Azure Power Global Limited Equity Shares

Ladies and gentlemen, good day and welcome to the Azure Power Fiscal Fourth Quarter 2021 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 conference call, please signal an operator by pressing star then zero on your touchstone phone. Please note that this conference is being recorded I now hand the conference over to Mr. Vikas Bansal from Azure Power. Thank you and over to yourself.

Thank you and good morning everyone and thank you for joining us. On Tuesday evening, the company issued a press release announcing results for the fourth fiscal quarter of 2021 and in March 31st, 2021. A copy of the press release and the presentation are available on the investor section of Azure Power's website at azurepower.com. With me today are Ranjit Gupta, CEO, Murali Subramanian, COO, and Pawan Kumar Agarwal, CFO. Ranjit will start the call by going through recent key highlights, Murali will then follow up with an update on our project under construction, technological innovation, and an industry update. Pawan will then provide an update on the quarter with additional discussion on performance of the quarter. And then we will wrap up the call with Ranjit updating FI 22 guidance and providing quarter one FI 22 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. These 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 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 measure And these reconciliations are also available on our website in the press release and presentation materials and annual report. It is now my pleasure to hand it over to Ranjit. Thank you, Vikas. And a very good morning, everyone. I would like to start today's call offering condolences to everyone impacted by COVID-19. We faced the pandemic's ugliest phase in India during April and May 2021, when almost no family was left untouched in some way or the other by COVID. Good part is that we are now seeing daily infections recede, and our vaccination drive has picked up pace with over 260 million doses administered till date. At Azure, we have stood by our employees and stakeholders, in the fight against the pandemic and have been following all COVID protocols with Vega. During the second wave, we undertook a number of initiatives to supplement the medical infrastructure in and around the areas we operate. We donated 30-plus oxygen concentrators to healthcare facilities in the states of Rajasthan, UP, Karnataka, and other states, supplied 30 BiPAP machines to a healthcare facility at Bikaner, supplied oximeters, PPE kits, masks, and other essential medical items to a number of facilities as per their requirement. Within the company, to help our team members, we strengthened our preparedness to respond to medical emergencies faced by our employees or their family members by implementing a cohort-based support group, procurement of 15 oxygen cylinders distributed across our various sites, and purchasing a number of oxygen concentrators for our own use placed at strategic locations. We continue to retain support of a qualified medical practitioner for any medical advice to our employees and their family members. We have also implemented a company-subsidized term insurance scheme to support the economic needs of our families in case of any unfortunate event. I am especially proud of the cohort-based group wherein we created a pyramid of contacts, thereby reaching out to every team member every day to track their and their family's health, providing help where needed. The way the team came together on several occasions to help a team member in his or her hour of need was exemplary and truly demonstrated the strength of Azure. Sustainability and ESG are key to the success of our business at Azure. We highlighted our ISO 45001 certification last quarter, which demonstrates Azure's focus on occupational health and safety and validates additional efforts we put in to make our workplaces safe for our team members and contractors. In December, MSCI announced the leading ESG rating agency, rated Azure Power as AA for ESG, which places us in the top quarter of all global utilities they cover and probably amongst the highest ratings among our peers in the country. We continue to strive towards improving further on this rating. I'm happy to report that we have entered into an agreement to sell our rooftop portfolio to Radiance Renewables for an enterprise value of approximately US$73 million. This is the first ever asset sale in Azure Power's history and signifies our commitment towards capital discipline while recycling capital into higher return committed projects. Continuing with this philosophy, I'm happy to report that Azure is seeking to increase size of our addressable market by foraying into other areas of renewable energy, especially wind and solar-wind hybrid projects. We have participated in a couple of auctions already and will look to have something more concrete sooner than later. As the share of renewable energy in the grid increases, we realize that the business will move towards more dispatchable energy. As the industry moves towards providing firm power to the grid, wind and storage will be two important technology additions we have to plan for our portfolio. I had mentioned in my previous remarks how green hydrogen and plummeting storage costs have the potential to disrupt our industry. We are in the process of critically examining our business and growth strategy as we go along our endeavor to be on the right side of the evolving renewable industry landscape. We are continuously evaluating, deploying new techniques and technology at our projects to improve returns. We assure our valued investors that we will continue to be disciplined in our approach and we'll keep all of you posted as we take steps in this territory. Today, we have 20% more megawatts operating than we did at the same time last year, excluding the rooftop portfolio. Our operating assets have performed well, and not only have we been able to continue collecting revenue during this pandemic, we even improved our collections with our DSO at 116 days at the end of the quarter compared to 122 days at the same time last year. We have controlled our costs and our cash GNA, excluding stock compensation expenses and one-time expenses in the previous period, increased marginally by 8% from the same quarter last year. We had promised to reduce our cash GNA expenses by 10% in 2020. fiscal year 21 versus fiscal year 20, and I'm happy to report that we have reported a reduction of 26% in G&A from previous period, excluding the impact of stock acquisition rights. Growth in our actions to improve returns have resulted in a 23% year-on-year increase in EBITDA from operating assets. and a 75% increase in cash flow to equity from operating assets. Since we started reporting CFE, we have seen a steady improvement in this metric due to our focus on sharing our assets, CapEx infusion in operating assets, reducing our costs, and collection of long outstanding dues. On the flip side, despite significant progress made prior to the second wave of COVID towards signing Papache's agreements on our four gigawatts, for which we have a letter of award but no PPAs, we have not much to report yet. We still remain optimistic that we will have positive news to deliver shortly as there is a definite movement towards the finish line. In spite of the pandemic, peak power demand recovery is underway, which would encourage DISCOMs to invest in buying power for their future needs. It may be noted that there is a backlog of 15 to 20 gigawatt awarded capacity, which is awaiting PSA to be tied up with DISCOMs. TEKI has been supportive by not coming out with any new solar ISTS bid till this backlog is cleared. As the second wave has eased, we have seen renewed interest in buying power from discounts. We have also seen global polysilicon prices escalate in the recent past, and it has impacted our supplies and our commissioning timelines. We continue to monitor the situation and are hopeful that the recent increase in prices is only temporary. The government continues to support the renewable energy sector, Honorable Prime Minister recently reiterated Government of India's commitment to climate actions at the G7 summit, and he has been the driving force behind India's vision of 450 gigawatts renewable energy operational by 2030. Apart from the push on setting up generation assets, the government has been talking about promoting make in India. There has been talk of measures to encourage solar cell and solar panel manufacturing domestically. Two important measures were announced in the last few weeks to enable local manufacturing industry. First was the imposition of basic custom duty from 1st April 2022 with 40% on modules and 25% on cells. The other was the notification of the ALM list, which is the approved list of models and manufacturers. Any project auctioned after April 10, 2021 will necessarily have to buy solar panels that appear on ALMM list. Our current pipeline will continue to enjoy the benefit of pass-through since our projects were auctioned before the imposition of both these notifications. Further, as per a recent judgment by the Honorable Supreme Court of India, All transmission lines in certain regions of Rajasthan and Gujarat have been asked to be converted from overhead wires to underground. We believe this would be cost neutral to us as we should be allowed to pass through of the same if we incur the cost. Given the turmoil of the last year, FY21, fiscal year 21, has been all about efficiency and prudence. We have invested in our operating projects to improve generation and living facilities of our team members at site. We are moving rapidly to deploy the latest bifacial modules and trackers to increase efficiency of insulation capture on our projects which are going into construction. If I look back at this difficult year, some of our achievements are that we were able to keep operating through the various lockdowns and pandemic surges. the work we were able to do to support our teams and our communities, that we were able to largely protect returns on our under-construction projects through COVID-induced delays. The sale of the rooftop assets and the patience we have shown by staying away from the temptation of bidding aggressively through the year have been huge successes and very satisfying. With almost two years behind me, I look forward to the coming fiscal with great hope and optimism. We believe in waiting for the right opportunity to earn our shareholders a return higher than our cost of capital and the philosophy of building a sustainable business rather than simply chase scale. We continue to look for suggestions from our investors and stakeholders on how we can further improve our disclosures and make it easier for you to understand our business. With that, I would like to turn it over to Moruli.

Thank you, Ranjit. On page five, we provide an update on our projects under construction. Second wave of COVID at its peak, severely impacting our construction activities, not only disrupting the supply chain, but also impacting several of our sites. The high local demand for solar modules in the past several months or so in China, coupled with the rising yuan and rising raw material costs, have resulted in module suppliers trying to renegotiate their contracted price and delivery commitments despite signed supply contracts. The module prices for new orders are at levels that were seen several years ago. We had anticipated earlier that by fiscal year end in our Rajasthan 600 megawatt project, we would operationalize 450 megawatt and the final 150 megawatt finished by May. However, As of today, we have finished 300 megawatts in FY 2021, and 300 megawatts have been pushed by another quarter due to the second COVID-related challenges. Thanks to the Ministry of New and Renewable Energy notification, however, granting extension to all projects with commissioning due date on or after 1 April 2021, we don't expect to incur any penalties for delays. Project construction work in SM2 has picked up after poor weather and COVID-related delays. However, the second wave of COVID came in strongly, and it has again taken a hit. After the initial 25 megawatts commissioned, we commissioned another 12.5 megawatt of project in May and expect another 12.5 to be done shortly. The entire project is expected to be fully commissioned by the end of the calendar year, as we are already in the midst of the monsoon season now. We have sought a commissioning date extension from the regulator and procurer getting extension till the end of this financial year, this fiscal year, sorry, this calendar year, I'm sorry. As mentioned in the past, we have made several incremental improvements in operations and construction practices to squeeze out better returns. Our recently operationalized analytics platform has been instrumental in identifying faults quicker, leading to lower downtime at the string level. Our ability to target, determine, and rectify electrical losses during operations have also been enhanced considerably. On the construction side, we are installing tracker-based systems in one of our projects under construction to combat the impact of increased panel prices. We have provided some highlights of our ESG accomplishments on page six. As Ranjit mentioned earlier, we have got a strong AA rating from MSCI for ESG and obtained the ISO 45001 certification, which verifies that Azure Power provides a safe and healthy workplace. Our carbon-free generation has avoided about 3 million tons of CO2 equivalent this fiscal, bringing the total to 9.5 million tons equivalent since inception. We remain net carbon neutral. We have been focusing on our water neutrality, having installed 84 groundwater recharge structures across 15 sites this fiscal. Another environmental focus this year is safe disposal, even recycling wherever possible, of damaged modules. and we have made very good progress this fiscal year with 555 tons of modules disposed. We also remain actively engaged with the communities in which we operate with support towards medical and health facilities and active response on the pandemic front. On the governance side, we are already complying with the World Bank Equator principles and governance standards of NYSE, SEC, and SGX. Majority of our directors on the board are independent and with increased gender diversity. During the fiscal, we introduced policies for human rights and equal employment opportunity, along with diversity and inclusion, which highlights our efforts towards upholding the highest governance standards. We are continuously striving to implement best practices to enhance our sustainability. Looking at industry and regulatory updates on page seven, there is a buildup of allocated solar projects with letters of award, but without power purchase agreements at the moment. In the last couple of quarters, the distribution companies have not been signing PSAs, and this has been accentuated by the second COVID wave and falling tariffs. However, our discipline has protected us from entering at the recently without low tariffs. We expect developers may find it difficult to build projects at the recently without low tariffs, given the rise in input costs coupled with COVID-related delays. The good news is that Overall power demand in India is expected to grow now as the country emerges from the second wave. With the challenges in supplies and pricing, we do expect that there should be an increase in tariffs compared to the ones discovered in the recent past. However, we've all been surprised and we shall see how tariffs pan out. We have seen that there have been periods of intense competition followed by moderation. We are pursuing newer opportunities such as wind and hybrid technologies and we assure that we shall only bid for projects at commercially viable tariffs. We continue to believe that we would be able to obtain the four gigawatt PTAs at value accretive tariffs, which would add to our contracted pipeline and provide returns above the cost of capital. With that, I will turn it over to Pawan to discuss the quarterly results. Thank you. Thank you, Muzli. Moving on to case nine. In 2021, we were operating 1,990 megawatts on a PPA or AC basis, which is 20% higher than what we were operating a year before. Our portfolio of 6,955 megawatts remains stable from the previous quarter, excluding rooftop portfolio. Since our last update, we have entered into definitive agreements to sell our rooftop portfolio and have therefore excluded these assets from our portfolio. Our construction costs have continued to fall in FY21 and were about 19% lower than the previous year. Turning on to page nine, sorry, page 10, looking at the quarter, our revenues continue to increase as we construct more projects, some of which have been affected by the second wave of COVID and supply-related challenges on module front, as noted by Murli. After adjusting for stock compensation expenses, our EBITDA has been 44.3 million, or 18% higher, against 16% increase in revenues from the same quarter in the prior year. Turning to G&A on page 11, save for stock appreciation rights, or SAR, which added about 18 million to G&A for the year. our cash G&A were below internal expectations. We remained very focused on reducing our costs as we had outlined earlier this year and are pleased to report that our G&A was 26% lower than the prior year. When looking out into FY22, we expect that cash G&A will rise about 10% from FY21 level, primarily reflecting inflation and an increase in megawatts in operation. We are progressing well on refinancing of our about $185 million long-term debt facilities outside the green bond pool, as well as $500 million green bond RG1. We expect substantial savings in interest costs once these refinancings are completed. Turning to stock compensation expenses, as the share price rises, our stock compensation expenses will rise, including G&A. to help with modeling the impact of SAR expenses on our G&A is directly linked to the share price. For fourth quarter 21, we had a reversal in the expense of around 7.7 million, primarily reflecting reduction in share price from $40.77 as of 31st March 2020 to $27.19 as of 31st March 2021. Going forward, for every $1 change in stock price above and below our previous quarter's close, will have about 800,000 impact, both positive and negative. We are particularly proud of our ability to improve our DSO despite the challenges this year. Our four-quarter 21 DSO was 116 days, which is better than 120 days about a year ago. We continue to make progress in collecting our payments and believe there will be further improvement in the future with commissioning of projects with high credit-worthy counterparty this year. On page 12, you can see that EBITDA from operating assets increased about 18% year on year, and that cash flow equity from operating assets rose about 55%. Net debt for operating assets was about 1.13 billion, and EBITDA for the last 12 months was about 179 million, resulting in net debt to EBITDA ratio for operating assets to 6.3x, which is better than last year's ratio of 6.6x. Finally, looking at page 13, providing balance sheet information, we had about 152 million of cash and cash equivalents and our net debt stood at approximately 1.19 billion. As a reminder, for those that are calculating our debt ratios, the hedging assets of 75 million included in other assets on our balance sheet should be netted against our total debt as this is directly linked to the foreign exchange hedge we put in place related to our green bonds. Now, I pass on to Ranjit to provide some commentary on our guidance.