Azure Power Global Limited Equity Shares

welcome to the Azure Power Q2 FY21 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nathan Judge, 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 second fiscal quarter of 2021, ended September 30, 2020. 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, CEO, Murali Subramanian, COO, and Pawan Kumar Agrawal, CFO. Ranjit will start the call by going through recent key highlights and to review the overall long-term positive outlook for solar in India. Murali will then follow with an update on our projects under construction and an industry update. Palandam will provide an update on the quarter. with additional discussion on the performance of operating assets, a deeper dive into our following cash G&A expenses, recent improvement in DSO, and then we will wrap up the call with Ranjit updating FY21 guidance and reiteration 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 releases we furnished in our Form 6K and 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 the press release, presentation materials, and annual report. It is now my pleasure to hand it over to Ranjit.

Thank you, Nathan, and a very good morning, everyone. Last time we spoke, I had hoped that we would get some relief from the pandemic and a vaccine would be found. Looks like there has been some positive news on the vaccine front, and we are all seeing light at the end of the tunnel. Here's wishing that the next call is held in an even more positive environment with our fight against COVID-19. Given the breadth of our operations, Azure had embarked on an aggressive awareness campaign internally to ensure we remain safe from COVID-19. Through continuous monitoring and management support, we ensured reduced incidents and report no severe health impact on any of our team members. We formulated and implemented strong quarantine and isolation protocols across our operations and provided a dedicated doctor on call to support all our team members and their families who were impacted by the pandemic. Our COVID-101 awareness flyer series continued to disseminate meaningful information and knowledge which enhanced capacity and preparedness of our staff during the pandemic. We have also continued to work with our communities to help them through our CSR outreach. Job training is an important focus for us across our operations. We are also moving forward to getting ourselves ISO 45001 certified. Azure continued to operate despite the challenges faced with COVID-19. During the quarter, we reported that cash flow to equity, or CAP, rose 50% year on year to $14.7 million. Starting this quarter, we will also begin highlighting EBITDA and leverage statistics for our operating assets. This will enable investors to better see how our operational assets are performing and have a greater ability to value the company. EBITDA from operating assets for the quarter rose 20% year to year to $40.7 million and the net debt to last 12-month EBITDA was 5.9x. We also made great progress this quarter in getting make-up payments from our past due customers and our day sales outstanding fell to 114 days from 139 days in the previous quarter, which is the lowest level we have reported since 2018. With regard to the PPAs for the four gigawatts pipeline for which we have LOAs, given the size of capacity combined with other factors, we now expect that the PPAs will be signed in tranches of 500 to 1000 megawatts at a time, rather than four gigawatts at once. We are making progress and do expect that we will receive PPAs for the first tranche pair on January, February 2021. As many are aware, construction costs have fallen, foreign exchange rate move has been favorable in recent months, and we continue to expect that we will realize our original expectation of 20% equity IRRs or more on this four gigawatts. As we have discussed before, there is an added advantage for the three gigawatts coming online after the interstate transmission system or ISTS cost waiver expires in mid 2023 for renewable energy. With expiry of this waiver, distribution companies will begin to incur about one to two cents per kilowatt hours for transmission costs that were previously avoided. However, for our entire four gigawatts pipeline, we will retain this waiver and distribution companies that buy power from this four gigawatts will not incur this expense, providing a significant pricing advantage. After mid-2023, the power generated from these megawatts will likely be some of the lowest delivered new power in the Indian market. In addition, we would note that many discomps are well short of meeting their renewable purchase obligations for the next several years. It is pertinent to note that the draft amendments to the Electricity Act increases penalties and discounts that do not meet their RPO obligations. Hence, discounts will need to buy renewable power and our tariffs with an IFTS waiver will be one of their lowest cost options. We also released our second sustainability report in less than nine months. The most recent one is for fiscal year end 2020. We have continued to expand our disclosure, including scope 3 emissions and participation in the carbon disclosure project. We have implemented several new policies, including diversity and inclusion, equal pay, and enhanced health and safety policy, ESG, a commitment to continue to not emit non-GHG air emissions, and to reduce loss time incidents by 5% annually, among others. We are also increasingly engaging with our suppliers to encourage better carbon reporting and efforts to reduce their environmental impact. We continue to remain a net carbon neutral company and are making good progress in reducing our water consumption with an aim to be water neutral by 2023. Whilst many are aware of the tremendous organic growth opportunities for solar in India, on page 5, we would like to provide a brief recap for the many new investors that have recently invested in AZRE. Electricity per capita usage in India is some of the lowest in the world as many only recently received access to the grid and what they do get is unreliable and not readily available. As solar capacity is the lowest cost source for new electricity, solar makes the most sense to satisfy substantial future demand growth. These are coupled by supportive government targets that aim to have 450 gigawatts of renewable energy capacity in place by 2030 or nearly 30 gigawatts of new capacity additions every year going forward. In fact, we see about 25 gigawatts of new capacity being auctioned by the end of next year. Today in India, there is only construction capacity to build about a third of what the government intends to auction. This provides a tremendously attractive runway for significant additional growth with returns that will be well above our current cost of capital. As we complete two quarters of work from home, I take this opportunity to thank all Azure stakeholders for their patience and support. At any organization, Its team is its biggest source of strength. And I can proudly say that the team at Azure has done an incredible job over these last two quarters. We currently have over 3,000 staff and labor at our various sites working through the dangers of this pandemic. Apart from the various initiatives, our human resource team has undertaken to ensure cohesiveness and engagement in these change times. has embarked on an ambitious online training program, which is specifically developed for our team members as we seek to upskill ourselves to take Azure to greater heights. With that, I will pass it over to Murali.

Thank you Ranjit. Good morning, everyone. On pages six and seven, we provide an update on the project under construction. Overall, we continue to expect that our projects will be finished by the expected revised commercial operation date and that they will remain within our initial budget. We finished 25 MW in Assam, which is part of the larger 90 MW project. We want to thank the many that worked tirelessly to finish this project, despite the tremendous challenges they faced, including torrid rains of the monsoon season, in addition to the pandemic and pandemic-related restrictions. We expect to have another 40 megawatts finished by the end of this fiscal year and the remaining 25 megawatts in the fall of next year. On our largest project to date, Rajasthan 6, we are making progress despite the many challenges. As of now, we expect to have about 300 megawatts completed by this calendar year end and the remaining 300 megawatts completed by March. As it relates to our Rajasthan 8 and 9 projects, each of which are 300 MW with 25-year fixed tariffs with SETI, we expect they will come online around the third quarter of next calendar year. Additionally, on the energy generation side from operating projects, we have achieved our targets for every year despite COVID-related restrictions and greater than expected rainy days. Looking at industry and regulatory developments on page eight, we still see significant demand for new renewable energy in India. It reported that the country had a power supply deficit of 0.3% for the first half of this fiscal year. During the quarter, there was nearly 2.9 gigawatts of new tenders released and about two gigawatts of solar capacity auctioned. Unfortunately, Distribution companies are taking time to sign power supply agreements with intermediary procurers such as SECI, and at the moment, about 9 gigawatts of capacity are without contracts. However, we do see increasing pressure on discounts to sign PSAs to meet their RPO and various proposed amendments to the Electricity Act that would give peace to the enforcement of RPOs. Power demand has also finally picked up after five months of contraction, with September demand this year registering a year-on-year growth of about 4.5%. We have also seen the introduction of a new renewable energy trading platform called the Green Term Head Market for short-term bilateral transactions in renewable power. Electricity trading in India is still very latent. This platform will provide an avenue for resource-rich states to sell RE power at market-driven prices, and enable RPO-deficient states and buyers to meet their RE targets. As an update on the proposed basic customs duty, BCD, we currently expect that it will be in the range of 10 to 20%, which would be in addition to the safeguard duty. We have been expecting the final decision for some time now, but there has been some hesitation given that India is very reliant on China for module input, and the BCD may result in higher electricity bills for customers. We do not expect any material impacts to our returns on our projects as they are protected by changing law provisions. Efforts to privatize discounts continue and the Ministry of Power recently issued documents that outline the criteria for potential bidders interested in buying a majority stake in distribution companies. We also wanted to highlight several positive proposed changes to the Electricity Act and electricity rules that would benefit us and the renewable energy sector in India. One set of proposals would give us greater certainty on revenue, including formalizing renewable energy in the Electricity Act as much strong capacity, making curtailment less likely, enhancing security payment, and establishing a new regulator to focus on contract disputes with an aim of shortening the time to resolve issues. If the proposed amendments are adopted, we will be able to get expedited recovery of cash outlays for items that are considered pass-through due to change in law, such as safeguard duty. With that, I will turn it to Pawan to discuss the quarterly results.

Thank you, Murali. As of September 30, 2020, we were operating 1,834 megawatts on a PPA basis. Our portfolio of 7,115 megawatts remained stable from the previous quarter and our construction costs were mostly flagged year on year. On page 11, overall, we were very pleased with the quarter and results came in ahead of our internal expectations, following efforts that we have put in over last few quarters to focus on improving generation and reducing operating costs. Revenues for the second fiscal quarter were US$47.6 million which was about 6% above the high end of our guidance. Our plans continue to operate very well and PLF was 18.8% or at the high end of our 18-19% PLF guidance range and about 200 basis points higher than second fiscal quarter of the prior year. This higher PLF a 5% increase in DC capacity, and recovery of about $2 million related to safeguard duty and GST, though a 23% increase in revenue from the same quarter last year. Costs were essentially in line with our internal expectations, say for stock appreciation rights or SARs, which added about $7 million to GNA due to 87% increase in share price during the quarter. On this we would note that most of that is the earliest would cash be paid. We also had a benefit related to SAR of about $2.4 million. We expect that tax expense will be around 12 million for the full fiscal year and tax expenses will be around $6 million for the third fiscal quarter. Excluding stock appreciation by its impact, the second fiscal quarter result would have resulted in a net loss of about $700,000, which was a meaningful improvement from the approximate of about 10 million loss in the same quarter last year. Turning to page 12, we remain very focused on reducing our costs as we had outlined earlier this year. We do continue to expect to see a reduction in our corporate overhead or G&A, excluding SARs, of at least 10% in FY21 versus FY2022, despite about a 35% increase in megawatts operational band of this fiscal. As you can see, we are driving continued operational leverage and we expect that there will be even more improvement in our margins going forward. If you look at G&A excluding stock compensation expenses, our corporate G&A is running a little over $1 million per month so far this fiscal year. We are doing more to reduce costs, and we recently moved our head office to a more economic location, saving about two-thirds on our office space expenses. One of the new areas of emphasis this quarter is on providing greater disclosures around operating assets. We believe this is very important for investors to properly value the company given the steady state of profit and cash flow generation once a solar project is operational. On page 13, you can see that EBITDA from operating assets increased about 20% year on year and that cash flow to equity rose about 50%. Net debt for the operating assets was about US dollar 964 million and EBITDA for the last 12 months was about 163 million. resulting in a net debt to EBITDA ratio for operating assets of around 5.9x. This ratio is much more reflective of our balance sheet than net debt to EBITDA ratio for the overall company, which includes debts for projects under construction or just recently commissioned but have yet to produce normalized EBITDA. This leads us to a review of our overall balance sheet on page 13. We had about $106 million of cash and cash equivalents and our net debt stood at 1.08 billion. As a reminder, for those that are calculating our debt ratios, the hedging assets included in other assets could be included as this is directly linked to the foreign exchange hedging we put in place related to our green bonds. I want to take a moment and discuss our day sales outstanding DSOs on page 15. We are pleased to see a notable improvement in our DSO this quarter. DSO fell to 114 days from 139 days in the last quarter after two past due discoms. Discoms and Andhra Pradesh made about 6 million of make-up payments on the past due bills. We continue to work on getting payments from the other discoms in Karnataka as well as Andhra Pradesh and hope to have some good news in the coming quarters. Before I pass it over to Ranjit to discuss guidance, I would like to mention that AZRE was recently included in two leading solar stock indices, which we expect should enhance trading liquidity and increase investor awareness of your company. Now, over to Ranjit to provide some commentary on FO21 and long-term guidance.

Thank you, Pawan. On page 16, as Murli noted, the completion of about 600 megawatts could slip into the early part of the next fiscal year reflecting delays related to COVID. However, as the commercial operation dates are also being adjusted to reflect the pandemic, we don't expect to incur any penalties related to these delays. We now expect to have about 2300 to 2500 megawatts operational by March 31st, 2021. In addition, we are changing our revenue guidance to a range of INR 15.3 to 15.8 billion, given the delays in completing projects. We would note that the shifting of revenue to the following quarter is related only to the delays in projects coming online on account of COVID-19. We have seen our operating portfolio perform as expected in H1, and it is expected to continue to deliver the expected revenue in H2. For third quarter 21, fiscal 21, We expect revenue to be between INR 3.6 and 3.8 billion and the PLS to be between 19.5 to 20.5%. Turning to page 17, our long-term outlook remains unchanged except for some movement of CAPEX from fiscal year 2021 into fiscal year 2022. We would note that our fiscal year 2022 CAPEX as a placeholder for potential additional megawatts we may win given the delays in signing PPS for the four gigawatts. As stated earlier, we will only do good projects that make sense and this placeholder is not a commitment. With this, we will be happy to take questions. Thank you.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask questions may press star and 1 on their touchstone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Apurva Badal from Jefferies. Please go ahead.

Hi, sir. Thank you so much for the opportunity. So just wanted to check on this 4 gigawatt TPA. So you stated that we will be eligible for the ISPS waiver. If I'm not wrong, the text of the policy says that the project needs to be commissioned before, I think, June end 2023. Are we confident that these projects will be commissioned before that?

Thanks for the question. You are right that the ISTS waiver which is in place currently for renewable energy projects expires in June of 2023. So all projects that are commissioned before June end 2023 are eligible for the waiver and those post June 2023 are not eligible for the waiver. However, the manufacturing tender, that's the tender which, you know, which we have won, the option that we have won. In this tender, the condition, because, you know, these projects are actually expected to be delivered over a period of time because they are linked to manufacturing capacity, right? So, as the manufacturing capacity comes up of 1000 megawatts a year, we are supposed to do these projects over four years, right? So from the time we sign up for the project, the first set of projects are supposed to come up in two years and three years and four years and five years. right, because by the time the manufacturing capacity comes up, you know, it supplies projects, you know, which we are going to build on the ground. That's the idea of the government. So, therefore, these projects, because they were anyway going to go well into 2025 or 2026, had this waiver for this capacity that regardless of what happens on the ISDS waiver, these projects will enjoy the ISDS waiver till they are commissioned.

Okay, got it, sir. Thanks a lot. So, secondly on this, I mean, recently announced PLI scheme on solar PV manufacturing. Just wanted to check if we have some insight into that. I mean, obviously, the text, fine print is not available, but if you have any insights or any discussions to the relevant department and what could be the benefit for us, given that we will also be mentioning this in manufacturing now.

you know this this the cabinet decision that we are referring to right it's been posted at 351 today in the afternoon and it's actually a very small amount of money right I mean it's just 4500 crores so I don't know what what exactly they will they will manage with the 4500 crores but Like you rightly said, the stuff that has come out is not very detailed and we will have to wait for more details on this as to how they want to do it. And perhaps the Ministry of New and Renewable Energy will work on how this PLI scheme is going to help with the sector. But the amount of money that they seem to have put down is small, unfortunately.

Right. Any idea, I mean, how long will it take to come out with this team or anyone's guess?

Yeah, I think, like I said, you know, this is just today afternoon. So it's, you know, it's really, really, it's really, really fresh, you know, really, really fresh, hot off the press. So at the moment, I must say that I have no more information than you have on this team.

Sir, lastly, your peer who also won that manufacturing tender, so they on their call recently said that they have signed two gigawatts of PPA. More details will follow. I mean, so obviously, as you said, it will start in tranches. So, has it started, I mean, has FICCI started signing these PPAs or will the first tranche of it will actually start in Jan-Feb when they were referring to it?

So for the manufacturing tender franchise, so far the power purchase agreements have not been signed because the power sale agreement has to be signed first. And like we had mentioned in the previous earnings call that Secchi is bundling this power with other auctions also. So, they are in the process. It's a large-ish capacity because obviously, you know, between us and our peers plus the other couple of vendors, right? So, and Secchi really started this process only in the month of August and pandemic is going on. So, you know, sometimes the distribution company offices are open, sometimes they are not open. So, it will take a little time. It's been just two, three months and I think Secchi has made tremendous progress. And we are quite hopeful that by January, February, they will start signing these PFAs and PPAs is what we hope.

Thank you so much and all the very best.

Thank you.

Thank you. The next question is from the line of Philip Shen from Roth Capital Partners. Please go ahead.

Hi, everyone. Thank you for taking my questions. As a follow-up there, Ranjit, I think you said you're expecting to see some of the PPA signs starting January or February of next year. How do you expect the cadence of the PPAs to come in next year? So, maybe the first tranche comes in at 500 megawatts early in 21, but do you expect all the PPAs to be signed before the end of the year in 21? Can you provide a little more color? Thanks.

Morning, Phil. The question that you asked, actually to tell you the truth, we have not yet started to focus on the next tranches. The auctions that will happen by the middle of 2021 calendar, right? June, July, August kind of time frame. In those auctions, most of the people, most of the companies will start taking into account the fact that they are not likely to be able to take the IFCS waiver, you know, because by the time the auction happens and then the LOA is given and the power purchase agreements are signed it becomes too close that the commissioning dates become too close to June 2023 right so we expect that once the tariffs start reflecting in the middle of next year by the time the tariffs start reflecting this new reality like we have mentioned one cent to two cents to three cents higher then I believe you know, Secchi will start making an attempt to sell Avapava also. And I'm hopeful that, you know, at least one more tranche, if not two more tranches, will get done by end of next year.

Okay, great. So just to ask the question in a different way, so when you talked about the 25 gigawatts that could be auctioned by the end of next year, How much of that do you think is reasonable to be addressed by you guys?

For us, if we, Phil, if, you know, if we get our power purchase agreement signed like we are expecting to get signed by January, February, and we will have this thousand, you know, megawatts to build, you know, From the new capacity, we will take part in very, very few options. I won't be able to tell you a number right now. It will depend upon how everything is spaced out. And it will also depend upon the opportunity that presents ourselves. We have said in the past that we are comfortable doing 1,000 megawatts a year. We are in no rush to become the largest company in the country. We want to be the most profitable company in the country. We have no plans to reach X megawatts or X gigawatts by such and such time. So we just want to make sure that our size our costs reflect the amount of projects that we are able to do. And at the moment we believe we can do a thousand megawatts a year. So, you know, we will have to see how it pans out, but you know, I don't think we will be taking part in too many auctions. If there are interesting options, for example, a hybrid auction or a storage auction, which will, from the technology perspective, take us forward, we would certainly be interested. If there is any arbitrage we see in the market where we feel that we can get a higher tariff or a better return, we could potentially see that. if you see any delays in the signing of the properties agreements or transmission connectivity which will delay our projects we could take part in options but if everything is running smoothly we will take part in very very few options that's what i can see okay that's helpful thanks uh as it relates to the basic custom duty um what is the timing as to when that new duty could be passed

And I know it sounds like economically it should not impact you guys because you can pass through that tariff cost to the end market or your customer. But there will be some kind of impact. Somebody loses out on economics. So just curious on the timing you expect on the basic custom duties.

You know, Phil, the issue with the basic continuity, I think, from what we hear, I mean, we don't know the real reason behind the delay because this was expected to come out in the month of July. in August. So there has been a little bit of a delay. What we are given to understand or what we hear is that it could be because of last time also we had these WTO considerations, right? India being part of WTO, there are certain hoops that we have to jump through to ensure that we are in compliance with WTO norms, we understand. So I think the government is crossing the T's and dotting the I's on this notification, which is why it is taking a little bit longer. Difficult to say how long it will take, but like we have mentioned in our remarks, this is change in law for us. So we are not really worried. What does happen is that whatever is the extra cost of the BCD or the SCB, 25% of that It will become our equity required to, you know, put in the equity. But we, you know, get pass-through for it. So all of it comes back through tariff. And for projects where we have paid SGD, for example, our Maharashtra project, for example, our Rajasthan 5 project, we have already started getting money back. As you might notice in our earnings presentation, we've already started getting money back for SGD.

Right. Okay. We saw that in this past quarter, FQ2, about $2.2 million. Is that correct?

That's right. That's right.

Okay. Great. One last question for me, and then I'll pass it on. With how well your stock price is doing, can you share how you're thinking about capital and how you could fund the four gigawatt pipeline that you have with Secchi? So, you know, what the potential that you guys tap the equity markets and what are the other sources of capital that you're thinking about and how do you see and balance all the different options?

Pawan, you would want to take this?

Sorry, sorry. I didn't get this. I'm just sorry.

Okay, so Phil, you are right. When we had planned our capex, our share price was at a different level and I think we have been able to instill some confidence in the market about where we are headed and we are seeing the impact of the hard work that we have done and the support that we are getting from the investor community in our share price. And obviously, as the share price gets closer to where the value of the company is, the cost of capital consideration comes into play when we are deciding how we want to raise capital. As far as the 4,000 megawatts is concerned, like we had said last time, this money is needed over four to five years. And this was expecting that the first power purchase agreements should have already been signed if this COVID thing had not happened. So there is a delay in raising that equity. from the perspective of the properties not having been signed. So when we need that equity and when we have, like we have said, one of the things that we were exploring was selling of assets. So we have to see now whether it makes sense for us to sell assets. Does it make sense to raise equity in the public markets? So that's the decision we will have to take when we come to that because, you know, like we have said in the past, the cost of capital needs to make sense, right? I mean, if it makes sense for us to come to public markets, we will come to public markets. If it doesn't make sense to come to public markets, we will, you know, sell assets or we will take corporate debt or, you know, we will take investment at SPV level. So there are many levers for us and we will accordingly, you know, take action as we come to the decision point for ourselves.

Great. Thank you, Ranjit. I'll pass it on.

Thank you. The next question is from the line of Mahi Mandloi from Credit Suisse. Please go ahead.

Hey. Hello. Thanks for taking my questions over here. I just want to understand the cadence of the project construction next year. Ranjit, if you could clarify on DSM project, there seems to be a gap over there. I understand a couple of delays because of the construction time-lensing push-up, but just want to understand what that gap for DSM project is driven by.

So, you know, the first project which we have already completed under really, really tough circumstances, right, was basically built during the monsoon, right, So that is suboptimal. And in case of Assam specifically, where the bottle table is very high, it becomes impossible to work during monsoons because as you start doing your piling, you run into water almost immediately, especially during the monsoons, right? So one project, we were able to complete most of it, you know, even during the monsoons. the other projects it will you know take you know we will be able to start only post monsoon so you know we have just started on a couple of the other projects so they should get done in this fiscal the last project you know we are that is the most remote project which you know we are building And there is, like we have mentioned in our earnings presentation, there is a little bit of land that is still to be completed there. So we expect to complete that land over the next two or three months. And that's the reason why there is a little bit of a delay in the completion of the fourth project. So the first three projects, the first project was done practically on time, even without the extension. practically, and the other two projects will get done within their extension time. And we are seeking an extra extension for the fourth project. The last project is only a 25 megawatt project. So hopefully it will not impact much the fact that it is slightly more delayed than the other projects.

Got it, got it. That's helpful. And please just clarify on that note for the four gigawatt backlog. I know you haven't. identified any, uh, locations yet publicly, but, uh, just in terms of the ISTS, uh, uh, PPS, they allow you to build the projects anywhere, right? So, are you looking to build them in Rajasthan or, uh, in Southern India or any other location in the country?

Sorry. So, though, um, The 4 gigawatt project, the good thing is that, you know, as soon as you have the letter of award, you can block transmission capacity, right? And that is one of the critical resources that you need to block right away, right? So as soon as we got our LOA, we had already planned, we had already scoped out at the time when we had actually taken part in these auctions because, you know, a 200, 300 megawatt project, which is a typical auction, you can bunk it anywhere, right? If you don't get it in... Then you have to make a plan for 4,000 megawatts. You cannot just run it anywhere, right? So this was, you know, we had planned this very, very well, well before we took part in the auction. And the day we get the LOA, the same day, literally, we apply for transmission capacity. For these 4,000 megawatts, you know, over three different substations within the state of Rajasthan, we have already received the connectivity for these three, for over these three substations. in the state of Rajasthan, which has the best information.

Yeah, that's helpful. And just on, you know, what you're seeing in terms of model prices out there, the cost of the system right now is 55 cents per quarter, roughly in that range for you at an AC level. But just in terms of your visibility under the model prices over the next year or two, how do you see that changing? for yourselves and for default equal faucet as well.

Perhaps, Murali, you want to take this?

Yeah, sure. You know, so the last couple of quarters has seen some volatility in the module prices because of lack of availability or supply crunch on the raw material side. So we have seen some price fluctuation. We expect this to continue, these fluctuations to continue over the next couple of quarters as per our understanding with suppliers of modules. However, that's like in the near term. If you look at the medium and the long term, I think there is a secular trend towards declining module prices on account of better efficiencies coming in, newer technologies coming in. So overall, we do expect a module price reduction year on year, a few percent a year at least, but in the short run, we are seeing volatility and fluctuations in price.

Thank you. And then just last one from me, and I'll hand it over to the others in the queue. The first PPA, as you said, you could potentially sign in in the next quarter, and assuming a 12, 18-month construction probably comes online in mid of 2022. Does there any gap between when that comes in and when the Rajasthan 6-8 projects get completed, and does that provide you with any window to bid for other projects, as you said, to get to that one gigawatt per year? construction run rate or do you think because of the delays that kind of narrows down the window and you'd rather just install the first branch of the 4 gigawatt?

So, Manik, these projects, the ones which are linked to the manufacturing tender, because these are larger size projects, they are 500 megawatt branches. So these have two years to build, right? So if we sign the PTA, for example, in December of 2020 or let's say January of 2021, then these need to be delivered in December 22, January 22, January 23, right? So, and our projects, like we have mentioned, the Secchi 8 and Secchi, sorry, Rajasthan 8 and Rajasthan 9 projects are expecting, we are expecting to commission by September, like quarter 3 of, you know, of the next calendar. So therefore, between the third quarter of 2021 calendar and the fourth quarter of calendar 2022, right, there is almost five quarters which are available to us, right? So yes, you know, there is a gap there which we will like to fill and we will take part in auctions. for, you know, for that gap, maybe 300 megawatts, maybe 500 megawatts, we can do in that time frame. So, but then once the cycle is established, right, once the cycle is established, then that, you know, that flexibility to do more projects goes away.

Right, right. That makes sense. Thanks for the questions and talk to you soon. Bye.

Thank you. The next question is from the line of Changwee from DIA. Please go ahead.

Hi, Arashin. Nice to hear from you. I have two questions. One is the stock appreciation rights in this quarter. Going forward, do we see the same expense affecting EBITDA margin? And then the next question is that the speaker had mentioned about the volatility in panel cost. Can you give us a sense of what type of volatility was it? You know, is it 10%, 20%, or 30%? Thank you.

Well, I'll take the first question.

When I say our stock acquisition rates, any increase in stock price, will result in corresponding increase in P&L charges for that, right? So, technically, theoretically, if our set price continues to go up, it will continue to hit our P&L and continue to show a lower EBITDA to that extent. However, what is very important to note that very, very large part of these affairs, while these are wasting as per the schedule, they cannot be exercised until 2024, until March 2024. So actual cash outgo will only happen after March 2024, if at all, they are exercised immediately after 2024 or whatever. So it's an eight-year wasting period. So maybe Ranjit may add more color to this, but I just wanted to highlight that these are accounting entries and these are charges which you have to accrue the way safe price moves. But actual cash outgo will not happen until March 2024.

So, I understand the cash versus accrual difference, but just from an EBITDA calculation basis, do we see an 80% EBITDA margin or do we see, say, a 70% EBITDA margin in the next, you know, coming quarters?

So, I have a suggestion for this on a lighter note. So, the two things. If my EBITDA margin decreases because of SIR expenses, I should be happy because that means that the service is doing very good. The company is doing very well. And a small part of that is actually reflected by your dragging EBITDA margin. But that was one way to look at. Very honestly, the way we model or the way we discuss internally with the board, with the stakeholders, in terms of internal stakeholders, we keep this more like outside bracket item. So, SIRs are charges which are linked to, linked to, linked to, linked to surprise and we totally focus as a management team how best we can do around generation, about cost and how we can improve EBITDA sans SIR. Difficult for me because of the nature of accounting whether EBITDA margins should be 87% or 80% or 90% because very, very difficult to predict and we don't take it very negatively, very honestly.

Okay. So, so, If I may, just a little bit more detail on this. Are you basing the appreciation on percentage increase in stock price, or are you basing that on the absolute level of the stock price?

So these are valued basis black holes model, right? So, for example, for the SAF system already been lifted, they are 20 and And for the SELs, which are yet to wait for the next seven, eight years, the option value of that becomes part of the charge. So that is the way it is accounted for. Okay.

This is Nathan. Just one way to think about modeling on that is at the end of the quarter, the stock was around $27. Every variance from that by the end of the quarter will result in about a half a million dollar swing. I'm sorry, half a million dollars for every $1 change in stock price.

Half a million dollars for every stock price change. All right. Great, Nathan.

Good to hear from you. To add on to your second question on the extent of volatility, so what we've seen in the last three months is the price has moved anywhere between 5% and 10%. And the other thing that's happened is there has been a little bit of a supply crunch because of, as we said, a shortage of raw material availability. And if you choose to defer supplies, which most of the Indian market has deferred supplies because of COVID, you know, then their volatility is not as much, not as high.

Okay, got it. Thank you very much.

Thank you. Before we take the next question, a reminder to participants that you may press star and one to join the question queue. The next question is from the line of Pavel Malkinov from Raymond James and Associates. Please go ahead.

Thanks for taking the question. Can I ask kind of a big picture question about the solar opportunity in India? I think there is 220 gigawatts still of coal-fired generation, what amount or what percentage of those 220 gigawatts do you think are realistically going to be displaced by solar?

You know, it's a question that the regulators and the ministry grapples with all the time. Our feeling in the industry really is that, you know, there are two things at play here. About, like you rightly mentioned, about 220,000 megawatts odd of thermal capacity, coal capacity exists in India. About 5 to 6% of this capacity is expected to, you know, decommission every year because at the moment, there are several plants that are really, really old, right, 30 years old, 40-year-old plants, especially in the state sector, that are still running, which the government is pushing very hard to get decommissioned. So every year, we expect about 5% to come down. The energy requirement also in India is expected to go up by about 3% to 5% on a year-on-year basis. design, it means that we need in India about 15 to 20,000 megawatts of new capacity to be built. This is about 5% of thermal capacity which is decommissioned and about 3 to 5% of capacity that needs to increase because our energy requirement is increasing. And like we mentioned, India has one of the lowest per capita utilization of units of electricity, 1200 units a year is our average. when we say about 20 000 megawatts of electricity some of it will actually still come from new build thermal right because the states unfortunately some of the states still continue to build some new build thermal so let's say about four to five gigawatts are still being built maybe two maybe three maybe four maybe five gigawatts so let's say about 15 gigawatts So, about between 10 to 15 gigawatts of capacity needs to come from the renewable energy sector. And 10 to 15 gigawatts equivalent to thermal, right, because thermal typically can run at a plant load factor of about 85%, whereas solar plants can run between 25 to 30%. So at least two and a half times, right? So when we say 15,000 megawatts, 15,000 megawatts automatically become 30,000 megawatts of solar. So if I want to fill the need for 15,000 megawatts of thermal, I need 30,000 megawatts of solar. to be installed so that is how we typically arrive at the 30 000 megawatt number which the prime minister of india has also said that we want to reach to 450 000 megawatts so you know where does the 450 000 megawatt calculation come from it comes from these kind of numbers that about 4% to 5% of thermal capacity will be decommissioned. 4% to 5%, the need of the nation will continue to increase. This comes to about 20,000 megawatts, 15,000 to 20,000 megawatts. 4,000 to 5,000 megawatts of thermal is still being put in place. The remaining thermal and growth will come from renewables, and that is where the approximately 30,000 megawatts comes from.

To add to that, at a very big picture level, to add to that is really, you know, the thermal does provide a huge baseload supply. And I suppose, or one supposes that as and when storage costs decline to a point where they become competitive with coal, that's when new builds will completely fall off. And then over a period of time, they just, you know, go away.

Okay. Can I also ask about... green bonds. As I understand, you issued two green bonds in the last three years. Obviously, interest rates in the U.S. and Europe continue to be close to zero and lots of appetite for green bonds. Are you continuing to look at that as an option for your future capital needs?

Robin, you want to take that?

Yeah, so green bonds, very honestly, as a company, we prefer to remain fairly conservative in terms of leverage. And we prefer to have optimal mix of debt and equity. So while green bond market does provide opportunity to raise the bonds again to partly fund equity need, But we have plans to focus on funding equity by equity and funding debt by debt. So green bond markets, we have plans to tap primarily to refinance our projects and refinance the debt. But yes, what happens when we do the initial project financing, we prefer to have very conservative debt levels because there is construction risk. Our projects are yet to stabilize and generate cash flows. So when we do the initial funding, we try and leverage the project at a relatively conservative level. But once the projects are operational and there is a track record of cash flows, we prefer to refinance the project with the level of debt which the cash flows can comfortably sustain. And in that process, some extra leverage based on the cash flows is available, which has been done in the past also, and which we are perfectly fine and open to do that. But purely coming to Green Bond to raise equity or primary with a focus to raise equity, that is not something that we have thought about.

Thank you very much.

Thank you very much. That was the last question in queue. On behalf of Azure Power, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.

Thank you, everyone, and a very happy Thanksgiving to everyone in the U.S.