Azure Power Global Limited Equity Shares

Ladies and gentlemen, good day and welcome to Azure Power's third quarter fiscal 2022 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 touch-tone 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 third quarter of fiscal 2022, ended December 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 Agrawal, CFO. Ranjit will start the call by going through key highlights and business updates. Murali will then follow with an update on our project under construction and an industry update. Someone will then provide an update on the quarter, and then we will wrap up the call with Ranjit providing quarter four financial year 2022 guidance and the initial financial year 2023 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 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, Vikas. Very good morning, everyone. It's almost two years since COVID first broke out globally. Since then, the world has started to move on, and we all have learned ways to coexist in this new normal. The fact that India came out of the third wave recently in less than a month and without much care underlines its progress and the importance of vaccination and COVID-appropriate behavioral changes. ESG has always been at the core of our business success. We recently released our third sustainability report for the period 2020-2021, in which we have highlighted a number of significant steps taken towards improving our ESG standards. We significantly reduced net water consumption across our plants from 122 liters per megawatt hours in 2017-18 to 49 liters per megawatt hours in 2021. And this is further improved to 30 liters per megawatt hours in the current year. This has been possible with active deployment of robotic and dry cleaning technologies at our plants. We continue to aim for net water neutrality in our operations by 2023. We have maintained our Kabul neutral status since 2019 and expect to further create significant positive impact as we look to migrate to 100% electric vehicles by 2030 under our electric vehicle policy. The biggest news for us since the last call has been signing of 2,333 megawatts of PPA taking the total PPA, Power Purchase Agreement, signed to 2933, 2,933 megawatts of the 4,000 megawatt Secchi manufacturing capacity. This 2.9 gigawatt capacity assures sustained base growth for Azure over the next four fiscal years, and the attractive tariffs provide a long runway of profitable, value-added growth for our shareholders. We continue to participate in auctions beyond the four gigawatt capacity and have received 470 megawatt of LOA. These include one plain vanilla wind project and two wind solar hybrid projects. We are developing a thousand megawatt of wind sites across the best wind regions in India to construct projects we have won and prepare for projects we intend to win. As we begin to implement these projects starting next fiscal, we reached out to our shareholders around end of this quarter to raise $250 million via our first rights offering, which is completed post-quarter end. Our capital team has been unstoppable this year. In addition to our first solar green bond refinancing in August with the lowest coupon dollar green bond till date by any renewable company in India, we have refinanced one gigawatt of our operating projects saving more than 200 bits in interest cost. These are long tenor refinancing with interest rates fixed for at least three years on average. This 200 basis point reduction in interest for these 1 gigawatt projects is expected to release approximately $10 million of EBITDA towards free cash flow annually. We continue to see steady improvements on key operational parameters we report. We had 37% more megawatts operating in Q2-Q3 this year than we did at the same time last year. There has been a 27% year-on-year increase in EBITDA from our operating assets and a 58% increase in cash flow to equity from operating assets during the quarter. From an industry perspective, the renewable energy sector in India continues to be high priority for the government. India recently announced green hydrogen and green ammonia policy. which will help boost development of renewable energy capacity. Hydrogen and ammonia are envisaged to be filled with the future, which will help mitigate India's fossil fuel dependency. Industry is also expecting a green hydrogen purchase obligation, which may push green hydrogen production. The budget allocated an additional $2.6 billion towards production-linked incentive program to boost domestic solar manufacturing as we move towards reducing dependency on imports in the solar value chain. After notifying rules for overhauling of transmission system planning and easier access through general network access, government has recently approved second phase of the green energy corridor program, which will aim to add over 10,000 circuit kilometers at a cost of $1.6 billion to support evacuation of 20 gigawatts of RE capacity from seven states. The budget also envisages sovereign green bonds to be launched for funding green infrastructure development. These proactive measures underline the importance with which RE sector is growing in the country and focus of policymakers in ensuring that it delivers the promised growth and objectives for India's goal of self-reliance in energy by 2047, i.e., 100th year of Indian independence. This also presents a reassuring scenario for global investors who are keenly tracking the increasing investments in this sector. As I mentioned last time, we have been strengthening our capabilities in clean energy domain in India and are in the initial phase of deep engagements with value chain players in the green hydrogen space. Further, to address and capitalize and a growing sense of urgency in corporate consumers to walk the decarbonization pathway, Azure has structured a new business unit to drive this energy transition under dedicated and capable leadership. The energy transition business is focused on delivering innovative solutions for power and heat for large energy consumers, including steel, cement, metal, glass, and other companies to accelerate their sustainability goals and targets. These solutions include around-the-clock RTC power, peak and dispatchable power based on storage, green steam, green hydrogen, et cetera. I want to update about a change in our board. As we announced earlier in the day today, Ms. Christine McNamara joins the board effective tomorrow as an independent non-executive director She will take over the chair of the audit committee. An integral part of the board for six years, Mr. Arno Harris indicated his desire to pursue other commitments. We express our gratitude to Arno for his guidance at the board and for the management over these years. I wish him all the best and I personally look forward to stay in touch with him. We welcome Christine to the board. Her extensive experience speaks volumes of her leadership strengths, and we look forward to working with her. I joined Azure almost three years back when we took up the task of consolidating and realigning our strategy towards business growth. I'm very excited to see that we have crossed that bridge in positioning Azure strongly and firmly with a super value-accretive pipeline for not months but years to come, and add significant potential growth with our strides in energy storage, green hydrogen, and energy transition space. 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. This is probably the shortest time between our two reportings, but as you heard Ranjit, we have significant updates from our business. Against all odds and navigating through a brief third wave of COVID in India subsequent to the quarter end, our engineering procurement and construction teams have worked tirelessly to bring us to the finish line on our construction projects. We commissioned 273 megawatts since we last reported and requisite material for balance megawatts are already at site or in transit. This places us well to be in the range of the Megawatt guidance for this fiscal. Our largest project, SECI 600 Megawatt Rajasthan 6, is now fully commissioned, and we expect it to deliver superior performance to our portfolio from the next fiscal onward. The SECI 300 Megawatt Rajasthan 8 is also in line to be fully commissioned shortly, and even though Rajasthan 9 was impacted due to supply-related challenges, we will persevere. While this is about under construction projects, we are very excited about the four gigawatt projects where we now have signed PPAs for almost three gigawatts, and we look forward to bringing these up to shovel-ready stage very quickly. We have provided a scheduled timeline for these projects on page five. We are at an advanced stage of development work, and depending upon timing of material procurement, we would look to bring forward some of these timelines. As Ranjit pointed out, these projects give us ample space to work our way through on implementation and ensure superior returns compared to current market. We have provided some highlights of our ESG updates on page six and seven. Our focus on reducing our water consumption has really paid off in conserving this scarce natural resource. Our net consumption has further reduced to 30 liters per megawatt hour in the current year, and we are well-placed to be net water neutral by 2023. We have completed the majority of our CSR-related projects we undertook this year related to COVID support, education and health, positively impacting over 2,000 beneficiaries. We are extremely proud of the role we play in ensuring a better world for our communities, which are so important for our business. Similarly, safety is one aspect that is paramount to us. The awards that we won for our safety culture, as I reported last time, demonstrate our efforts in this area. We continue to be rated highly on ESG with AA rating by MSCI and low risk categorization by Sustainalytics. I would like to keep it short this time and let Pawan discuss the quarterly results. But as I said earlier, we are very excited about our next phase of growth at Azure. We have traveled in our journey so far with a lot of hard work and learning accumulated by our teams. We continue to aggressively pursue digitalization and automation at our plants and construction sites. With large-scale construction projects now operationalized, the next few years of growth firmly in hand with one of the largest and most valuable creative pipelines in the industry. And with the addition of new businesses in the form of energy transition, storage, and green hydrogen, we truly think Azure is a top and compelling investment story. Handing it over to Pawan. Thank you, Murali. I'm happy to report that we have exceeded upper end of our revenue guidance for this quarter as well. with revenues of $60.2 million or $58.8 million excluding rooftop as against the guidance range of $55.3 to $58 million. As of December 31, 2021, we were operating 2,523 megawatts on a PPA or AC basis, which is 37% higher than what we were operating a year before. Our portfolio was at 7,425 megawatts at the end of the quarter, which includes signed PPAs for 2,933 megawatts and another 1,537 megawatts for which PPAs are awaited. We have updated our run rate matrix with 5,888 megawatts contracted capacity now in the portfolio. That is 2,955 megawatts that will be in operation. and 2,933 MW PPS recently signed. For these contracted capacities, we expect the run rate revenue to be $581.2 million with gross margin in the range of $530 to $560 million and cash flow to equity of around $125 to $200 million. On our rooftop sale update, we have closed transfer of 64 megawatts assets across seven SPVs subsequent to quarter end and are in the process of completing transfer of balance 89 megawatt capacity, which is awaiting requisite approvals and we expect to close by end of March 2022. This sale will enable freeing up of substantial management bandwidth in addition to recycling capital and discipline for future growth. While these rooftop capacities are excluded from discussion on our portfolio, we continue to consolidate rooftop financials till the process is completed. On page 12, after adjusting for stock compensation expense reversal, our EBITDA against 27% increase in the venues from the same quarter in the prior year. Turning to G&A on page 13, our G&A increased by 10% in line with our expectations we communicated earlier. We have made substantial progress on refinancing operating projects this year. Prime example is our largest project, Rajasthan 6. a 600 megawatt shaky project, which will fully refinance in just over a month of commissioning at the lowest interest rate for any project in our portfolio at 7.2% per annum, which will be fixed for the next 42 months. Our overall average interest rate continues to see substantial decline this year, from 9.2% at the last fiscal closing to 8.8% at this quarter end. The average further improves to 8.5% considering the refinancing already completed subsequent to the quarter end. These are tremendous savings on the largest cost item in our P&L. Indicatively, 100 basis points reduction in our interest rate. Call on about $1.5 billion debt would release approximately $15 million annually in the system. This refinancing at lower coupon and fixed rate reflects strong credit profile of SBRCRO. We now have about a gigawatt of our operating budgets outside the bond portfolio, having at least 200 basis points less interest cost than before. And this has not changed for three years on an average. This is a significant actualization that you bring amidst market concerns on interest cost. Our day sales outstanding, DSO, remains consistent and has held up very well even in the last two years of turmoil, thereby demonstrating the inherent strength of HR strategy and portfolio. Our DSO as of December 31, 2021, were 113 days compared to 116 days as of March 31, 2021. These are industry-leading DSO numbers. which we believe will further improve substantially with the commissioning of our SIKI projects and with favorable orders received in Karnataka from the regulator in Jescom and Sescom matters and from the Honorable High Court in the HESCOM matter. We are also hopeful of a favorable judgment very soon in Andhra Pradesh where hearings have now been concluded and order is reserved. On page 40, you can see that our EBITDA from operating assets increased by about 27% year-on-year, and that cash flow equity from operating assets rose about 58%, owing to incremental operating capacity that we added compared to the prior event. Net debt for operating assets were about 1.24 billion and EBITDA for last 12 months were about 205 million, resulting in a net debt EBITDA ratio for operating assets of 6.1 times as of December 31, 2021. This important metric continues to see substantial improvement as megawatts we add stabilize and fully contribute to the EBITDA. Finally, looking at phase 16, providing balanced information, we had about USD 150 million of cash and cash equivalent, and our net debt stood at approximately USD 1.48 billion. We are very excited about the growth path ahead of us with strongest pipeline, strongest counterparty, and strongest credit to work with. We are thankful to our investors and shareholders for continuing to support this journey and and helping us successfully raise to $50 million of equity under the rights of him. We are always looking out for valuable and critical advice, suggestions, and dialogues from our stakeholders. Now I'll pass on to Ranjit to provide some commentary on the guidance.