set up a project has reduced, like we have mentioned, we have agreed to tariff markdown, right? So once you agree to a little bit of a tariff markdown, that sends a signal to the government also that, look, these guys are not out here to insist on a tariff that does not make sense at this point in time, right, for the consumer. So they are -- that will also push a little bit of a moral obligation on SECI to try and place our power first, because it's not as if they are at the moment trying to place our power at a price, which is way out of the market, right? The tariffs in the market are $0.0275, and we are looking to place our power at $0.04. It's not like that, right? I mean most of the power is obviously not at $0.0275. Most of the power available in the market is at about $0.033, $0.035. So we are not looking at a differential between $0.033 to $0.039 kind of or $0.035 to $0.039 kind of differential, right? So -- because of these 2 reasons, because of the fact that we are open to a tariff markdown. So therefore, the difficulty is lower for them to place this power. And secondly, because of the fact that this tender is a prestigious tender, because of these views, they are still trying to place our power first before they place the power which has been auctioned post our auction.

Okay. As it relates to PLF, you guys gave a lot of good detail in your slide deck about the historical PLFs by quarter. I was wondering if you might be able to share how you expect that PLF to trend by quarter in fiscal 2022? And then one other question on the FQ3 PLF. It looks like weather was an issue and may have driven the lower-than-expected PLF. Can you share a bit more about what happened in the quarter? And is it a seasonal issue that is likely to recur? Or do you think it persists?

So 2 questions that you asked, Phil. The first one is about the '22 guidance. We will certainly work on that and provide you with some quarter-by-quarter numbers, if that's what you would like. It's -- like I have mentioned in my remarks earlier, too, that a part of the improvement in PLF is really nothing of our doing literally, right? I mean in the sense that the -- across the sector, the AC/DC loading has improved, right? And one of the reasons why PLFs across the sector are rising is because now people are putting higher DC capacity behind the AC capacity. So earlier, if you were doing a 100-megawatt project, we would put 100 megawatts of modules. So if you were going to get 19%, 20% PLF, that's the PLF you were going to get. But as time goes by and people start putting 110% or 120% modules -- 110-megawatt, 120-megawatt modules behind a 100-megawatt AC capacity, the PLFs tend to rise.

Azure, of course, has legacy assets, right? So at that time, the tariffs were supportive of 100% AC to DC ratio and when the industry was still young. So we have several projects, which are in states where the installation is lower. We have several projects where the AC/DC ratio is not what it is currently for other projects, which we are building today. Therefore, we will continue to see an uplift in our PLF as we move forward. The projects that we are constructing today in Rajasthan have -- are expected to be in high 20% PLF, because of the fact that they have 1.4x or 1.5x loading, and they are in one of the best installation areas of India. So because of that our installation -- our PLF numbers will continue to rise over the next few years.

As far as the third quarter is concerned, right, we had extended monsoons and a storm that went through Southern India. So in the south, right, we had rainfall in the months of October and November. Typically, the monsoon in India ends in August and September, but this time, we had monsoon stretching into October and November, which hurt us quite badly in the months of October and November. Because of that, our numbers are lower, because the installation in those months was lower. So this is, of course, a one-off kind of an event. I was looking at the 20-year data, the NASA data over the last 20 years, and there have been years that have been worse than this, and there have been years that are much, much better than this, right? So that's why, from an average, over the year, we have been about 5% lower from the long-term average across the country this year. If I look at different states -- of course, different states have different numbers, but overall, it's about 5% lower. And some years, it will be 5% higher or 6% higher. So it averages out over the 25-year period that the PPA exists.

One last one. A quick one, hopefully. As it relates to trackers and bifacial, you talked about starting to use them. Can you share what kind of trackers you're using? Are you possibly using, for example, U.S. trackers like Nextracker array? Or do you think you'll be using other brands? And if so, what are the names of those trackers that you plan on engaging?

Can I take that? Phil, it's Murali. We -- at the moment, as we mentioned, we are experimenting with trackers in the sense that we have our test bed, and we are piloting several suppliers. So we have a couple of the big industry names, and we have a couple of small names as well. An American company, an Indian company, a Chinese company, they're all there. And so we -- once we're comfortable with which tracker is good for us, we will work with them closely to see if they can be deployed for our next projects.

One quick follow-up there. What kind of pricing makes sense for you guys, given the potential performance in gains? Do you think it's $0.05 a watt? Or do you think it's got to be sub-$0.05 a watt?

So this is also dependent on the module pricing, right? As module prices drop, trackers don't make as much sense. As module prices go up, trackers certainly start to make sense. So this is a moving number. At the current module prices, which are early $0.20s, trackers actually start to make sense. But if module prices drop just $0.17, $0.18, then it doesn't make sense, right? So approximately, I would assume, $0.06, $0.07, $0.08. At that price level, it would start to make sense.

The next question is from the line of Maheep Mandloi from Credit Suisse.

Just following up on the different factors driving the PLF here, the string inverters, bifacial and potentially, the trackers. How should -- how do we think about the long-term PLF target over here and any potential impact to the CFe for the whole 2.1-gigawatt portfolio here?

So thanks, Maheep. Thanks for the question. On the 3.1-gigawatt portfolio, most of the modules have been decided. And as far as the tracker is concerned, we are still taking the final decision for the last 600 megawatts of the 3.1 gigawatts. And those decisions will be made over the next 4 to 6 weeks as to how we go ahead and bid them. Like Murali mentioned, depending upon the modules they have closed, depending upon the cost of trackers, we will take a call on whether we're going to do trackers on those 2 projects. So once that is frozen, so let's say, by the end of March or middle of April, we would know what kind of PLFs we can expect from the entire 2.1-gigawatt portfolio, because for the 2.1, which is already operating, we know what the PLF is expected to be. We -- for the remaining 450 -- for the nearly 300 megawatts of the Rajasthan 6 project, right, the modules are on the way and so on. So we know what the PLFs are going to be. For the last 600 megawatts, the things will be clearer in 6 weeks' time line.

Got it. And then maybe just one follow-up on that one. So the PLF was roughly around 19.5%, 20% in FY 2021 for an average for the whole year. How should we think about that PLF for new projects for the 4 gigawatts with SECI or some of the new contracts here? How much uplift do you see in PLF for new projects from all these new technologies?

So the projects that we build with trackers and bifacial. If we do trackers and bifacial, we could be looking at early to mid-30% -- in the 30s, right? That's the kind of PLFs you will get. Because mono PERC with 1.5 loading in some of the sites that we have secured, which are some of the best sites, we can get as close to 30%, very close to 30% kind of numbers. And as you add bifacial and as you add trackers, the uplift of what the industry says, we have the update -- like we mentioned, we have yet to put up our test bed and to test it in India. But across the world, people are saying that there could be between 10% to 20% uplift due to these trackers and bifacial.

Of course, what happens, Maheep, is that as we start going into the tracker and bifacial, because of the fact that your clipping starts to increase, right, as your PLF increases, right. What happens is that you start to reduce your overall AC/DC loading, right? So once your AC/DC loading -- because if you suppose have a 30% PLF with just mono PERC and you add 15% on top of that, if you go and try and do 34.5%, you will probably not get 34.5%, right? You'll probably drop, because a lot of clipping will happen. So the way to do it would be to then reduce your AC/DC loading and bring your PLF down to maybe 31%, 32%, so that the clipping losses are reduced. So -- but I think getting upwards of 30% with manageable clipping is possible, but we'll have to do the design and figure it out. Murali, perhaps, you can add something to that?

No, I think you've explained it very well. That's fine.

Got it. That makes sense. So there's probably some savings on CapEx from reduced AC/DC loading, but probably somewhat offset by higher cost for trackers and bifacial line string inverters, you say. Got you. And just on the broader market here, so right now in the budget, the only provision we saw was the tariffs on inverters and not on modules yet. So anything else you're expecting from the budget or the basic customs duty, which was previously expected last year, but we haven't yet seen that 20% to 40% BCD yet. Any expectations on when that could come in? And how that could impact the 4 gigawatt?

There was a very strong rumor that the BCD announcement will come in this budget, right? However, yes, we were all surprised that nothing was mentioned about it, so -- right? But what the ministry had said a couple of months back was that they expect that the BCD will be applicable from April 1, 2022. So our 3,100 megawatts or the 900-odd megawatts that are under construction at the moment will not be affected by the BCD. But of course, the 4 gigawatts, if the government comes out, I would be -- I would think that the BCD would come in before we ship modules for the 4 gigawatts unless the ALMM list that the government is coming out with is a success, which is like a nontariff barrier. So it is possible, Maheep, that -- and the government is talking about coming out with the ALMM list as soon as by the end of this month. If the approved list of modules and manufacturers, if that list comes out before the end of February or in March, then I think the government might wait to see the impact of this nontariff barrier before deciding to put a BCD on top of that.

The next question is from the line of Puneet Gupta Gulati from HSBC Securities.

Pawan talked about debt to EBITDA at 6x on operational FX. Would it be possible to get what that number would be on a debt-to-equity basis as well?

So typically, a project -- if you look at the project level, Puneet, the projects are funded typically 75/25 debt to equity, right? So -- again, so the problem comes when you look at the overall balance sheet, right? So at the balance sheet level, the leverage would reflect very, very different from what we look at the project level. And as a part of our overall capital structure, we do have pure equity. We do have project debt. We do have some part of -- some proportion of our pure equity. We also carry a corporate debt to optimize on our return on equity while ensuring the prudence. And prudently base the parameters.

So similar to the operational debt to EBITDA, which you said is 6, is there a number that we can -- will it be fair to assume that operational debt to equity will be at 75/25? Or...

Operational projects debt equity will be around 75/25. That's a fair assumption, but we have not provided any recent guidance, but yes, we can -- we can take the numbers and calculate and get back to you, because those numbers are anyways part of the -- part of our numbers. So we will not have any problem in getting those calculated and share with you.

Okay. Great. And secondly, can you talk a bit more about what is the new cost of debt that you're able to target for now? What is that ballpark number, including the hedging cost?

So recently, Puneet, we have seen domestic market giving us cheaper rate than what is available possibly in the green bond market, if you look at the coupon plus hedge plus withholding tax that is cost. The domestic market -- of course, domestic market is not available for all borrowers. So that's a separate problem. But for players for whom domestic market is accessible, we are getting much, much finer rates. So for example, the recent transactions that we've closed is around 8.5%, and we've already closed and then the next terms that we've got is around 8.25%. So these are the levels that you see between 8% to 8.5% is something that we are getting for the recent projects that we will refinance.

Okay. And what is the tenor of this debt? Is it fixed cost or floating?

So these -- so the tenor of the debt is around 80% of the remaining life of PPA. So it ranges around 12, 13 years to 16, 17 years, depends on at what stage of PPA are we refinancing these projects. And -- so the loan that we take from bank, Puneet, that is floating. That is linked to their MCLR, which is typically linked to 1-year MCLR. But we have also taken debt from -- infra debt funds, IDFs. And then I talked about 8%, 8.5%, 8.25%, these are the rates which are fixed for 5 years.

Okay. Okay. This is very useful. Secondly, Ranjit, you talked about everything, but you didn't talk about the plan of asset sale, which you talked about a couple of quarters. Any update that you'd like to share there?

So Puneet, there was 2 sets of assets that we have mentioned in the past that we were looking to divest, right? And one set of assets, we have made significant progress, and hopefully, we'll move forward on that. And on the second set of assets, which were the assets that we were looking to divest, we have received some very good interest. As you know, the M&A market is extremely, extremely hot in India, lots of transactions taking place. So there is a keen interest in those assets, but at this point in time, as we go out and try and figure out how much equity do you need to fund our future growth, we are figuring out whether selling those assets will be the best cost of capital that we can get. So the decision on the sale of the second set of assets has been deferred, right, for the time being. We are considering when it comes time, because you see the original -- before the pandemic came, we had expected that we would have started spending money on the 4-gigawatt projects already. Because of the pandemic, the infusion of capital for the 4 gigawatts is delayed by 6 to 9 months. So our capital raise has been delayed by 6 to 9 months. So therefore, we have to -- at the time when the capital raise comes around and that's when we will take a call on whether we want to divest those assets or we want to raise the money that we need in a different way. And the good thing is that, like I mentioned, there is a huge demand for operating assets. And so therefore, when we can do the discussion with the people, who have shown interest, we believe that a lot of the work that was to be done to evaluate those assets has been done. And if required, we can close the deal fairly quickly.

And when you said the first block of assets, I presume you're referring to the rooftop assets?

That's right.

The next question is from the line of Joseph Osha from JMP Securities.

I wanted to return a little bit to some of the pricing comments you made early on in that sort of 20% dislocation. Obviously, things are evolving. But as we think about, especially this first gigawatt, would it be fair to just take a 20% haircut from that INR 2.92? Is that how we should be thinking about it?

A 20% dislocation, like I said, right, I mean when we looked at that pricing and looked at the cost of setting up projects, right, that tariff, we could not -- for us, we could not -- the numbers did not add up. And over the last month or 1.5 months since the tariffs have been discovered, more and more people that we talk to including SECI, feel that, that is perhaps not a reflective tariff, right? So as we know, there were a couple of public sector undertakings that had taken part in those auctions like NTPC and SJVN and NLC, Neyveli Lignite Corporation. So the cost of capital and the cost of debt for these companies is much, much lower. So we feel that this tariff is not reflective really of the market, and therefore, I don't think there is any question of us expecting a 20% reduction in the numbers. Unless and until over the next few weeks, we see a huge -- again, a dislocation in the module market, which makes us comfortable that, yes, we can still make the kind of returns that we're hoping earlier with that kind of a decrease in pricing. At this point in time, given how the module pricing is holding firm and the guidance that we're getting from the large manufacturers on the prices of modules over the next 2, 3, 4 quarters, I don't think it is -- 20% will be difficult to accept.

Okay. And you alluded to the second question I was going to ask since if we're short of everything from semiconductors to building materials to solar panels these days. It sounds as if the signals you're getting is that this tight environment is going to continue for another couple of quarters. Is that correct?

That's not yet -- that's what it seems, right, Joe, but these things change very rapidly, right? I mean today, China will announce a 90-gigawatt capacity addition. You will see the prices firm up, because the supply and demand is fairly well balanced. It's like the oil market, right? I mean Saudi will reduce -- they were 90 million barrels a day, they'll reduce 1 barrel -- 1 million barrels, and suddenly, you'll see the price shocks up. So it's a little bit like that. I suppose China reduces its requirement by 10 gigawatt or 15 gigawatts, it's possible that the prices will moderate very, very quickly. But at this point in time, as we talk to the larger suppliers, they are -- all of them are saying that they expect the pricing to remain firm until the end of this year.

And you're kind of in the low 20s at the moment?

In India, we're getting early 20s delivered in India.

Okay. Third and final question, and I'll jump off. We talked before and then you alluded just recently to this effective debt pricing at kind 8.25%, 8.5%. Can you perhaps -- I know I asked about this before, reeducate me as to what it would take for your company to be able to access your rated debt markets in India, and what, if you could, the pricing would look like?

Pawan, you will take that?

Sir, is the question answered? Can we move to the next question?

No, no, no. I was asking if Pawan can...

Yes. The question was, what would it take in terms of price of your enterprise or what else for you to be able to access rated debt markets in India?

So -- see, I don't know if you're asking about the domestic bond market because, as I explained, in the domestic IDF market, we are getting rates closer to 8.5%, and domestic banks -- and this is a -- this typically will get a 5-year fixed kind of rate. But if we look at domestic banks, the rates are, again, closer to the single level, but these are floating. So these are -- these are typically linked to 1 year MCLR. Now with the rated bond, in India, we do have market for rated bonds, which is typically for AA and above category rated bonds, right? But those bonds are also -- it's difficult to get an amortizing long tenor bond in the domestic market, because the mutual funds and other investors, who look at corporate bonds, typically look for a bullet maturity bond, which is something we, as a company, are not very comfortable, because we prefer our debts to be amortized as and when we keep on receiving our cash flows.

Okay, so that's, you are not going to be a factor then you want to stay with and the type of debts, that's fine, then it's not an issue.

The next question is from the line of Moses Sutton from Barclays.

Following up on some of the comments on tracker and bifacial cases. As you mentioned bringing down the inverter loading due to clipping, how about adding DC-coupled storage to capture that clipping, so you could still have a higher DC loading and not get so negatively affected by clipping while optimizing the overall generation of projects. Any thoughts there?

No, no, absolutely. When we said we are doing a test bed, and we are testing all of this, this is very much part of the testing that's going on. We want to get ready, both from a perspective of what the future distribution companies might want in future. And for ourselves, if the pricing makes sense to capture the excess clipping and rack it back into the grid.

Great. Great. And if panel prices drop back to, let's say, went to mid-teens even, is there a scenario you'd increase inverter loading beyond 1.5? Or is that really the most feasible, safe equilibrium, and you're not comfortable going beyond that?

No. At the moment, it's basically the -- where the curve flattens and then starts to pick up again, right? As you clip more, you draw a line in the U-shaped curve, right? So as you increase the loading, you start to clip more, and a point comes where incremental loading of modules results in disproportionate clipping. So at the moment, it varies between 1.4 and 1.5, depending on the level of insulation and the specific location. It's also a function, obviously, of the module price. So as the module price drops, you can load more and more. So all of these factors are there, and it's really not a technology bottleneck anymore. The inverters can take much more power. It's just a matter of determining how much you want to clip. And as you rightly pointed out, if storage becomes really low, then -- sorry, the cost of storage becomes really low, then we may just add more DC capacity and store it in a rack and pack. So that is something we will continuously evaluate.

Great. No, that makes a lot of sense. A complete shift here, really high-level thought. Any thoughts towards starting to explore options and expanding maybe even on a longer-term basis beyond solar, perhaps, wind or even thinking about the hybrid plants over time, wind-solar storage, maybe through a partnership. I totally understand it's a very different process and execution and all of that, but any thoughts on longer-term technology focus of the business?

Yes. So the business is -- again, it's all driven by what the customer wants. Our customer is the distribution company. And if the customer wants more power, which is less intermittent, then they will ask for storage, and we will give it to them. If the customer wants a larger sort of a hybrid supply source, so that the PLF is beyond 30%, it's actually in the range of 55%, 60% because, when you combine wind and solar, you can get higher PLF. If that's what the customer wants, we'll do that. We -- while Azure may not have done wind projects before, Ranjit and me, and there's a lot of wind experience in the country. There's a lot of very good players. The industry in India is fairly mature. So we're very comfortable moving into wind, if required.

Great. No, that's very helpful. And last one from me. I may have missed this, but any update on timing of the next time you'd need to raise equity for -- to execute on the portfolio? I expect it's aligned with final timing on starting on the 4 gigawatts somewhere, but just -- sorry if you said this already, but any thoughts on timing there?

Sorry, I missed that. Is that for Murali or me?

Ranjit, that's for you. That's the question on the timing for equity raise. What's your thought on that?

Yes. So Moses, as far as the equity raise is concerned, right, we are -- there are 2 things that are playing on our mind. One, of course, is the -- when is the need, right? When do we actually need this money, and that is going to get decided as we secure more capacity, either the 4 gigawatts or any other auction that we win or any other project that we secure. At the moment, like we have mentioned in the past, for the 3.1 gigawatts, we are fully funded. So therefore, we don't need to go out and raise equity for that.

The second factor, of course, is that, because the 4-gigawatt is coming and whether it comes in 2 months' time, it comes in 3 months' time or it comes in 4 months time, at the end of the day, we will need equity for it. And the market is fairly strong at this point in time. So should we go out and raise money right away in preparation for the 4-gigawatt and other capacities that we will eventually build. So this is a thing -- this is a discussion that we are currently having within the company. And we have said in the past that we will not raise money till FY '22, which means, post-April. So I guess, we are not going to raise money in this fiscal, but for sure, sometime during the next fiscal, we will raise equity.

The next question is from the line of Puneet Gupta from HSBC Securities.

Yes. Although I'm surprised that you want to play (inaudible), where do you think is the room to improve on the ESG front for you guys?

So as far as ESG is concerned, Puneet, ESG is an always-evolving field. You can never be fully compliant with everything at site. It's a continuous process. And also because unless and until you build that culture of awareness and training, right, you cannot rest on your laurels. It's not -- oh, I have done my governance bit. Now I don't need to do anything. I've done my safety stuff, I don't need to do anything anymore, or I've done the social stuff that was to be done, so I don't need to do this anymore, right? So it doesn't work like that, right? I mean it's a continuous process. There are -- for example, we got ISO-45001 done this year. We are continually working with consultants and with advisers to improve our safety performance. Just this year, for example, we started driver training, right? So we appointed a third-party company to do training for all our drivers, whether they are on our rolls or they are contract drivers or they are large-vehicle drivers, which deliver stuff to our projects. Because we figured that when we looked at the risk identification reports, we found that driving was coming out to be one of the major risks. So I will never say that we are the best at ESG or we don't need to work more on ESG. ESG is a continually evolving process. We have to continually keep our eyes. Otherwise, we'll drop the ball. And we have to keep raising awareness, keep training to make sure that we are near at the top of our game.

And then what kind of costs should one think would be associated with these kind of endeavors to improve ESG score?

On the ESG front, you're saying about the cost of ESG?

Yes. I mean, all these things will have some costs as far as sustainability. Drivers learning is a small cost, but there could be others as well. Should we worry about any material costs that will come with improvement in ESG or not really?

No, not really because the basics are in place, right? I mean our governance standards, the stuff that you do on safety, the stuff that we do to -- for environment, it's all in place. It's a question of are there are any new methodologies or methods which we can incorporate in our business to make our workplace even safer, we will do that. But overall, if you look at the CapEx of our business, right, these costs are very, very, very small. They are insignificant. And anyway, I mean, ESG is a hygiene. I mean we have to do it. It's not something that is an option that we can take an optional call that, oh, we'll do it if it is less than this amount of money. We'll not do it if it is more than this amount of money, right? So I have never seen ESG as being considered a cost. It is always an investment, and you make up -- for whatever you spend on ESG, you make up in the -- in terms of the way the investors look at you, the way your employees look at you, the way your contractors look at you. If you run a ship, which is clean, which is safe, you will have more people on that ship and often (inaudible) ship, right? So I think it's very, very important. It's not a -- it's not something that we can compromise on.

Okay, very useful. The second part I wanted to check was, is the labor availability all on track? And is there a risk that we could see on the execution of balance as we go up?

So as far as labor is concerned, Puneet, I don't see any issue with the labor. Over the last 3 or 4 months, we have not seen any labor issues. We are seeing supply constraints on material, right? Some supply of steel, supply of modules, that kind of thing, but whenever we have wanted to increase the labor at site, we have not seen anything, any issues. And on the supply side, also, the non-module supplies are starting to get back to almost normal now. So whatever delays or whatever challenges were there, which happened over the last 2 or 3 quarters as COVID ran its course, most of them are now behind us. The module situation continues to remain tight, but other than that, most other things are coming online fairly smoothly. And I'm sure they will, by the end of this quarter, if things continue to remain the way they are on the COVID side, we will be 100% normal apart from the module situation.

Do you run a risk there on delays, or is it mostly a cost issue?

Sorry?

I'm saying, on the module side, do you run a risk of delays because of nonavailability? Or is it more of a cost issue?

So on the Rajasthan 6 project, our 600-megawatt project, right, where we already have 300 megawatts operating and 300 megawatts under construction, I don't see any delays there, because the modules have been ordered. A lot of the remaining modules -- so 450 megawatts is already installed. 450 megawatts is under either manufacturing or on the way. So I don't see any delays there.

For the second -- for the Rajasthan 8 and Rajasthan 9 projects, right, Rajasthan 8 is almost close to the modules, and they have a good supplier. At this point in time, they are saying that they're going to start manufacturing those modules in the month of April and May. So we'll have to see. The Chinese book last year -- over the last 2 quarters have come back and asked for changes on the supply schedule. So far, we are seeing for the first 600 megawatts, things are going smoothly. We'll have to see how it pans out over the next couple of months. At the moment, there is a Chinese New Year going on when -- and people will come back to work close to around the 15th of February. We will get more updates as the factories ramp up back.

The next question is from the line of Apoorva Bahadur from Jefferies.

Just one quick question. Sir, in your notes to accounts, there is a mention of certain past few years SAR expenses. So could you please throw some light on the amount?

Yes. So you're talking about the breakup of the $18 million SAR?

Right.

Yes. So close to $9 million pertains to the previous quarter and close to $9 million is for this quarter.

Okay. Got it. And if I may just squeeze in one last question, and that is on the reduction -- likely reduction for the manufacturing-linked tariff. So we heard there were some news items that Kerala has probably agreed to sign 200 megawatts at INR 2.66. Should we look at that as a representative tariff?

It's early days and a little bit difficult, because yes, Kerala has expressed an intent to sign at INR 2.66, and which was the weighted tariff between the 3 auctions in the INR 2.92 auctions, the INR 2.50 auction and the INR 2.36 auction. When you weigh these 3 auctions, it comes to INR 2.66. So -- but Kerala is just 200 megawatts out of the large quantity that SECI is trying to place. So they will not drive the final tariff. We have to wait for a few more weeks to figure out what exactly will be the tariff land at.

Thank you. Ladies and gentlemen, that will be the last question for today. On behalf of Azure Power, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.