Sterling and Wilson Renewable Energy Ltd

NSE:SWSOLAR

Earnings Call Transcript 2020-Q4

[Vishal Jain]

Good morning. I welcome you all to Q4 and FY '20 earnings call. Along with me, I have Mr. Khurshed Daruvala, our Chairman; Mr. Bikesh Ogra, Director and Global CEO; Mr. Bahadur Dastoor, CFO; and Strategic Growth Advisors, our Investor Relation advisers. We'll start the call with the operational highlights for the quarter and the year by Bikesh, followed by financial highlights by Bahadur and an address by Khurshed Daruvala, post which we will open the floor for Q&A. Thank you, and over to you, Bikesh.

[Bikesh Ogra]

Thanks, Vishal, and a warm welcome to all the participants on this call. I wish you a very healthy and safe time in this tough and challenging environment. As all of you know, COVID-19 was declared a global pandemic by the WHO. I'd like to give you a perspective of the impact for the solar industry and more specifically, our operations. I'd also like to add some color on the market -- on our market reach and the order book position.Our project execution was impacted due to COVID-19 since the beginning of Q4 FY '20 as the supply chain and execution was disrupted due to lockdown imposed by various governments. However, lately, we have been witnessing gradual resumption of supply chain and execution activities in various countries from middle of May 2020. This has enabled us, therefore, to accelerate the project activities at majority of our international projects, which includes countries like Australia, Chile and Oman, purely in compliance with the direct deals issued by the respective governments.The project execution in other countries like India, Kenya and Jordan were also impacted due to logistical challenges in movement of material and manpower. However, of late, we are seeing gradual resumption of works in these countries as well.We have promptly circulated force majeure conditions to our customers on account of this pandemic. So we do not expect any liquidity damages, claims related to the delay of the project execution. As explained earlier, with the partial easing of lockdown and restriction in various countries, we have resumed the project execution in those location and currently focusing on ramping up the execution pace.Having said that, our most important objective and priority in the current situation is the safety and well-being of our employees, vendors, partners and other stakeholders in the value chain. We have taken additional health and safety measures in line with the guidelines to mitigate the COVID impact.Also, as a derisking strategy, we are developing alternate sources of equipment procurement, which will reduce our dependence on any one country. Even during these difficult times, I think we should be moving on to the market with an order book position. Even during these difficult times, we have been able to secure orders from geographies like Australia, U.S. and Latin America, which strengthens our presence in these markets. As you must have read recently, we have signed an EPC contract of approximately [ AUD 525 million ], which equates to around INR 2,600-odd crores as well as the operational maintenance contract of around INR 415 crores, which is our largest order in Australia till date. This order cements our leadership position in Australia.Also in the middle of the nationwide lockdown in India, we were able to sign 2 projects to leading global EPCs, adding up to a value of INR 620 crores. I'm immensely happy and very pleased now that just yesterday night, we have signed our largest contract in U.S. worth around [ $19 ] million. That is around INR 750 crores. With this order, we are well on course to be a relevant EPC player in that market as well.Our order flow for the financial year '20 has been INR 9,048 crores, which is an increase of around 15% year-on-year over FY '19. The key orders received during FY '20 are as follows: Australia, 2 projects worth INR 1,725 crores; Middle East, 2 projects, around INR 4,600-odd crores; India aggregated projects totaling to around INR 2,174 crores; and Americas, which includes the Latin America as well, 2 projects around INR 784 crores.With an order inflow of 2,900 megawatt in the financial year FY '20, our portfolio has reached 10,134 megawatts as compared to 6,732 megawatts as of March 2019. Our UOV as of 31st March 2020 is INR 11,396 crores compared to INR 7,740 crores as of 31st March 2019, which is a very robust growth of around 47%.We have further added around 1 gigawatt order in our portfolio, approximating to around INR 3,650 crores, including the order received from the U.S. yesterday, which is the order received post March 31, 2020, which is approximately 40% of the overall previous year order inflows in terms of the order value. We have a visibility on the project pipeline and expect to bid for 22 gigawatts in FY '21, which are well diversified across the geographies, including India. This would be approximately 30% growth in comparison to 17 gigawatt we bid in FY '20. Of the 22-gigawatt project, the results have been announced of 4 gigawatts until now, and the conversion rate has been far better than our expectations. We expect to bid 4 gigawatt in quarter 2, 7 gigawatt in quarter 3 and balance 7 gigawatt in the last quarter of the year. This, of course, is assuming that reemergence of COVID-19 situation does not defer or delay the bidding of these projects.Our O&M business also continues to see strong traction as well. As of March 31, 2020, our contracted O&M portfolio is 7,468 megawatts, which grew by around 34% as compared to 5,558 megawatts as of March 31, 2019. O&M portfolio has grown to 7,797 as of date. Of this 7,797 megawatts of the O&M portfolio, 47% are third-party O&M contracts. That are the projects, which are not constructed by us, but we are providing O&M services for these projects. During the year, we have recorded an O&M revenue of INR 183 crores as compared to INR 94 crores, which is a growth of around 96% from last year. O&M is a very high-margin business with EBIT margin in upwards of 35% to 40%. And we continue to focus on increasing our O&M portfolio as it provides a very steady cash flow with better profitability.We are confident of relatively better performance in FY '21 in comparison to the previous year, provided COVID-19 situation does not reescalate in our target markets. We are consistently evaluating the situation and should be able to give more informed guidance during the earnings call for the first quarter FY '21.I'd also like to highlight that the fact that even during the current testing times, there have been no changes in the commitment by the Government of India, global IPPs towards the investment in renewable energy projects and specifically, the solar power projects. Their commitments are driven by long-term sustainability of the solar power plant as the cost of producing each unit of electricity over the project life, that is the levelized cost of energy, has become competitive in comparison to coal and gas power projects. We continue to see the strong inclination of these IPPs and utilities towards the solar power projects.Lastly, I would like to thank all of you, who have reposed your faith in us, and we assure you that we would work very diligently towards creating further value for all the stakeholders.With this, I'll ask Mr. Bahadur, our CFO, to take you through the consolidated financial highlights. And thank you very much.Bahadur, over to you.

[Bahadur Dastoor, Chief Financial Officer]

Thank you, Bikesh, and good morning. I will take you through the consolidated financials for the year ended March 31, 2020. Before we run through the financials, I would like to reiterate that being an EPC company, the revenue, order inflows and gross margins could be lumpy due to geographical mix and stage of execution of the project in any particular quarter. Hence, comparison with corresponding previous period will not be a true reflection of the performance either for a quarter or for the full year.Revenue for FY '20 has been at INR 5,575 crores, slightly in excess of the guidance given in the earnings call for the third quarter. The region-wise revenue breakup is as follows: India and Americas contributed about 27% each; followed by the MENA region, which contributed 24%; Southeast Asia with 11%; Australia with 6%; and balance 5% by Africa.As Bikesh mentioned earlier, our O&M revenue has almost doubled to INR 184 crores in FY '20 compared to INR 94 crores in FY '19 with a gross margin upwards of 40% for FY '20 as compared to 36% in FY '19. The contribution of the O&M business to total revenue grew to 3.3% in FY '20 as compared to 1.1% in FY '19.At the company level, the gross margins have improved to 12.8% in FY '20 as compared to 11.9% in FY '19, which is a result of execution of projects in emerging geographies having higher margin and efficient procurement strategies. Overheads increase was due to setting up of offices and strengthening management teams in new geographies, which have now started providing the results. The EBITDA margin for FY '20 came in at 6.9% and the PAT margin at 5.5%.Coming to the balance sheet. The net worth of the company grew from INR 837 crores as at March '19 to INR 1,072 crores as at March '20. The increase is attributable to the profit for the year as offset by dividend distribution of INR 96 crores and corresponding dividend distribution tax of INR 20 crores. Borrowings reduced from INR 2,228 crore as on March 31, 2019, to INR 1,224 crores as at March 31, 2020.The net debt position as at March '20 was INR 725 crores, giving a net debt-to-equity ratio of 0.67x. The receivable balance, however, has gone up from INR 1,900 crores at March '19 to INR 2,030 crores as at March '20. Receivables include balances of INR 454 crores that are due for more than 1 year, including INR 92.5 crores due from a customer, which is under NCLT. The company has already made an expected credit loss provision of INR 21 crores on this count.Of the balance INR 382 crores, the company has already recovered INR 117 crore post 31st March '20 and is on course for recovery of the balance. Due to reduction in turnover in FY '20 as compared to FY '19, the receivable days have gone up from 82 days to 128 days. However, the net core working capital days have gone up only marginally from 8 days to 12 days.The promoters have facilitated repayment of the intercorporate deposits of INR 1,500 crores since the date of listing. And the ICDs outstanding as on March 31, '20, now stand at INR 1,217 crores, which comprise of principal INR 1,105 crores and interest of INR 112 crores. The promoters will be making a statement on the balance outstanding as part of this earnings call.We have cash and cash equivalents of INR 499 crores as at March '20, which is comparable to the INR 454 crores as at March '19. During the year, we have generated strong cash flow from operations of INR 338 crores as compared to negative cash flow of INR 720 crores in FY '19. Cash flows from operations, coupled with recovery of ICDs, have gone towards reducing the borrowings of the company.Considering the present COVID situation and the need to conserve capital, the Board did not think it feasible to declare any further dividend for the previous year FY '20. We would also like to inform you that the company is diligently focusing on a cost optimization program in the current year.With this, I will ask Mr. Daruvala, our Chairman, to address us. Thank you very much.

[Khurshed Yazdi Daruvala, Chairman]

Thanks, Bahadur. Good morning, ladies and gentlemen. As you are aware that I'm both Chairman of the Board as well as promoter of our company, along with Shapoorji Pallonji. I would like to give you an update on the status of the repayment of the loan of INR 2,563 crores, which was owed by Sterling and Wilson to our company on the listing date. Our earlier request to the Board to reschedule the loan payment was accepted. And accordingly, the mutually agreed dates were INR 1,000 crores by December '19, INR 500 crores by March '20, INR 500 crores by June '20 and the balance by September '20. As on date, as promoters, we facilitated Sterling and Wilson to repay INR 1,500 crores.At this juncture, I would like to bring to your attention about the fact that in February and March, the world was struck by the COVID pandemic, throwing the global financial markets into chaos. While a number of companies are seeking a moratorium due to genuine issues being faced by all of us, we were able to facilitate repayment of INR 500 crores on schedule by 31st March.Even though the group is in the most challenging sectors of real estate and EPC, this clearly shows the intention of the promoters to honor their commitment in these very challenging times. Over the past few months, even though there has been a huge challenge in the banking and financial markets, we've been able to tie up a significant level of funding. Had it not been for the COVID issue, we would have easily met the June 30 deadline of INR 500 crores. However, because of the COVID situation, there have been delays on the transactional side of our fundraising exercise, due to which the June repayment is likely to spill over by a few weeks. Although all the efforts are still on to meet the June 2020 deadline, we could get delayed by a few weeks to make the payment to the company.Both the promoters are committed to facilitate Sterling and Wilson to clear 100% of the outstanding loans by September 30. We would appreciate your support and understanding in these very, very difficult times.In fact, Bikesh, Bahadur and the entire solar team have done a wonderful job of managing the cash flows of the company. I do look forward to September 30 when we can all achieve our dream of being a debt-free company.Thank you very much. And we now open the call for a question-and-answer session, which we look forward to be very interactive. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Chetan Shah from Jeet Capital.

[Chetan Shah]

Sir, one quick question, more on a broader terms. A lot of government and companies across the globe is talking about increasing their solar presence. Even in today's newspaper, NTPC is also talking about helping a few of the countries in other emerging markets like Africa and all to help them to improve their solar presence while quoting couple of ongoing projects. So could you just give us some flavor and sense in terms of opportunity in this area?You explained about USA, explained about Australia in opening remarks. But in terms of ongoing opportunity, what is the size and scale is possible in next 3 to 5 years? And where exactly we stand now because of our existing executed projects and our experience compared to other competitors in the world? That will be very helpful for us as shareholders.

[Bikesh Ogra]

So thanks. Thanks for the question. Can you hear me? This is Bikesh.

[Chetan Shah]

Yes, sir, I can hear you.

[Bikesh Ogra]

Thank you very much. No, so I think what I mentioned in my speech was that the solar power plants are coming up in a big way all across the globe. There are a couple of reasons for that. One is, obviously, the sustainability, the friendliness on the environment, and the fact that it has become very competitive with respect to your conventional sources of energy like coal and gas. And that has given it a lot of fillip in terms of proliferating those capacities all across the globe.And when I give you a small example in, say, Middle East, in the recent bids, the cost of the solar power energy is around INR 1.20, which has been recently discovered. And if you take a comparison of the coal power plants, which have been constructed in the same region, it is in excess of around INR 2. So there is a no-brainer -- it's a no-brainer that people would -- and the governments would want to adopt this policy. One is because it's cleaner, and the second it's more sustainable commercially. And when you talk about the outlook of how it is panning out over the next 4 to 5 years, like I said, we would be participating in around 22 gigawatts of bids in this year at Sterling and Wilson, which is all across the globe. And globally, I think the business of solar has been growing at a steady pace of around 20% year-on-year at a CGR level. And we expect this to be definitely growing at the same, if not more, growth for the next 5 to 10 years. And that's how the business is positioned.As far as we are concerned, we are in a very sweet spot. The reason being that with our presence in around 26 countries, we are able to address each and every opportunity that exists in these markets. And now since we have now started gaining a very dominant position in most of these solar markets, so we see ourselves very relevant in this space for the years to come.

[Chetan Shah]

Sir, if I may allow to ask one more follow-up question. This is very specific to O&M opportunity. You explained us about our current capability in terms of O&M and also the size of the portfolio. But sir, if I just want to fast forward just being as a thumb rule, what do you think this opportunity can lead to only because of understanding the cash flow what it generates and how this can actually bring down our working capital and balance sheet stress, if one fast forwards 3 or 5 years from today? If you can give some broad picture of that, that will be very helpful, please.

[Bikesh Ogra]

No. So that's a very valid question, I think, in terms of the perpetuity of the cash flows for the business. And as you must have heard in my speech that around 47% of our O&M portfolio is a third-party portfolio. And that has been a very target and a focused approach that we want to lay, not only for our own build plants but also for the third-party EPC players.As I mentioned, we have a portfolio of around 7,900 gigawatts under the O&M fleet. And we are definitely wanting not only to scale this up with our own constructed plants but also to the third-party operation maintenance. That target is definitely in our mind. The unfortunate part being that we were wanting to expand in these last few months in markets like Australia and U.S. and Europe, but this has got slightly derailed because of the COVID situation.And now since the COVID situation is easing out, I think we should be now focusing around getting this portfolio scaled up further. And we see ourselves -- as it is, we are amongst the top 2 O&M players in the globe today. And now we see ourselves as the largest O&M player in the coming years in this space.

[Operator]

We'll move on to the next question. That is from the line of Anupam Gupta from IIFL.

[Anupam Gupta, Vice President]

A few questions. First, on the existing operations that you have. So of the INR 14,000 crore order book if I include the order inflow, which has happened post FY '20, what proportion right now is under execution? So let's say, firstly, is I need more details. So has the Saudi order started yet? Or is it only COVID, which is delaying it or is it other factor?Generally, a few others like Montecarlo (sic) [ Montenegro ] where you are expecting starting, what is the status there? So what proportion of order book is right now under execution? And what proportion and whatever you have won after FY '20, when do you expect that to start execution for that?

[Bikesh Ogra]

So I'll answer the question on after the post March '20, the orders that we have won, when they will go into execution. And I'll let Bahadur know what are the -- answer the question around which are -- how many is the total orders under execution.So post '20, we have bagged Australia, which is a large order. So the Australia order is already under -- started under construction, the site mobilization is on, and we should start full construction activities in a month's time.In India, the couple of orders that we have won, both of those orders are currently under the execution stage. Unfortunately, there is not the kind of activities, buzzing activities happening because of -- and these lockdowns not being fully removed. But the construction activities have already started.In terms of the Saudi Arabian order commencement, I think unfortunately, because of last 4 to 5 months of the situation that we've all been facing, there has been that lull in terms of the contract signing between the off-taker and the IPP. And we are hoping that in the next couple of months, there may be movement in terms of the PPA signing between the off-taker and the IPP. And post that, we would see a financial closure of the project happening. And mostly by the beginning of next year, calendar year, there should be a construction commencement on the project.And on the Montecarlo (sic) [ Montenegro ], the land activities have been -- are going on. And we are hoping that by September, we should receive a limited notice to proceed on that well. So Bahadur, can you just give a perspective of the orders that are currently under execution?

[Bahadur Dastoor, Chief Financial Officer]

So the total orders under execution of approximately INR 14,000 crores. And now we have, of course, added INR 750 crores in the U.S. just yesterday. Approximately INR 4,000 crores are under execution. And the remaining, about INR 11,000 crores or INR 10,750 crores, the execution is about to commence.

[Anupam Gupta, Vice President]

So INR 10,750 crores also includes the Saudi and the Montecarlo (sic) [ Montenegro ], right?

[Bahadur Dastoor, Chief Financial Officer]

Yes, it does. It's Montenegro.

[Anupam Gupta, Vice President]

Montenegro, sorry. Yes. Okay.

[Bahadur Dastoor, Chief Financial Officer]

It includes Saudi as well as Montenegro. And for Saudi Arabia, we had already mentioned this in our presentation, which we have uploaded. That it is because of COVID and delay in PPA signing.

[Anupam Gupta, Vice President]

So it -- right now, it's still in the -- at the stage of limited notice to proceed, right?

[Bahadur Dastoor, Chief Financial Officer]

That is correct.

[Anupam Gupta, Vice President]

Okay. Secondly, for the U.S. order, has the sourcing of panels from China being sorted? Or how is that being handled?

[Bahadur Dastoor, Chief Financial Officer]

In the case of the -- Bikesh, you could answer about the BOS order of U.S.

[Bikesh Ogra]

Yes. So the order that we got in the United States, which is yesterday, we signed a contract, the sourcing of the panels is getting facilitated by the owner itself. So we are not responsible for the sourcing of the panels. And whatever has been is the discussion direct between the panel supply, the PV panel supplier and the owner.

[Anupam Gupta, Vice President]

Okay. And in general, given the animosity -- sort of animosity towards China globally and everywhere, do you expect disruptions in sourcing for the balance order book for yourself as well?

[Bikesh Ogra]

No, I did mention about we being on the lookout for an alternate countries for our sourcing of critical equipment like PV panels. But currently, I think we don't see really a major disruption happening in terms of the PV modules coming in from China.But that being said, I think we are seeing a lot of traction in countries like Vietnam, Taiwan, Malaysia, Thailand in terms of the model capacity getting spruced up. Even in India, we have seen a large extent of -- you must have read recently that there are people who are putting up the PV module factory.So all of these countries are coming up to counter the excess supply that we were reliant on for China. So we see traction happening in the other countries for the PV modules manufacturing.

[Bahadur Dastoor, Chief Financial Officer]

And just add to what Bikesh has said, since most of our orders are outside India, so there the animosity would, obviously, not play a role. And as far as India is concerned, most of our orders are on balance of supply basis. So the panels are the responsibility of the customer.

[Anupam Gupta, Vice President]

Right. Understand. And just one question for Mr. Daruvala. So the few week delay is -- I think we should read it how, it should be weeks? Or will it extend beyond, like say, July?

[Khurshed Yazdi Daruvala, Chairman]

Yes. Our internal target would be, let's say, 4 weeks, but let's say, 4 to 6 weeks is what we are looking at to be doing it. In fact, actually, we could have -- we are still not 100% sure that we won't meet this deadline.See, what happened is that there's been a larger fundraising, which we've been expecting, and that has got delayed because of COVID. And right now, we're trying to bridge the larger fundraising. So we are just hoping that this still can get done by the end of the month. But if it doesn't happen, the larger fundraising is definitely expected within July.

[Operator]

The next question is from the line of Abhinav Bhandari from Nippon India Mutual Fund.

[Abhinav Bhandari]

Just -- so we appreciate that you can't give a revenue guidance at this point of time. But just to understand on the orders, which were bidded last year and those are under execution, is there any advantage of lower module prices now, the correction that we have seen that we would have? And consequently, if you could give any guidance on gross margins for FY '20?

[Bikesh Ogra]

No. I think, like I mentioned, I think we are taking a very clear assessment of the market. We are taking a very clear assessment of how situations pan out in the coming months. And we should be definitely wanting to give you a very guided -- informed guidance once we have a very full perspective of the situation emerging in the coming months.So when you talk about the advantage in terms of the module pricing, it will be definitely important for us to note that as Bahadur also mentioned, that most of our module prices and negotiations are happening by the IPPs. Obviously, we take the turnkey margins on this other than U.S. and India.So effectively, there isn't, and it saves us as for any module upside and downside movement. So effectively, we don't see much of an advantage coming in from the module, barring a couple of projects wherein the module has been negotiated by us. So effectively, I would say that module risk and reward lies with the customer. And therefore, we don't face any issues on the module in terms of the pricing valuation.

[Khurshed Yazdi Daruvala, Chairman]

Abhinav, if I may just add to what Bikesh has said, we are pretty confident of a better performance in FY '21 even without Saudi, of course, provided COVID-19 situation doesn't escalate in any of our target markets. But as of right now, we are definitely confident of a better performance even without Saudi Arabia.

[Abhinav Bhandari]

Sure, sir. The second one was on -- given the situation, any fixed cost-saving measures that we are taking or that we have already taken for this year? And just to understand -- you may not provide exact numbers, but just to understand how has been the working capital in the first 2, 2.5 months of this fiscal? Just trying to understand if there has been a delay on the receivable side from the clients much more in this scenario?

[Bahadur Dastoor, Chief Financial Officer]

So I had already mentioned that the company is focusing on a cost optimization program in the current year. So we are definitely working on it. I have already said that we have done recoveries of amounts, which are more than a year old. I would not want to give anything on the working capital because that would be forward-looking at this stage. Let me just say that things are the same as what they were, in fact, slightly better. But I would not want to give out any number.

[Abhinav Bhandari]

Sure, sir. I understand. And just one last thing on this O&M revenue trajectory. So now you have almost reached INR 51 crores, INR 52 crores a quarter, if I'm not wrong on the number, so is that maintainable kind of number?And specifically for FY '20, the EBITDA margins seem to be very high for this segment. So is there any one-off in that?

[Bikesh Ogra]

No, we have been consistently -- Bahadur, do you want to answer this question?

[Bahadur Dastoor, Chief Financial Officer]

I'm just answering on the gross margin. So there were a few emerging economy O&M orders, which is why the gross margin was very high. We still believe that in the long run, it will be between 35% to 40%. Bikesh will answer the question on O&M growth.

[Bikesh Ogra]

Yes. So like I mentioned earlier, we see the O&M business as a very, very lucrative business for us in terms of the scale that we can achieve. One is because of our presence in almost all the emerging markets and the markets which have got solar historically built. And the fact that we have a very, very good relationship with almost all global IPPs and the fact that most of the plants, which were contracted, are coming to the end of the O&M period with the existing EPCs who have contracted for that.So it gives us a huge advantage in terms of scaling this business up in those markets. And as you can see that we already got around 47% of our O&M portfolio from the third-party contracts.

[Abhinav Bhandari]

So because specifically, what I was trying to understand is this 7 gigawatt, which you have under portfolio now, is about what, INR 200 crores annually, INR 250 crores annually in terms of potential is what I'm trying to understand.

[Bikesh Ogra]

So right now 7,700 is -- around last year, we did around INR 183-odd crores and which is going to get scaled up. One is because of the third-party getting deployed on this portfolio. And the second is our EPC projects, which will get completed, which also fall into the O&M category.So just to give you a small perspective. As I had mentioned, Australia, we've got a 20-year contract for operation maintenance, which was signed along with the EPC contract. And that contract value is around 40 -- INR 415-odd crores. So once the project gets completed next year, so the operation maintenance will automatically fall into the stream of revenues. So this is how the projects fall into the stream of revenues for the operation maintenance.So to answer your question, I think we should be targeting around -- from 7.7 gigawatts to around 10 to 11 gigawatts for this year in terms of the total O&M portfolios for FY '21.

[Operator]

The next question is from the line of Avinash Nahata from Aditya Birla Capital.

[Avinash Nahata]

Am I audible?

[Bahadur Dastoor, Chief Financial Officer]

Very audible.

[Bikesh Ogra]

Yes, very audible.

[Avinash Nahata]

Yes. And appreciate Mr. Daruvala for coming in upfront talking about the situation. I have a couple of questions. During our past interactions, we have spoken about Chinese service providers being active in Middle East market. So if there were to be a backlash against the Chinese service providers, does this reduce the competitive intensity in those markets wherever they are present? Number one.Number two, you have said that 22 gigawatts is what you're targeting as far as participation is considered. So just give us a sense, financial year '19 and financial year '20, what was the participation? And what was the conversion success rate?Third is, as we move into newer and larger markets like Australia and as we stabilize our operations and there would be lesser of mobilization expenses, et cetera, so how would EBITDA margin and gross margin grow in these markets and stabilize?And the last being receivables of INR 300 crores more than 12 months. Can you just talk about it? I mean what is this specific customer across LD? Just talk about it. These are the 4 questions.

[Bikesh Ogra]

Okay. So in terms of your question, which is around the Chinese competition and the backlash that we have currently for the Chinese as a sentiment, so what we have seen in the Middle East is that Chinese have participated with some very ridiculously low prices. And obviously, as a strategy, we definitely want to maintain a particular threshold for specific geographies. And we definitely realize that it's not feasible for us to really get into those price levels. And therefore, we had just let those jobs go.That being said, I think what has also happened for us, fortunately, Middle East being a 5 to 6 gigawatt market, we have opened avenues in countries like U.S. and Latin America, and U.S. is a 12-gigawatt market year-on-year, which has given us that hedge in terms of the Middle East market. And also the fact in Middle East, the cost per megawatt is much more competitive than the cost per megawatt in the U.S. And therefore, the returns in the U.S. markets are much more in comparison to the Middle East. And can you just repeat the second question, so that -- I just missed the thought. If you can just repeat this?

[Avinash Nahata]

Second one was on our bidding, past successes, conversion rates for FY '19 and '20, so that it gives us some sense as to what could be a possible conversion for this 22,000 megawatts.

[Bikesh Ogra]

So I can give you a sense of FY '20, including conversion rate. So we had participated in around 17 gigawatt worth of opportunities, and our conversion rate was around 14-odd percent. And for this year, we will be participating in around 22 gigawatts. And we have already bagged around 2.9 gigawatts of orders in the first 3 months of this year.For financial year '19, I would not be very certain. But since at that point in time, we had Abu Dhabi project and Middle East projects, which were running, so the conversion rate was a bit skewed and on the higher side. But year-on-year as a steady growth on the conversion rate, we feel between 14% to 17% would be the right number where we will be targeting as a conversion rate.

[Avinash Nahata]

Okay. And my last 2 questions were one, regarding the newer markets, larger markets, U.S., Australia. So how could we see the gross margin and EBITDA margin improving as we stabilize the operations and some of the mobilization expenses, et cetera, reduce with stabilization of business there?

[Bikesh Ogra]

See, I'll give you a perspective of Australian market. Australian market has seen a lot of churn in terms of the EPCs coming in there, quoting very, very low prices and then burning their fingers and even shutting down their businesses. So what we have done is we used a wait-and-watch approach in those markets, like Australia. And once those guys really went past and a couple of them went past and you must have read them also, we -- it opened a space for us and also opened a space for us to get a better return in terms of the margin profile. And Australia, the project that we are executing are far better in terms of the margin profile that we're getting because of the limited competition that we have.And in terms of the U.S. also, as I mentioned, the cost per megawatt and the returns per megawatt are far, far higher than if you take a Middle East market, wherein it's almost 60 -- 50% to 60% higher in terms of the cost per megawatt and the returns per megawatt. So our margin profile is definitely going to be whatever we have guided in terms of the ranges that we have given at 10% to 11%. We are very sure of and confident of retaining those bands going forward as well.

[Avinash Nahata]

So when you're talking about EPC providers in Australia, you're talking about local competition?

[Bikesh Ogra]

It's mostly local competition, and there are a couple of Spanish guys, who are also present in those markets and who had quoted certain price, who had not understood the landscape properly, and they had to really wind up the business subsequently.

[Avinash Nahata]

Okay. And last, just split for us the INR 300 crores outstanding for more than 12 months.

[Bikesh Ogra]

Yes, I think Bahadur will take this.

[Bahadur Dastoor, Chief Financial Officer]

Yes. So as I have said, of the INR 382 crores, we have already recovered about INR 117 crores post 31st March. It is essentially made up of 4 or 5 customers. Two of them have been completely liquidated. And of the 3 which are there, also we have recovered a substantial amount of money. We are very confident of recovering the same in the time to come, mostly in the current year.

[Avinash Nahata]

Mr. Bahadur, just a small follow-up. Is this change in scope of work, LD, what is it, I mean, mostly like?

[Bahadur Dastoor, Chief Financial Officer]

So it is on -- some of it is on scope of work. Some of which is on settlement of LDs. We have already signed a lot of settlement agreements. We are working expeditiously to close that in the few months which will follow.

[Avinash Nahata]

Okay. And just if you can give us in FY '19 and FY '20, both the years, respectively, how much amount you have written off against all of this? I mean, what has been the trend in absolute? That would be helpful.

[Bahadur Dastoor, Chief Financial Officer]

I will tell you in absolute. So we have provided INR 17 crores as an expected credit loss in FY '19 for the customer, which is in NCLT. We have provided a further INR 5 crores against the same customer in the current year.As against the other customers, we have totally provided for on best management estimates, liquidated damages of about INR 46 crores in FY '19. And we have added another INR 15 crores in that in the current year, bringing the liquidated damages provision to about INR 65 crores to INR 67 crores. All of this is already netted off in the numbers that we are talking to you here.

[Operator]

We'll move on to the next question. That is from the line of Narottam Garg from CWC Advisors.

[Narottam Garg]

One question, just on the BOS contracts because that is going to be larger, what is the margin profile vis-a-vis the full contracts that we have?

[Bikesh Ogra]

Sorry, Narottam. Are you referring to the contract in the U.S. specifically? Or is...

[Narottam Garg]

Yes, the ones which do not involve us buying the panels and making a margin on that.

[Bikesh Ogra]

Yes. So the margin profiles on those particular projects, and if you talk about specifically India, they are in the double-digit percentages. And in the U.S. also, like as a strategy, we have gotten into a U.S. contract, and those -- there also, the margins are in the same region.

[Narottam Garg]

Double-digit margins?

[Bikesh Ogra]

Yes.

[Narottam Garg]

Okay. And just one more question for Mr. Bahadur. In terms of liquidated damages, that is in a scenario wherein there is a delay in a project or some kind of deficiency from our end, right?

[Bahadur Dastoor, Chief Financial Officer]

Yes. So it could be on account of time delay or any scope changes, which could have been there. So it is on account of those things only.

[Narottam Garg]

Okay. And the liquidity damages, which you provided in FY '19, we have written that back in FY '20 or not?

[Bahadur Dastoor, Chief Financial Officer]

No, we have not. Because those projects, the settlement agreements were dragged on. We have got the substantial completion works done. Settlement agreements have been signed or are in the final stages of signing. So all of that will be knocked off in the current year.

[Narottam Garg]

So, it will be returned back, right?

[Bahadur Dastoor, Chief Financial Officer]

No, it will be adjusted against the receivables. So it's already provided there. So there will be no further impact. The provisions have been made on best management estimates as to what is the liability that will finally hit the P&L.

[Operator]

The next question is from the line of Mayank Bhandari from B&K Securities.

[Mayank Bhandari, Research Analyst]

I wanted to understand your -- about your overhead costs, which has increased YoY. And the reason for the same is highlighted as increased ramp-up cost in different countries. So can you just give us some sense on, like, how many countries we are still left to ramp up? Or how should we treat this going forward? Because that will probably lead to a significant increase in our EBITDA margin going forward if that is stable right now.

[Bahadur Dastoor, Chief Financial Officer]

So I will answer the question on what are the overhead increases on account of. So as we mentioned, in Australia and U.S., we had partial costs last year. And we have a full period cost in the current year, leading to an increase in overheads.Also, at the same time, our team in the United States was strengthened and which has transpired, as you can see, in large orders in Australia as well as one of our large orders, which we have just signed off yesterday of almost INR 750 crores. At the same time, we are looking at the cost optimization drive to bring down our overheads. These overheads do include things like expected credit loss provisions. It also includes certain one-off provisions, which come in, for example, mark-to-market losses. These are all figures, which hit the overheads.But at the same time, we are looking at bringing down our overhead substantially. And with the higher turnover and the reduction in overheads, we are definitely looking at a slightly larger EBITDA in the current year as compared to what we achieved in the previous year.

[Bikesh Ogra]

Yes. So the -- to respond to your latter half of the questions, in terms of the growth potential that we're seeing, I think we did Australia and the United States and Latin America. Now the next target market for us is the European market.I think Europe has picked up pace from last year after being dormant for almost 6 to 7 years in terms of the solar capacity. And we were supposed to be setting up a larger base and larger structured organization in Europe and more specifically, in Spain during March of this year. Unfortunately, we all know that things have got slightly derailed, but we see now things getting restored to almost normalcy in those parts of the country -- globe. And we will now start setting up the structure of the organization there and -- which will give us a slight bit of an increase in overheads.But I think we also clearly see a lot of business opportunities with our existing customers, who are wanting us to set up their -- our offices in those parts, so that the business can be bought. So we don't see the kind of overhead increase as much we did in the U.S. to set up the organization -- the management team there because we already have an existing relationship with the IPPs there. And they just want us to come there, so that the business can be acquired.

[Mayank Bhandari, Research Analyst]

Okay. So essentially, after Europe, you may look for more geographies because I think that would be the end of your expansion spree? Or like what do you see there?

[Bikesh Ogra]

No, I think if suppose we had something going above besides the globe, we would have surely gone there. But for us, China definitely is not the target market. I think the next market -- yes, to answer your question, most specifically, the next target market, although that market is not very large, is the South Korean market. And it is a very lucrative market with very limited EPC players there. And there also, that was a focus for us to set up our bases there. But again, that has got a bit deferred because of the COVID situation. So South Korea would be the market that we would be addressing in the near future besides the European market.I think if you leave Japan and China, I think we would be now present in all -- globally, all the markets that has the solar energy programs or teams running around it.

[Operator]

The next question is from the line of Subham Agarwal from Aequitas Investments.

[Subham Agarwal]

And first of all, congratulations for a very good set of numbers. Sir, my question is related to the European market specifically. So we have not seen any execution in last year in the European market. And we have also not received any orders from that market. So what is your outlook? And out of the 22 gigawatt bid, have we put in bid in that specific market, if you'll give some details?

[Bikesh Ogra]

No. So like I said, the 22 gigawatts would be the order, which we would bid, we may lose for this year. And had it not been the situation that we currently are in, we would have started bidding the projects in the European market as well. But now since, like I mentioned, it has got slightly deferred, we should be bidding in around 750-odd megawatts in the quarter 4 financial year in the European market. And we hope to see the commencement -- construction commencement also for the quarter 1 calendar year next year -- sorry, calendar 1 -- calendar year quarter 2 of next year, we should see the commencement of the construction in the European market.To answer your question, I think we have that one job in Montenegro that has got deferred the construction, but we hope that the construction would be starting by September or October of this year in that particular cycle.

[Bahadur Dastoor, Chief Financial Officer]

To add to what Bikesh has said, the European market was a BOS market. But now we are also focused there because the BOS values are quite large.

[Subham Agarwal]

Okay. Sir, secondly, any other orders that we have either renegotiated or canceled in the last 3, 4 months or the last year?

[Bikesh Ogra]

No, we haven't got any order that has got -- that's been renegotiated or that has got canceled. Yes, there is one order in Chile, which has got deferred because of the COVID situation by a couple of months. That's about the situation that we are having currently for the orders -- cancellation or order deferment.

[Subham Agarwal]

Okay. Sir, and the imposition of BCD, which has been doing rounds in India. So will this impact you in the Indian business?

[Bikesh Ogra]

I beg your pardon. Can you please repeat? I couldn't hear that?

[Subham Agarwal]

Yes. Impact of BCD, which government may apply on the solar cells and other equipments, basic custom duty.

[Bikesh Ogra]

So yes. So basically, for us, our business model in India is a balance of plant model. We don't do the modules. Modules are being supplied and pre-issued to us for the plants. So anything related to the modules, custom duties or anti-dumping duties is, we are unaffected by that change because for us, the business model in India is the balance of plant. Whilst in other parts of the globe other than the U.S., it's a complete turnkey, and they don't have any policy in terms of anti-dumping. If at all there is a change in law, that all is covered under the contract as a change in law provision in those countries.

[Bahadur Dastoor, Chief Financial Officer]

And we recognize orders only after order signing now. So the possibility of renegotiation is highly remote.

[Subham Agarwal]

Okay. Sir, my last question was regarding the Saudi Arabia contract. So you said on the call that barring this contract also, we'll see a very good revenue this year. So when do you actually expect this contract to start working or the execution to start working?

[Bikesh Ogra]

Like we mentioned, I think what's been happening is that the Saudi government, which is the off-taker affiliated to the Saudi government, has been taking a lot of, I think, other issues as a priority. And this issue has gone on the back burner.Now we are hoping that you may see some amount of traction happening on the Saudi order in terms of the PPA discussions, the negotiations starting in a couple of months. And once those PPA discussion negotiations start, it may take maybe 4 to 5 months for the financial close of the job. So effectively, if all goes well, we might see the commencement of the Saudi order early next year, which is Q1 of next year 2022.

[Khurshed Yazdi Daruvala, Chairman]

So just one area that I would like to just comment on the Saudi order. See, I think one of the challenges is that the client -- our client has not yet signed up a PPA contract with the Saudi government. And I think is an area over the last 6 months, the tariffs have gone down significantly in Saudi Arabia.So we are still waiting now of how the client and the government there will react and then how the client will come back to us. So I think to your point on renegotiating of a contract, now all contracts that we've signed, we don't see any realizations.On this particular contract, because the tariffs have come down, if they sign up at the old tariffs, I don't see a problem at all. But if they sign up at the new tariffs, I think that they will be under pressure, and they'll come back to us on pressure because it's LOI and a notice to proceed and it's not a finally signed contract. So I think that this is one contract where we'll need to be a little [indiscernible] as we go forward.

[Operator]

We'll move on to the next question. That is from the line of Ritika from Aequitas.

[Ritika Garg, Vice President]

Sir, I wanted to know now that you are moving into the more developed markets, like 30% of our current order book is Australia, and U.S. also contributes to around 20% to 25%, do we see the gross margins being a little lower?

[Bikesh Ogra]

No. So on the contrary, I think like I've mentioned, Australia with a very limited EPC players being there, we are seeing a good margin profile in the Australian market.And in the U.S. market also, like I mentioned, we would be clocking in a low double-digit numbers on the BOS packages that we will be bidding there. And that's the margin profile we're having, which is far better than like you take in the Middle East, wherein you get single-digit numbers ranging between 6% to 7%. So therefore, we are seeing a far better margin profile in those markets in comparison to the Middle East market.

[Ritika Garg, Vice President]

Yes. And sir, I had some bookkeeping question. So on the stand-alone, we have a dividend income received of INR 78 crores. What was that towards?

[Bahadur Dastoor, Chief Financial Officer]

So that is the dividend, which we received from our subsidiary, which, in turn, we added on to it, and we passed on to our shareholders here.

[Ritika Garg, Vice President]

Okay. Which subsidiary is this? Is this the Middle East one?

[Bahadur Dastoor, Chief Financial Officer]

That is correct.

[Ritika Garg, Vice President]

Okay. And loss from partnership firm of INR 15 crores?

[Bahadur Dastoor, Chief Financial Officer]

That is on a stand-alone basis. That is for one of our projects, which we have done through a partnership firm because it required Shapoorji, Sterling and Wilson as well as the module supplier to be in a partnership.On an overall basis, it has no impact on the consolidated financial statements because those results are anyway taken. However, on a stand-alone basis, it's a requirement of the standard to show that loss as a separate line item. You will see that it is not there in the consol financial figures.

[Ritika Garg, Vice President]

Yes, yes, yes. Okay. And could you give us a breakup of the subsidiaries performance for this year?

[Bahadur Dastoor, Chief Financial Officer]

It is uploaded on our website. If it isn't, we'll just ensure that it is done, Ritika.

[Operator]

The next question is from the line of Gautam Gupta from Nine Rivers Capital.

[Gautam Gupta, Vice President]

I think most of the questions have been answered. I had a small follow-up to the earlier previous gentleman's question. The customs duty, which has now come on the solar panels, I understand that it doesn't really impact us because of BOS, because of the legal mechanism pass-through. But do you see any second order impacts in terms of solar CapEx in India now that the projects become a little more expensive?

[Bikesh Ogra]

We have been seeing an uptick on the solar CapEx in terms of tariffs that are being quoted. We used to see a [ tariff ] over INR 2.5, which has gone up to around INR 2.6, INR 2.7. And I think that is a sustainable number, which would be bid by the IPPs. For us, that being said, we are [Technical Difficulty]

[Gautam Gupta, Vice President]

Hello?

[Operator]

Sorry to interrupt. We are...

[Bikesh Ogra]

Sorry. Can you hear me? Can you hear me?

[Gautam Gupta, Vice President]

We can hear you now. We can hear you now. You have faded out for a minute there, yes. I think that the tariffs are now INR 2.6...

[Bikesh Ogra]

INR 2.6 to INR 2.7. And we clearly are seeing an uptick in those numbers. And for us, that being said, for us, we are unrelated to the tariff change because for us, it's a BOS package. And we have always participated in the balance of packages without IT.

[Gautam Gupta, Vice President]

But you don't see that dampening the solar CapEx plans or sentiment? There's enough headroom in the tariffs to absorb those...

[Bikesh Ogra]

Absolutely. I think like I mentioned, even during the absolute lockdown of last 3 months, there were around 1 gigawatt worth of -- 1.2 gigawatt worth of orders that got finalized. And we won around 600-odd megawatt even in the lockdown. So Government of India is laying a lot of trust in terms of proliferating the solar capacities in the country. We don't see any dampening happening on this.

[Operator]

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Bikesh Ogra for his closing comments.

[Bikesh Ogra]

Yes. Thanks, and we'd like to again thank everyone for joining this call and your continual support all the while. I hope we have been able to address all your queries. For any further information, kindly get in touch with Vishal Jain or Strategic Growth Advisors, our Investment Relation advisers. And thank you once again, and have a great day.

[Bahadur Dastoor, Chief Financial Officer]

Thank you.

[Khurshed Yazdi Daruvala, Chairman]

Thank you, everyone.

[Operator]

Thank you. Ladies and gentlemen, on behalf of Sterling and Wilson Solar Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.