Azure Power Global Limited Equity Shares

Ladies and gentlemen, good day and welcome to Azure Power's second quarter fiscal 2022 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be no 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 touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Vikas Bansal, head investor relations at Azure Power. Thank you, and over to you, Mr. Bansal.

Thank you. Good morning, everyone, and thank you for joining us today. On Friday evening, the company issued a press release announcing results for the second quarter of fiscal 2022, ended September 30, 2021. 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 key highlights and business updates. Murali will then follow up with an update on our project under construction. operational innovation, and an industry update. Pawan will then provide an update on the quarter, and then we will wrap up the call with Ranjit providing quarter three fiscal year 2022 and fiscal year 2022 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 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 known gap measures that we reconcile to the most comparable gap 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, Vikas, and a very good morning, everyone. I'm happy to report that we have steadily transitioned from work from home to our office desks this quarter while following COVID appropriate protocols. Worldwide, we do see disruptions continue due to COVID and its variance, but hope that severity remains contained. On the ESG front, we have taken number of significant steps this quarter towards improving our ESG standards. We have been focusing on reducing our scope on emissions and have adopted an electric vehicle policy. As part of this policy, any new vehicle that the company purchases going forward for company use will only be electric vehicles. Further, we have adopted a social accountability policy to enshrine socially acceptable and responsible practices in our workplace. Through our social accountability policy, we have committed compliance to SA-8000 standard requirements for ourselves and our vendors. We have already conducted internal audits to a certain compliance to SA8000 principles and are planning external audit certifications in the month of January 2022. SA8000 certifications will reaffirm our commitment to maintain labor and working conditions as per international standards. We continue to strive hard to improve our ESG performance and keep demonstrating our leadership. Beyond ESG, my most important business update is signing of 600 megawatts of power purchase agreements from the Secchi manufacturing capacity of four gigawatts. We further understand that Secchi has signed 7,000 megawatts of PSA, power sale agreements, with the state of Bangladesh, which will translate to another 2,333 megawatts of PPAs getting signed for Azure very soon. These are heartening and significant developments for the elongated period of age on these projects. Tariffs of INR 2.54 for the 600 megawatt PPA and INR 2.42 for PPAs to be signed under Andhra Pradesh PSAs are significantly value accredited. We expect concerns comfortably above the upper end of our threshold targets. Given the work we have already done with land acquisition and securing transmission connectivity, we will strive to complete these projects before time. Apart from the Secchi manufacturing PPA, we received letters of award for 120 megawatt wind project and 150 megawatt wind solar hybrid project with Secchi subsequent to quarter end. These are first steps beyond solar for Azure And we firmly believe that as the industry moves towards providing dispatchable renewable energy to the grid, wind and storage will be two important technology additions in our portfolio. We have already developed significant organizational capabilities for these in-house and are looking forward to implementation on the ground with our teams already working on developing large wind sites across the country. Further, we are actively developing our capabilities in new operating areas for renewable energy, be it energy transition for corporates or new technologies like green hydrogen. The government has already announced the national hydrogen mission and proposed policies related to green hydrogen adoption. I firmly believe that energy storage and green hydrogen are going to change India's energy consumption scenario quite dramatically within this decade. Azure aims to be at the forefront of these new businesses and has taken concrete steps in this direction. On operational front, while Murali will talk in detail, I'm extremely proud of our procurement and construction team given the challenges this year from COVID disruptions in the first quarter, followed by volatile supplies and module pricing more recently. We had 31% more megawatts operating in quarter two this year than we did at the same time last year. There has been a 28% year-on-year increase in EBITDA from our operating assets and a 32% increase in cash flow to equity from operating assets during the quarter. We continue to see steady improvement in these metrics going to our continuous efforts at project sites. I also commend the stellar work done by the capital team in raising the lowest cost green bond and refinancing older projects, driving down our cost of debt by almost 200 basis points in these projects. The government continues to support the renewable energy sector in India. India recently announced 150 gigawatts of installed renewable energy capacity in the country, including hydro. Honorable Prime Minister in his address during COP26 meeting in Glasgow provided five results that India has undertaken to contribute towards global fight against climate change. These include, number one, increased non-fossil energy capacity target of 500 gigawatts by 2030. Number two, to meet 50% of the country's energy requirements through renewable energy by 2030. Number three, to reduce economies' carbon intensity down to 45% by 2030. Number four, reduce 1 billion tons of carbon emissions from the total projected emissions by 2030. And number five, achieve net zero emissions by 2070. These announcements, along with India's goal of self-reliance in energy by 2047, i.e. 100 years of Indian independence, clearly demonstrate the vast growth opportunity the sector presents for Azure. We are looking at our addressable market size of approximately 40 gigawatts per annum going into this decade, considering India's target of 500 gigawatts by 2030. Investment in new renewable energy generating assets will top USD 250 billion just within this decade. In confidence with this ambitious target, the government has recently taken a series of very significant reform measures to strengthen operating framework and boost investor confidence in the sector. After the landmark judgment from the Appalachian Tribunal for electricity allowing compensatory tariff for solar power curtailment in the state of Tamil Nadu, Ministry of Power recently brought a notification reinforcing must-run status for RE power plants and allowing developers to sell unscheduled power due to curtailment because of technical constraints directly on exchanges. It also specified rules to simplify the process of recovery of costs incurred by developers due to change in law post-project bidding. The rules provide for predefined formula to determine the one-time charges or impact on tariffs due to change in law and lays down fixed time period for approval. These are big developments that are at the time and address issues that have been in discussion lately. The government is also actively working on enhancing transmission capacity in the country. Ministry of Power recently notified rules that paved the way for overhauling of transmission system planning and provide for easier access to transmission networks across the country, termed as general network access in the ISDS system. This provides flexibility to the states as well as the generating stations to acquire, hold, and transfer transmission capacity as per their requirements. In addition, net zero and RE100 announcement by corporate is driving a resurgence in interest in energy transition through round-the-clock RE contracts. On our organizational update, as you all know, around the end of this quarter, Mr. Alan Rothling joined the board as the new chairman and replaced Mr. Barney Rush, who served as director on the board for six years, including the last two years as chairman. We were privileged to have worked with Barney Rush on the board. We express our gratitude to Barney for his leadership and guidance in strengthening Azure's power. Mr. Rothling, brings an inspiring mix of great leadership and hands-on industry experience himself, and we at Azure Management are already deeply working with him in taking our company to a greater accomplishment together. 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 and value our business. With that, I would like to turn it over to Murali. Thank you, Ranjit. As we last reported, the second wave of COVID impacted construction activities at our sites. Subsequently, however, both COVID and the supply situation improved significantly. Our construction and procurement teams worked very hard to ensure we adhere to committed timelines on our projects. We commissioned 158 megawatt AC capacity and 188 megawatt DC capacity during the quarter. As of today, we have completed and commissioned 500 megawatt out of 600 megawatt in our Rajasthan 6 project, and balance 100 megawatt is to be commissioned in this month. We also commissioned 150 megawatt in our Rajasthan 8 project, subsequent to quarter end, and are now in advanced stages to commission the balance capacity in the project in the current quarter. Even though construction work on the 300 megawatt Rajasthan 9 was impacted due to supply-related challenges, the team has rallied and we are confident that we will meet the promised timelines. We have provided some highlights of our ESG accomplishments on page 6. As Ranjit mentioned earlier, we are extremely proud to adopt our EV policy this quarter, which provides a direction towards reducing our Scope 1 emissions. We have committed to shift 100% EV by 2030 under this policy. Further, to encourage adoption of electric vehicles at a personal level, we are providing interesting interest cost subsidy to our staff, and I'm happy to report that we have already seen two electric vehicles purchased by the company and one electric vehicle purchased by one of our staff members since adoption of this policy. We are hopeful that this policy will prove to be useful in the expeditious transition to electric vehicles. We also obtained carbon neutrality status through offsetting of carbon emissions in our operations, and together with our path towards electric vehicles, we hope to reduce that requirement in the coming years. I'm happy to report we have also recently won the Green Tech Effective Safety Culture Award for 2021 from the Green Tech Foundation and the OHS Award from GrowCare India in these areas, which signifies the efforts we have put in to ensure safety culture, which is now embedded across the project locations and sites. Further, we have also successfully completed the surveillance audits for ISO 9001 and ISO 14001 certification. signifying our continuous focus and improvement on our quality and environment management systems. Our carbon tree generation has avoided about 0.9 million tons of CO2 equivalent this quarter, bringing the total to 11.5 million tons equivalent since inception. We remain net carbon neutral. We are in the process of planting 30,000 trees in the immediate vicinity of our 600 megawatt Rajasthan 6 project this year. We have also committed to plant 50 trees for every Megawatt we construct. We also remain actively engaged with the communities where we operate and provide proactive support towards medical and health facilities, especially on the pandemic front. We've also constituted a new sustainability committee of the board to continuously strive to implement and monitor best practices to enhance our sustainability efforts. On the technology front, Azure continues to be an early adopter. We were among the first companies in India to install a large-scale project based on monopark panels. And we are also constructing now a large-scale project using Bifacial Tracker technology, where we are expecting yields in excess of 30% for our Rajasthan 9 project. These are industry-leading efforts to ensure projects are built and operated with the best returns metrics. Further, on the operations side, all our projects are now fully connected with our central monitoring system, which has accessibility through the mobile application as well. We are gradually facing out laptops at our sites and have provided tablets to our site engineers who are now always connected with the head office staff and monitor at a granular level the performance of each of our plants on a real-time basis. This also helps us in predictive monitoring of our plants to tackle any challenge in its infancy. Looking at industry and regulatory updates on page eight, India's big announcement at COP26 and the fact that we recently reached 150 gigawatt installed renewable energy capacity continues to ensure a solid environment filled with growth opportunities in India. As we discussed during a previous call, we have recently developed organizational capabilities to implement our plans in wind and the hybrid space. Our recent wins in this regard, the 120 megawatt wind project, and the 150 megawatt hybrid project, both with Secchi, provides us an opportunity to kickstart this process of diversifying the portfolio and move in line with the industry, which is increasingly looking at such a power as a sustainable way forward in Indian RE. We want to assure you again that we shall only bid for projects at commercially viable tariffs, one which provides returns above our cost of capital. With that, I will turn it over to Pawan to discuss the quarterly results. Thank you.

Thank you, Murali. I'm happy to report that we exceeded upper end of our revenue guidance for this quarter with revenues excluding rooftop at USD 56.9 million against the guidance range of USD 49 to 51.7 million. We found significant contribution from sale of our carbon credits this quarter amounting to USD 5.5 million. However, Even after excluding this contribution, the revenue is at the upper end of the guidance range. Significant developments during the quarter and in the period subsequent to the quarter end have assured all of us of the tremendous opportunities in the sector that we at Azure are well-placed to leverage. Our field is simple business that needs strong and impeccable execution. which we have been focusing at. Our first PP execution under the project is one such example for which we have been working hard with FICCI and other stakeholders. With these projects in motion, I believe we have widened the road for our stakeholders on value attribution. Turning to page 12, as of September 30, 2021, we were operating 2,210 megawatts on a PPA or AC basis, which is 31% higher than what we were operating a year before. Our portfolio was stable at 6,955 megawatts at the end of quarter, which further increased to 7,255 megawatts subsequent to the quarter end with our recent gains. While these portfolio megawatt numbers exclude rooftop portfolio, which is in the process of getting transferred to Radian, our financial numbers continue to consolidate rooftop till the transfer process is completed. On page 13, after adjusting primarily for stock compensation expense, our EBITDA has been US dollar 48.7 million or 29% higher against 25% increase in the venues. for the same quarter in the previous year. Turning to G&A on page 13, our G&A increased by 6% in line with our expectation we communicated earlier. All our recent refinancing, both domestic as well as overseas, have resulted in substantial savings in interest costs for us, improving our equity returns. Over 70% of our total project debt at present including our outstanding bonds, have fixed interest rates for a period of at least two to three years. As we refinance our project debt on completion of new projects this year, we will endeavor to have almost 100% of project debt to be under fixed rate. Refinancing at lower cost and fixed rate reflects strong credit profile of the group, supported by strong sponsors such as CDPQ and OMERS. Further, we expect that India may not see much impact from global interest rate increase apprehension in a longer term. As India progresses economically and with events like India's sovereign debt inclusion in the global bond indices, we expect India to significantly gauge from long-term inflows of global capital much larger than previous years, which may be expected to keep the rates in check. Turning to stock compensation expense for second quarter 2022, our sales price decreased from US dollar 26.92 as on 30 June 2021 to US dollar 22 as on 30 September 2021, resulting in reversal of SAR expenses of US dollar 3.3 million. Despite challenges in past few quarters, our DSO have been fairly consistent at around 116 days on an average in the recent quarter. We believe there will be further improvement in our DSO days in future with commissioning of projects with high credit worthy counterparty. And also expected improvement in collection due to favorable awards in Karnataka discount. We are also hopeful of a favorable judgment soon in Andhra Pradesh. Moving on to page 50, You can see that EBITDA from operating assets increased about 28% year on year and cash flow equity from operating assets rose about 32%. Net debt for operating assets was about 1.2 billion and EBITDA for the last 12 months was about $194 million resulting in a net debt to EBITDA ratio for operating assets of 6.2 times as on September 30, 2021. Finally, Looking at page 16, providing balance sheet information, we had about US dollar 128.3 million of cash and cash equivalent and our net debt stood at approximately US dollar 1.41 billion. As a reminder, the hedging assets of US dollar 17.2 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 hedges we put in place related to our green bonds. During the current quarter, we have used part of this asset related to our first green bond to reduce the leverage on the green bonds at the time of refinancing. Now I pass on to Ranjit to provide some commentary on the guidance.