Azure Power Global Limited (AZRE) on Q3 2021 Results - Earnings Call Transcript
Operator: Good day, and welcome to Azure Power Q3 2021 Earnings Conference Call. As a reminder, all participant lines will be in a listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded. I now hand the conference over to Mr. Nathan Judge from Azure Power. Thank you. And over to you, sir.
Nathan Judge: Thank you, and good morning, everyone, and thank you for joining us. Last night, the company issued a press release announcing results for the third fiscal quarter of 2021 ended December 31, 2020. A copy of the press release and the presentation are available on the Investors’ section of Azure Power’s website at azurepower.com.
Ranjit Gupta: Thank you, Nathan, and a very good morning, everyone. It was around this time last year that COVID began spreading rapidly across the world. It has been truly unfortunate how this pandemic created so much pain and uncertainty. Fortunately, the light at the end of the tunnel is getting brighter with the vaccine being globally distributed as we speak. Here’s to hoping that we can all claim victory over the virus on our next call. Sustainability and ESG are key to the success of our business. At Azure, we start every meeting with a discussion of health and safety which is of paramount importance. We would like to start this call by highlighting our ESG accomplishments this quarter. We are very proud to announce that we obtained the ISO-45001 certification which demonstrates Azure’s focus on Occupational Health & Safety. Given the remote locations of our projects, the extreme heat and difficult conditions for construction and operations, as well as the inherent safety risks that come with the large scale construction project, we believe this validates the additional efforts we make to our work place safe for our team members and contractors.
Murali Subramanian: Thank you, Ranjit. Good morning, everybody. On Pages 5 and 6, we provide an update on our projects under construction. Whilst we have overcome many challenges and the level of construction activity has continued to increase, new supply constraints have arisen. High local demand for solar modules in the past six months or so in China, coupled with a rising yuan and rising raw material costs, has resulted in the inability of several module suppliers to honor their price and delivery commitments despite signed supply contracts.
Pawan Kumar Agrawal: Thank you Murali. Turning to Page 10, as of December 31, 2020, we were operating 1.987 gigawatts on a PPA or AC basis, which is 8% higher than what we were operating as of September 30, 2020. Our portfolio of 7.115 gigawatts remained stable from the previous quarter. Our construction costs continue to fall and were about 10% lower year-on-year. On Page 11, when looking at the quarter, we faced reduced insolation by around 4.6% compared to our expectations of normal weather. Had insolation been as per the long-term average, our revenues would have been about $50 million, or a 20% year-on-year increase. I will discuss G&A in more detail in a few minutes – in a few moments, but excluding stock compensation expenses, which rose significantly due to the rising stock price, our G&A would have been about 15% lower than G&A in the same quarter last year after adjustments. After adjusting for stock compensation expense, our EBITDA would have been $39.4 million, or a 21% increase from the same quarter in the prior year and we would have reported a net loss of about $2.7 million versus about a $7.9 million loss after adjustments last year. Turning back to G&A, on Page 12, cash costs were lower – below our internal expectations, save for stock appreciation or SARs, which added about $18 million to our G&A. We remain very focused on reducing our costs as we had outlined earlier this year. We are pleased to report that we are on track to deliver on our original target of a 10% reduction in G&A, excluding stock compensation expenses, during fiscal year 2021, when compared to fiscal year 2020. One example of cost savings is the relocation of our head office, which is expected to save about $1 million every year. When looking out into fiscal year 2022, we expect that cash G&A will rise about 10% from fiscal year 2021 levels reflecting inflation and an increase in megawatts operating. We also have embarked on a refinancing initiative and so far, we have been able to refinance about $73 million of debt saving about 150 to 200 basis points on our interest costs. We are working on refinancing about $185 million and would highlight that our first Green Bond for $500 million dollars that we issued in 2017 with a 5.5% coupon is now callable. Based on indicative rates in the market, we would expect to be able to realize savings once this is refinanced. Turning to stock compensation expenses, as the share price rises, our stock compensation expenses will rise inflating our G&A. To help with modeling, the impact of SAR expenses on our G&A is directly linked to the share price. For fourth quarter 2021, we would incur about $2.5 million of additional SAR expenses if the share price remained at yesterday’s close. Every $1 change in the stock price above and below last nights close of $37.76 will have about $800,000 impact of G&A in that period, both positive and negative. Given the uncertainty around collections when the pandemic first began, we are particularly proud of our ability to improve our DSO despite the challenges this year. Our third quarter 2021 DSO was 113 days, which is better than the 119 days, when the pandemic first began about a year ago. We continue to make progress in getting back payments and believe there will be further improvement in the future. On Page 13, you can see that EBITDA from operating assets increased about 26% year-on-year and that cash flow to equity from operating assets rose about 142%. Net debt for operating assets was about $1.03 billion and EBITDA for the last 12 months was about $172 million, resulting in a net debt-to-EBITDA ratio for our operating assets of about 6 times. This ratio is much more reflective of our balance sheet than the net debt-to-EBITDA ratio for the overall company which includes debt for projects under construction as well, or just recently commissioned which have yet to produce their corresponding EBITDA. Which leads us to a review of our balance sheet on Page 14. We had about $122 million of cash and cash equivalents and our net debt stood approximately $1.15 billion. As a reminder, for those that are calculating our debt ratios, the hedging assets included in other assets on our balance sheet should be netted against our total debt, as this is directly linked to the foreign exchange hedges we put in place related to our green bonds. Before I pass it over to Ranjit to discuss guidance, I would like to mention that Azure continues to gain traction, stock trading liquidity and visibility as a leader in the India Solar Industry. At December 31, 2020, AZRE was a part of at least 25 stock indices compared to none at the middle of the year. Now, over to Ranjit to provide some commentary on fiscal year 2021 and long-term guidance.
Ranjit Gupta: Thank you, Pawan. In February 2020, when we had issued our guidance for fiscal year 2021, I had mentioned the caveats of timely commissioning, normal weather and no curtailment. I am happy to report that despite the pandemic, we have hardly seen any curtailment across our projects. Pandemic did impact timely commissioning and continues to impact construction. On Page 15, as Murali noted, because of supply constraints and delays related to COVID, we now expect to be at the lower end of our previously provided range of 2,300 to 2,500 megawatts operational by March 31, 2021. Performance of our operating projects has improved significantly, but lower insolation in this quarter and in fact the entire year-to-date, to the tune of about 5% compared to the 20 year average has weighed on our performance and we are now expecting to be at the lower end of our previously provided revenue guidance. For fourth quarter 2021, we expect revenue to be between INR4.335 billion and INR4.435 billion and the PLF to be between 22% and 23%. We also provide initial guidance on our operating capacity and expected revenue generation for the next fiscal on Page 15. Turning to Page 16, which is our long-term outlook, at the moment, due to uncertainty around the tariff that will be realized for our 4 gigawatts pipeline, we are pulling our long-term outlook which included our 4 gigawatts. With this, we will be happy to take questions. Thank you.
Operator: Thank you very much. The first question is from the line of Philip Shen from ROTH Capital Partners. Please go ahead.
Philip Shen: Hi everyone. Thanks for taking my questions. Like to focus initially on the 4 gigawatts tender and the status there. So specifically with that long-term outlook Ranjit, that you were just highlighting, it looks like there is a one-year delay. And so, with this new timeline, what do you – when do you need to sign the PPAs by to stay on schedule? And what is the visibility that you have now in terms of being able to sign a PPA at the first tranche – for the first tranche? Thanks.
Ranjit Gupta: Thank you, Phil; it is perhaps the most important question, that is in front of us. So I think the good thing is that a lot of progress has been made by SECI in trying to place the power, right. And like we had mentioned, 4 gigawatts is going to be placed in tranches, most likely the first 1 gigawatt will be placed first. And then the 3 gigawatts would be placed later in this year. For the first gigawatt, there was very little traction as laws mentioned by SECI in a letter to us, which we had mentioned in ours 6-K filing towards the end of last year. But like I mentioned in my remarks just now, over the last year or last month or so, we have seen that power demand has come back very strongly, and as we are in touch with SECI almost on a day-to-day basis, they are reporting that there is a renewal and sort of enquiries that they are getting from the distribution companies for signing power purchase agreements once again, which was very, very muted over the last couple of quarters. So that is heartening news. And also the fact that SECI is still insisting on signing our megawatts first, before signing the megawatts of projects that were auctioned post the manufacturing bit, right. So therefore, they are not sort of bypassing us, they are saying that yes, they will sign our power purchase agreements first and only then they will sign the remaining power purchase agreements, which his good news for us. So, because then we will be first in night. So I'm very positive, we had in the last earnings call mentioned that we expect the power purchase agreements for the first tranche to be signed in January, February. February has gone one-third and we still have three weeks left, I don't know whether we'll have something signed in three weeks, but I would think that we are fairly close to signing some power purchase agreements over the next, I would think six to eight weeks. So it's no longer – next quarter or next to next quarter within the next two quarter kind of a thing. I feel the way things are going at the moment, that we should see some progress this quarter. As far as the delay is concerned, Phil, under normal circumstances, these power purchase agreements would have been signed in the month of – around the month of June, July of 2020. Of course, COVID has caused a delay, between six to nine months anyway on project commissioning of almost all projects across India. So if you look at it from that perspective, if you assume that COVID had caused a six to nine month delay, then if we sign our power purchase agreements by March of this year, maybe we'll probably be almost on time compared to what we had originally scheduled for as far as our earlier projects were to be commissioned and then there were supposed to be a gap, and then we were supposed to commission the manufacturing gigawatts. So there won't be that bigger gap really in our original plan versus this plan, assuming that the whole plan had been shifted by six to nine months going to the pandemic.
Philip Shen: Great. Thanks, Ranjit. You highlighted just now that SECI is still insisting on prioritizing your award in PPA ahead of the others. Can you talk about why you think they're prioritizing you?
Ranjit Gupta: The reason why they are prioritizing us is two-fold. One is of course that this is a very prestigious tender for the government. So they do want to make this tender successful. And secondly, because of the fact that realizing that the costs have reduced, right, and module efficiencies have improved, overall the cost of energy for us to set up a project has used, like we have mentioned, we have agreed to tariff markdown, right. So once you agree to a little bit of a tariff markdown, that sense – signal to the government also that look, these guys are not out here to insist on a tariff that does not make sense at this point in time, right, for the consumer. So they are – that will suppose a little bit of a model obligation on taking to try and place our power first because it's not as if they are at the moment, trying to place our power at a price, which is way out of the market, right? The tariffs in the market are to $0.275, and we are looking to place our power at $4, it’s not like that, right? I mean most of the power is obviously not $0.275, most of the power available in the market is at about $0.033, $0.035. So we are not looking at a differential between 3.3 to 3.9 kind of or 3.5 to 3.9 kind of differential, right? So because of these two reasons, because of the fact that we are open to a tariff markdown. So therefore, the difficulty is lower for them to place this power. And secondly, because of the fact that this tender is a prestigious tender because of these news, they are still trying to place power first before they place the power, which has been auctioned post our auction.
Philip Shen: Okay. Thanks. As it relates to PLS, you guys gave a lot of good detail in your slide deck about the historical PLFs by quarter. I was wondering if you might be able to share how you expect that PLF to trend by quarter and fiscal 2022? And then one other question on the FQ3 PLF, it looks like weather was an issue and may have driven the lower-than-expected PLF. Can you share a bit more about what happened in the quarter? And is it a seasonal issue that is likely to recur? Or do you think it persists?
Ranjit Gupta: Two questions that you have Phil. The first one is about the 2022 guidance. We will certainly work on that and provide you with some quarter-by-quarter numbers, if that's what you would like. It's – like I have mentioned in my remarks earlier, too, that a part of the improvement in PLF is really nothing of our doing literally, right? I mean, in the sense that the across the sector, the AC/DC loading has improved, right? And one of the reasons why PLF across the sector are rising is because now people are putting higher DC capacity behind the AC capacity. So earlier, if you were doing a 100 megawatt project, we would put 100 megawatts of modules. So if you were going to get 19%, 20% PLF, that's the PLF you would going to get. But as time goes by and people start putting 110% or 120% modules – 110 megawatts, 120 megawatts modules behind a 100 megawatt AC capacity, the PLF tend to rise. Azure, of course, has legacy assets, right? So at that time, the tariffs were supportive of 100% AC to DC ratio and when the industry was still young. So we have several projects which are in states where the installation is lower. We have several projects where the AC/DC ratio is not what it is currently for other projects, which we are building today. Therefore, we will continue to see an uplift in our PLF as we move forward. The projects that we are constructing today in Rajasthan have – are expected to be in high 20% PLF because of the fact that they have 1.4 times or 1.5 times loading, and they are in one of the best installation areas of India. So because of that our insulation – our PLF numbers will continue to rise over the next few years. As far as the third quarter is concerned, right, we had extended monsoons and a storm that went through Southern India. So in the South, right, we had rainfall in the months of October and November. Typically the monsoons in India ends in August and September, but this time, we had monsoon stretching into October and November, which hurt us quite badly in the months of October and November. Because of that, our numbers are lower because the installation in those months was lower. So this is, of course, a one-off kind of an event. I was looking at the 20 year data, the NASA data over the last 20 years, and there have been years that have been worse than this, and there have been years that are much, much better than this, right? So that's why, from an average, over the year, we have been about 5% lower. From the long-term average across the country this year, if I look at different states – of course, different states have different numbers, but overall, it's about 5% lower. And some years, it will be 5% higher or 6% higher. So it averages out over the 25 year period that the PPA exists.
Philip Shen: Thanks, Ranjit. One last one. A quick one, hopefully. As it relates to trackers and bi-facial, you talked about starting to use them. Can you share what kind of trackers you're using? Are you possibly using, for example, U.S. trackers like Nextracker array? Or do you think you'll be using other brands? And if so, what are the names of those tractors that you plan on engaging?
Murali Subramanian: Can I take that? So hi Phil, it's Murali. We – at the moment, as we mentioned, we are experimenting with trackers in the sense that we have our test bed, and we are piloting several suppliers. So we have a couple of the big industry names, and we have a couple of small names as well. An American company, an Indian company, a Chinese company, we're all there. And so we – once we are comfortable with which tracker is good for us, we will work with them closely to see, they can be deployed for our next projects.
Philip Shen: Thanks, Murali. One quick follow-up there. What kind of pricing makes sense for you guys, given the potential performance in gains? Do you think it's $0.05 a watt? Or do you think it's got to be sub-$0.05 a watt?
Murali Subramanian: So this is also dependent on the module pricing, right? As module prices drop, trackers don't make as much sense. As module prices go up, trackers certainly start to make sense. So this is a moving number. At the current module prices, which are early 20s, trackers actually start to make sense. But if module prices drop to $0.17, $0.18, then it doesn't make sense, right? So approximately, I would assume, $0.06, $0.07, $0.08 at that price level, it start to make sense.
Philip Shen: Got it. Okay. Thanks for the color. I’ll pass it on guys. Thank you.
Operator: Thank you. The next question is from the line of line of Maheep Mandloi from Credit Suisse. Please go ahead.
Maheep Mandloi: Hey, thanks for taking the questions. Just following up on the different factors driving the PLF here, the string inverters, bi-facial and potentially, the trackers how should – how do we think about the long-term PLF target over here. And any potential impact to the CFE for the whole 2.1 gigawatt portfolio here.
Ranjit Gupta: Thanks, Maheep, thanks for the question. On the 3.1 gigawatt portfolio, most of the modules have been decided. And as far as the tracker is concerned, we are still taking the final decision for the last 600 megawatts of the 3.1 gigawatts. And those decisions will be made over the next four to six weeks as to how we go ahead better, like Murali mentioned, depending upon the modules they have closed. Depending upon the cost of trackers, we will take a call on whether we're going to do trackers on those two projects. So once that is frozen, so let's say, by the end of March or middle of April, we would know what kind of PLF we can expect from the entire 3.1 gigawatt portfolio because for the 2.1, which is already operating, we know what the PLF is expected to be. We – for the remaining 450 – for the nearly 300 megawatts of the Rajasthan 6 project, right, the modules are on the way and so on. So we know what the PLF are going to be. For the last 600 megawatts, the things will be clearer in six weeks' time, Maheep.
Maheep Mandloi: Got it. And then maybe just one follow-up on that one. So the PLF was roughly around 19.5%, 20% in FY-2021 for an average for the whole year. How should we think about that PLF for new projects for the 4 gigawatts, SECI or some of the new contracts here? How much uplift you see in pay and for new projects from all these new technologies?
Ranjit Gupta: So the projects that we built with trackers and bi-facial. If we do trackers and bi-facial, we could be looking at early to mid-30% – in the 30s, right? That's the kind of PLF you will get because mono PERC with 1.5 loading in some of the sites that we have secured, which are some of the best sites, so we can get as close to 30%, very close to 30% kind of numbers. And as you add bi-facial and as you add trackers, the uplift of what the industry says, we have yet – like we mentioned, we have yet to put up our test bed and to test it in India. But across the world, people are saying that they could be between 10% to 20% uplift due to this trackers and bi-facial. Of course, what happens, Maheep, that as we start going into the tracker and bi-facial because of the fact that your clipping starts to increase, right, as your PLF increases, right, what happens is that you start to reduce your overall AC/DC loading, right? So once your AC/DC loading – because if you suppose have a 30% PLF with just mono PERC and you add 15% on top of that, if you go and try and do 34.5%, you will probably not get 34.5%, right? You'll probably drop because a lot of shipping will happen. So the way to do it would be to then reduce your AC/DC loading and bring your PLF down to maybe 31% or 32% so that the clipping losses are reduced. So – but I think getting upwards of 30% with manageable clipping is possible, but you will have to do the design and figure it out. Murali, perhaps you can add something to that.
Murali Subramanian: No, I think you explain it very well. So that's fine.
Maheep Mandloi: Got it. That makes sense. So there's probably some savings on CapEx from reduced AC/DC loading, but probably somewhat offset by higher cost for trackers and bi-facial and string inverters. Got you. And just on the broader market here, right now in the budget, the only provision we saw was the tariffs on and what is – not on modules yet. So anything else you're expecting from the project or the basic customs duty, which was previously expected last year, but we haven't yet seen. That 20% to 40% BCD yet. Any expectations on when that could come in? And how that could impact the full gigawatt?
Ranjit Gupta: This was a very strong rumor that the BCD announcement will come in this budget, right? However, yes, we were all surprised that nothing was mentioned about it, so – right? But what the ministry had said a couple of months back was that they expect that the BCD will be applicable from April 1, 2022. So our 3,100 megawatts of the 900-odd megawatts that are under construction at the moment will not be affected by the BCD. But of course, the 4 gigawatts, if the government comes out, I would be – I would think that the BCD would come in before the ship modules for the 4 gigawatts unless the ALMM list that the government is coming out with is a success, which is like a nontariff barrier. So it is possible, Maheep, that – and then the government is talking about coming out of the ALMM list as soon as by the end of this month. If the approved list of modules and manufacturers, if that list comes out before the end of February or in March, then I think the government might wait to see the impact of this nontariff barrier before deciding to put a BCD on top of that.
Maheep Mandloi: Thanks for the clarification, and I’ll jump back in the queue here. Thanks.
Operator: Thank you. The next question is from the line of Puneet Gupta from HSBC Securities. Please go ahead.
Puneet Gupta: Yes, thank you so much for the color. Pawan talked about debt-to-EBITDA at 6 times on operational FX. Would it be possible to get what that number would be on a debt-to-equity basis as well?
Pawan Kumar Agrawal: So typically, a project, if you look at the project level, Puneet, the projects have funded typically 75-25 debt equity, right? So again, so the problem comes when you look at the overall balance sheet, right? So at the balance sheet level, the leverage would reflect very, very different from what we look at the project level. And a part of our overall capital structure, we do have pure equity. We do have project debt. We do have some part of – some proportion of our pure equity. We also carry a corporate debt to optimize on return on equity while ensuring the prudence and terms, the parameter, so.
Puneet Gupta: So similar to the operational debt-to-EBITDA, which you said is 6. Is there a number that we can – will it be fair to assume that operational debt-to-equity will be at 75-25?
Pawan Kumar Agrawal: No, our projects debt-to-equity will be around 75-25. That's a fair redemption, but we have not provided any guidance, but yes, we can – you can take the numbers and calculate and get back to you because those numbers are anyway part of the – part of our numbers. So we will not have any problem in getting those calculated and share with you.
Puneet Gupta: Okay. And secondly, can you talk a bit more about what is the new cost of debt that you're able to target for now? What would that ballpark number, including the hedging cost?
Pawan Kumar Agrawal: So recently, Puneet, we have seen domestic market giving us cheaper rate than what is available possibly in the green bond market, if you look at the coupon plus hedge was holding tax that is cost. The domestic market – of course, domestic market is not available for all borrowers. So that's a separate problem. But for players for whom domestic market is accessible, we are getting much, much finer rates, so for example, the recent transactions that we've closed is around 8.5%, and we've already closed and then the next is around 8.25%. So these are the levels that you see between 8% to 8.5% is something that we are getting for the recent projects that have refinanced.
Puneet Gupta: Okay. And what is the tenure of this debt? Is it fixed cost or floating?
Pawan Kumar Agrawal: So, these – so the tenure of the debt is around 80% of the remaining life of PPA. So it raises around 12, 13 years to 16, 17 years, depends on at what stage of PPA are we refinancing these projects. And – so the loan that we take from bank, Puneet, that is floating. It does linked to their MCLR, which is typically linked to one year MCLR. But we have also taken debt from Infra Debt Fund, IDFs. And when I talked about 8%, 8.5%, 8.25%, these are the rates which are fixed for five years.
Puneet Gupta: Okay. This is very useful. Secondly, Ranjit, you talked about everything, but you didn't talk about the plan of asset sale, which we talked about a couple of quarters back. Any update that you'd like to share there?
Ranjit Gupta: Puneet, there were two sets of assets that we have mentioned in the past that we were looking to divest, right. And one set of assets that we have made significant progress. And hopefully, we'll move forward on that. And on the second set of assets, which were –the assets that we were looking to divest, we have received some very good interest, as you know, the M&A market is extremely, extremely hot in India, lots of transactions taking place. So there is a keen interest in those assets, but at this point in time, as we go out and try and figure out how much equity do we need to fund our future growth, we are figuring out whether selling those assets will be the best cost of capital that we can get. So the decision on the sale of the second set of assets has been deferred right, for the time being. We are considering when it comes time, because you see the original – before the pandemic came, we had expected that we would have started spending money on the four gigawatt projects already. Because of the pandemic, the infusion of capital for the four gigawatts is delayed by 69 months. So our capital raise has been delayed by 69 months. So therefore, we have to – at the time when the capital raise comes around. And that's when we will take a call on whether we want to divest those assets or we want to raise the money that we need in a different way. And the good thing is that, like I mentioned, there is a huge demand for operating assets. And so therefore, we can do the discussion with the people who have shown interest, we believe that a lot the work that has to be done for evaluate those assets has been done. And if required, we can close the being fairly quickly.
Puneet Gupta: And when you said the first block of assets, I presume you're referring to the rooftop assets?
Ranjit Gupta: That's right.
Puneet Gupta: Okay. Okay, great. That's all for my side. Thank you so much.
Ranjit Gupta: Thank you.
Operator: Thank you. The next question is from the line of Joseph Osha from JMP Securities. Please go ahead.
Joseph Osha: Thank you. And good morning and good afternoon, I wanted to return a little bit to some of the pricing comments you made early on in that sort of 20% dislocation. Obviously, things are evolving, but as we think about especially this first gigawatt, would it be fair to just take a 20% haircut from that Rs. 2.92? Is that how we should be thinking about it?
Ranjit Gupta: Good morning, Joe. The 20% dislocation, like I said, right. I mean, when we looked at that pricing and looked at the cost of setting up projects, right, that tariff, we could not – for us, we could not – the numbers do not add up. And over the last month or month and a half, since the tariffs have been discovered, more and more people that we talk to, including SECI, feel that that is perhaps not a reflective tariff, right. So as you know, there were a couple of public sector undertakings that had taken part in those auctions like NTPC and SJVNL and NLC, Neyveli Lignite Corporation. So the cost of capital, the cost of debt for these companies is much, much lower. So we feel that, this tariff is not reflective really of the market. And therefore, I don't think there is any question of us, expecting a 20% reduction in the numbers. Unless and until over the next few weeks, we see a huge again, a dislocation in the module market, which makes us comfortable that yes, we can still make the kind of returns that we're hoping earlier with that kind of a decrease in pricing. At this point in time, given how the module pricing is holding firm and the guidance that we are getting from the large manufacturers on the prices of modules over the next two, three, four quarters. I don't think it is – 20% will be difficult to accept.
Joseph Osha: Okay. Thank you. And you alluded to the second question I was going to ask, since if we're short of everything from semiconductors to building materials to solar panels these days, it sounds as if the signals you're getting is that this tight environment is going to continue for another couple of quarters. Is that correct?
Ranjit Gupta: That’s not a term – that's doesn't seems like, Joe, but these things change very rapidly, right. I mean, today China will announce a 19 gigawatt capacity addition, you will see the prices firm up. Because the supply and demand is fairly well balance, it’s like the oil market, right. I mean, Saudi will reduce out of 90 million barrels a day, they'll reduce 1 million barrel, and suddenly, you'll see the price shock. So it's a little bit like that if suppose China reduces its requirement by 10 gigawatt or 15 gigawatts, it's possible that the prices will moderate very, very quickly. But at this point in time, as we talk to the larger suppliers and they are – all of them are saying that they expect the pricing to remain firm until the end of this year.
Joseph Osha: And you're kind of in the low 20s at the moment?
Ranjit Gupta: In India, you're getting early 20s, delivered in India.
Joseph Osha: Okay. Third and final question, and I'll jump off, we've talked before, and then you alluded just recently to this effective debt pricing at kind 8.25%, 8.5%. Can you perhaps – I know I asked about this before, reeducate me as to what it would take for your company to be able to access related debt markets in India? And what, if you could, the pricing would look like?
Ranjit Gupta: Pawan, can you take that?
Operator: Sir, is the question answered? Can we move to the next question?
Ranjit Gupta: No, no, I was asking if Pawan can…
Operator: Okay, sorry.
Joseph Osha: Yes. The question was, what would it take in terms of ease of your enterprise or what else for you to be able to access rated debt markets in India?
Pawan Kumar Agrawal: See, I don't know if you're asking about the domestic bond market because, as I explained, in the domestic idea of market, we are getting rates closer to 8.5% and domestic banks – and this is a – this typically get a five-year fixed kind of rate. But if you look at domestic banks, the rates are, again, closer to the single level, but these are floating. So these are – these are typically linked to one year ancillary. Now with the rated bonds, in India, we do have market for rated bonds, which is typically for AA and above category rated bonds, right. But those bonds are also – it is difficult to get an amortizing long termer bonds in Indian domestic market because the mutual funds and other investors, who look at corporate bonds, typically look for a bullet maturity bonds, which is something we, as a company, are not very comfortable because we prefer our debts to be amortized as and when we keep on receiving our cash flows.
Joseph Osha: Okay, so that’s really not going to be a factor than you want to stay with amortizing. That’s fine. It’s not an issue. Okay, thanks. That’s it from me. I appreciate it.
Operator: Thank you. The next question is from the line of Moses Sutton from Barclays. Please go ahead.
Moses Sutton: Hi, everyone. Following up on some of the comments on tracker and bi-facial cases. So you mentioned bringing down the inverter loading due to clipping, how about adding DC-coupled storage to capture that clipping? So you could still have a higher DC loading and not get so negatively affected by clipping while optimizing the overall generation of projects. Any thoughts there?
Murali Subramanian: No, no, absolutely. When we said we are doing a test bed and we are testing all of this, this is very much part of the testing that's going on. We want to get ready, both from a perspective of what the future distribution companies might want in the future. And for ourselves, if the pricing makes sense to capture the excess clipping and rack it back into the grid.
Moses Sutton: Great. Great. And if panel prices drop back to, let's say, went to mid-teens even. Is there a scenario you'd increase inverter loading beyond 1.5 or is that really the most feasible, safe equilibrium? And you're not comfortable going beyond that?
Murali Subramanian: No. At the moment, it's basically the – where the curve flattens and then starts to pick up again, right. As you clip more, you draw a line in the U-shaped curve, right. So as you increase the loading, you start to clip more and a point comes where incremental loading of modules results in disproportionate clipping. So at the moment, it varies between 1.4 and 1.5, depending on where – depending on the level of insulation and the specific location. It's also a function, obviously of the module price. So as the module price drops, you can load more and more. So all of these factors are there and it's really not a technology of bottleneck anymore. The inverters can take much more power. It's just a matter of determining how much you want to clip. And as you rightly pointed out, if storage becomes really low, then – sorry, the cost of storage becomes really low, then we may just add more basic capacity and stored it in the lack of backup. So that is something we will continuously evaluate.
Moses Sutton: Great. That makes a lot of sense. A complete shift here, really high level thought. Any thoughts towards starting to explore options and expanding, maybe even on a longer term basis beyond solar, perhaps wind, or even thinking about the hybrid plants over time, wind solar storage, maybe through a partnership. I totally understand. It's a very different process and execution and all of that, but any thoughts on longer term technology focus of the business?
Murali Subramanian: Yes. So the business is – again, it's all driven by what the customer wants, our customer is the distribution company. And if the customer wants more power, which is less intermittent, then they will ask for storage, and we will give it to them. If the customer wants a larger sort of a hybrid supply source so that the PLF is beyond 30%, it's actually in the range of 55%, 60% because when you combine wind and solar, you can get higher PLF. If that's what the customer wants, we'll do that. We – while Azure may not have done wind projects before, Ranjit and me, and there is a lot of wind experience in the country. There is a lot of very good players. The industry in India is fairly mature. So we are very comfortable moving into wind if required.
Moses Sutton: Great, that’s very helpful. And last one for me, I may have missed this, but any update on timing of the next time, you'd need to raise equity to execute on the portfolio. I expect it's aligned with final timing on starting on the four gigawatts somewhere, but just – sorry if you said this already, but any thoughts on timing here?
Ranjit Gupta: Sorry, I missed that. Is that for Murali or for me?
Murali Subramanian: Ranjit, that's for you. That's the question on the timing for equity raise. What's your thought on that?
Ranjit Gupta: Yes, so Moses, as far as the equity raise is concerned, right, we are – there are two things that are playing on our mind. One, of course, is the – when is the need, right. When do we actually need this money? And that is going to get decided as we secure more capacity, either the four gigawatts or any other auction that we win or any other project that we secure. At the moment, like we have mentioned in the past, for one gigawatt, we are fully funded. So therefore we don't need to go out and raise equity for that. The second factor, of course, is that because the four gigawatt is coming and whether it comes in two month time, it comes in three month time or comes in four month time. At the end of the day, we will need equity for it. And the market is fairly strong at this point in time. So should we go out and raise money right away in preparation for their four gigawatts and other capacities that we will eventually build. So this is a discussion that we are currently having within the company. And we have said in the past that we will not raise money until FY2022, which means post-April. So I guess, we are not going to raise money in this fiscal, but for sure, sometime during the next fiscal, we will raise equity.
Moses Sutton: Great. Thank you.
Operator: Thank you. The next question is from the line of Puneet Gupta from HSBC Securities. Please go ahead.
Puneet Gupta: Yes. Thank you so much. And thanks for the color on the ESG part. Although, I'm surprised that you got a , where do you think is the room to improve on the ESG front for you guys?
Ranjit Gupta: So as far as ESG is concerned, Puneet, ESG is an always evolving field, you can never be fully compliant with everything at site. It’s a continuous process. And also because unless and until, you build that culture of awareness training, right, you cannot rest on your laurels. It's not – I have done my governance bid. Now I don't need to do anything. I've done my safety stuff. I don't need to do anything anymore, or I've done the social stuff that has to be done so I don't need to do this anymore, right. So it doesn't work like that, right. I mean, it's a continuous process. There are, for example, we got the ISO-45001 done this year. We are continually working with consultants and with advisors to improve our safety performance. Just this year, for example, we started driver training, right. So we appointed a third-party company to do training for all our drivers, whether they are on our roles or their contract drivers or their large vehicle drivers, which deliver stuff to our projects because we figured that when we looked at the risk identification reports. We found that driving was coming out to be one of the major risks. So I will never say that we are the best at ESG or we don't need to work more on ESG. ESG is a continually evolving process. We have to continually keep our eyes, otherwise we’ll drop the ball. And we have to keep raising awareness, keep training to make sure that we are near the top of our game.
Puneet Gupta: And what kind of costs should one thing would be associated with these kind of and being able to improve ESG score?
Ranjit Gupta: On the ESG front, you're saying about the cost of ESG?
Puneet Gupta: Yes. I mean, all these things will have some things on the sustainability driver training will be a small cost, but there could be others as well – should we think – should we worry about any material costs that will come with improvement in ESG or not really?
Ranjit Gupta: No, not really because the basics are in place, right. I mean, our governance standards, the stuff that you do on safety, the stuff that we do to – for environment, it's all in place. It's a question of if there are any new methodologies or methods, which we can incorporate in our business to make our workplace even safer, we will do that. But overall, if you look at the CapEx of our business, right, these costs are very, very, very small, they're insignificant. And anyway, I mean, ESG is a hygiene impact. I mean, we have to do it. It's not something that is an option that we can take an optional call that we'll do it if it is less than this amount of money, we will not do it if it is more than this amount of money, right. So I've never seen ESG as being considered a cost. It is always an investment. And you make up for whatever you spend on ESG, you make up in terms of the way the investors look at you, the way your employees look at you, the way your contractors look at you. If you run a ship, which is clean, which is safe, you will have more people on that ship and not on other ship, right. So I think it's very, very important. It's not something that we can compromise on.
Puneet Gupta: That’s very useful. The second part I wanted to check was, is the labor availability all on track? And is there a risk that we could see on the execution of balance that we got?
Ranjit Gupta: So as far as labor is concerned, Puneet, I don't see any issue with the labor. Over the last three or four months, we have not seen any labor issues. We are seeing supply constraints on material, right. Some supply of steel, supply of modules, that kind of thing. But whenever we have wanted to increase the labor at site, we have not seen anything, any issues. And on the supply side also, the non-module supplies are starting to get back to almost normal now. So whatever delays or whatever challenges were there, which happened over the last two or three quarters as COVID ran its course. Most of them are now behind us. The module situation continues to remain tight, but other than that, most other things are coming online fairly smoothly. And I'm sure they will, by the end of this quarter, if things continue to remain the way they are on the COVID side, we will be 100% normal apart from the module situation.
Puneet Gupta: Do you run a risk of delays or is it mostly a cost issue?
Ranjit Gupta: Sorry.
Puneet Gupta: On the module side, do you run a risk of delay because of non-availability? Or is it more of a cost issue?
Ranjit Gupta: On the Rajasthan 6 project, our 600 megawatt project, right, where we already have 300 megawatts operating and 300 megawatts under construction. I don't see any delays there because of modules that have been ordered. A lot of the remaining modules so 450 megawatts is already installed for 450 megawatts is under either manufacturing or on the way. So I don't see any delays there. For the second – for the Rajasthan 8 and Rajasthan 9 projects, right, Rajasthan 8 is almost closed the modules, and they are the good suppliers. At this point in time, they are saying that they're going to start manufacturing those modules in the month of April and May. So we will have to see the Chinese folks last year, over the last two quarters have come back and ask for changes on the supply schedule. So far, we are seeing for the first 600 megawatts, things are going smoothly. We'll have to see how it pans out over the next couple of months. At the moment, there is a Chinese New Year going on, when – and people will come back to work post around the 15th of February. We’ll get more updates as the factories ramp up back.
Puneet Gupta: Good. Thank you for that.
Operator: Thank you. The next question is from the line of Apoorva Bahadur from Jefferies. Please go ahead.
Apoorva Bahadur: Hi. Thank you so much for the opportunity. Just one quick question, sir, in your notes to accounts, there is a mention of certain past period SAR expenses. So could you please throw some light on the amount?
Ranjit Gupta: Yes. So you're talking about the breakup of the 18 million SAR?
Apoorva Bahadur: Right.
Ranjit Gupta: Yes. So close to 9 million pertains to the previous quarter and close to 9 million is for this quarter.
Apoorva Bahadur: Okay. Got it. And if I may just squeeze in one last question, and that is on the reduction – likely reduction for the manufacturing linked tariff. So we heard there were some new items that Kerala has probably agreed to sign 200 megawatts at 2.66. Should we look at that as representative tariff?
Ranjit Gupta: It's early days and a little bit difficult because, yes, Kerala has expressed an intent to sign a 2.66 and which was the weighted tariff between the three auctions, Rs. 2.92, Rs. 2.50 and the Rs. 2.36 option, when you weight these three auctions, it comes to Rs. 2.66. But Kerala is just 200 megawatts out of the large quantity that SECI is trying to place. So they will not drive the final tariff. We have to wait for a few more weeks to figure out what exactly will the tariff land at.
Apoorva Bahadur: Okay, thanks a lot.
Operator: Thank you. Ladies and gentlemen, that will be the last question for today. On behalf of Azure Power, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.
