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Edited Transcript of AZRE.N earnings conference call or presentation 15-Nov-19 1:30pm GMT

Q2 2020 Azure Power Global Ltd Earnings Call

New Delhi Dec 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Azure Power Global Ltd earnings conference call or presentation Friday, November 15, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Nathan Allen Judge

Azure Power Global Limited - Head of IR

* Pawan Kumar Agrawal

Azure Power Global Limited - CFO

* Ranjit Gupta

Azure Power Global Limited - CEO & Board Member

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Conference Call Participants

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* Abel Ortega Jr.;ROTH Capital Partners;Equity Research Associate

* Joseph Amil Osha

JMP Securities LLC, Research Division - MD & Senior Research Analyst

* Maheep Mandloi

Crédit Suisse AG, Research Division - Associate

* Moses Nathaniel Sutton

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello and welcome to the Azure Power Fiscal Second Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I'd now like to turn the conference over to your host today, Nathan Judge. Mr. Judge, please go ahead.

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Nathan Allen Judge, Azure Power Global Limited - Head of IR [2]

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Thank you, and good morning, everyone, and thank you for joining us.

After last night's close, the company issued a press release announcing its fiscal results for the second fiscal quarter of 2020 ended September 30, 2019. 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, President; and Pawan Kumar Agrawal, Chief Financial Officer. Ranjit will start the call by going through the finding of the review over the past several months since they joined and what initial actions have been taken followed by an industry update. Pawan will provide us an update on the quarter, and then we will wrap up the call with Ranjit providing commentary on new disclosures we are providing this quarter that we believe highlights the value of the company. 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 6-K and presentation on our website for a more complete description.

Also contained in our press release and presentation materials are certain non-GAAP measures that we reconcile to the most comparable GAAP measures, and these reconciliations are also available on our website and in the press release and presentation materials.

It is now my pleasure to hand it over to Ranjit.

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [3]

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Thank you, Nathan, and a very good morning, everyone. Murali and I have reviewed the majority of the business in great detail, and what we have found has been very positive on many fronts. We will continually review the business and will take steps to address areas that we find to be deficient.

Last quarter, we provided a framework of our commitment to capital discipline and the important components of the actions we considered important to deliver shareholder value. At our core, we are a shareholder return-focused management, and only when returns are above our cost of capital will we invest in growth projects for future growth.

I want to walk through each of the principles provided and update you on the actions we are taking.

One of the fundamentals that is paramount to value creation is execution of the core business. We must deliver our current pipeline on time and on budget. During the quarter, we delivered 189 megawatts. We have another 90-megawatt facility under construction in Assam. Most of the land for that has been procured and financing has been secured. We expect this plant will be delivered on time by the middle of calendar year 2020.

We also expect that another 27 megawatts of rooftop will be completed over the next 4 months or so. We believe that there is a lot of incremental value from making more with what we have, i.e., sweating the assets. To this end, Murali and I have been doing an extensive review of the company's cost structure and have found meaningful opportunities to enhance returns through efficiency gains and cost optimization. We will be providing more in way of quantification in the future, but wanted to provide some examples now.

We believe there are ways to meaningfully reduce our capital costs going forward and expect our cost per megawatt -- sorry, cost per watt operating on a DC basis will be between $0.40 to $0.45 per watt, excluding safeguard duties, which we recover for projects under construction, which would be up to 15% lower than the capital costs we just reported. For example, we are benchmarking our EPC business against peers to further improve efficiency in our EPC business. And if we find that a third-party is more competitive in any specific project, we will potentially outsource the low-margin nuts and bolts construction process.

In operation and maintenance, we are benchmarking performance against the expected performance at the time of build and finding opportunities to increase output at least 1% to 2% by closely monitoring performance ratio of each plant.

We also see opportunities to increase the generation of power plants through wider deployment of cleaning technology that not only increases output but also reduces operating costs and, very importantly, water consumption. We also believe that we can make more of the scale of our platform by optimizing employees to enhance productivity. We will leverage our scale more in the future with vendors to improve value and service.

During the quarter, we successfully undertook 2 large capital raises, which included our second green bond of USD 350 million as well as USD 75 million private placement with our largest shareholders, CDPQ. We are pleased to note that the completion of the private placement with CDPQ, our contracted portfolio will be fully equity funded. Overall, we believe that this illustrates our access to capital in an environment where capital is at a premium and most of our peers are capital-constrained.

Turning to a very important facet of the value creation proposition. We are intently focused on doing only projects that meet threshold returns and must be above our cost of capital. During our review over the past 3 months, we came upon projects that did not meet these thresholds, and we took actions to exit 350 megawatts. We are reviewing all projects in our portfolio and exploring an exit from 200 to 300 more megawatts, and we will provide more disclosure once we have something to announce.

Looking at expected equity returns for new projects. We believe that our business is a utility and should earn utility-type returns over the long run or mid-teen equity returns. Having said that, the Indian solar industry is currently in an environment where we may be able to achieve the returns above this run rate in the short term. Overall, there is significant demand for new solar capacity given that it is the lowest-cost source of new electricity capacity in the country. In fact, the amount of new capacity auctions in process is so large that the industry does not have enough capacity to fill demand and auctions are not being fully subscribed. As a result, we are now seeing tariffs for new capacity beginning to rise. Recently, SECI has increased the tariff cap to INR 2.78 from INR 2.65 or by about 5%. These higher tariffs could present opportunities that could allow us to earn higher than long-term normalized returns.

In other news, the central government recently implemented a tax cut that we view as a strong long-term positive for business. Importantly, the government reduced the minimum alternate tax rate, which should save us cash taxes.

We continue to make progress in improving payment security through letters Of credit. At this point of time, more than 20% of our operating megawatts have LCs in place, and we expect more LCs will be put in place in the future. The situation in Andhra Pradesh is evolving rapidly. We continue to be pleased by the central government's strong backing of the sanctity of contract. At the moment, we have about $6 million of accounts receivable outstanding with AP, with Andhra Pradesh, that are over 90 days past due, and we expect that following some of the positive court orders that we will begin to see payments from AP sooner than later.

The MNRE, which is the Ministry of New and Renewable Energy, recently proposed a new version of safeguard duties, called basic custom duty, which could potentially become effective in 2021. It is very early to know how this plays out. In any case, we continue to be covered by our contracts for any such eventuality and do not expect there would be any material negative impact on our business if basic custom duties are implemented.

I would now like to turn it over to Pawan to go through the fiscal second quarter results.

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Pawan Kumar Agrawal, Azure Power Global Limited - CFO [4]

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Thank you, Ranjit. We had 1,798 megawatts in operations as of September 30, 2019, which is about 77% more than what we had at the end of fiscal quarter of 2019. We have another 117 megawatts under construction and 900 megawatts that have PPAs and are in development. Combined, this contracted portfolio is 2,815 megawatts. We have another over 500 megawatts of capacity that have Letters of Award, although we are exploring to exit some of these. We expect that we will sign PPAs with some of the capacity with LOAs, although some of these projects could be dropped.

The contracted portfolio of 2,815 megawatts has a revenue portfolio run rate of USD 310 million or about 93% higher than the revenues we realized over the past 12 months.

Including the contracts with LOAs, our portfolio revenue run rate would be USD 358 million.

Focusing on project cost per megawatt operating for the 6 months ended September 30, 2019. Excluding the impact of safeguard duties, which represented about $40,000 per megawatt, our cost per megawatt on a DC basis decreased by 27% to $460,000. As a reminder, we do expect to recover safeguard duties over time either through a reimbursement or through an increased tariff. We continue to work through this, and once we have better clarity, we'll provide more color to the market.

Looking at the profit and loss. Second quarter FY '20 would have been in line with our internal budget after excluding various charges and weather headwinds. Revenues rose 28% year-on-year. However, an extended monsoon resulted in a 3% lesser revenue than if the season had ended when it normally does. Our cost of operations rose 44% year-to-year, this increase reflecting the 330 megawatts of solar park projects that were brought online during the quarter.

Solar park projects cost more to operate than non-solar park projects. However, we expect this negative solar park impact will moderate as all of our future projects under construction or development are non-solar park projects, and the gross margin average will revert back to historical levels.

Our G&A doubled during this quarter. However, after taking out about USD 2.1 million of charges and provisions, that was generally one-time impact, G&A was slightly better than our internal budget.

Second quarter FY '20 EBITDA increased about 15% year-on-year. However, adjusting for the $2 million charges in G&A and weather, EBITDA would have increased in line with the revenue growth. Longer term, we continue to expect that there will be meaningful EBITDA margin improvement over the next couple of years.

Our depreciation and amortization increased 12% year-on-year to USD 9.5 million in the quarter, which reflected the 189 megawatts of projects which were brought online during this quarter. Our D&A has gone up by about $1 million every quarter, and we expect this trend to continue for the third fiscal quarter as well.

Interest expenses increased by 53% to $27.1 million in the quarter, as the gross debt also increased by a similar amount because of more projects coming into the operation. For the third quarter, we would highlight that we expect to record close to USD 5.4 million charge in our interest expenses related to the recent issuance of our second green bond.

On foreign exchange, we are relatively hedged capital cost, which is costing us about USD 1 million per quarter, but reducing our exposure to foreign exchange meaningfully, and this should continue for the remainder of the quarter. We also realized a one-time FX hedging loss of around $2 million related to refinancing in this quarter.

On our balance sheet, cash and equivalents ended the quarter at USD 106 million. Property, plant and equipment increased to about USD 1.3 billion, and net debt was slightly over USD 1 billion.

I would now like to turn it over to Ranjit to provide some of the commentary on new guidance and disclosures that we are providing in this earnings.

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [5]

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We subscribed to the ethos that transparency breeds trust and trust results in value creation. As we had promised in the last earnings call, today, we are rolling out a significant amount of new disclosure and guidance. We believe that this additional information should highlight the value of the company and that the disclosure will make it easier for investors to invest.

On EBITDA and cash flow guidance, we expect the currently operating portfolio of 1,798 megawatts to generate around $200 million of run rate EBITDA and produce run rate funds from operations around $75 million to $85 million once the portfolio is operational for 1 full year.

The net debt required to support this 1.8 gigawatts operational level of capacity is about $1 billion. Looking further out to once our contracted portfolio of 2,815 megawatts is completed in the next 15 months or so, we expect EBITDA to be around $270 million run rate and FFO to range from $105 million to $120 million annually effectively in the financial year 2022. We will have about $1.6 billion of net debt on our balance sheet once the capacity is all operational.

To help you further model the financials of a larger portfolio, a 300-megawatt project should add between $22 million to $28 million of EBITDA, $10 million to $15 million of FFO, and about $125 million to $135 million of debt.

We also are providing NAV/share value of the contracted 2,815-megawatt portfolio under various cost of capital scenarios. We would highlight that this value does not place any value for growth with differentiated platform, nor cost reductions we believe are achievable. We also believe that there is an opportunity to lower our borrowing cost, and every 100 basis points reduction in our cost of debt over the 25-year life of a project equals to about 50% more in NAV per share.

Turning to operating megawatt guidance. We reiterate that we expect to deliver about 1,800 to 1,825 megawatts operating this fiscal year and grow it by about 1,000 megawatts next year and have the contracted capacity of 2,815 megawatts fully operational by the end of next fiscal year as in fiscal year '21. To build these, we will spend another $600 million to $650 million in CapEx with about $150 million to $200 million spent in the second half of the current fiscal and the remainder in fiscal 2021. On liquidity, we wanted to provide better disclosure about funds available to build new megawatts.

Whilst we have $417 million of cash on the balance sheet, about $278 million has been since used to refinance debt related to our recent issuance of a green bond and another $108 million is allocated largely for projects that are completed but where we have yet to make payments and for meeting upcoming debt servicing obligations. This leaves about $30 million of cash for new projects, which was a driver for our recent private placement with CDPQ.

We have also provided new information on plant load factors, on days sales outstanding and credit ratings by counter-parties in our appendix. We continue to make progress on a sustainability report by the end of this fiscal to increase the awareness of our cultural focus on improving the lives of those in our community and the natural advantage we have of providing clean, sustainable energy for generations.

On guidance, we are reiterating our revenue guidance for fiscal year of revenues between INR 12.8 billion and INR 13.4 billion, which will translate to USD 181 million to USD 189 million using the September 30, 2019, exchange rate of INR 70.64 for every U.S. dollar.

With this, we will be happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Philip Shen with Roth Capital Partners. I'm sorry, actually, the question comes from Maheep Mandloi from Credit Suisse.

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Maheep Mandloi, Crédit Suisse AG, Research Division - Associate [2]

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A lot of good information in the slides. Just wanted to briefly touch upon the changes we can expect to the existing projects apart from the changes to the projects under development. What can we expect around the existing projects, if you could just highlight upon that?

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [3]

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Maheep, I didn't actually get your question right. This is Ranjit here. I didn't get the question.

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Maheep Mandloi, Crédit Suisse AG, Research Division - Associate [4]

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Ranjit, I just wanted to understand, like, the levels you have to improve profitability or EBITDA on the existing projects going forward. I think you (technical difficulty) to something like that in your comments?

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [5]

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Right. So on the existing projects, right? So like we mentioned, we believe that we can stretch these projects more. Over the last 3 months, Murali and I have visited our projects in Rajasthan, in Karnataka, in Andhra Pradesh, right, and looked at the operating performance, how we are analyzing the data that is coming out from those projects. And we are starting to monitor our projects on a week-to-week basis, looking at the performance ratios on a week-to-week basis, right? And we have already seen that this focus on a weekly PR, as we call it, the performance ratio, has made the team a little bit more aware of the generation issues that typically if you do a monthly or a quarterly update you don't see.

So apart from that, we are also, like I mentioned, looking at some dry-cleaning options. Typically, what happens is when you do water cleaning and you clean your modules, typically, you are able to clean modules only, let's say, twice a month or something of that sort, whereas if you are able to retrofit dry cleaning on the modules in our projects, then you can clean modules on a daily basis, right?

There are also some repowering opportunities that exist on our projects, which we are currently undergoing, right? I mean we hope that all the repowering that is -- that we have put in place will complete by end of January. So there are several opportunities out there for us to stretch our operating portfolio more, and we are doing that very aggressively.

Apart from the operational part, we are also looking at the financing of each project very closely. Of course, 2 large chunks of our projects are in bonds, but there is still almost 500-odd megawatts that are still funded individually, either through local debt or foreign debt. So at least 2 or 3 of those projects we're looking at refinancing. We are in talks with various lenders so that we can bring down the cost of debt. So we are -- not only in the new projects, but in the operating projects, we are looking at very aggressively how we can improve -- on a project-by-project basis how can we improve the performance of each project.

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Maheep Mandloi, Crédit Suisse AG, Research Division - Associate [6]

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Got it. That's helpful. And just on the mid-teens IRR guidance, could you just clarify whether that's unlevered or levered? And as you exit the 350 megawatts and the additional 200 to 300 megawatts, could you just touch upon the drivers for exiting these projects? And then just looking at the project list, it looks like some of the projects being excluded were not necessarily the lowest PPAs on the market. Just wanted to understand the drivers behind the cancellations.

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [7]

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Right. So Maheep, the cancellations are purely driven by economic reasons, right? And if -- so there are 2 aspects we have to look at. One is, of course, that there should be an out on a project so that we don't get financially hit when we exit the project. And secondly, we have to ensure that we don't get hit reputationally when we exit projects, right? So of course, there is economics and then there is the reputation. So we are -- we have to balance both these things. So balancing those, we are exiting projects where we can. Please note that tariff is not the only driver for returns because a tariff of $0.035 or $0.038 might be great for one state and might be horrible for another state, right? So just because I drop a project which is $0.04 doesn't mean that, that project was giving me better returns than a project that was $0.037, but in a state where the installation is much higher, the project is much larger so I can drive economies of scale, I can get better installation, I can be closer to other projects that I have. So many factors will lead to an equity return to -- on a particular project. So we are taking the decisions purely based on economics.

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Maheep Mandloi, Crédit Suisse AG, Research Division - Associate [8]

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Got it. And if you can touch upon the IRR guidance?

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [9]

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So the IRR is always levered. We are talking about equity IRR, so these are levered IRRs. Yes. And this is a yield to maturity. If you hold these projects to maturity, this is what you will get.

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Maheep Mandloi, Crédit Suisse AG, Research Division - Associate [10]

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Perfect. And just one last from me and then I'll probably jump back into the queue for others. The 15% CapEx reduction you expect going forward, does it include any module price savings and just more from the rest of the balance systems and EPC cost reductions which you spoke about? And -- because just looking at the spot prices, and we are seeing continuous pressures, downward pressures on the module prices, just given the bringing overcapacity out there. So any thoughts on that?

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [11]

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No. 100%, right? I mean whenever -- when you are trying to drive 15% CapEx reduction, a lion's share will come from modules, right? So the reduction in other parts, when you are looking at a CapEx of the project, there are largely 3 or 4 elements, right? One is, of course, the module price in the balance of plants and then the rest of the establishment cost, the financing cost and so on and so forth.

So as far as the 15% is concerned, a large portion of it will come from modules, but certainly on the BOS part and on the financing cost and establishment cost and overheads, et cetera, et cetera, also, we are focusing, even though the returns there on our effort might be slightly lower. But on an efficiency basis, we are looking at reducing CapEx on all items.

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Operator [12]

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The next question comes from Philip Shen with Roth Capital Partners.

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Abel Ortega Jr.;ROTH Capital Partners;Equity Research Associate, [13]

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This is Abel Ortega. I'm on for Phil. Just a quick question from me and then I'll jump back into the queue. How do you expect PLF to trend in fiscal year 2021?

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [14]

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Abel, you're asking about the PLF in fiscal 2021?

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Abel Ortega Jr.;ROTH Capital Partners;Equity Research Associate, [15]

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Yes.

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [16]

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So the PLFs in fiscal 2021 we expect to be better than the 2020 numbers simply because of the fact that a large portion of our upcoming capacity is going to be in Rajasthan, which has the best installation. And also, if you look at the overloading DC to AC of our portfolio, with every new project that we build, the DC by AC ratio also goes up. So we are building projects which are in the higher insulation area going forward. Almost 90% of the capacity between 1,800 to 2,800 is going to come from Rajasthan. And also as you will see that the DC/AC ratio will also continue to increase. So we expect the PLFs to get better.

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Abel Ortega Jr.;ROTH Capital Partners;Equity Research Associate, [17]

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Got it. And jumping onto the previous -- sorry, I have one more question. Jumping onto the previous question, you mentioned reaching cost per operating megawatt of $0.40, and you mentioned that to reach that, it would be because of lower marginal cost. Do you see other leverage you expect to use to reduce this cost? And how much lower do you think this cost can be as the industry matures? Do you see more low-hanging fruit?

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [18]

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So like I've mentioned to Maheep, Abel, the large part of the cost reduction will continue to come from modules. In the next 12 months, we don't see any huge technology advancements that will allow us to reduce CapEx significantly apart from modules. So there are always design improvements and technology improvements on the BOS side, which enable us to get certain advantages. But like I mentioned in response to the last question, the lion's share will come from modules. As far as how low the modules can go, we keep hearing of new technologies which are in development and people talk about the module prices going down really low. But when those technologies will come to force, when they will become commercial and when we will see the benefits of that to our projects is difficult to assess.

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Operator [19]

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And the next question comes from Joseph Osha with JMP Securities.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [20]

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A couple of questions. First, listening to you discuss your IRRs, I'm wondering, have you established a hurdle rate methodology within your company that will affect whether you take on new projects or not? Then I have a couple of follow-ups.

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [21]

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Yes, absolutely, Joe. I mean that's the reason why we have dropped those projects that we spoke about. They did not meet our internal hurdles. And we're looking to drop some more if we can get out of them because they don't meet our internal hurdles. So certainly, there is a benchmark for us. And if we don't hit those benchmarks, we will not participate in future growth going forward.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [22]

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Okay. And obviously, there's a number there, but it strikes me that the philosophy here is more important going back to the initial comments about utility scale returns. I mean over time, is that IRR likely to converge with the IRR realized by any utilities? Or how do you think about how you should manage that number?

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [23]

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So to tell you the truth, the number -- even currently the number that we are looking at is the number that typically the Indian regulator actually allows as a pass-through when they do -- when they used to do MOUs or bilateral power purchase agreements. So we are very close to that number already, right? So mid-teens is what people expect. Unless and until there's a structural change in India which reduces the India risk in the eyes of foreign investors, we don't believe that we will see any contraction in the returns. At the end of the day, in this sector, in the renewable energy sector, majority of the money comes from international investors, and they all have similar return expectations where they factor in the technology that we are using, and also they add a premium for India. And unless and until that premium goes down, we expect to see similar returns.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [24]

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Okay. All right. And can you share with me what the number is at the moment?

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [25]

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It's mid-teens.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [26]

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Okay. And then just on the kind of the other side of the equation, if you will, you have all these assets; some of them have green bond financing; some of them have, I presume, amortizing debt. What's the philosophy over time here. Are you going to seek to -- once you've got a project operating? Are you going to seek to delever it over time? Or are we going to see you tend to go back and back-lever those assets over time to provide cash, assuming that you can identify that new opportunities that meet your hurdle rate?

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [27]

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So I mean, Joe, we are very clear on this. We are not going to take any risks on refinancing projects or take up funds that 10 years down somehow I'll be able to make a bullet payment by raising money from somewhere and repay our debt. Debt is a debt. It has to be repaid. We can be -- as a utility, we cannot be aggressive on this. The reason why we have a non-amort facility is because we are confident that post this non-amort period, there is still a 20-year PPA left for us to do an amort refi. And even in this, if you look at our presentation, you will see that we have committed that year 4 and year 5 of our bond, we are going to not do any distribution internally, right? So the year 4 cash and the year 5 cash will be locked which will be about 15% of the bond issuance of the debt that we have on those projects that will help us in refinancing. We are going to be conservative. We're not going to over-leverage our balance sheet. And as time goes by, on our operating projects, the level of debt will continue to go down.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [28]

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Okay. So that's a critical point that you're committing that you are, over time, going to match the amort schedules on these projects with the PPAs, so that we're not facing any sort of bullets or refi risk down the road. That's the objective.

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [29]

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100%. We are a utility. We are not a start-up.

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Operator [30]

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And the next question comes from Moses Sutton with Barclays.

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Moses Nathaniel Sutton, Barclays Bank PLC, Research Division - Research Analyst [31]

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A quick question on leverage to pick up on that point. The go-forward leverage amount on future projects, could we maybe put like a percent marker on that? So historically, the ongoing leverage rate would be 70% or 75%. I'm wondering if you could give us sort of your thoughts on that even thinking beyond the committed portfolio.

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [32]

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So Moses, absolutely, that is the right number. Typically, we refinance our projects 75% to 25%, 75% debt and 25% equity. If there is a good DSCR cover, if there is a good debt service coverage ratio, on some of our projects, when we have seen operating history of those projects, sometimes we are able to take it up to 80-20. But I have not seen, at least in the time that we have spent in India, sustainable projects that are -- that have been levered over the -- more than 80-20. And at construction, 75-25, once you have a stable established cash flows, maybe you can take it up to 80-20. Keeping in mind that you want to be able to amortize such that at the end of 80% of your PPA life, so if your PPA life is 25 years, then approximately at the 20-year marker, you should be completely debt-free, so that in case there is any hiccup along the way, you still have the 20% run rate if you need to do anything with that project, right? So the target has to be 75-25, maybe go up to 80-20 once the cash flows have been established and try and see that at 80% of your PPA life, your project becomes debt-free.

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Moses Nathaniel Sutton, Barclays Bank PLC, Research Division - Research Analyst [33]

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Got it. That's helpful. And then thinking of debt to EBITDA, I guess I'm going to look at the metrics here. From the full committed portfolio, it would be an implied like 5.4x using midpoint. So putting that in other way, are you -- would you say you're comfortable with that level? Obviously, some of it would come down naturally a little bit over time as projects split out cash flow. So around a 5 to 5.5x range, is that sort of a fair long-term target for debt to EBITDA?

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [34]

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Absolutely. And like you rightly pointed out, as we continue to grow and as project debt keeps getting amortized and paid, this number will continue to come down. On the new projects, when we build new, we may not target 5.5. And as the percentage of new build in our portfolio will reduce -- once we are 4,000 or 5,000 or 7,000 or 10,000 megawatts, as the percentage of new build reduces, we will see a continual decrease in this ratio.

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Moses Nathaniel Sutton, Barclays Bank PLC, Research Division - Research Analyst [35]

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Got it. That's helpful. And then shifting to capacity factors, you gave historical numbers. Any update on thoughts on go-forward project capacity factors? So just to put numbers here, in the past, management disclosed high 20%, given the amount of DC overloading. I'm just -- what are your thoughts there? And how do you think of the blended capacity factor or even the go-forward numbers for these projects?

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [36]

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So that is the right number still, the high 20s. And of course, like I mentioned earlier when we were talking about tariffs that in some states, you will see lower insulation, where you will see these numbers come down. And in some states like Rajasthan, you will see the high-20 numbers, including the overloading. Over the last few years, we have seen that the overloading has sort of matured to between 1.35 to 1.5. We have not seen a significant uptick in this number. So assuming that the overloading stays in this range of 1.35 to 1.5, and if you are building projects in Rajasthan, you would tend to see a high 20 number.

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Moses Nathaniel Sutton, Barclays Bank PLC, Research Division - Research Analyst [37]

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Great. Great. And then last one from me. NAV per share at the varying cost of debt, that was very helpful sort of metric you've put -- you have in the presentation. Just thinking, going forward, any updated thoughts on selling an entire asset to sort of validate -- give a validating market valuation there?

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Pawan Kumar Agrawal, Azure Power Global Limited - CFO [38]

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You're talking about selling portfolio?

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Moses Nathaniel Sutton, Barclays Bank PLC, Research Division - Research Analyst [39]

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Yes, sort of thinking of selling a single asset to give you a marker.

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Pawan Kumar Agrawal, Azure Power Global Limited - CFO [40]

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So of course, we do have in our mind how do we recycle our capital at best. And we have thought of a couple of options. But as you know, the initial focus is more on trying to optimize the CapEx, trying to set our assets better, trying to get the capital structure in place. And even if you look at selling any of our asset, the process is going to take its own time. And the current environment wherein there are lot of projects available, this is not something which is readily available market. And as of now, we are not really looking at selling off our assets very, very actively. Having said that, as a management team, we are extremely clear that anything and everything that can create more value, we will be looking at those. And the capital recycling is one of the options -- one of the buckets in which we are -- we have 2, 3 options in mind, but to be very honest, it is a little premature. Maybe as you move along in the next couple of quarters, we should be in a better position to prioritize that and probably come back to you.

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [41]

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And Moses, to also give further color to this, we will continually look to rebalance our portfolio, right? So as the business moves forward, as the risks change for the portfolio, we will certainly look at seeing what makes sense for us. For example, today, it's SECI and NTPC that are the flavor of the month. Today, people are doing very large projects, 200-megawatt, 250-megawatt portfolios. We have one project that is almost 600 megawatts. So on the other hand, we have projects in our portfolio that are 5 megawatts and 10 megawatts and 15 megawatts, some of them have state offtakers. So we will continually look to see how to rebalance the portfolio and make it more homogenous, right? So like Pawan mentioned, over the next few quarters, we will take some decisions on this and move forward to ensure that we are deploying our time, our bandwidth in the most optimal and efficient fashion.

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Operator [42]

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Thank you, and this concludes both the question-and-answer session as well as the call itself. Thank you so much for attending today's presentation. You now disconnect your lines.

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Ranjit Gupta, Azure Power Global Limited - CEO & Board Member [43]

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Thank you.