Azure Power Global Ltd (AZRE) 2020 Q1 法說會逐字稿

Good day and welcome to the Azure Power Fiscal First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

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

Thank you, Nicole, 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 first fiscal quarter of 2020 ended June 30, 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 Ranjit Gupta, our recently joined as CEO; and Murali Subramanian, who also just recently joined as President; and Pawan Agrawal, Chief Financial Officer. Ranjit will start the call with some comments about his initial thoughts on creating value for shareholders and capital allocation. This will be followed by a business and industry update by Murali and an update on the quarter by Pawan, and we'll finish our prepared remarks by reiterating our fiscal 2020 guidance. After this, we will open up the call for questions.

As way of introduction, Ranjit was the CEO, and Murali was the Chief Operating Officer, and both were co-founders of Ostro Energy, a startup that grew into one of the leading renewal energy companies in India with a portfolio of over 1,000 megawatts. Prior to Ostro Energy, Ranjit and Murali were senior executives at other power companies, including Orange Renewables and IndiaBulls Power. They began their careers at Schlumberger and won -- in various fields and management positions.

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 reconcile to the most comparable GAAP measures, and these reconciliations are also available on our website and in the press release and presentation material.

It is now my pleasure to hand it over to Ranjit.

Thank you, Nathan. A very good morning, everyone.

Murali and I joined Azure about 3 weeks ago and have begun a review of the business. While we continue our review, overall, we are pleased with our core assets and our team members. However, we do see many opportunities at Azure to enhance shareholder value. We expect to provide a candid assessment of where we stand and a roadmap to create value with subsequent initiatives in due course. In the meantime, we want to provide the principles of how we look at capital allocation and shareholder value creation.

At our core, we are a shareholder return-focused management, and the relationship with investors is of paramount importance to us. It is very clear to us that only when returns meet minimum thresholds will we invest in projects for future growth. That threshold must be above our cost of capital and must be accretive on a cash flow per share basis. We will endeavor to invest your capital wisely. If we cannot return above our cost of capital on future growth, we expect to explore means of returning capital to our shareholders.

In our careers working together, Murali and I have led several companies in the energy sector where we created significant value for our shareholders by following a risk-mitigated approach through project selection and being disciplined with our allocation of capital. We are dedicated to creating long-term value, and the majority of our compensation rests over a long time period and is directly linked to value creation.

In the few weeks we have spent at Azure, we believe there is an opportunity to improve returns on our operating and on the construction projects. We see many opportunities to increase the company's return on invested capital by optimizing the current operating assets through efficiency gains, implementing industry best practices and cutting unproductive costs.

On under construction or development projects, we believe that through better capital structuring, we will be able to drive further efficiencies and enhance shareholder returns.

On an overall basis, we need to reduce leverage, and we have to finance projects more conservatively going forward.

We are blessed with a tremendous opportunity for organic growth with the potential to invest at returns that are attractive. The reality is that solar is now the lowest-cost source of electricity in India without subsidies. India needs more power, and solar is one of the best options to fill this need. There are 100-plus million people in India currently without a readily accessible and reliable power supply, and the average user in India uses only 1/10 of what is used in the U.S.

In addition, there is a significant opportunity to displace polluting and expensive backup diesel generation in the rooftop segment, providing clean sustainable power to the grid at prices that cannot be matched by any other generation today. Today, there are government mandates to increase solar power manyfold in only a couple of years. Given the sheer magnitude of attractive growth opportunities in the Indian market, it provides us the luxury of being able to selectively choose the best projects without having to run after growth that doesn't add value. This offers a significant upside to current and future shareholders. But this growth can only be realized on a sustainable basis if we can demonstrate to our investors that we are strong stewards of your capital.

We also subscribe to the ethos that transparency breeds trust and trust results in value creation. As a part of this review, we are looking at ways to enhance disclosure and guidance to investors to provide greater transparency. We will evaluate what other metrics we can transparently provide on our completed and development portfolio, which will enhance the trust between the company and the investors.

In addition, we expect to provide a sustainability report within the next year to increase awareness of our cultural focus on improving the lives of those in our community and the natural advantage we have of providing clean, sustainable energy for generations.

As mentioned earlier, we are undertaking a review and will provide a roadmap and initiative for creating value in the near future. In the meantime, we will be asking for feedback from stakeholders to help improve our plans on what we should do to create shareholder value.

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

Thank you, Ranjit. Good morning, everyone, ladies and gentlemen.

Looking at the present portfolio today, the 3,351 megawatts as of June 30, 2019 are diversified across many geographies and customers. Most of the projects are located in some of the highest radiation zones in the country.

In addition, the credit profile of our customer contracts is better than most of the industry. Almost 82% of our projects are with counterparties that are domestically rated at investment-grade. The government of India related counterparty represents 62% of all our contracts.

To provide a perspective of our historical performance and opportunities for growth, today, we have 3,351 megawatts contracted with some of the best counterparties in India. We have 1,659 megawatts operating and 172 megawatts under construction, as we just brought 50 megawatts into service into operation in July in Rajasthan. The remaining 1,520 megawatts of our contracted pipeline are in various stages of development, and we expect our under construction and committed projects to be commercially operational by the end of -- by end 2021. This is expected to grow our revenues from $158 million realized over the past 12 months to $376 million in the following 18 months, once our 3,351-megawatt portfolio is completed on approximately calendar 2021.

We continue to benefit from economies of scale of our platform and are driving operating costs lower, as well as significantly reducing our interest costs, thereby ensuring meaningful expansion of our EBITDA and our cash flows. Specifically, our annual operations and material cost per megawatt are almost half since our IPO about 3 years ago. EBITDA has risen 284% over the same period.

Focusing more on counterparty credit, there have been some high-profile changes. To mention the positive first, the Ministry of Power Government of India has mandated distribution companies to open and maintain adequate letters of credit to strengthen payment security for generating companies starting August 2019. The Ministry of New and Renewable Energy has also reiterated the Must Run status to renewable energy projects and that PPA tariffs must be paid to generating companies in case of curtailment. We view these as big positives for improving credit quality of our contracts.

There has also been some news lately about some states pursuing auctions for renegotiating tariffs on facilities that are operating. We have no intention of reducing our tariffs on any contract. There is significant amount of case law supporting these contracts, and these states are under pressure from the central government to honor the renewable energy contracts in the state.

Looking at the industry and regulatory news. We have received several reaffirmations of pass-through of both safeguard duties and GST taxes. However, the recovery period for these are likely to take longer than we originally anticipated.

I would now like to pass it over to Pawan, our Chief Financial Officer.

Thank you, Murali. We have 1,609 megawatts in operation as of 30th June 2019, about 59% more than what we had at the end of first fiscal quarter 2019. Subsequent to the end of quarter, we commissioned another 50 megawatts in July, putting the total operational capacity to date at 1,659 megawatts. Effectively, a total of 280 megawatts commissioned since the beginning of this fiscal year.

Focusing on project cost by megawatts. Operating for the year ended 30th June 2019, our cost per megawatt decreased by 9% to $580,000, and this includes the impact of safeguard duties payment of about $50,000 per megawatt. As a reminder, we do expect to recover safeguard duties over time, either through our investment or through an increase in our tariffs. We continue to work through this. And once we have better clarity, we'll provide more color to the market.

Revenues rose in the quarter year-on-year. However, our G&A rose faster, primarily due to management transition expenses. Excluding these non-recurring expenses, G&A would have been around $12.5 million, which is around what we expect to incur each quarter for the remaining of this year.

On our balance sheet, cash and equivalents ended the quarter at USD 160 million. Property, plant and equipment increased to about USD 1.3 billion, a 48% increase from same quarter in the prior year as we brought new facilities online. Net debt was USD 997 million as of 30th June 2019.

Now regarding guidance. We are reactivating our guidance for fiscal year ending 31st March 2020, and the company continues to expect to have between 1,800 to 1,900 megawatts operational by the end of fiscal.

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 194 million using the 30th June 2019 exchange rate of INR 68.92 for every U.S. dollar.

With this, we'll be happy to take questions.

(Operator Instructions) Our first question comes from Maheep Mandloi of Crédit Suisse.

Maheep Mandloi from Crédit Suisse. Ranjit, probably 2 questions for you to begin with. Could you just probably first talk about, like, the -- I mean first of all, to all the color on the roadmap you provided is really helpful. But one thing, which probably which we were looking for is if any color on new technologies or any plans to diversify away from solar? If you could touch upon that.

And the second point just if you could just talk about the returns you expect in the market from new solar or other technologies.

Maheep, thanks for the question. As far as diversification from solar is concerned, it's still early days. We have been in the job only 3 weeks, still coming to grips with our portfolio. And at the moment, we have lots to do. As you heard, we have more than 1,500 megawatts to develop and construct over the next 12 to 18 months, so there's a lot going on. So at the moment, we have not had any opportunity to see whether we want to diversify out of solar. But if we do, then we will certainly let you folks know.

As far as the solar returns are concerned, that question is very, very pertinent in today's environment. The good thing, if you have seen how the tariffs have moved over the last few months, there has been stability in the market. There is still a bunch of new auctions being planned, and the number of participant in these auctions is steady. The tariffs are holding steady. So the returns that the industry is looking to make remain decent. And of course, the returns will depend on the counterparty. The returns will depend on where you set up the project and several other issues related to equipment pricing and so on. But overall, given the fact that there is a lot of new auctions coming up and the fact that there are not too many -- or not any new participants, it's the same old industry that is participating, the returns remain stable.

Got it. And then maybe just switching gears towards probably the broader environment and the country. Murali, probably, this question is for you. On the counterparty risk or tariffs, we heard the Indian government is looking to impose additional tariff barriers on certain modules in the future. I know it's like pretty recent, but if you could throw any light on what that proposal could look like and how should we think about the impact of any such proposal on the projects in the pipeline or new bids out there.

So the government may be considering any tariff imposition, but we are still not aware of any plans that the government has. There could be the odd press article about it. Whenever it happens, they will not impact our projects because in case of all our projects, the -- as we mentioned, the existing duties -- or the safeguard duties and the GST taxes, they are on a pass-through prices in so far as our existing PPA book.

As far as the new upcoming capacity, which we may choose to participate in auction, for sure, the entire industry will be affected by this and it will accordingly be taken into account in the tariffs. So we don't see any significant impact one way or the other.

Got it. And then just last question for me and then jump back in the queue. If you could talk about the recent rate -- or repo rate reductions in the country on -- how do you see the cost of financing evolving in the country in light of that? Any color on that will be helpful.

Yes. Maheep, Pawan here. So definitely, as you would have been noticing, like, since January, they have increased the rate cuts and this is just split into 3: 25; 25; 25 and all 25 basis points. So as far as Central Bank is concerned and as far as [internal monitoring] is concerned, definitely, there is a declining trend. But having said that, we're very, very on it. The domestic market, in terms of funding and liquidity, still remains tight. And only the few good projects and good borrowers are able to tap the liquidity.

Our next question comes from Philip Shen of ROTH Capital Partners.

As a followup to one of the previous questions, Ranjit, I think you mentioned there's still a bunch of auctions being planned ahead. Was wondering if you could comment on the degree of participation you plan for Azure to participate in those auctions. And do you expect -- and with those -- with that participation, how much do you anticipate that you guys could win, given the historical auction win rate that Azure has had?

Thanks, Philip, for the question. As far as auctions and participation in auctions are concerned, like I mentioned, at the moment, we still have a large portfolio of projects to develop and build, almost 1,500 megawatts. We are almost doubling our capacity that we have built over the last 10 years. We are looking to double that capacity -- almost double that capacity in the next 15 to 18 months. It's a very challenging task. So at this point in time, right now, we are not looking at taking part in auctions. However, we do need to have a pipeline going 18 months, 24 months, 36 months down the road. And we will continue to evaluate auctions as they come out.

The good thing -- there are 2 good things at this point in time. One good thing is that we are in no rush because we have plenty of work ahead of us. And the second good thing is that the government is still committed to a large renewable energy program, so there is not going to be any dearth of auctions. So whenever we are ready, whether it is 2 months from now or 6 months from now or 9 months from now, there will be auctions available. So we don't have to rush.

And like we mentioned on the call, our key metric for taking part in any future auction is going to be that, that particular return has to be better than our cost of capital and it has to be accretive to our earnings per share. So that is going to be the driving mantra for us going forward. So just to reiterate very, very quickly, no plans right now because we have plenty of work and no worries right now because there is plenty of auctions happening.

Great. Very helpful, Ranjit. And as it relates to the projects that you have won, do you anticipate any of those projects dropping out of your pipeline -- of your committed portfolio because after your review, you expect that the return may actually not be better than your cost of capital or the cash flows may not be accretive? Of the remaining 1.5 gigawatts you expect to add, how much of that do you think could become -- could drop out of your pipeline?

So that's, again, a very, very good question because we are in the midst of the review of the current portfolio that is operating and the portfolio that we are to develop, the 1,500 megawatt. The question about not doing any of those is very, very sensitive because it's -- there is -- obviously, there is a capital return issue. There is a return on the project issue, the doability of the project issue, and all of those things are very important.

But apart from that, all the projects that we are doing have central government utilities -- central government agencies as counterparties. So whatever steps we take, if we decide over the next few weeks, over the next few months that there are some projects that do not meet our return expectations, we will have to be very, very careful as to how we proceed to exit those projects. And it will be a decision, which will be taken holistically. It will not be a decision because we have already a committed to those projects. So the decision will be holistic in nature. We have to look at our future also and we have to look at our present also to -- before we take a decision on exiting any projects. But if there are dogs in this portfolio, which we have to bid, then we will seriously consider rechecking it.

Great. Another question coming from your prepared remarks. You mentioned there could be some new disclosures. What kind of new disclosures do you anticipate? If you can't speak to specific disclosures, perhaps you can talk about the types of disclosures that you have not -- we have not seen so far that you're contemplating.

So this is a guidance from Nathan, our Investor Relations person, who has said that typically, we have -- as Azure, we have not done disclosures that are in line with the industry. So again, it's just 3 weeks and we still have to get our arms around what all we have been disclosing in the past and how we can disclose more to the stakeholders. Like we also mentioned in the prepared remarks, the relationship with the investors is of paramount importance. You folks are the ones who are providing the capital for our growth. And unless and until you folks are comfortable that we are putting your capital to good use, we will always struggle to raise the capital for our growth going forward.

So I mean I'm not in a position right now to tell you what other things that we will add to our disclosure. But if we are behind the industry in any disclosure norms, I can assure you that we will correct that and make sure that we are in the top percentile for disclosure.

Our next question comes from Joseph Osha of JMP Securities.

Welcome to Azure. There was one comment made during your prepared remarks that I was hoping we could expand on, and that with the observation that leverage needs to be reduced. Wondering why the reason for that might be. And then I have some other questions.

I would like Pawan to take that question. Pawan?

Sure, Ranjit. Thanks. This is the -- [the] idea is, actually, you mentioned, I mean, the idea is to kind of go towards deleveraging and then having a leverage level, which is optimal for a company in this sector. Now our key -- we haven't, as Ranjit has earlier pointed out that we -- all of us are collectively in the process of looking at in which direction the company has been going so far and what all need to be kind of less likely or as you modified as the case may be. And we collectively believe that our leverage is currently on a [halt] state and then that we work towards the new projects. Also we have been talking about raising debt level, which is slightly lesser than what we used to kind of leverage in the past. So very honestly, give it a couple of weeks more time, and we'll be in a better position to give you more, more, more there. Definitely, range of how much leverage we want to reduce.

Okay. So the implication then would be not just that you might look to deleverage the existing portfolio, but we might see the way you all come at capital structure for new projects also change. Is that correct?

Yes, that's correct.

Okay. Next question. Obviously, it's early days yet. I'm just wondering if we might hear some general thoughts about the philosophy of how capital might be returned to shareholders over time. Just wondering if you have some experiences from your previous companies that you think might be germane to this situation.

That's a good question.

This is Murali...

Yes, go ahead.

Thanks, Ranjit. So the industry is witnessing a fairly rapid growth. And as Ranjit had mentioned in the past, we believe that there will be ample opportunity to deploy the capital into projects where returns are good. However, if the industry goes into a situation where the new projects coming up do not have returns, which -- they're up to our requirement, then we will think of ways of returning this capital. We have not had this situation in the past only because, over the last several years, the country has only increased its capacity year-on-year, and there is adequate opportunities to invest the money. But we will discuss and figure out ways and means of returning the capital, if we come to a view that deploying more money isn't value-accretive for our shareholders.

Okay. And then the last question for me. You have in India now, perhaps, one of the most powerful governments that has been in place in half a century. I'm just wondering how the Modi government -- what the situation with the Modi government now means for Azure and for some of the longer-term goals that the Indian government has articulated and so forth? And that's it for me.

So Joseph, this is a very important question, and the answer to this question actually has evolved over the last 4 or 5 years. When the Modi government came in earlier, it was very important for the government to push renewable because at that point in time, renewable power was still more expensive than conventional power. And that government did very well to bring in the auction regime on both the wind side and the solar side and to make sure that the capacities are auctioned and that prices were driven down.

Now in their second innings, really, it's just the fact that solar is -- and wind -- in fact, both renewable energy as a whole is cheaper than conventional power. So now it has become -- it has gained momentum of its own really. This government is very, very focused on increasing the renewable energy capacity. The targets that have been announced are 175 gigawatts by 2022 and 100 -- 225 gigawatts by 2024, 450 gigawatts by 2030, so huge deployment of renewable energy has been planned by this government. But we strongly feel that, now, this momentum of renewable energy industry has really become government-agnostic. And in the long term, for players like Azure and other players who are long-term players, this is a fantastic place to be in because of the fact that India still is a growing economy. People are still underserved as far as energy is concerned. And renewable energy is going to be the way of the future as far as providing energy security to the country is concerned.

(Operator Instructions) As we have no further questions, this concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.