Capacit'e Infraprojects Limited (CAPACITE) Earnings Call Transcript

Congratulations on great numbers. Sir, just wanted to understand the projects which have been removed from the order book. So you mentioned about one project being of Oberoi and one another project. So is this the practice which we followed even before? Because earlier, we have seen some projects like of maybe a Kalpataru project you removing from the order book because of the delay in payment. But in Oberoi Mall, is it like from the client side we have been asked to renegotiate? Or if you could just elaborate on that.

No, no, no. What I mentioned is, as a practice, slow-moving orders are removed from the order book and whatever order book is intimated, as a prudent practice, it's 100% executable order book, number one. The Oberoi Mall has undergone design changes, and therefore will have to be costed again. And therefore it -- while we have a firm order, letter of award from the client, it is normal. If a design change happens, there will be negotiation. And maybe because of the 2,034 DSR, even the area may increase, and therefore the value may go up. Now that's -- therefore, this is very different to the Kalpataru issue. Kalpataru issue, make no mistake, was on the payment front. Oberoi is one of the best clients on our portfolios, and their debtor levels are nothing more than 40 days. So that's not the case. The second order which has been removed is on Neelkanth Phase 2. Phase 1, we have completed. Phase 2, the client has not been able to start as yet. And therefore, obviously, a 4-year-old pricing will not work. And therefore that also has been removed from the order book. The third order removed is Kalpataru MIG. The client paid some money. After that, has not been able to pay. And therefore, we have removed that from the order book. So these are the 3 orders, substantial, which we have removed. Out of this, we expect Oberoi Mall to be back in the order book, let's say, by first quarter of next fiscal. That's our understanding. But ultimately, it will depend on the timelines for design completion and other statutory approvals obtained by our client.

Sure, sir. And also wanted to understand if -- like you mentioned, one Kalpataru project was removed. So typically, when we do this, do we end up losing some money or we just -- how do we take it forward from there if some project is removed and work is stopped?

So there are 2 aspects to that. Number one, it is -- whenever we go to a client with such a situation, it's very clear that at least we, at our end, don't see a proper target available or a proper schedule available with a particular client. And therefore, there are 2 points to it. One is the certified debtors or creditors. Debtors, that is the RA bills. And the second part is the unamortized site establishment. The site establishment is either purchased, in most cases, like Arihant, which was removed last quarter, is purchased by the client, all right? So the question of losing money does not arise. Yes, of course, if you are -- debtors are there and they are beyond 360 days, then as per the stringent ECL guidelines, as I've already mentioned, we have close to INR 50 crores, and there are other additional provisions of about INR 10 crores. So we have an overall provisioning, including ECL of INR 60 crores. That's a substantial amount. But 9.9 out of 10 times, we haven't lost money because of a foreclosure of a project from our end.

Sure, sir. Just last question. You mentioned about revenue guidance. If I understood correctly, it was around INR 2,000 crores for FY '22. Is that correct?

Absolutely.

Yes. So the CIDCO would be around, whatever run rate you mentioned, if we just put it at an annual level, it would be around INR 800 crore, INR 900 crore, around that.

Could be INR 750 crores, could be INR 900 crores. But then there are other projects. Generally, the target given out contains a substantial safety factor because the private sector order book, 100% operational, is close to INR 3,800 crores. Now that has to be completed over the next 2.5 years. So there is a substantial revenue which has to come from the private sector also. So it's basically distributed. I will tell my colleague to forward a mail of the expected revenue project-wise for the next fiscal.

The next question is from the line of Parikshit Kandpal from HDFC Securities.

Congratulations on a very significant recovery during this quarter. My first question was, last couple of quarters we've been touching upon the payment issues and the suppliers asking us -- not giving any credit to us now. An LC also has been taken away, has been converted to fund-based limits. So now any further challenges? I mean, do you think these challenges are easing now and funding availability has improved? Or do you still believe that challenges will continue and it's the clients now who will basically have to reduce the debtor days and payers -- shorten the debtor cycle overall to match up with the creditors side?

It's something very dynamic. You are aware that the earlier credit terms, 190 days, at times 120 days, that supply chain, as per my understanding, is as good as over. So either you will open an advanced LC for commodities or big ticket-size projects and the other terms will come down to maybe 30, 40 days. This is here to stay because it's not in my -- our hand as a general contractor. The problem is that there are a lot of payments held up of the small vendors and other places. So obviously, they are not in a position to give extended credit. Now this challenge, more or less, has been overcome. Second point, you mentioned about the nonavailability of LC because it is converted into CC. INR 50 crores plus of LC -- CC has been reinstated into LC. And that is why you see a total reduction of INR 40 crores in the gross debt when you -- as compared to quarter 2, am I right?

Yes.

So therefore, LC available at the moment to INR 50 crores. And I believe another INR 30 crores, INR 35 crores or thereabouts should be further available by March -- pro rata January, February and March, and we should be at pre-COVID levels by June quarter. So your gross debt level, more or less, give/take INR 5 crores, INR 10 crores, INR 15 crores, will be at the March levels or maybe the December levels by June quarter. December '19 levels by June of '21.

Sir, talk about the conversion. So basically, that is rewinding -- winding off now and going back to the LC limits, right?

Absolutely. Because the point is no one wants to pay us 8% or 9% interest when today LCs are available between 5.5% and 6.5% per annum. Secondly, it's on a debt. The cash flows are robust. Even if you see in the current quarter, out of INR 303 crore -- as against INR 303 crore, INR 272 crore would have -- has been received. And as actually opposite to the popular belief that only CIDCO, we did not execute the project of Wadhwa Wise City in quarter 3 because the payments came in January. And therefore, we lost the revenue of INR 25 crores. Oberoi OGC has just started this quarter the non-tower area. The tower area also [ is sure ] to start this quarter. And the average revenue from that project was INR 10 crores. So basically, INR 65 crores was lost. About INR 60 crores was lost on these 2 projects, alright? So this is what I'm trying to say. At the end of the day, any debtor or any client not paying within the contractual period, we are left with no choice, and rightfully so, to stop the work. We cannot work in the pre-COVID fashion where we'll wait for 60 days, 70 days. It is far too risky. And we cannot disturb the improving working capital cycle by 1 or 2 such clients who choose not to pay. And therefore, any client not paying within a stipulated time, work will be suspended.

Sir, my second question was on your outlook on ordering -- booking about INR 3,000 crores next year and INR 2,000 crores of revenue next year. So when I look at the real estate sector and the clients which you have are almost like marquee clients across the order book, and when you're seeing uptake and when you're talking about gaining market share of the organized players and the kind of credentials you have in high-rise and super high-rise, it's unmatchable or unbeatable versus the peers. And also, government ordering is expected to be very robust. You yourself have given the kind of bid pipeline there. And when you correlate it with INR 3,000 crores of inflow which was largely coming from the private sector in historical years and now government is going to add on top of it, so doesn't this guidance look very conservative? Or are you want to be conservative? Are there constraints on working capital side or funding side is getting [ limits ]? That's why you're not chasing growth right now? So if you can just throw some color on that. Even on your revenue, INR 2,000 crores -- sir, I counted, it's about INR 900 crores coming from the CIDCO project. You have very strong clientele in the private side. The order book quality is now improved significantly. So -- and used to average about INR 1,500 crores to INR 1,800 crores on a yearly basis from private. That leaves only about INR 1,000 crores to be done from private. And I would also assume there are some other hospital orders that you have, which will contribute besides CIDCO. So maybe government order itself will be about INR 1,200 crores, INR 1,300 crores in this INR 2000 crores. So are we looking at only INR 700 crores kind of execution from private next year?

Parikshit, you should leave HDFC and come to me. You know more than I know. See, I've mentioned, as a policy, what -- you have an order book of, let's say, of INR 9,000-odd crores, if you are even doing INR 2,000 crores, INR 2,200 crores, INR 2,300 crores, it is not the question of limits. The bank guarantees have already been issued for these projects, am I right? So the point is that you take something for -- there could be excess monsoon. And thereafter -- earlier we never used to give guidance. This 1 year, I am giving a guidance, but then we have to take into account the monsoon, et cetera. Now the bid pipeline and the visibility from private sector no doubt has increased manifold. But let us wait for the quarter 4 to get completed when we will have clear visibility from our existing clients. And as you know that our projects inherently have the potential to add to the order book in the same location, isn't it? So we will revisit this at the end of quarter 4. I think if 35% growth leaving 2021 is low, then you should come and join Capacit'e.

Sir, last question was on the net working capital. You have said it's about INR 581 crores as of this quarter. So do you believe that -- and obviously, it's on a very low base, so the number, if I convert to days, looks very elevated. But do you think this is the peak NWC day in terms of [indiscernible] value? And with CIDCO ramp-up happening, it should reduce significantly? Because CIDCO has really -- I mean, after advances come in, the entire advances come in, I mean it should be near 0 net working capital kind of a project?

Yes. So what happens generally is that you are ramping up operations. It was INR 300 crores on a WIP basis. There is an addition of only INR 32 crores for this quarter, which means earlier WIP got built, and on net basis, only INR 32 crore increase was there. I do believe there will be a slight reduction in quarter 4, there will be a reasonable reduction in quarter 1 and there'll be a substantial reduction in quarter 2 for the WIP to go to the pre-COVID levels or even better. But I am sure over the next financial year, we will be at the pre-IL&FS day or better situation than that. I think that's the best we can do. But you cannot take away 6, 7 months of COVID which we have had to encounter. We have got the people back. The revenue has gone up. Are we happy? No, we can do better. And that's what we intend to do in quarter 4 and then move towards the growth path. Now simply put, once you are at INR 400 crore, INR 450 crore level, it is automatic that your financial assets will reduce, converting into higher revenue.

The next question is from the line of Kirthi Jain from Sundaram Mutual Fund.

Sir, first of all, congratulation for good recovery. Sir, my question is with regard to our cost structure and margins. Sir, given that we have dynamically moderated our cost structure and adopted according to our revenue and achieved good margins, sir, can we expect this 16, 17 percentage of ex of other income margin, which we have achieved on a subscale operation, to sustain when the operations come on a full-scale, like, whatever, INR 500 crore scale, which we achieve on a normal basis? Can we expect this margin, sir?

Yes.

Okay. With finance costs under control, sir, like as a percentage, they will come down, that expectation we should build in, sir?

Yes. It is because the order book is higher, government order book is there. Now fortunately, the guarantees in government have come down, both central government and state government. We believe that next financial year, we will have some positive impact in the guarantee so that -- if you see that at the end of December 2020, our bank guarantee within consortium has come down to INR 516 crore, which is a substantial reduction. And the project-specific limits of CIDCO, MCGM, those limits are separate. So I do believe that the finance costs will be similar to the current year over the next year, maybe slightly more if we receive INR 3,000 crores of order book. And therefore, on a double revenue, let us say, when we did about INR 1,450 crores in the last financial year -- that means FY '20 -- and if we have a 35%, 40% jump over that, we believe, as a percentage, the finance cost will be much lower. Secondly, you are aware that our fixed deposits with the bank are substantially high. And over a year, we have about INR 16 crores of interest income accruing from that. So INR 16 crores to INR 17 crores. So if you actually net that out, our interest outgo is very, very within control. And most importantly, except MCGM, none of the advances are interest-bearing, whether public or private. This is a very important thing to note.

Sir, in the last quarter, you had guided [indiscernible], in Q1 FY '23, we will try to be debt-free, gross debt-free. That was the thing. So we stand by our guidance, sir?

Absolutely. We write down all these things in bold when we talk to you. So we don't forget it.

Good, sir. Good to see, sir. Congratulations once again, sir.

Thank you. Thank you very much.

[Operator Instructions] The next question is from the line of Bharanidhar Vijayakumar from Spark Capital.

Sir, just one -- a little more granular clarity on the bid pipeline that you mentioned, which is INR 40,000 crores. So is this...

Sorry -- yes, please go on.

Yes, yes. So you mentioned about 25% to 30% of it coming from health care. Can you give the remaining -- of this pipeline, what would be the broad classification? Would it be your go-to real estate? How much of it is that? How much of it is affordable? How much of it is data centers, if any?

I suggest that I tell my colleague to send you the bid pipeline breakup. It's very difficult, because the point is in government you have convention centers, you have stadiums, all these are F&B, factories and buildings. We classify under the same segment. You have a lot of PMAY projects. Now in Mumbai, PMAY has gone up to 32-story. So the point is that we'll classify in government as high-rise. So we still have to -- as I said, INR 40,340 crores is the bid pipeline, which Capacit'e is eyeing. Actual bid pipeline from, let's say, L&T perspective, could be INR 2 lakh crore or INR 3 lakh crore. So -- but being a small company, being a 1 segment company, what we will be targeting is this bid pipeline plus the private sector INR 25,000 crores, which we can visualize. So giving further breakups, detailed breakups, we will split it into 2 for your convenience. About 25% is what we see from health care; another 20% from institutional, retail commercial; and rest from residential, including affordable.

Got it. Got it. So this pipeline, we would target to bid in the near term or is it more like the next 1 year pipeline?

No, no, no. When we talk about a bid pipeline of INR 40,000 crores, these are the tenders which are on board to be tendered maybe over the next 6 months. This gets updated on a daily basis.

[Operator Instructions] The next question is from the line of Siddharth Rajpurohit from JHP Securities.

Sir, in the government project, the guidelines from the government was to reduce the retention money. So what would be the retention asked in the current bid pipeline, sir?

Nearly INR 40 crores has been reduced in retention from 31st March '20 levels. Going forward -- it is different with different states. In Maharashtra, MCGM has come out that earlier, the performance guarantee used to be between 3% to 5% and retention 5%. Now they have restricted performance plus retention, that is security deposit overall, to be 5%. In CIDCO, the overall security deposit was 5% -- 2.5% bank guarantee we had given earlier, 2.5% to be built up through RA bills -- which we believe will come down to 3% since the state bid guidelines have come. Similar for MHADA, similar for MMRDA. So this is the case as far as the bank guarantees are concerned. In the private sector, we have already, I just mentioned in my previous answer, such a robust order book, let's say, backlog, INR 3,800 crores; overall, let's say, INR 6,000 crores, and only an outstanding of INR 500 crores. It is self-explanatory on how the bank guarantees are being managed. So going forward, we believe that the bank guarantee requirements will reduce. The government is committed to construction infra. And if the government reduces and private sector does not reduce, people will go up towards the government sector. That's normal, isn't it? And most importantly, the government sector has become sensitive to timely release of payments. That's a very positive thing which we -- why we? Even L&T during in the COVID period collected INR 55,000 crore. So the point is across the industry -- again, you cannot generalize through clients. I'm talking about good quality clients. Good quality clients [ release payments ] on time. And therefore, I do believe that the guarantee requirements will come down going forward, which will help us to book more orders in the coming financial years.

Any long-term target, sir, means, of the share between public and private that you would like to give?

Sorry, please repeat.

Sir, any target in terms of the share in the order book between public and private you would like to give?

Very difficult to say. Before CIDCO came, we were 80% private. Questions were asked then. Now we are 60-40. Tomorrow, we get another private sector of INR 500 crores. It is dynamic, sir. But generally, we would like to have a healthy mix of public and private. We are, obviously, with God's grace and whatever our operations have done, one of the key contractors in the private sector. So Capacit'e has a very good brand recall as far as the private sector is concerned. In government, we would like to target INR 400 crore, INR 350 crore-plus projects because the competition below INR 250 crore, INR 200 crore is something which we wouldn't like to focus on. So that's how the order mix will unfold. I cannot give any guidance as on today.

[Operator Instructions] The next question is from the line of Sagar Parekh from One Up Financial Consultants.

Sir firstly, I wanted to...

Sorry to interrupt you, Mr. Parekh, your voice is not clear. May I request you to come on the handset mode?

Hello?

Yes, please.

Yes. So firstly, wanted to check on the tax rate for FY '22. What should we consider?

The full rate is 25%, and we are following the same. However, in the Q1, there has been a loss, which we believe at the whole year we will not be having any loss. So the tax rate won't change.

Okay. And just on -- so since we are growing our revenue base by 50% for next year, the working capital in absolute terms should increase by at least INR 200 crores, right? So just wanted to check whether the absolute gross debt level should remain where it is or you think there should be some movement upwards in gross debt levels?

Gross debt will come down.

Okay. Is that because of this CC to LC conversion?

Absolutely, because that was a COVID issue. So...

Right. But in spite of the INR 2,000 crore top line, the gross debt will come down?

No, no. We had a similar debt level of INR 260 crores when we were doing INR 1,500 crores revenue also. Point is you cannot compare FY '20, especially for contractors like us who are restricted to urban areas, because the intensity for the first 6 months in the urban areas was far higher than the rural areas, all right? So don't think it is going to be 100% increase. You have to compare with FY '20.

Understood. Understood. So FY '20 levels also 35% growth, still the debt levels will be maintained at FY '20 levels on a gross...

We have been doing that for the last 7 years.

The next question is from the line of V.P. Rajesh from Banyan Capital.

Congratulations on a good set of numbers and the guidance. My question is on the labor side. Are you seeing -- if you can give some color -- are you seeing them in plenty or that's becoming an issue as you see more and more construction projects coming up?

I understand you mentioned the labor, workmen?

Right. Yes.

No, no, that issue is behind us. So that's over. You will have holidays coming up in March, you will have holidays -- Chhath Puja coming in April. That's a yearly phenomenon. But other than that, it's going to remain -- so what happened in June, July or May end and June, I don't think, and everyone prays, it never repeats.

The next question is from the line of Kirthi Jain from Sundaram Mutual Fund.

Sir, my question is on the MHADA project, like, how has been the progress and what we are likely to do in terms of our share of revenues? Something you can...

Sir, as I told you earlier also by March 31, we will be clear on the consolidation process, whether the revenue can be added. We believe that revenue can be added. That's one part of it. But my team will clarify to you through a separate mail on this subject in a couple of weeks.

No, no, not revenue addition, sir, like in terms of project progress, like, we were adding or not, but our share of profit will anyway come, no, sir?

Absolutely. Yes. So I just mentioned that the MHADA project -- in an endeavor, the state, to complete the project in 4.5 years from the 0 date, the main challenge that the department and the client or the state government was facing was open space. To counter this, a government resolution from the housing ministry has come that BDD Worli, the project with us under question, under reference, the height of the rehab buildings, which was earlier 22-story will be increased to 44-story. And the double basements under all the rehab towers will be removed and that will be converted into multilevel car park, which means that we believe with the new GR in place, our proposal has been sent. We expect approval from the Empowered Committee before 25th of this month. And thereafter, in 2 months, the project should start because we already have free land available. Therefore, I do believe that the revenue built-up should start from the next financial year. And thereafter, for the next 4 years, you will see INR 1,000 crores per year.

We'll take one last question from the line of Nidhi from Alpha Alternatives.

Congratulations on a good set of numbers. Sir, I wanted to know about the depreciation policy of the company going forward. And since we have projected a revenue of upwards of INR 2,000 crores in the next fiscal, so how the depreciation is going to play against that?

Depreciation comprises of 2 parts: one is the core assets and the other part is the site establishment. The site establishment, at the moment, unamortized portion over the INR 9,300 crore order book is INR 190 crores to INR 200 crores. That will be written off on pro rata as 85% of the projects are completed. It will be very difficult for me to give you a complete sense of understanding. So if you can send your e-mail ID to SGA, our IR team, we will be able to give those details. As far as the core block depreciation is concerned, it's close to about INR 10 crores to INR 12 crores every quarter, which means about INR 50 crores over a year. I don't think that will change. That will continue for the next financial year. More or less, my guess is that the site establishment depreciation part will be close to INR 40 crore or thereabouts. So you can safely conclude that the next financial year, the depreciation would be INR 90 crores, INR 95 crores. Now please do not hold me on this. I'm giving you just numbers with my experience. I think my team will be able to put it in a more accurate manner and send it to you.

As there no further questions from the participants, I now hand the conference over to Mr. Rachit Kamath for closing comments.

Thank you, all participants, for participating in this Q3 and 9 Months FY '21 Conference Call. And we also thank the management for having given us this opportunity. Thanks a lot, Rohit, sir, and the team. Any last comments, sir?

Thank you, everyone, for joining on the call. We hope that we have been able to answer your queries. For any additional information, we request you to get in touch with SGA, our Investor Relations advisers. Thank you and look forward to seeing you -- hearing you in the next quarter. Thank you.

Thank you. On behalf of Anand Rathi Share and Stockbrokers, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.