Earnings Transcript for AZRE - Q2 Fiscal Year 2021

Operator: Ladies and gentlemen, good day, and welcome to Azure Power Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nathan Judge. 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 second fiscal quarter of 2021 ended September 30, 2020. A copy of the press release and the presentation are available on the Investors section of Azure Power's website at azurepower.com. With me today are Ranjit Gupta, CEO; Murali Subramanian, COO; and Pawan Kumar Agrawal, CFO. Ranjit will start the call by going through recent key highlights and to review the overall long-term positive outlook for solar in India. Murali will then follow with an update on our projects under construction and an industry update. Pawan then will provide an update on the quarter with additional discussion on the performance of operating assets, a deeper dive into our falling cash G&A expenses, recent improvement in DSO, and then we will wrap up the call with Ranjit updating FY '21 guidance and reiteration of our longer-term guidance. After this, we will open up the call for questions. Please note, our safe harbor statements are contained within our press release, presentation materials and available on our website. These statements are important and integral to all our remarks. There are risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements. So we encourage you to review the press releases we furnished in our Form 6-K and presentation on our website for a more complete description. Also contained in our press release, presentation materials and annual report are certain non-GAAP measures that we reconcile to the most comparable GAAP measures, and these reconciliations are also available on our website in the press release, presentation materials and annual report. It is now my pleasure to hand it over to Ranjit.

Ranjit Gupta: Thank you, Nathan, and a very good morning, everyone. Last time we spoke, I had hoped that we would get some relief from the pandemic and a vaccine would be found. It looks like there has been some positive news on the vaccine front, and we are all seeing light at the end of the tunnel. Here is wishing that the next call is held in an even more positive environment vis-à-vis our fight against COVID-19. Given the breadth of our operations, Azure had embarked on an aggressive awareness campaign internally to ensure we remain safe from COVID-19. Through continuous monitoring and management support, we ensured reduced incidents and report no severe health impact on any of our team members. We formulated and implemented strong quarantine and isolation protocols across our operations and provided a dedicated doctor on call to support all our team members and their families who were impacted by the pandemic. Our COVID 101 awareness flyer series continue to disseminate meaningful information and knowledge, which enhanced capacity and preparedness of our staff during the pandemic. We have also continued to work with our communities to help them through our CSR outreach. Job training is an important focus for us across our operations. We are also moving forward to getting ourselves ISO-45001 certified. Azure continued to operate well despite the challenges faced with COVID-19. During the quarter, we reported that cash flow to equity, or CFe, rose 50% year on year to $14.7 million. Starting this quarter, we will also begin highlighting EBITDA and leverage statistics for our operating assets. This will enable investors to better see how our operational assets are performing and have a greater ability to value the company. EBITDA from operating assets for the quarter rose 20% year to year to $40.7 million and the net debt to last 12-month EBITDA was 5.9x. We also made great progress this quarter in getting makeup payments from our past due customers, and our days sales outstanding fell to 114 days from 139 days in the previous quarter, which is the lowest level we have reported since 2018. With regard to the PPAs for the 4 gigawatts pipeline for which we have LOAs, given the size of capacity combined with other factors, we now expect that the PPAs will be signed in tranches of 500 to 1,000 megawatts at a time rather than 4 gigawatts at once. We are making progress and do expect that we will receive PPAs for the first tranche by around January, February 2021. As many are aware, construction costs have fallen, foreign exchange rate move has been favorable in recent months, and we continue to expect that we will realize our original expectation of 20% equity IRRs or more on this 4 gigawatts. As we have discussed before, there is an added advantage for the 3 gigawatts coming online after the interstate transmission system, or ISTS, cost waiver expires in mid-2023 for renewable energy. With the expiry of this waiver, distribution companies will begin to incur about INR 0.01 to INR0.02 per kilowatt hours for transmission costs that were previously avoided. However, for our entire 4 gigawatts pipeline, we will retain this waiver and distribution companies that buy power from this 4 gigawatts will not incur this expense, providing a significant pricing advantage. After mid-2023, the power generated from these megawatts will likely be some of the lowest delivered new power in the Indian market. In addition, we would note that many DISCOMs are well short of meeting their renewable purchase obligations for the next several years. It is pertinent to note that the draft amendments to the Electricity Act increases penalties on DISCOMs that do not meet their RPO obligation. Hence, DISCOMs will need to buy renewable power, and our tariff with an ISTS waiver will be one of their lowest cost options. We also released our second Sustainability Report in less than 9 months, the most recent one is for fiscal year-end 2020. We have continued to expand our disclosure, including scope 3 emissions and participation in the carbon disclosure project. We have implemented several new policies, including diversity and inclusion, equal pay, an enhanced health and safety policy, ESG, a commitment to continue to not emit non-GHG air emissions and to reduce lost time incidents by 5% annually, among others. We are also increasingly engaging with our suppliers to encourage better carbon reporting in efforts to reduce their environmental impact. We continue to remain a net carbon-neutral company and are making good progress in reducing our water consumption with an aim to be water neutral by 2023. Whilst many are aware of the tremendous organic growth opportunities for solar in India, on Page 5, we would like to provide a brief recap for the many new investors that have recently invested in AZRE. Electricity per capita usage in India is some of the lowest in the world as many only recently received access to the grid and what they do get is unreliable and not readily available. As solar capacity is the lowest cost source for new electricity, solar makes the most sense to satisfy substantial future demand growth. These are coupled by supportive government targets that aim to have 450 gigawatts of renewable energy capacity in place by 2030 or nearly 30 gigawatts of new capacity additions every year going forward. In fact, we see about 25 gigawatts of new capacity being auctioned by the end of next year. Today, in India, there is only construction capacity to build about 1/3 of what the government intends to auction. This provides a tremendously attractive runway for significant additional growth with returns that will be well above our current cost of capital. As we complete 2 quarters of work from home, I take this opportunity to thank all Azure stakeholders for their patience and support. At any organization, its team is its biggest source of strength, and I can proudly say that the team at Azure has done an incredible job over these last 2 quarters. We currently have over 3,000 staff and labor at our various sites working through the dangers of this pandemic. Apart from the various initiatives our Human Resource team has undertaken to ensure cohesiveness and engagement in these changed times, the company has embarked on an ambitious online training program, which is specifically developed for our team members as we seek to upskill ourselves to take Azure to greater heights. With that, I will pass it over to Murali.

Murali Subramanian: Thank you, Ranjit. Good morning, everyone. On Pages 6 and 7, we provide an update on the projects under construction. Overall, we continue to expect that our projects will be finished by the expected revised commercial operation date and that they will remain within our initial budget expectations. We finished 25 megawatts in Assam, which is part of the larger 90-megawatt project. We want to thank the many that worked tirelessly to finish this project despite the tremendous challenges they faced, including torrid rains of the monsoon season, in addition to the pandemic and pandemic-related restrictions. We expect to have another 40 megawatts finished by the end of this fiscal year and the remaining 25 megawatts in the fall of next year. On our largest project to date, Rajasthan 6, we are making progress despite the many challenges. As of now, we expect to have about 300 megawatts completed by this calendar year-end and the remaining 300 megawatts completed by March. As it relates to our Rajasthan 8 and 9 projects, each of which are 300 megawatt with 25-year fixed tariffs with SECI, we expect they will come online around the third quarter of next calendar year. Additionally, on the energy generation side from operating projects, we have achieved our targets for revenues despite COVID-related restrictions and greater-than-expected rainy days. Looking at industry and regulatory developments on Page 8. We still see significant demand for new renewable energy in India and regulators reported that the country had a power supply deficit of 0.3% for the first half of this fiscal year. During the quarter, there was nearly 2.9 gigawatts of new tenders released and about 2 gigawatts of solar capacity auctioned. Unfortunately, distribution companies are taking time to sign power supply agreements with intermediary procurers, such as SECI. And at the moment, about 9 gigawatts of capacity are without contracts. However, we do see increasing pressure on DISCOMs to sign PSAs to meet their RPO and various proposed amendments to the Electricity Act that would give teeth to the enforcement of RPOs. Power demand has also finally picked up after 5 months of contraction with September demand this year registering a year-on-year growth of about 4.5%. We have also seen the introduction of a new renewable energy platform called the Green Term Ahead Market for short-term bilateral transactions in renewable power. Electricity trading in India is still very nascent. This platform will provide an avenue for resource-rich states to sell RE power at market-driven prices, and enable RPO-deficient states and buyers to meet their RE targets. As an update on the proposed Basic Customs Duty, BCD, we currently expect that it will be in the range of 10% to 20%, which would be in addition to the Safeguard Duty. We have been expecting a final decision for some time now, but there has been some hesitation given that India is very reliant on China for module imports and the BCD may result in higher electricity bills for customers. We do not expect any material impact to our returns on our projects as they are protected by change in law provisions. Efforts to privatize DISCOMs continue, and the Ministry of Power recently issued documents that outlined the criteria for potential bidders interested in buying a majority stake in distribution companies. We also wanted to highlight several positive proposed changes to the Electricity Act and Electricity Rules that would benefit us and the renewable energy sector in India. One set of proposals would give us greater certainty on revenue, including formalizing renewable energy in the Electricity Act as must-run capacity, making curtailment less likely, enhancing security payment and establishing a new regulator to focus on construct disputes with an aim of shortening the time to resolve issues. If the proposed amendments are adopted, we will be able to get expedited recovery of cash outlays for items that are considered pass-through due to change in law, such as Safeguard Duty. With that, I will turn it Pawan to discuss the quarterly results.

Pawan Kumar Agrawal: Thank you, Murali. Turning to Page 10. As of September 30, 2020, we were operating 1,834 megawatts on a PPA or AC basis. Our portfolio of 7,115 megawatts remained stable from the previous quarter. Our construction costs were mostly flat year-on-year. On Page 11. Overall, we were very pleased with the quarter and results came in ahead of our internal expectations, following efforts that we have put in over the last few quarters to focus on improving generation and reducing operating costs. Revenues for the second fiscal quarter were USD 14 -- USD 47.6 million,which was about 6% above the high end of our guidance. Our plants continue to operate very well. And PLF was 18.8% or at the higher end of our 18% to 19% PLF guidance range and about 200 basis points higher than the second fiscal quarter of the prior year. This higher PLF, a 5% increase in DC capacity and recovery of about $2 million related to Safeguard Duty and GST, drove a 23% increase in revenue from the same quarter last year. Costs were essentially in line with our internal expectations, save for stock appreciation rights, or SARs, which added about $7 million to G&A due to 87% increase in share price during the quarter. On this, we would note that most of that is for SARs that cannot be exercised until 2024 at the earliest and only then would cash be paid. We also had a tax benefit related to SARs of about $2.4 million. We expect that tax expense will be around $12 million for the full fiscal year of 2021 and tax expenses will be around $6 million for the third fiscal quarter. Excluding stock appreciation rights impacts, the second fiscal quarter results would have resulted in a net loss of about $700,000, which was a meaningful improvement from the approximate of about $10 million loss in the same quarter last year. Turning to Page 12. We remain very focused on reducing our costs as we had outlined earlier this year. We do continue to expect to see a reduction in our corporate overhead or G&A, excluding SARs of at least 10% in FY '21 versus FY '22 despite about a 35% increase in megawatts operational by end of this fiscal. As you can see, we are driving continued operational leverage, and we expect that there will be even more important -- more improvement in our margins going forward. If you look at G&A, excluding stock compensation expenses, our corporate G&A is running a little over $1 million per month so far this fiscal year. We are doing more to reduce costs, and we recently moved our head office to a more economic location, saving about 2/3 on our office space expenses. One of the new areas of emphasis this quarter is on providing greater disclosures around operating assets. We believe this is very important for investors to properly value the company given the steady state of profit and cash flow generation once the solar project is operational. On Page 13, you can see that EBITDA from operating assets increased about 20% year-on-year and that cash flow to equity rose about 50%. Net debt for the operating assets was about USD 964 million, and EBITDA for the last 12 months was about $163 million resulting in a net debt-to-EBITDA ratio for operating assets of around 5.9x. This ratio is much more reflective of our balance sheet than net EBITDA -- net debt-to-EBITDA ratio for the overall company, which includes debt for projects under construction or just recently commissioned but have yet to produce normalized EBITDA. This leads us to a review of our overall balance sheet on Page 13. We had about $106 million of cash and cash equivalents, and our net debt stood at $1.08 billion. As a reminder, for those that are calculating our debt ratios, the hedging assets included in other assets should be included as this is directly linked to the foreign exchange hedging we put in place related to our green bonds. I want to take a moment and discuss our days sales outstanding, DSOs, on Page 15. We were pleased to see a notable improvement in our DSO this quarter. DSO fell to 114 days from 139 days in the last quarter after 2 past due DISCOMs, GESCOM and Andhra Pradesh, made about $6 million of makeup payments on the past due bills. We continue to work on getting payments from the other DISCOMs in Karnataka as well as Andhra Pradesh and hope to have some good news in the coming quarters. Before I pass it over to Ranjit to discuss guidance, I would like to mention that AZRE was recently included in 2 leading solar stock indices, which we expect should enhance trading liquidity and increase investor awareness of your company. Now over to Ranjit to provide some commentary on FY '21 and long-term guidance.

Ranjit Gupta: Thank you, Pawan. On Page 16. As Murali noted, the completion of about 600 megawatts could slip into the early part of the next fiscal year, reflecting delays related to COVID. However, as the commercial operation dates are also being adjusted to reflect the pandemic, we don't expect to incur any penalties related to these delays. We now expect to have about 2,300 to 2,500 megawatts operational by March 31, 2021. In addition, we are changing our revenue guidance to a range of INR 15.3 billion to INR 15.8 billion given the delays in completing projects. We would note that the shifting of revenue to the following quarter is related only to the delays in projects coming online on account of COVID-19. We have seen our operating performance -- our portfolio performed as expected in H1, and it is expected to continue to deliver the expected revenue in H2. For third quarter '21, fiscal '21, we expect revenue to be between INR 3.6 billion and INR 3.8 billion and the PLF to be between 19.5% to 20.5%. Turning to Page 17. Our long-term outlook remains unchanged, except for some movement of CapEx from fiscal year 2021 into fiscal year 2022. We would note that our fiscal year 2022 CapEx has a placeholder for potential additional megawatts we may win given the delays in signing PPAs for the 4 gigawatts. As stated earlier, we will only do good projects that make sense, and this placeholder is not a commitment. With this, we will be happy to take questions. Thank you.

Operator: [Operator Instructions] The first question is from the line of Apoorva Bahadur from Jefferies.

Apoorva Bahadur: Sir, just wanted to check on this 4-gigawatt PPA, you stated that we will be eligible for the ISTS waiver. If I'm not wrong, the text pace of the policy says that the project needs to be commissioned before I think June end 2023. Are we confident that these projects will be commissioned before that?

Ranjit Gupta: Apoorva, thanks for the question. You are right that the ISTS waiver, which is in place currently for renewable energy projects, expires in June of 2023. So all projects that are commissioned before June ends 2023 are eligible for the waiver. And those post-June 2023 are not eligible for the waiver. However, the manufacturing tender, that's the tender which we have won, the auction that we have won, in this tender, the condition -- because these projects were actually expected to be delivered over a period of time because they are linked to manufacturing capacity, right? So as the manufacturing capacity comes up 1,000 megawatts a year, we are supposed to do these projects over 4 years, right? So from the time we sign up for the projects, the first set of projects were supposed to come up in 2 years and 3 years and 4 years and 5 years, right? Because by the time the manufacturing capacity comes up, it supplies projects which we are going to build on the ground. That was the idea of the government. So therefore, these projects, because they were anyway going to go well into 2025 or 2026, had this waiver for this capacity that regardless of what happens on the ISTS waiver, these projects will enjoy the ISTS waiver until they are commissioned.

Apoorva Bahadur: Okay. Got it, sir. Sir, secondly, on this -- I mean recently announced the CLI thing on solar PV manufacturing. Just wanted to check if we have some insight into that. I mean, obviously, the text, fine print is unavailable. But if you have any insights or any discussions to the relevant department on what could be the benefit for us given that we will also be mentioning this to the manufacturing now.

Ranjit Gupta: So this -- the cabinet decision that you are referring to, right, it's been posted at 3

Apoorva Bahadur: Sorry.

Ranjit Gupta: So -- and it's actually a very small amount of money, right? I mean it's just INR 4,500 crores. So I don't know what exactly they will manage with INR 4,500 crores. But like you actually said, the stuff that has come out is not very detailed, and we will have to wait for more detail on this as to how they want to do it. And perhaps the Ministry of New and Renewable Energy will work on how the CLI thing is going -- are going to help with the sector. But the amount of money that they seem to have put down is small, unfortunately.

Apoorva Bahadur: Right. Any idea I mean how long will this -- will they take to come out with the scheme or anyone's guess?

Ranjit Gupta: Yes. I think, like I said, this is just today afternoon. So it's really, really fresh. It's really, really fresh, hot off the press. So at the moment, I must say that I have no more information than what you have on this.

Apoorva Bahadur: Right. Got it. Right. Sir, lastly, your peer who also won that 25 tendering thing. So they, on their call, recently said that they have signed 2 gigawatts of PPA, more details will follow. I mean so obviously, as you said, that it will start in tranches. So has it started? I mean has -- if you started signing these PPAs? Or will the first kinds of collections starting and they were referring to it?

Ranjit Gupta: So the -- for the manufacturing tender tranches, so far, the power purchase agreements have not been signed because the power sale agreement has to be signed first. And like we had mentioned in the previous earnings call that SECI is bundling this power with other auctions also. So they are in the process. It's a largest capacity because, obviously, between us and our peers plus other couple of tenders, right? So -- and SECI really started this process only in the month of August and pandemic is going on. So sometimes the distribution company offices are open, sometimes they are not open. So it will take a little time. It's been just 2, 3 months, and I think SEI has made tremendous progress. And we are quite hopeful that by January, February, they will start signing these PFAs and PPAs is what we hope there.

Operator: The next question is from the line of Philip Shen from ROTH Capital Partners.

Philip Shen: As a follow-up there, Ranjit, I think you said you're expecting to see some of the PPAs signed starting January or February of next year. How do you expect the cadence of the PPAs to come in next year? So maybe the first tranche comes in at 500 megawatts early in '21. But do you expect all the PPAs to be signed before the end of the year in '21? Can you provide a little bit more color?

Ranjit Gupta: Phil, yes. The question that you asked, sir, actually, to tell you the truth, we have not yet started to focus on the next tranches. The auctions, that will happen by the middle of 2021 calendar, right, June, July, August kind of time frame. In those auctions, most of the people, most of the companies will start taking into account the fact that they are not likely to be able to take the ISTS waiver. Because by the time the auction happens and then the LOA is given and the power purchase agreements are signed, it becomes too close, that the commissioning dates become too close to June 2023, right? So we expect that once the tariffs start reflecting in the middle of next year, by the time the tariffs start reflecting this new reality, like we have mentioned, the INR 0.01 to INR 0.02 to INR 0.03 higher, then I believe SECI will start making an attempt to sell Azure Power also. And I'm hopeful that at least 1 more tranche, if not 2 more tranches, will get done by end of next year.

Philip Shen: Okay. Great. So just to ask a question in a different way. So when you think -- when you talked about the 25 gigawatts that could be auctioned by the end of next year, how much of that do you think is reasonable to be addressed by you guys?

Ranjit Gupta: For us, if we -- Phil, if we get our power purchase agreement signed, like we are expecting to get signed by January, February, and we will have this 1,000 megawatts to build from the new capacity, we will take part in very, very few auctions. I won't be able to tell you a number right now. It will depend upon how everything is phased out, and it will also depend upon the opportunity that presents ourselves. We have said in the past that we are comfortable doing 1,000 megawatts a year, right? We are in no rush to become the largest company in the country. We want to be the most profitable company in the country. We have no plans to reach X megawatts or X gigawatts by such and such time. So we will -- we just want to make sure that our size, our costs reflect the amount of projects that we are able to do. And at the moment, we believe we can do 1,000 megawatts a year. So I -- we will have to see how it pans out. But I don't think we will be taking part in too many auctions. If there are interesting auctions, for example, a hybrid auction or a storage auction, which will, from the technology perspective, take us forward, we would certainly be interested. If there is any arbitrage we see in the market where we feel that we can get a higher tariff or a better return, we could potentially see that. If we see any delays in the signing of the power purchase agreements or transmission connectivities which will delay our projects, we could take part in auctions. But if everything is running smoothly, we will take part in very, very few auctions, as what I can see.

Philip Shen: Okay. That's helpful. As it relates to the Basic Custom Duty, what is the timing as to when that new duty could be passed? And I know it sounds like economically, it should not impact you guys because you can pass through that tariff cost to the end market or your customer, but there will be some kind of impact. Somebody loses that on economics. So just curious on the timing you expect on the Basic Custom Duty.

Ranjit Gupta: Phil, the issue with the Basic Custom Duty, I think from what we hear, I mean we don't know the real reason behind the delay because this was expected to come out in the month of July and August. So there has been a little bit of a delay. We -- what we are given to understand or what we hear is that it could be because of last time also we had these WTO consideration, right? India being part of WTO, there are certain hoops that we have to jump through to ensure that we are in compliance with WTO norms, as we understand. So I think the government is crossing the T's and dotting the I's on this notification, which is why it is taking a little bit longer. It's difficult to say how long it will take. But like we have mentioned in our remarks, this is change in law for us. So we are not really worried. What does happen is that whatever is the extra cost of the BCD or the SGD, 25% of that will become our equity required to put in the equity. But we get pass-through for it. So all of it comes back through tariff. And for projects where we have paid SGD, for example, our Maharashtra project, for example, our Rajasthan 5 projects, we have already started getting money back. As you might notice in our earnings presentation, we've already started getting money back for SGD.

Philip Shen: Right. Okay. We saw that in this past quarter of Q2 of about $2.2 million. Is that correct?

Ranjit Gupta: That's right. That's right.

Philip Shen: Okay. Great. One last question from me and then I'll pass it on. With how well your stock price is doing, can you share how you're thinking about capital and how you could fund the 4-gigawatt pipeline that you have with SECI? So what's the potential that you guys tapped the equity markets in -- or what are the other sources of capital that you're thinking about? And how do you see and balance all the different options?

Ranjit Gupta: Pawan, you would want to take this?

Pawan Kumar Agrawal: Sorry, sorry. I didn't get this one, sorry.

Ranjit Gupta: Okay. Don't start commenting. So Phil, yes, you are right. When we had planned our CapEx, right, our share price was at a different level. And I think we have been able to instill some confidence in the market about where we are headed. And we are seeing the impact of the hard work that we have done and the support that we are getting from the investor community in our share price. And obviously, as the share price gets closer to where the value of the company is, the cost of capital consideration comes into play when we are deciding how we want to raise capital. As far as the 4,000 megawatts is concerned, like we had said last time, this money is needed over 4 or 5 years. And this was expecting that the first power purchase agreement could be -- should have already been signed if this COVID thing had not happened, right? So there is a delay in raising that equity from the perspective of the power purchase agreement not having been signed. So we are -- we -- when we need that equity and when we are -- like we have said, one of the things that we were exploring was selling of assets, right? So we have to see now whether it makes sense for us to sell assets, does it make sense to raise equity in the public markets? So that's the decision we will have to take when we come to that because, like we have said in the past, the cost of capital needs to make sense, right? I mean if it makes sense for us to come to public markets, we will come to public markets. If it doesn't make sense to come to public markets, we will sell assets or we will take corporate debt or we will take investments at SPV level. So there are many levers for us, and we will accordingly take action as we come to the decision point for ourselves.

Operator: The next question is from the line of Maheep Mandloi from Credit Suisse.

Maheep Mandloi: I just wanted to understand the cadence of the project construction next year. Ranjit, if you could clarify on the Assam project, there seems to be a gap over there. I understand a couple of delays because of the construction time lines being pushed out, but I just want to understand what that gap for the Assam project is driven by.

Ranjit Gupta: So the first project, which we have already completed under really, really tough circumstances, right, was basically built during the monsoon, right? So -- and that is suboptimal. And in case of Assam, specifically, where the bottle table is very high, it becomes impossible to work during monsoons because as you start doing your filing, you run into water almost immediately, especially during the monsoons, right? So one project, we were able to complete most of it even during the monsoons. The other projects, it will take -- we will be able to start only post monsoon. So we have just started on a couple of the other projects. So they should get done in this fiscal. The last project, we are -- incidentally, that is the most remote project which we are building. And there is -- like we have mentioned in our earnings presentation, there is a little bit of land that is still to be completed there. So we expect to complete that land over the next 2 or 3 months. And that's the reason why there is a little bit of a delay in the completion of the fourth project. So the first 3 projects, the first project was done practically on time even without the extension practically. And the other 2 projects will get done within their extension time, and we are seeking an extra extension for the fourth project. Those -- the last project is only a 25-megawatt project. So hopefully, it will not impact much the fact that it's slightly more delayed than the other projects.

Maheep Mandloi: Got it. Got it. That's helpful. And could you just clarify on that note for the 4-gigawatt backlog? I know you haven't identified any locations yet publicly. But just in terms of the ISTS PPAs, they allow you to build the project anywhere, right? So are you looking to build them in Rajasthan or in Southern India? Could you just -- or any other location in the country?

Ranjit Gupta: So the 4-gigawatt project, Maheep, the good thing is that as soon as you have the letter of award, you can block transmission capacity, right? And that is one of the critical resources that you need to block right away, right? So as soon as we got our LOAs, we had already planned, we had already scoped out at the time when we had actually taken part in these auctions because our 200-, 300-megawatt project, which is a typical auction, you can bang it anywhere, right? If you don't get it in A, you'll get it in B. If you don't get it in B, you'll get it in C. But then you have to make a plan for 4,000 megawatts. You cannot just bang it get anywhere, right? So this was -- we had planned this very, very well, well before we took part in the auction. And the day we get the LOA, the same day, literally, we apply for transmission capacity. For these 4,000 megawatts over 3 different substations within the state of Rajasthan, we have already received the connectivity for the 3 -- for over these 3 substations for the 4,000 megawatts. So these 4,000 megawatts are currently planned to be built in the state of Rajasthan, which has the best installation.

Maheep Mandloi: Got it. That's helpful. And just on what you're seeing in terms of model prices out there, the cost of the system right now is INR 0.55 or roughly in that range for you at an AC level. But just in terms of your visibility under the module prices over the next year or 2, how do you see that changing for yourselves and for the 4-gigawatt project as well?

Ranjit Gupta: Perhaps, Murali, you want to take this?

Murali Subramanian: Yes. Sure. So the last couple of quarters has seen some volatility in the module prices because of lack of availability or supply crunch on the raw material side. So we have seen some price fluctuations. We expect this to continue -- these fluctuations to continue over the next couple of quarters as per our understanding with the suppliers of modules. However, the -- that's like in the near term. If you look at the medium and the long term, I think there is a secular trend towards declining module prices on account of better efficiencies coming in, new technologies coming in. So overall, we do expect a module price reduction year-on-year, a few percent a year at least. But in the short term, we are seeing volatility and fluctuations in price.

Maheep Mandloi: That's helpful. And then just last one from me. And just -- I'll hand it over to the others in the queue. The first PPA, if you -- as you said, you could potentially sign in, in the next quarter and assuming a 12-, 18-month construction, it probably comes online in mid of 2022. Is there any gap between when that comes in and when the Rajasthan 6, 8 projects get completed? And does that provide you with any window to bid for other projects, as you said, to get to that 1-gigawatt per year construction run rate? Or do you think because of the delays, that kind of narrows down the window and you'd rather just install the first tranche of the 4 gigawatt?

Ranjit Gupta: So Maheep, these projects, the ones which are linked to the manufacturing tender because these are larger-sized projects, they are 500-megawatt tranches. So these are 2 years to build, right? So if we signed the PPA, for example, in December of 2020 or, let's say, January of 2021, then these need to be delivered in December '22, January '22 -- January '23, right? So -- and our projects, like we have mentioned, the SECI 8 and -- sorry, Rajasthan 8 and Rajasthan 9 projects are expecting -- we are expecting to commission by September in quarter 3 of the next calendar. So therefore, between the third quarter of 2021 calendar and the fourth quarter of calendar 2022, right, there is almost 5 quarters which are available to us, right? So yes, there is a gap there, which we can -- which we would like to fill, and we will take part in the auction. For that gap, maybe 300 megawatts, maybe 500 megawatts, we can do in that time frame. So -- but then once the cycle is established, right, once the cycle is established, then that flexibility to do more projects goes away.

Operator: The next question is from the line of [Chang Louis] from TIAA.

Unidentified Analyst: I have two questions. One is the stock appreciation rights in this quarter. Going forward, do we see the same expense affecting EBITDA margin? And then the next question is that the speaker has mentioned about the volatility in panel cost. Can you give us a sense of what type of volatility was it? Is it 10%, 20% or 30%?

Pawan Kumar Agrawal: I'll take the first question. On the stock appreciation rights, an increase in share price will result in corresponding increase in P&L charges for that, right? So technically, theoretically, if our share price continues to go up, it will continue to hit our P&L and continue to lower EBITDA to that extent. However, what is very important to note that very, very large part of these SARs while these are vesting, as for the schedule, they cannot be exercised until 2024, until March 2024. So actual cash outflow will only happen after March 2024, if it all, they are exercised after -- immediately after 2024 or whatever. So it's 8-year vesting period, right? So maybe Ranjit may add more color to this, but I just wanted to highlight that these are accounting entry, and these are charges which we have to accrue, that the basin price moves. But the actual cash outflow will not happen until March 2024.

Unidentified Analyst: So I understand the cash versus accrual difference. But just from an EBITDA calculation basis, do we see 80% EBITDA margin or do we see, say, a 70% EBITDA margin in the next coming quarters?

Pawan Kumar Agrawal: So I have a suggestion for this on a lighter note. So there are 2 things. One is that if the EBITDA margin decreases because of SAR expenses, I should be happy because that means that the SAR price is being very good. The company is doing very well. And a small part of that is actually reflected by your dragging EBITDA, EBITDA margin. But that was one way to look at. Very honestly, the way we model or the way we discuss internally with the Board, with the stakeholders, in terms of internal stakeholders, we keep this more like outside bracket item. So SAR prices are charges which are linked to SAR price. And we totally focus as a management team how best we can do around generation, about costs and how we can improve EBITDA, sans SAR. It's difficult for me because of the nature of accounting, whether EBITDA margins should be 87% or 80% or 90% because very, very difficult to predict, and we don't take it very negatively, very honestly.

Unidentified Analyst: Okay. So if I may, just a little bit more detail on this, are you facing the appreciation on percentage increase in stock price? Or are you facing that on the absolute level of the stock price?

Pawan Kumar Agrawal: So these are valued basis Black Scholes model, right? So for example, for the SARs, which have already been vested, they are subject to NTM. And for the SARs, which are yet to vest over the next 7, 8 years, the option value of that become part of the charge. So that is the way it is accounted for.

Nathan Judge: Okay. [Chang Louis], this is Nathan. Just one way to think about modeling on that is at the end of the quarter, the stock was around $27. Every variance from that by the end of the quarter will result in about $0.5 million swing -- I'm sorry, $0.5 million swing for every $1 change in stock price.

Unidentified Analyst: $0.5 million for every pack of stock price change. All right. Great, Nathan.

Ranjit Gupta: To add on to that, on your second question on the extent of volatility. So what we've seen in the last 3 months is the price has moved anywhere between 5% and 10%. And the other thing that's happened is there has been a little bit of a supply crunch because of, as we said, a shortage of raw material availability. And if we choose to defer supplies, which most of the India market has deferred supplies because of COVID, then the volatility is not as much or as high.

Operator: [Operator Instructions] The next question is from the line of Pavel Molchanov from Raymond James & Associates.

Pavel Molchanov: Can I ask kind of a big-picture question about the solar opportunity in India? I think there is 220 gigawatts still of coal-fired generation. What amount or what percentage of those 220 gigawatts do you think are realistically going to be displaced by solar?

Ranjit Gupta: So Pavel, it's a question that the regulators and the Ministry grapples with all the time. Our feeling in the industry really is that there are 2 things that play here. About -- like you rightly mentioned, about 220,000 megawatts of thermal capacity, coal capacity exists in India. About 5% to 6% of this capacity is expected to decommission every year because at the moment, there are several plants that are really, really old, right? So 30 years old, 40-year-old plants, especially in the state sector that are still running, which the government is pushing very hard to get decommissioned. So every year, we expect about 5% to come down. The energy requirement also in India is expected to go up by about 3% to 5% on a year-on-year basis, right? So if you look at these 2 metrics, right, it means that we need in India about 15,000 to 20,000 megawatts of new capacity to be built, which is about 5% of thermal capacity that needs to be decommissioned and about 3% to 5% of capacity that needs to increase because our energy requirement is increasing, right? Like we mentioned, India has now the lowest per capita utilization of units of electric, right? 1,200 units a year is our average. So when we say about 20,000 megawatts of electricity, some of it will actually still come from newbuild thermal, right? Because the states -- unfortunately, some of the states still continue to build some newbuild thermal. So let's say, about 4 to 5 gigawatts are still being built, maybe 2, maybe 3, maybe 4, maybe 5 gigawatts. So let's say about 15 gigawatts. So about -- between 10 to 15 gigawatts of capacity needs to come from the renewable energy sector. And 10 to 15 gigawatts equivalent thermal, right, because thermal typically can run at a power plant load factor of about 85%, whereas our solar plants will run between 25% to 30%. So at least 2.5x, right? So when you say 15,000 megawatts, 15,000 megawatts automatically become 30,000 megawatts of solar. So if I want to fill the need for 15,000 megawatts of thermal, I need 30,000 megawatts of solar to be installed. So that is how we typically arrive at the 30,000 megawatt number, which the Prime Minister of India has also said that we want to reach to 450,000 megawatts. So where does the 450,000 megawatt calculation come from? It comes from these kind of numbers, that about 4% to 5% of current capacity will be decommissioned, 4% to 5%, the need of the nation will continue to increase. This comes to about 20,000 megawatts, 15,000 to 20,000 megawatts. 4,000, 5,000 megawatts of thermal is still being put in place. The remaining thermal and growth will come from renewables, and that is where the approximately 30,000 megawatts comes from.

Murali Subramanian: And if I can add to that. At a very big-picture level, to add to that is really the thermal does provide a huge baseload supply. And I suppose or one supposes that as and when storage costs decline to a point where they become competitive with coal, that's when newbuild will completely fall off. And then over a period of time, they'll just go away.

Pavel Molchanov: Okay. Can I also ask about green bonds? As I understand, you issued 2 green bonds in the last 3 years. Obviously, interest rates in the U.S. and Europe continue to be close to 0 and lots of appetite for green bonds. Are you continuing to look at that as an option for your future capital needs?

Ranjit Gupta: Pawan, you want to take that?

Pawan Kumar Agrawal: Yes. So green bonds, very honestly, as a company, we prefer to remain fairly conservative in terms of leverage. And we would prefer to have optimal mix of debt and equity. So while green bond market does provide opportunity to raise the bonds and then to partly fund the current need, but we have the plans to focus our nonfunding equity by equity and funding debt by debt. So green bond markets, we have new plans to tap primarily to refinance our projects and then refinance our debt. But yes, what happens when we do the initial project financing, we prefer to have a very conservative debt levels because there is construction risk. Our projects are yet to stabilize and generate cash flows. So when we do the initial funding, we try and lever the project at a relatively conservative level. But once the projects are operational and there is a track record of cash flows, we prefer to refinance the project with the level of debt which the cash flows can comfortably sustain. And in that process, some extra leverage based on the cash flows is available, which has been done in the past also, and which we are perfectly fine and open to do that. But purely coming to green bond to raise equity or primarily with the focus to raise equity, that is not something that we have thought about.

Operator: That was the last question in queue. On behalf of Azure Power, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines. .

Ranjit Gupta: Thank you, everyone, and a very happy Thanksgiving to everyone in the U.S.

Murali Subramanian: Thank you, everyone.