Azure Power Global Limited
Q2 2019 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Hello, and welcome to the Azure Power Fiscal Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I now would like to turn the conference over to Nathan Judge. Please go ahead, sir.

[Nathan Judge:]

Thank you. Good morning, everyone, and thank you for joining us. After the close on Tuesday, the company issued a press release announcing its financial results for the second fiscal quarter of 2019 ended September 30, 2018. A copy of the press release and the presentation are available on the Investors section of the Azure Power’s website at azurepower.com. With me today are Inderpreet Wadhwa, Founder, Chairman and Chief Executive Officer; and Sushil Bhagat, Chief Financial Officer. Inderpreet will provide a business update, and Sushil will discuss our fiscal second quarter financial performance. Inderpreet will finish our prepared remarks by reiterating our fiscal 2019 guidance. After this, we will open up the call for questions. Please note, our safe harbor statements are contained within our press release, presentation material 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 with our Form 6-K and presentation on our website for a more complete description. Also contained in our press release and presentation materials are certain non-GAAP measures that we reconciled to the most comparable GAAP measures, and those reconciliations are also available on our website in the press release and presentation materials. It is now my pleasure to hand it over to Inderpreet Singh Wadhwa, Founder, Chairman and Chief Executive Officer

[Inderpreet Wadhwa:]

Thank you, Nathan, and good morning, everyone. Slide 4 summarizes our mission and core values, which are critical to our long-term success. Our mission is to be the lowest-cost power producer in the world, and this is not the same as having the lowest selling price for power in the world. In fact, our 2-gigawatt pipeline has a tariff 17% above the lowest solar bid in the market. Core to our culture as a company are four values

[Sushil Bhagat:]

Thank you, Inderpreet. Turning to our second quarter of fiscal 2019 performance, we continued to record strong growth with a number of operating and committed megawatts increasing to 3,059 megawatts or 122% from the prior year fiscal second quarter. We had 1,018 operating megawatts as of fiscal second quarter 2019, about 27% more than the fiscal second quarter of 2018. Our fiscal second quarter 2019 revenue was approx $31 million, which is a 22% increase from the prior year same period. While the G&A increased 35% compared to the same period of the previous year, we had a onetime credit from our vendors in the prior period. Excluding this credit, our actual G&A was only up 9% from the prior period, which is in line with how we see our G&A growth based on the economics or the scale of our platform. EBITDA rose 21% year-on-year. Our interest expense during the second quarter was approx $17.3 million, which, when compared to the last year, was a 47% decline. This was because of the two reasons

[Inderpreet Wadhwa:]

Thank you, Sushil. So overall, the company is ahead of our internal plans so far this year. We have had some notable successes, including winning more projects than planned at better-than-expected returns, completing large projects in record time and raising over $400 million against a challenging economic backdrop. However, we are disappointed with the disconnect between the intrinsic value of the business and the current share price. Since our IPO, we have nearly tripled our revenues, EBITDA and our high-quality portfolio and have become one of the leaders in the fastest growing market in the world. The returns on our existing projects and expected returns on our contracted projects are above the levels we committed to the market at the time of the IPO. Our committed pipeline should generate free cash flow after debt service of about $150 million each year once it is completed in two years time, and we are increasingly confident of reaching our 5-gigawatt aspiration with returns that should meet and possibly exceed the levels we have indicated to the market, or we feel the pipeline growth credit is not reflected in our share price. We will continue to evaluate options to drive the share price closer to the fair value in the ensuing quarters. With regards to our guidance, we continue to reiterate our guidance of $143 million to $151 million for revenues and are confident to have between 1,300 and 1,400 megawatts operating by fiscal year-end. I would like to point out that when we issued our guidance for the fiscal year at the beginning of the year in February, the rupee-dollar exchange rate was about 64, and today it is around 73. We have seen heightened volatility on the exchange rate against rupee and dollar this year. We expect it to stabilize over the next couple of months. As we report our third quarter fiscal results, we will be in a better position to refine our outlook. With this, we will now take questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Philip Shen with Roth Capital.

[Philip Shen:]

Hi, everyone and thanks for the questions. I wanted to touch on guidance to start. In your guidance, just the back-half revenue would be about $81 million in the second half of the year. So we know that F Q4 is typically seasonally stronger than F Q3, but can you give us a sense for how you see the mix of revenue between F Q3 and F Q4, given seasonality and the ramp-ups that you might be expecting? Thanks.

[Inderpreet Wadhwa:]

Hey, Phil, thanks for the question. So I think because a lot of these projects that are under construction will contribute some of that in the fourth quarter revenue, but seasonally, the third quarter and fourth quarter split is in the range of 45%, 55% percent wise if you were to break it down, but we’ll see perhaps a slightly bigger SKU because of the projects that could be coming online in the last quarter. So I would guide you towards 60-40 at this point, 68% in the last quarter and 30% in the next quarter.

[Philip Shen:]

Okay. Great, that’s really helpful for modeling. Thank you. Shifting over to SECI. Recent responses to the SECI auctions have seemed to be lukewarm with multiple auctions postponed or reduced in the past quarter. Traditionally, SECI auctions seem to be a high priority, given their credit rating and flexibility. Is this primarily caused by the ceilings that they have set on the tariffs? Or are there any other issues that you see? And how do think that impacts your outlook in general and what’s your overall view of what’s happening with the apathy with the SECI auctions? Thanks.

[Inderpreet Wadhwa:]

Yes. So – I think – I mean, I just maybe speak a little bit broadly, and then we can talk about SECI as well, and what I mentioned is that we see almost 24,000 megawatts of auctions that we are tracking. And SECI, of course, is an important and big part of all of that. But generally, the auctions continue to be oversubscribed. The ones that have concluded of late, there was an auction in UP by the state that was oversubscribed. There was also an auction down in Karnataka by the state, which was also oversubscribed. Now coming back to SECI, there’s this one auction that perhaps you are referring to that has had a challenge, which was actually for wind, where – and this is consistent with what we have been saying and seeing in the market that wind is not going to be competitive with solar and there are many challenges of finding the right wind sites and finding interconnection, whereas with solar you can build projects in many parts of the country. Now with the SECI solar auctions, there has been a little bit of word on the sort of public domain in terms of tariff caps within the period of, I’d say, six to eight months, SECI has tightened the tariff caps trying to sort of capture the maximum value for the customer. And from an industry standpoint, there is a view that this is an open market, and this is a reverse auction, and why does the government have to tighten the caps? So there have been discussions on that, and SECI has sort of gone back and increased the caps back to – close to the original levels. So the catalyst that you see is largely on the wind side. On the solar, there was some discussion around tariff caps, and the size of the tenders are getting so large that SECI sort of wants to make sure that there is enough participation and the projects are not allotted closer to the benchmark, and there is some tightness on the tariffs. So there has been some of that. Now couple that with India as moving into the election season, so several of the states are up for election this month and the next month, and then first quarter, second quarter next year, you’ll have the federal elections. And when states get busy in elections, there are delays on approvals. There are delays on back-to-back sale contracts because SECI is not going to buy the power. They’re actually going to sell the power to another customer. So some of those delays have also led to extensions of auctions. But I’d also tell you the other side of this is the power prices in the exchange are going up, and we pointed out to some very high tariffs that we are seeing in the market, almost like $0.08, $0.10 a kilowatt hour. So the appetite of low-cost energy is very high, and it is just a matter of time that you will see additional auctions being concluded this year.

[Philip Shen:]

Okay. Great, that color is really helpful. Thanks, Inderpreet. Shifting over to Rajasthan. I think there’s some minor issue – well, I’m not sure if it’s minor, but there are some potential issues with the solar park there with the developers securing land. And I believe you have 200 megawatts in that park slated for next year. So I was wondering if you could just comment a little bit about are you seeing any issues with that and just your general view of how that might impact your business? Thanks.

[Inderpreet Wadhwa:]

Yes. And I think, again, so consistent with what I have said earlier, we believe that we are very strong on the ground on development and versus when government tries to do this, they generally face longer periods of resolving issues or getting things done. So there were some issues where in the park, the land was not completely acquired while rebids had been auctioned out, but that was with the first phase of projects in the park. The 200-megawatt project that we are building is actually in the second phase of the project in the same park. So the issues that were faced in the earlier phase of the park are no longer challenged now, so we’ve actually got the land and we’ve started our construction there. And we are making good, nice progress there. So I think the fact that we came into the second phase has moved in our advantage.

[Philip Shen:]

Great. Okay. That’s it for me. Thank you very much and I will pass it on.

[Operator:]

Thank you. And the next question comes from Joseph Osha with JMP Securities.

[Joseph Osha:]

Good morning, everyone or I guess it’s good afternoon. This is morning here in California. I’m wondering if you could talk a little bit about what’s been happening in India in the financial system. It seems like the amount of pressure around non-performing assets appears to be intensifying. I understand, of course, that you may not be as exposed to some of the state-owned banks, but I’m just wondering about how this environment is impacting your ability to raise debt financing?

[Inderpreet Wadhwa:]

Yes. So I think – like I actually said and we sort of reiterate that we are not impacted by any of the issues that you read about with the state-owned banks. I mean, our exposure to state-owned banks is almost non-existent or negligible. We do a lot of work with private banks. We have done business with state banks earlier, but most of that was refinanced through our green bond offering last year. What’s happening is really that the government is trying to get the state banks to acknowledge the stressed assets as per new regulations of the central bank, which is the Reserve Bank of India. And these banks have historically delayed resolution of these matters in hopes that sponsors will find a way to make these projects work and a lot of these projects are – at least on the power side, on the coal power projects where either companies were not able to secure PPAs or were not able to secure fuel supply or had issues with imports in terms of increasing the cost pass through to customers and so forth, variety of reasons that these projects have stranded over a long period of time. So with the RBI enforcement of stricter implementations of dealing with the situation has led the – some of the state-owned banks’ inability to finance new projects. So there is tightening of liquidity on some of the state-owned banks, which, again, does not impact our business as we have a very diversified set of debt investors. But the good news is that once the issues are resolved on these stressed assets one way or another, either the sponsors will step in and resolve it or they will go through NCLT process, which is akin to sort of the bankruptcy process of the stressed assets in the United States. The banks will then be able to clear their sort of balance sheets off of these assets and be back in business again. So really, the intent of the government is to – it’s like you close your eyes, but problems don’t go away. So they say wake up and let’s do something about it, and there are a lot of consultations, a lot of focus, a lot of meetings, and we read a lot of updates on a regular basis that there is a serious effort going on in resolving and bringing these banks back into business. So that’s the idea.

[Joseph Osha:]

Okay. So it sounds like you’re comfortable with your continued ability to raise capital from your partners. Just following on with that, obviously, the rupee has moved. The rates have moved. Do you think it would be possible to contemplate another green bond offering in this kind of environment or close to this environment or is that pretty much off the table now?

[Inderpreet Wadhwa:]

No, I think in terms of our financing strategy – and we sort of reiterated that we do bridge capital, we do project finance and we tap green bond markets and – but tapping public markets much like equity markets, the debt markets also have to be value accretive to us. And if you just look at the bond we issued last year, it was at 5.5%. And this year, we’ve actually seen a couple of sovereign bonds issued out of India at 5.5%. So the good news is that our bond was issued at where sovereign is today. So it shows the strength of the bond that we offered, so we have that ability to continue to do that going forward. But we actually feel that we are able to tap more cost, debt and spread than the bond allotted as we see the rates today, but we will continue to sort of monitor the public debt market rates. And then some of this is the function of interest rates going up in the United States. So a lot of these are linked with LIBOR. And if LIBOR moves up and we are be able to tap local rupee money or ECBs from project finance lenders at much tighter spreads, we prefer that. And when the time is right, we pull those assets and issue a bond. So there’s no sort of guidance towards when we issue a bond, but we will continue to watch the markets and do that when we feel the time is right.

[Joseph Osha:]

Okay. And then just last question on that point, given how much strength you have in the balance sheet at the moment. Is it possible that for the intermediate term, we could see you leave some of your projects perhaps a little less leverage and put some of that cash to work while you wait for the financing markets to settle down a bit?

[Inderpreet Wadhwa:]

We actually don’t feel that it is that much of an issue, right? I mean, we just – in this period, we talked about we closed almost $150 million worth financing and we are in the process of closing something to the tune of similar numbers as well, and those are well within our expectations on financing of these projects. So we don’t see that we have a challenge and hence, let’s use equity instead of debt. But having said that, we are going to be prudent on capital deployment, so we don’t necessarily have to incur interest costs if we have money sitting on the balance sheet, which is idle. So we will be prudent about doing that. But broadly speaking, we will try and accelerate all our projects rather than just focus on a handful with the cash and the balance sheet. So we’ll continue to raise project finance and continue to accelerate other projects, which are due to be commissioned two years out.

[Joseph Osha:]

Okay. Thank you very much.

[Operator:]

And as that was the last question, that does conclude the question-and-answer session as well as the call itself. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.