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Edited Transcript of WABAG.NSE earnings conference call or presentation 13-Aug-19 11:00am GMT

Q1 2020 Va Tech Wabag Ltd Earnings Call

Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Va Tech Wabag Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rajiv Devaraj Mittal

VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director

* Sandeep Kumar Agrawal

VA Tech Wabag Limited - CFO

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Conference Call Participants

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* Anoop Nambiath

* Dhananjay Mishra

* Kaushik Poddar

* Rishab Bothra

Sharekhan Limited, Research Division - Equity Research Analyst

* Vipin Goel

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and a very warm welcome to the VA Tech WABAG Limited Q1 FY '20 Earnings Conference Call.

(Operator Instructions)

Please note that this conference is being recorded. I now hand the conference over to Mr. Rajiv Mittal, Managing Director and Group CEO of VA Tech WABAG Limited. Thank you. And over to you, sir.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [2]

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Thank you. Dear friends, good afternoon. I welcome you all to this earnings call post announcement of Q1 FY '20 Results of VA Tech WABAG Limited. Mr. Sandeep Agrawal, our Group Chief Financial Officer, joins me in this earnings call.

I would like to start the call by mentioning about our 2 large project wins in this quarter. I'm highly pleased to inform you that WABAG secured INR 1,477 crores worth order from state mission of Clean Ganga, Uttar Pradesh for operation, maintenance and management of sewage treatment plant and networks infrastructure in the cities of Agra and Ghaziabad for a period of 10 years. This is the first initiative across the country on a One City - One Operator model. WABAG will manage, operate and maintain 22 sewage treatment plants, 22 pumping station and underground network of approximately 3,000 kilometers with the objective of providing round-the-clock uninterrupted operations. WABAG shall also improve, rehabilitate and upgrade facilities related to the system, structures and equipment associated with the sewage treatment plant and underground collection systems. Such projects help us with steady, predictable revenues and cash flows. This project will improve our backlog on [O&M] contracts and also help us move forward with our target of 20% revenue contribution from O&M business.

I would like to recall that WABAG already carries rich experience of managing over 120 sewage treatment plants, pumping stations with a sewage load of almost 4,000 million liters per day and a population of 16 million people in the city of Istanbul, Turkey. I am confident that we will succeed in this new initiative in India and a model that can be repeated across the country.

Another breakthrough in this quarter was WABAG securing the largest order under Namami Gange worth INR 1,187 crores from the Bihar Urban Infrastructure Development Corporation, BUIDCO, to develop sewage treatment plant of 150 million liters capacity along the sewage network of about 450 kilometers in Digha and Kankarbagh zone of Patna, one of the most popular city on the bank of River Gange. This project comprises of design, build and operate DBO scope worth of INR 940 crores and Hybrid Annuities of worth around INR 247 crores.

WABAG will also be responsible for operation and maintenance of the STPs and the sewage infrastructure for a period of 15 years. The project will be implemented by Goodco with the financial assistance from World Bank under the prestigious Namami Gange scheme. It has been a great start to the year from the perspective of order intake, and we have already secured 50% of the order intake guidance for the year, and our order backlog is also at an all-time high of over INR 11,700 crores, including the framework contracts.

Moving over to the updates on project integration. As of end of the quarter, the net receivables from GENCO were about INR 410 crores and from Tecpro at about INR 69 crores, totaling to INR 479 crores. Receivables from Tecpro of INR 69 crores is being pursued by us legally through NCLAT and out of INR 410 crores from GENCO, we are currently pursuing the receivables from TSGENCO of about INR 140 crores as a part of the final settlement, which we are expecting to be approved in the forthcoming Board meeting of TSGENCO followed by collection. We expect that TSGENCO's final settlement will reduce GENCO's receivables to below INR 300 crores in the next few months. Receivables from APGENCO becomes due for payment progressively on achieving the various contractual milestones. We expect that PGTR, performance guaranteed trial runs, of the project will be completed within this fiscal year, post-PGTR and hand over half of the retention money will be payable.

Balance retention money will become due after 1 year of (inaudible) repeated, we continue to receive payments against our running bills on this project. In our Dangote project in Nigeria, engineering is at final stage and equipment ordering is nearly complete. Clients have issued dispatch clearances for key equipments and dispatches have started. 97% of engineering approval for construction have also been released, 65% of physical progress is complete.

In our Polgahawela project in Sri Lanka, the design phase is now complete, and majority of designs have been approved by the client, the project is now in advanced construction stage. The transmission and distribution pipeline -- pipelaying is in full swing with multiple contractors at site. The treatment plant and intake structure are progressing well, along with the 7 reservoirs. Manufacturing of major equipments is on schedule and major deliveries are expected to be completed by end of Q3 FY '20. The project commissioning is expected to commence in the third quarter of 2020.

The construction activities at Koyambedu tertiary treatment plant are on the verge of completion and decommissioning activities have started. Most of the key structures are ready and finishing works are underway, 95% of transmission pipelaying is completed, commissioning has been kicked off and the commissioning team is under mobilization. First phase, the pretreatment out of the pipe basis is commissioned. The second phase, the clinical dosing area; and the third phase, the ultrafiltration treatment are under advanced stage of commissioning.

Moving over to the MEA projects, Middle East and Africa projects, MARAFIQ project in Saudi Arabia, which is a shining example of intercluster collaboration, has picked up good pace. Purchase orders for all lead -- long lead items have been placed, 50% of engineering is complete, 30% model review is also over, local site mobilization has been completed and the exploration work on the major structures have started.

The other 2 key projects in the MEA region, South Doha in Qatar and Zarat in Tunisia, engineering activities and local site mobilization is progressing well. The projects are now in early stages of equipment ordering and expected to pick up pace through this year. I now request Sandeep to take you through the financial highlights of the quarter. Over to you, Sandeep.

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Sandeep Kumar Agrawal, VA Tech Wabag Limited - CFO [3]

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Thank you, Mr. Mittal. Friends, just here is an opportunity to look at the results of the presentation as circulated and uploaded on our website. Let me take you through the key financial highlights for the quarter ended June 30, 2019. Our revenue from operations for the quarter ended 30th June 2019, stood at INR 324 crores on stand-alone basis and INR 457 crores on consolidated basis. The consolidated revenue is lower as compared to previous year. As stated during our previous earnings calls, since our large key overseas projects like AMAS and RAPID have reached completion, and the new orders are currently under the start-up phase, the revenue from new orders are expected to pick up pace through this fiscal. Now Europe also, performance was little subdued during the quarter. The EBITDA for the quarter stood at INR 46 crores on stand-alone basis and INR 38 crores on the consolidated basis, profit after tax for the quarter is about INR 19.9 crores on a stand-alone basis and INR 2.6 crores on consolidated basis. With this, we now open the floor for question and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question is from the line of Sachit (inaudible) from Smart Equity.

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Unidentified Analyst, [2]

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Sir, actually I'm a new investor to your company, and I would really appreciate if you could give some background about the Tecpro issue as well as the Andhra issue. And I mean, if you can maybe start with that, and then I can bring forward with my next question.

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Sandeep Kumar Agrawal, VA Tech Wabag Limited - CFO [3]

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I think I will be a little brief because I think most of the investors know about it, and if you really to get into it, please get in touch with us and we will take you through in detail. Basically, some 14 projects, it was in 2010. There are 3 companies who bid this project together. It was Tecpro, Gammon India and VA Tech WABAG. Each one had their scope and WABAG had the water treatment plant, Gammon had the cooling tower and chimney and Tecpro had the coal and ash. Both the other partners, Gammon and Tecpro, had the financial difficulties, and they could not (inaudible), so we were asked to take the lead and just take their position to continue the project because we were all together in consulting. We did that. We completed both the projects, one was commissioned and COD was obtained almost 2 years back, the other one is more than 1 year back, both the power plants are running. Even the peripheral work of the first one is over. We have finished all the reconciliation, and the money due is agreed by the client, they have to just take it to the Board and create it. The APGENCO one, CODs are obtained, empirical works are still to be done. Generally, it would take about 6 months, post that we can do a trial run, and after that, the retention money, which is 20%, I think this contracts for 10%, will be due on handing over, 10% will be after the tax liability period.

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Unidentified Analyst, [4]

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Okay. So out of this INR 410-odd crores and the Tecpro INR 70-odd crores, what kind of credit risk do you expect?

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Sandeep Kumar Agrawal, VA Tech Wabag Limited - CFO [5]

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Generally, as per our policy, if you're a new investor, we have our own bond-driven policy, also depending on the aging of the receivable, we make a provision, which we have started providing. Yes, we a (inaudible). As for index, 1 0 9, where we do a credit risk, and we make a provision. So as for that, if you see our balance sheet, the provisions have already been made.

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Unidentified Analyst, [6]

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On both of these accounts, you're saying?

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Sandeep Kumar Agrawal, VA Tech Wabag Limited - CFO [7]

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Yes.

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Unidentified Analyst, [8]

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Okay. And the last question, sir, I noticed that the amount from AP was INR 415 crores, and now it is down to INR 410 crores. So is that (inaudible) playing or is that the recovery of INR 5, INR 6 crores, as you said, in this quarter?

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Sandeep Kumar Agrawal, VA Tech Wabag Limited - CFO [9]

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The (inaudible) playing, the INR 5 crores, we have to make an extra provision.

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Operator [10]

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The next question is from the line of (inaudible) from SKS Capital.

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Unidentified Analyst, [11]

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I wanted to ask for the working capital deal that you're following right now, and what are you expecting in the future? That will be reduced or not?

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Sandeep Kumar Agrawal, VA Tech Wabag Limited - CFO [12]

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So just working capital focus is there in the company. In fact, in the last -- 31st March, we were about 130 days. And this year, we plan to reduce it may be closer to 100 or maybe below 100 days.

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Unidentified Analyst, [13]

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Okay. So that's the focus. And so we see, obviously, in the forthcoming projects that you are taking, the finance cost is increasing, so it is apparently the cost increasing more in the coming future? And so the number of (inaudible) projects are (inaudible)?

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Sandeep Kumar Agrawal, VA Tech Wabag Limited - CFO [14]

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No. Not really. In fact, there are a couple of advances we are supposed to get during this quarter. So once these advances are in place, so we don't see any further increase in your finance cost as a whole. Of course, some DB charges will be there during the quarter on account of new projects, but interest costs should be coming down.

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Unidentified Analyst, [15]

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Yes, so because your World Bank is also there so the effective cost which would be there would be lower than the Indian counterpart versus the World Bank credit that's you are (inaudible), right?

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Sandeep Kumar Agrawal, VA Tech Wabag Limited - CFO [16]

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No. So the World Bank projects, what you are talking about, probably you are talking about LNCD project.

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Unidentified Analyst, [17]

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Yes.

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Sandeep Kumar Agrawal, VA Tech Wabag Limited - CFO [18]

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What will be there is the separate STBs. And since it is a HAM model, so we will see that, how to structure that. And we don't get these assets in our balance sheet. And I wanted to see (inaudible).

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Operator [19]

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The next question is from the line of [Prashant Hazariwala], an individual investor.

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Unidentified Participant, [20]

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So this is a continuation of the same question as (inaudible) told. This kind of thing, like, I think this will be serious by next quarter or something like that. I used to hear since now 2 years, and I have not seen any improvement in it. Another thing is that (inaudible) from last 2 quarters, we are saying that projects are on the completion, so you have (inaudible), so when projects around completion, we should receive our money, right? So with all receivables, I mean the costs would go down right? But we are not seeing. So what is your (inaudible)? This is the story since last 2 years, and I am (inaudible) I am invested since last 5, 6 years, so now, I'll get the answers.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [21]

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Yes, I think, [Prashant], the advance which you are talking about, okay? And...

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Unidentified Participant, [22]

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No, I'm not talking about advances, I'm not talking about advances, I'm talking about interest cost reduction, right? I am referring this same since last 2 years, right? That every quarter-on-quarter is increasing. Right? So you guys are not confident what you are doing or what is the (inaudible)?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [23]

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(inaudible) just to, would you listen to this? Hey! What has happened is you must be watching also, one -- have you heard real term, working capital increase has happened from 100 days to 130 days, number one. So there is maybe a 30% increase has happened in the debt. The other things, the major things which has happened as per the recent RBI's guideline, we have to have 60% of our debt at double CDL. So this is what has increased the borrowing cost to almost double, we were at around 5%. Today, we are around 9%, 9.5%. So business increased the interest costs substantially. Number two, because of this all-time high order intake, there is a higher amount of bank guarantees we have to give. So this is also increasing the financial cost. This was your first question. This is what is the reason of you seeing the higher financial costs.

The second one you talked about -- when we are closing the projects. Yes, we are closing the project, that means the physical work is getting over and retention moneys will come after defects liability period, which is generally 1 year, in some cases, it is 2 years. So we will have about 10% of our money which will come 1 year after completion of projects. So you don't see the revenue towards the end as we are closing and the retention money will flow 1 year after we hand over the project.

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Unidentified Participant, [24]

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Let me (inaudible) just one thing, that you have (inaudible) we have INR 100 crores of (inaudible), right?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [25]

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A little louder, [Prashant].

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Operator [26]

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[Prashant], you are not audible.

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Unidentified Participant, [27]

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(inaudible) So if you have INR 100 crores of order right, so we would then, INR 10 crores (inaudible) retention money, right? Hello?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [28]

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Yes, we are listening, Prashant.

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Unidentified Participant, [29]

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Hello? (inaudible) a bit?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [30]

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Yes, it's okay, [Prashant].

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Unidentified Participant, [31]

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And so each year INR 100 crores of order, right? So we would have INR 10 crores (inaudible) retention money, right? And these INR 10 crores will be (inaudible) for at least 1 year or 2 years, right, that is what we see?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [32]

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That's right.

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Unidentified Participant, [33]

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And the early EBITDA margin of INR 9 crores, 9% or 10% around that. So we are not like 15%, 20% kind of EBITDA margin, you are only 9% of EBITDA margin, right? So all of the profit -- all of those operating profit is (inaudible) retention money, then how did (inaudible)?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [34]

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Just sir, initially, that's how we say, we are also getting new contracts. The new contracts are also bringing advances which are interest free. So today, when we win our contracts, after we sign the contract, we set up the company, we start execution, we give the advanced bank guarantees and also collect a 10% advance. So business is a just a cycle. You start with a 10% advance, you have a retention, so all the time you try to balance it. If you don't have a major imbalance like APGENCO, generally, this company has not borrowed money and has also not raised capital for last 20 years and has grown from a start-up to INR 3,000 plus company. This is all done because that's how the cash flow was managed.

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Unidentified Participant, [35]

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All right. So on the other side, when is the stand-alone business (inaudible) on INR 324 crores. Consolidated (inaudible) INR 456 crores, so you are -- and on the EBITDA, you have INR 46 crores on stand-alone, that the consolidated (inaudible) is (inaudible) crores, so it's a reduction of INR 9 crores absolute, your consolidated (inaudible) on standalone. I'd say while this is, this is happening at future quarter time in maybe because of interest in (inaudible)?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [36]

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After -- let me explain to you, because when we close the project, the EBITDA is directly proportionate to the revenues. As you can see, the revenues have come down by almost 30% and we have given the reasons very clearly in our presentation. These are some 2, 3 large projects which have closed and the new projects are just kicking off because when you take international projects, you have to set up a local subsidiary or a branch office. And these are geographies which are in Middle East and Africa, it takes about 4 to 5 months to set up an operative company or a branch office to start the work. Now it has all started. We are in the engineering phase, you are seeing a traction. And you will see in the next few quarters, this all top lines will start moving up because the kind of order backlog we have, we have just no choice but to execute and convert that into revenues. And this will happen. But always, there is a starting point because we are an engineering company. It takes about 6 to 8 months to do engineering before we can start construction or supply the equipments.

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Unidentified Participant, [37]

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All right. So -- so what kind of sequential money do you have, currently, right now altogether?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [38]

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It must be around INR 300 crores, INR 350 crores.

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Unidentified Participant, [39]

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And what is the -- what is your borrowing?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [40]

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The net borrowing will be close to INR 400 crores.

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Unidentified Participant, [41]

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Net borrowing. And total borrowing?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [42]

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About INR 550 crores, INR 600 crores, because we have a (inaudible) fixed deposits of about INR 150 crores, INR 200 crores.

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Unidentified Participant, [43]

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So, yes, (inaudible) INR 500 crores and INR 600 crores, which basically reach their interest (inaudible).

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [44]

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No. No, please again, don't mistake. Finance cost is not interest alone. As I've said, it is also paying for the bank guarantees, which we give performance bank guarantees, retention bank guarantees, advance bank guarantees and letters of credit, and also interest.

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Unidentified Participant, [45]

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Okay. So what is interest cost in this quarter?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [46]

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The interest cost in this quarter is about INR 10 crores, INR 11 crores in India and about INR 14-odd crores -- INR 14 crores, INR 14.5 crores in consult.

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Operator [47]

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The next question is from the line of Vipin Goel from ICICI.

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Vipin Goel, [48]

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So most of the questions have been covered, but then just a bit more on the working capital basis. If you can give the breakup of receivable inventory and table days?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [49]

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I think today we don't have a balance sheet, but Sandeep can try and give you the numbers. Although can you come back and we'll get the numbers and give it to you?

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Vipin Goel, [50]

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Yes, sure. That's okay. And just one more thing on the new orders that we have received. So there'll be some working capital requirement associated with these, so what's the advance as linked to these new orders?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [51]

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Generally, most of them have an interest-free advance of 10%.

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Vipin Goel, [52]

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Okay. But this won't be --

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [53]

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We have seen in our past experience, we are able to manage the project without a huge working capital, if everything goes on time, and that's how we have grown the company. So we will not see a huge working capital required for these projects.

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Operator [54]

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The next question is from the line of Kaushik Poddar from KB Markets.

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Kaushik Poddar, [55]

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Yes. Are you looking at an uptick in margin because commodity costs are a little benign now? I mean iron and steel, for example, is low, so are you looking at a higher operating profit margin for this year?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [56]

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We -- our endeavor is always to improve our margins compared to what we take our order to a better execution, better engineering. So naturally, we do that. But there's always issues which are related to some delays in payment or delay in readiness of the customer which keeps away that. But generally, yes, not only because of commodity because for us steel is a very small portion of our total cost because we mostly go for engineered products where we don't see steel prices being that much affected, but overall, yes, that is the aim for every project manager, to improve the margin on his project.

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Kaushik Poddar, [57]

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Ideally, what is your margin? When you bid for a project, what is the margin you bid at?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [58]

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These are all -- I think, in a public call, we don't talk about that. But if you want, we can take it at one-to-one and then we can talk about it.

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Kaushik Poddar, [59]

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Okay. And are you defocusing on international orders? I mean, this time, whatever you have got is only Indian orders? I mean, is there any kind of change in focus towards India? Or this is just a -- this is something -- I don't know, I mean.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [60]

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No. Not at all. We have never been a particular geography focus because we are very lucky to have a multi-geography presence. We look at the opportunities wherever we see the best opportunities, which fits into our cash flow -- risk and payments are secured, we go for it, like last year, we had a substantial order intake from Middle East and Africa. This quarter, it so happened that Namami Gange is moving fast and the government also wants to push this scheme. So there were 2 orders, and we got two large orders which has covered 50% of our committed guidance for order intake. But not at all we have reduced our focus on international geographies. Yes, in terms of Europe, as we have said in many calls before, yes, we are looking at reducing our (inaudible) and concentrating more and more on the emerging markets.

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Kaushik Poddar, [61]

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Okay. And at the start of this call, you had talked about 20% income from operational and maintenance being your ideal. So will that finally result in a change in margin over the company?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [62]

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Yes. Sure. Change in margins because on one hand is the annuity business. It has better visibility, it has a higher margin, it has a lower risk. So yes, that is the reason we want to increase 1, and a percentage of our total revenue to 20%. Presently, we are about 13%, 14%. This year, we may go to 17%, 18%, and next year, we may reach our 20% number.

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Operator [63]

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Our next question is from the line of Dhananjay Mishra from Sunidhi Securities.

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Dhananjay Mishra, [64]

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Sir, could you explain the revenue model for both the project, (inaudible) Patna project, I mean how does (inaudible) book? How long it will take to book the entire revenue of both these projects? And secondly, model how would the equity and debt contribution?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [65]

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Are you talking about the 2 projects which we have won in this first quarter?

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Dhananjay Mishra, [66]

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Right.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [67]

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See, the first project is basically a (inaudible) project. These are monthly revenues, which get booked over a period of 10 years. It's a (inaudible) INR 1,500 crores project approximately, to INR 150 crores per year will be the revenue booked in these 2 projects, which is Agra and Ghaziabad, which is purely an operation maintenance.

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Dhananjay Mishra, [68]

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Have you done any working capital for this project? Let me start with that.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [69]

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Because plant is giving a 10% advance on the first year's revenues. So I think that is starting.

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Dhananjay Mishra, [70]

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So at the end of -- end of every year, you will not have any working capital issue, and you will get to your money INR 150 crores-something and you will make your profit? Right?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [71]

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But always at the start, we need to invest. For that, client is giving 10% advance payment.

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Dhananjay Mishra, [72]

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Okay. 10% of annual risk annuity or 10% of entire thing?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [73]

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No, 10% of annual revenue.

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Dhananjay Mishra, [74]

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Okay. So INR 15 crores, you will be getting as your

annuity.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [75]

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That's right. And now if you look at the other one which is our Patna, Namami Gange project, as I told you, it is about INR 1,200 crores, out of which INR 1,000 crores is pure EPC and O&M, which is DBO, and about INR 200-odd crores is HAM. Now DBO is also approximately 3 years, so you can take this INR 1,000 crores will be spread over a 3-year period. And the HAM part is, 40% will be invested by the central government, and 60% has to be invested by the private company, of which 25% is equity and 75% is debt and we are tying up the debt and equity. We are also trying to bring in an equity partner so that we remain absolutely minimum to what is required in terms of equity and take the total responsibility of EPC and O&M.

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Dhananjay Mishra, [76]

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So with this INR 1,000 crores, what is the breakup between EPC and O&M?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [77]

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Mostly, I think, about INR 800 crores, INR 850 crores is EPC and about INR 150 crores is O&M. And on the HAM, INR 200 crores will be executed in 2 years. HAM is INR 200 crores and the DBO is INR 1,000 crores, in fact, (inaudible).

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Dhananjay Mishra, [78]

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I just wanted to know the (inaudible) period of entire project. I mean, EPC and O&M will get over in 3 years, you are saying?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [79]

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EPC will get over in 3 years. After that, we have 15 years of O&M.

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Dhananjay Mishra, [80]

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Okay. And then -- okay. And that O&M (inaudible) are your (inaudible) due for next 15 years, annuity.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [81]

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Yes.

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Dhananjay Mishra, [82]

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And this HAM you are investing, what kind of earning you'll get for this?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [83]

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This is normal EPC and O&M margins we will get, plus, whatever is our investment, there will be some. SPV will have a certain return on investment as an income based on our equity investment, that also we will have as an income, as a return on our investment.

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Dhananjay Mishra, [84]

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And when we are expecting to start these projects? I mean, a major contributor will start this year or next year?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [85]

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No, we will start this year but the major contribution will come next year. But it will get kick-started this year.

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Operator [86]

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(Operator Instructions)

The next question is from the line of Rishab Bothra from Sharekhan.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [87]

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(inaudible)

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [88]

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Can you be a little louder? We can hardly hear you.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [89]

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(inaudible) and your guidance unchanged, so what will be the key (inaudible) that you will be contributing in the next few quarters? Because our run rate in Q1 is quite low.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [90]

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As we have said before, we want to reiterate, we had lowered revenue because old projects had completed and new projects got started. Now if you go to our presentation, Page #18, you will see all these projects we talked about: BUIDCO, Agra, Ghaziabad, (inaudible), KMDA, Namami Gange, Zarat, desalination plant, Doha, FIFA 2020, MRPL. All these projects -- Dangote, that's another NMCG of Kanpur, Polgahawela in Sri Lanka, these will be major revenue drivers for this year and next year.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [91]

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Okay. Right. And sir, on the second question, you mentioned that increase of international orders, it takes time to open up subsidies and do the groundwork, but to my understanding, we are present all across the world and would be having subsidies there. So why is it taking longer than expected time, as you mentioned, to that contract or to execute projects?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [92]

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I think you are very right and good observation. But suppose -- like we have a subsidiary from our Austria organization in Tunisia, this project is booked from India for competitive reasons. India doesn't have a subsidiary or a branch office in Tunisia. [To do] the project in Tunisia from India, we will have to open up at least a subsidiary or a branch office.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [93]

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But that will increase the cost further if we have a subsidiary in that geography. I think in one of the (inaudible) you mentioned, we are moving towards cluster-ready operations. So why that (inaudible) opportunity and do the work?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [94]

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Absolutely. It's not a question of cluster, not taking the responsibility and doing the work, work will be still done from the MEA cluster, but we need to have a legal entity for tax reasons, to book the revenues, book the profit, pay the taxes, be compliant in the local taxation, all that has to be happening.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [95]

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Okay. And lastly, sir, on the margin front, any guidance on margin?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [96]

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Normally, traditionally, for the last 10 years of listing, we have never given guidance on margin, but I think you all have seen it, I think we have a margin. And I think, as we said before, we expect to improve the margins with more international contracts, with more contracts where technology is coming in, plus a bigger share of operation and maintenance.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [97]

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Sir, on the taxation side, this quarter, almost whatever we have always moved toward those in the tax department. (inaudible).

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [98]

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(inaudible) Good observation, you're talking about consult.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [99]

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Yes, consult. Whatever we need to look at, needs to look at concern because your investors are doing (inaudible) on the company level (inaudible)

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [100]

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I could tell you to just look at stand-alone, our tax at stand-alone was INR 73. All that has moved into tax, but somebody said, some of the losses in the overseas, (inaudible) cannot set off again the tax in India, each country, each legal entity has to pay their tax. If somewhere you have a loss and somewhere you have profit, where you have a profit, you still pay tax. That's how the tax number looks high to you.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [101]

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Okay. And lastly, sir, you mentioned the margin expansion. But do we cover this LC, BG, all those projects under -- when we complete our project stand-alone margin? Because I think that comes below the operating level margin. So I'm sure that (inaudible) monthly, doing a backwards calculation of how much LC, BG charging would be there, and finance cost would be there. So just lastly, if you could touch upon those. And net margin looks pretty low. EBITDA margin also on (inaudible).

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [102]

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I think you pay EBITDA of 6 -- 14.3%. Even if you add the finance cost into that, still it's a double-digit margin. I think that's still a good margin.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [103]

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Sir, we can't look at only stand-alone because we, as investor and analyst, we look at the company at overall concern level. (inaudible)

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [104]

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(inaudible) Wait, you have to wait a few quarters. As we have told you, it is not a quarter-on-quarter business which we are running. It's a project business, we all know, it's a lumpy business as we have seen after last year, where there were some order delays. And this year, we are full with orders. Our order book is almost INR 12,000 crores. So you have to look at that way. So we can't look at them quarter-on-quarter as a company.

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Rishab Bothra, Sharekhan Limited, Research Division - Equity Research Analyst [105]

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Absolutely, sir, I was speaking of annual basis only, only not quarterly basis, but somehow the numbers have not improved over the last 2, 3 years if I correctly read that.

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Operator [106]

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The next question is from the line of Sachit (inaudible) from Smart Equity.

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Unidentified Analyst, [107]

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Sir, do you have any cash flow guidance for this year? Because, I guess, that could also be something which should be on the investors' line.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [108]

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As Sandeep told you earlier, from a cash flow perspective, we are trying to generate cash, and that's how we are trying to reduce our working capital days from 130 to 100 or lower than 100. So that's how we are seeing that this year, we will generate cash.

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Unidentified Analyst, [109]

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Okay. Let me just reframe that. Considering that your order book has increased a lot and given that you will be executing lot in the future, I expect that your working capital will, again, go on the higher side, so what kind of, let's say, increase in borrowings do you expect for this year?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [110]

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In fact, we are working on a plan to reduce the borrowings. If we are able to collect our achievables and also the advances on the new projects we have booked, the plan is to reduce the borrowing.

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Unidentified Analyst, [111]

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Okay. So you don't really expect an increase?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [112]

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No. Not at all.

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Unidentified Analyst, [113]

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Okay. That's really good to know. And second, sir, we haven't heard a lot about how Uttar Pradesh is going strict on projects. So I mean, do you expect any other unforeseen risk to the amount that you need to collect?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [114]

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Today, our project is almost 90%, 92% complete. We are in the finishing touches, as we said before, and we are going to do our performance guaranteed on trials and collect our milestone payments. And once we hand over the plant we will collect our first retention money. That is what we are working on.

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Unidentified Analyst, [115]

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So you haven't really had any intimation from the AP (inaudible), any other AP Authority board, which sort of excepting any kind of risks, though, let me just word it like that.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [116]

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No. Not at all. As we said before, the moment we have any risk, as for the quality and as for interest, we immediately make a provision. And if you see our balance sheet, we already have a lot of provisions for various projects where we see a risk, though it has not precipitated, but the increase of provision.

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Unidentified Analyst, [117]

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Okay. And do you have any specific provision for Tecpro receivables?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [118]

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This is as the total we have, and that's what we said. As for the ETA policy, we take a judgment and make a provision.

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Unidentified Analyst, [119]

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Okay. So I mean, if you don't mind disclosing how will we see the Tecpro receivable?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [120]

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As overall, you can see we have almost about INR 140 crores of provisions. If you see our balance sheet and annual report as of March 2019, we have made a provision of almost INR 140 crores.

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Operator [121]

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(Operator Instructions)

The next question is from the line of [Pratik] (inaudible) an individual investor.

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Unidentified Participant, [122]

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Yes, can you give me the breakup between (inaudible) orders versus private orders? And how do you expect this ratio to go going forward? And the second question is, what is the difference between -- in commercial terms between these 2 bank orders, and do you have better margins in private orders or these receivable days? (inaudible)

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [123]

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Yes, I think for us, it's the way we look at it, we look at municipal business and industrial business, international versus India business because for us, we don't take exposure, even municipal or government bodies, unless it is funded by a multilateral agency. If you see our order backlog, they will fall under 3 categories, either they are international orders. Second, they are funded by the central government, or third, they are funded by the multilateral agencies. Most 95% of our order backlog will fall under this category. So we don't take general exposure of the state government on local municipal corporations, number one. Number two, if you say about private, when you go to private, there's urgency to execute, the speed is there and we only work with large private sectors and payments are also generally on time, but okay, there are strict documentation and strict quality and compliance with the contract. And we told both the government, there is mostly delays in order, which affects the payment cycles also, but they are more flexible in accommodating some requests. So that's the difference between a government or a private client.

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Operator [124]

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(Operator Instructions)

The next question is from Anoop Nam from Equity Intelligence.

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Anoop Nambiath, [125]

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So my question was regarding this INR 400 crores (inaudible) operation that we have made in the AGM. So any immediate plans to raise capital because (inaudible) say, a big order book pending in our books.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [126]

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Yes, I think right on now, you are very correct. Last 2 years, we have been wanting to do that. We have taken various approvals, but somehow the markets, they are not conducive. And we have not gone ahead 2 years back with equity raise and 1 year back because -- we have seen them all, we're not in good shape. This year, we have gone more or less for an enablement resolution for either equity or debt raise, and we are also looking at if we can get any preferential interest in it. So when we can raise some capital and again, have cash in our balance sheet, which we used to have a few years back. And just to keep that as a security. But from the order backlog we have, I think most of the projects will be able to support themselves without a huge demand of working capital, and that's how we will try to reduce our working capital. But present, definitely, with the kind of borrowings we have, it will be great favor if we can raise some equity, which will reduce our borrowing and reduce our interest cost.

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Anoop Nambiath, [127]

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My second question was more of a bookkeeping question. This -- dues from customers with construction contract works that we have in the balance sheet, is it something, a part of our working capital or something, is it something like a receivable? Can you just (inaudible)?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [128]

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To add further the tenders for construction contracts, there is always a milestone base building which you can do. But whenever the standard prescribes, whenever you do some of this physical work, and there is a progress on that, you take a POC and that is not built as per year on track to the customer and you take it the work in progress earlier and now you take a percentage on completion method of revenue. And that's what the revenue is, which is not built, but it is still taken in the revenue. It is not a receivable.

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Anoop Nambiath, [129]

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Okay. So this is not something which we can securitize or anything, this will be something like future revenue, which we would be receiving?

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [130]

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Correct. That means the work is completed but not as per the milestones agreed with the customers.

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Operator [131]

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As there are no further questions, I now hand the conference over to the management for their closing comments.

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Rajiv Devaraj Mittal, VA Tech Wabag Limited - Group CEO, MD, Head of SBU -MBG & Director [132]

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Thank you, everyone, for your participation in our Q1 FY '20 earnings call. We have uploaded the analyst presentation in our website. In case you have any further queries, you may get in touch with Stellar IR Advisors, our investor relation adviser based in Mumbai, or feel free to get in touch with us directly. Thank you.

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Operator [133]

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Thank you. Ladies and gentlemen, on behalf of VA Tech WABAG Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.