Azure Power Global Limited
Q4 2018 Earnings Call Transcript

Published: 18 Jun 2018

[Operator:]

Good day. And welcome to the Azure Power Fiscal Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Nathan Judge, Investor Relations. Mr. Judge, please go ahead.

[Nathan Judge:]

Thank you. Good morning, everyone, and thank you for joining us. After the close on Friday, the Company issued a press release announcing its financial results for the fourth fiscal quarter of 2018 ended March 31, 2017. A copy of the press release and the presentation are available on the Investors section of Azure Power’s Website at azurepower.com. With me today are Inderpreet Singh Wadhwa, Founder, Chairman and Chief Executive Officer and Sushil Bhagat, Chief Financial Officer. Inderpreet will provide a business update, and Sushil will discuss our fiscal fourth 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 Harbour statements are contained within our press release, presentation materials and available on our Web site. 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 Web site for a more complete description. We also contained in our press release and presentation materials our certain non-GAAP measures that we reconcile to the most comparable GAAP measures, and those reconciliations are also available on our Web site and 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 continues to be the lowest cost power producer in the world, and this is not the same thing as having the lowest selling price of power in the world. Core to our culture as a company are four values

[Sushil Bhagat:]

Thank you, Inderpreet. Turning to our financial year performance. We continue to record strong growth with the number of kilowatt hour generated during the financial year at 1,236 million kilowatt hours, which represents 100% increase compared the previous fiscal year. We had 1,871 of operating and committed megawatts as on fiscal year-end 2018, up 75% than the prior fiscal year, including 275 megawatts of the wins that we have secured after March 31, 2018. Our portfolio would have been 2,146 megawatts, which is little more than the twice of number that has stood at the financial year-end 2017. Our operating projects cost per megawatt rose 3% for the fiscal year 2018 when compared to the previous fiscal year. However, the project cost per megawatt was higher due to higher cost domestic modules as required by the power purchase agreement. It was also contributed by land which was purchased and overloading, which was done to maximize generation compared to the previous year when lower-cost open source modules were used, leased land was used in the corresponding previous period. Adjusting for this, the estimate by the operating cost per megawatt would have declined approximately 10% year-on-year. Our fiscal year 2018 revenue was $118 million, which was in line with our guidance and which represented 84% increase from the previous fiscal year as we commissioned new projects. We were able to leverage our platform and capitalize on the economies of the scale, and increase our EBITDA at a faster pace at 93%. For the fourth quarter, the revenues were $35 million representing 71% increased Y-o-Y, while our reported EBITDA was $25 million. Our interest expense during the fourth quarter was $12.8 million as we have been able to lower our costs of financing for the year. Our balance sheet remains well capitalized and continues to grow as we add new projects to our portfolio. Property, plant and equipment increased to $869 million, up 38% from the prior fiscal year end. Net debt was $679 million as on 31st of March 2018. Our liquidity position continues to remain strong. We are beginning to see significant cash flow from operations as our portfolio grows. And for the quarter, we recorded $22 million from cash flow of operations. We ended the quarter with $186 million of cash and cash equivalent, including restricted cash. We also had undrawn project debt facilities of $52 million at the end of the quarter. And we also have $122 million of working capital facilities, which we can draw on as and when we do. We believe we are well positioned to finance the projects we recently won. As a result of reducing our loan balances, following the issuance of our Green Bond in August 2017, our borrowing capacity at the bank has increased. In addition, the Green Bond would release additional cash over its tenure, which can be used for funding of growth. We continue to have support of our large shareholder CDPQ, which has a ROFO on our efforts where we can grow our portfolio by bringing in CDPQ as a minority equity investor in our projects without existing shareholders’ dilution. In addition, we believe we have a full range of other options for funding growth. With this, I will now pass it over to Inderpreet to discuss our initiatives to enhance shareholder value as well as guidance.

[Inderpreet Wadhwa:]

Thanks, Sushil. We continue to record strong growth year-in and year-out. Since our IPO in October 2016, we have increased our revenues 150% to $118 million. We have more than doubled our portfolio from 965 megawatts to 2,146 megawatts. We have constructed over 657 megawatts and we have filed over six technology patents. We expect growth to continue. We continue to win contracts with among the highest tariffs in the market. We have secured our 2019 pipeline ahead of schedule. We should realize another $152 million of revenue growth, up 129% from the fiscal year we just reported, once our pipeline has been completed and operating for a full year. As we look out into this next fiscal year, we expect cost will decline even further as both we realize efficiency gains on our balance of system costs and potentially benefit from lower module costs, given the recent developments in China, thus improving our returns further. We believe we are on track to meet our guidance previously shared with you, and will deliver high growth in fiscal year ending March 31, 2019. We continue to expect to have 1,300 to 1,400 megawatts operating by end of our fiscal year, and revenues between $143 million to $151 million in the same timeframe. With this, we will now take questions.

[Operator:]

We will now begin the question-and-answer session [Operator Instructions]. The first question today comes from Maheep Mandloi with Credit Suisse. Please go ahead.

[Maheep Mandloi:]

You’re trying to build more than 1 gigawatt of projects over the next year. Could you talk about how many of those have already secured modules? And as a follow-up, can you also talk about the pricing mechanism for these solar modules, are those spec to the spot market, or locked in a few months ahead of the COD?

[Inderpreet Wadhwa:]

We have locked in partly modules for one of our large projects that we are constructing this year, which is the project in Gujarat, 260 megawatt project. And the remaining contracts are under negotiation. So from a timing standpoint, we are in a position to take advantage of the recent downturn that we see. And even the ones that we have secured are done at very attractive prices. When we do the next earnings call, I think we’ll be able to share the all-in achieved cost targets for the Gujarat project. But if you look at the other projects there, their commissioning is towards the end of the financial year for this year. So we have time to conclude the module contracts on those.

[Maheep Mandloi:]

And just switching gears to growth, you already have 2.1 gigawatts of contracted portfolio on the balance -- right now, which is well funded with the existing liquidity as you said. How much growth can be funded beyond this 2.1 gigawatt using the existing surplus cash, or rather, how should we think about growth at this time?

[Inderpreet Wadhwa:]

So Maheep, I think as we mentioned in our last call as well that what we are constructing at the moment, we are adequately funded for those projects. And then the cash from those projects can subsequently be used to build more megawatts. And this is something that does work in perpetuity based on the cash flows we generate or free cash flows we generate from these projects. Having said that, we also believe that India is on a very high growth trajectory; and given that trajectory and given the desire of the government to get to 113 gigawatts by 2022, we believe that Azure has an opportunity to be extremely successful along this backdrop; and to do that, we are deliberating internally what is the right growth for the business next year and the year after; so both '19 and '20. And we expect to conclude those deliberations when we talk about the next quarter results, so we’ll be able to give you a better color in terms of how we are looking at capital for future growth beyond internal accruals. So at this point, I’d just reiterate the fact that projects we are building now are funded off of the balance sheet and project finance; and projects in '19 and '20, we are deliberating internally what's the best way of funding those.

[Maheep Mandloi:]

And just last question from me. Could you talk about what you’re seeing on the cost of debt, or interest rates in the domestic market in India, especially given the recent rate hikes and expected rate hikes this year? How is that impacting your debt for projects, which are yet to come online? Thanks.

[Inderpreet Wadhwa:]

Yes, so I think, we don’t see any significant movement from where we sit. But of course, we’ve not achieved financial closure for every project that’s in the pipeline, but at least the ones that we have gotten into negotiations with financial institutions. While there is a slight increase on the base rate, we are able to compensate that increase through a tighter spread on account of the off-take credit quality and our own track record of execution and delivery on those projects. We’re also blending the traditional project finance with trade finance, which we are able to bring in at quite attractive rates compared to long-term project finance. So we feel that what we've guided the market to in terms of the cost of finance, we’ll continue to meet it or perhaps in some cases even beat it, going forward.

[Operator:]

The next question comes from Philip Shen with ROTH Capital Partners. Please go ahead.

[Justin Clare:]

This is Justin Clare. I am on for Phil today. So in your prepared remarks, you mentioned that tariffs have recently been rising in India. I was just wondering if you could talk about the factors that are driving the tariff higher, and what your outlook is for the trend ahead.

[Inderpreet Wadhwa:]

So Justin, if you look at the chart we had, I believe on Slide 12 that talks about the projects where we’ve seen the tariffs move in the higher direction. So I think the first and the foremost comment there is that this is a function of projects being done outside of solar park. So what we saw last year, a lot of projects were being built in solar park where you see inherently a lot of competition from companies that do not have on ground development expertise or presence. And some of the options that have concluded in the first half of this year have been outside solar park where Azure historically has done really well, because of the local knowledge and expertise and so forth. So that is one reason why we’ve seen this. The other piece is also I believe that markets are taking into account the possibilities of interest rate hike and module price increase in these auctions as well. And we believe that our insight into local development and balance of cost reductions and now module price as well, put us into a unique position to build these projects at good returns. Going forward, we also feel that the fact we are cheaper than spot coal power prices in India, there will not be a lot of downward pressure on pricing through the rest of the year.

[Justin Clare:]

And then the next question I had here, in fiscal 2018, your plant load factor fell slightly versus 2017. I think it was largely due to just lower than average installation in the year. So looking ahead, how should we think about the potential for improvement in the plant load factor in, I'd say, fiscal '19 and fiscal '20?

[Inderpreet Wadhwa:]

So I think in terms of the plant load factor, we'd start seeing higher in '20, in fiscal '20, because the projects that we are constructing now and the project that we'll be constructing next year are going to be concentrated in high solar radiation zones, and also the technology overloading that we are doing in these farms will yield a higher result. Now, exactly what those load factors would be, we probably start talking about those once we turn those projects on. But we expect that the portfolio average to start moving toward 19%, 20%, 21% over the next two to three years.

[Justin Clare:]

And then one final question for me, with the results of quarter you provided, estimated portfolio run rate for the revenue of $242 million. I was just wondering if that number included any consideration for the overloading of plants. And if it didn't, what's the potential revenue that's possible with overloading of those plants?

[Inderpreet Wadhwa:]

So actually the $242 million number does include the effect of the overloading of those projects. And in fact, one of the other prepared remarks we actually mentioned, the number $270 million, which is for 2,146 megawatts versus the $242 million number is about 1,871 megawatts, which were at the end of fiscal year. But since then, we've won some additional megawatts but both these numbers do include the effect of overloading.

[Operator:]

[Operator Instructions] The next question comes from Joseph Osha with JMP securities. Please go ahead.

[Joseph Osha:]

Two questions, first just looking at your commissioning break here. Obviously, the good pipeline of committed capacity has grown well. I'm wondering is there a practical upper limit to how quickly you can commission capacity, and how should we think about that?

[Inderpreet Wadhwa:]

We generally plan for what we have won in the previous fiscal years. So for example, the capacity for the project management and execution today already is designed to deliver what we promised in our guidance. And similarly, if you look at from a planning standpoint, we added about 350 megawatts last year. This year, we’re adding about four hundred and some odd megawatts there in the current fiscal year. And if you go with the 2.1 gigawatt portfolio that 400 number would then jump to 600 for next year. So we’re still going through the planning exercise for next year at the moment. But we believe that the increase is not that significant from the prior year that we will not have, or we’ll have an upper limit or so forth. So most of the hiring has to be done in supervision off-sites, and that's a very easy skill set for us to hire in India and train them within three to four month period. So we ramp-up that team based on what we need to deliver in a given financial year.

[Joseph Osha:]

So there just to be clear, obviously, you’re not saying this now. But there's nothing theoretically that would prevent you from commissioning 600 megawatts in a year if that was in place?

[Inderpreet Wadhwa:]

Yes, and that is correct. But I would also point out too in India in a year, about 7, 8 gigawatts have been commissioned. So there is enough talent available to scale-up that part of the construction team. And we consistently, right from then we were a 2 megawatt company in 2009 and the same questions were asked, can you execute 17 megawatts in one year. And over the years, we've now delivered 350 megawatts in last year and we don't see any challenges in wrapping-up the construction team.

[Joseph Osha:]

Okay, great. And thanks -- a separate question Philip’s -- touched on this a little bit. What has taken spot power to $0.075? Is that the coal pricing, is policy? Why has it moved so much?

[Inderpreet Wadhwa:]

So we haven't done an extensive analysis on that. I mean some of these things are seasonal and supply demand generated, so it's a function of availability of power and demand for power. And when there is a mismatch, the prices go up and we believe it's seasonal. But some of the experts seem to suggest that this may stay between now and the election year next year, because as the country moves towards an election, the government tries and ensures availability of power as key to keep better fresh in peoples mind that progress is real. And to make that power available based on the demand out there, the cost might go up because of fuel source availability and so forth as well. And there is a technical trend here as well that two-three years ago, the prices were closer to $0.08, $0.09, $0.10 and then they came down for a bit, which was also, perhaps at some point, linked to the industrial growth cycle and we believe that growth is starting to pick up. If you recall last year or the year before, there were a few initiatives that led to little tempered growth, the introduction of GST taxation in India, the demonetization process. So that did soften some of the industrial demand, which we feel is now being picked up.

[Operator:]

This concludes our question-and-answer session, and also concludes our conference. Thank you for attending today’s presentation. You may now disconnect.