Azure Power Global Limited (AZRE) Q1 2021 Earnings Call Transcript

Azure Power Global Limited (AZRE 21.05%)
Q1 2021 Earnings Call
Aug 14, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day, and welcome to the Azure Power Q1 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 -- Head of Investor Relations

Thank you, and good morning, everyone, and thank you for joining us. On Thursday evening, the company issued a press release announcing its fiscal results for the fiscal first quarter of 2021 ended June 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 Agrawal, CFO.

Ranjit will start the call by going through the recent key highlights and comment on recent market trends in auctions. Murali then will follow with an update on our projects under construction and an industry update. Pawan will then follow and provide an update on the quarter, and then we will wrap up the call with Ranjit reiterating fiscal year 2021 guidance, as well as 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 release 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. And with that, it's now my pleasure to hand it over to Ranjit.

Ranjit Gupta -- Chief Executive Officer

Thank you, Nathan, and a very good morning, everyone. Despite our hope that progress will be made in quashing COVID-19 during the time since we last spoke, the pandemic continues to worsen. Our heartfelt best wishes to everyone during this difficult time, and we pray that a vaccine or cure can be found quickly. Murali and I completed our first hectic and rewarding year at Azure about four weeks ago.

We strongly believe Azure is moving in the right direction, is in the right market, and has the right team and the right shareholders to power its growth to the next level. As mentioned in the past, we continue to be focused on returns much more than megawatts and hope to see results of actions we have taken, over the last four quarters, in the coming year. Even before I talk number starting on Page 3, I would like to spend time on our sustainability efforts. On the sustainability front, we are pleased to report that Azure recently received recognition as the most sustainable company in the solar energy industry by World Finance magazine.

We also received a rating upgrade from Sustainalytics. Azure is now ranked as the 10th Best Renewable Company globally and in the top 5% of all utilities by Sustainalytics. This was a notable increase from our rating in November and has been a real testament to the team's efforts to provide disclosure on all the good work being done on the ground. We are not stopping there.

We are actioning a plan that we expect will drive an even better rating by year-end, including a more comprehensive sustainability report by the end of August and implementing new policies on freedom of association, human rights, diversity and inclusion. We plan to join the Task Force on Climate-related Financial Disclosure, become a UN Global Compact signatory, and we are contributing to the Carbon Disclosure Project. Given our better standing with ESG rating agencies, combined with recently improved average daily trading volume and a market cap of over $1 billion, we believe we will increasingly be eligible for ESG indices. All of this should enhance our visibility with investors that are looking for strong, sustainable companies to invest in.

Looking at the company, we are pleased to announce a very strong quarter despite challenges of the pandemic. The cash flow to equity, CFE, from our operating assets grew 45% year to year to USD 21.7 million. We benefited this quarter from lower costs, which has been a strong focus of ours since we joined a little over a year ago. Corporate overhead was down 30% compared to the same quarter last year, even though we are operating 21% more megawatts on a DC basis.

We continue to be confident about future growth and expect that CFE will be about USD 170 million to USD 210 million annually once our 7.1 gigawatt portfolio is completed. Also today, we are increasing the midpoint of the present value of equity for our 7.1 gigawatts by $100 million or about $2 per share to $1.75 billion to reflect falling interest rates. This compares to our current market cap of around $1 billion. We now expect that we will be able to realize interest rates of about 9.5% for new projects given recent pricing and transactions, compared to our previous assumption that we would realize an average rate of 10%.

Declining base rates and tightening bond yields for our green bonds and investment-grade Indian renewable companies bodes well for lower financing costs. Currently, we are seeing lenders offer us terms for around 9 to 9.5%, at least 50 basis points lower than rates we saw at the beginning of the year. In fact, we recently closed a foreign debt fully hedged facility that has an interest rate of approximately 8.5% in INR terms, just received a sanction from a large Indian lender at an interest rate of around 9.5% and refinanced about $40 million of debt with an interest rate of 9.7%. As a reminder, there is a significant uplift to our equity valuation for lower interest rates.

We are also reducing our long-term net debt projections by about $100 million to reflect the additional cash generation related to our expectations of lower interest rates. As many have seen, we have received a letter of award for the two-gigawatt greenshoe capacity we had optioned for as part of an auction we won in December 2019. It is clear that the delays associated with getting the LOA will delay the timing of signing of the PPA. SECI has taken the initiative to bundle power from these projects with current auctions to prevent tariff shopping by distribution companies.

Once the power sale agreements with distribution companies are consummated, our PPAs will be signed soon after. There is strong political will to get this in place as it will give a tremendous boost to the domestic solar cell and module manufacturing base in India. The implementation of safeguard duty, the proposed basic custom duty and other non-tariff restrictions, such as ALMM, approved list of modules and models are all designed to boost India's solar manufacturing base. The 12 gigawatts of manufacturing-linked tenders, which includes our four gigawatts, are a cornerstone of the central government's plans to propel India's solar manufacturing into a global leadership position.

The tariff of our four-gigawatt power also makes economic sense as well. As a reminder, the four gigawatts interstate transmission system transmission charges and loss waiver that is otherwise scheduled to expire in mid-2023 around the time when our first gigawatts of the four gigawatts will begin producing at full utilization. Without the ISTS transmission waiver, discounts will incur about INR 1 to INR 2 per unit of transmission costs, depending on the state, receiving the power, which makes delivered price of power from our four gigawatts comparative. If INR 1 to INR 2 per unit is added to the recent auction of a record low tariff of around INR 2.36 per unit, the realized cost of power would actually be around INR 3.4 to INR 4.4 per unit, which is 16 to 50% higher than the INR 2.92 per unit tariff for our four gigawatts.

In addition, we would note that many DISCOMs are well short of meeting their renewable purchase obligations for the next several years. We expect them to buy renewable power that is available and a blended tariff from SECI with an ISTS waiver as one of the lowest cost options. We will continue to update investors as things develop. As part of our commitment of pursuing the lowest cost source of capital, the process of selling assets continues.

The process is ongoing. And although we do not have anything to announce as yet, but we continue to believe that we will be able to sell the assets well before additional equity is needed and will update the market as soon as any material change occurs. We continue to expect that we will not issue any new shares before fiscal 2022 unless this becomes the cheapest source of capital. As part of our efforts to improve the depth and diversity of our board, we are pleased that Ms.

Supriya San has joined our board recently as a non-executive independent director. The amount of experience she has with raising capital for green energy projects, her extensive work with nonprofits helping children in Cambodia and Singapore and her focus on governance and sustainability will all be a welcome addition to our board. As of date, we currently have 10 board members, of which six are deemed independent and of which two are female. Looking at Page 4.

As we have said many times since we joined a little over a year ago, we remain very committed to creating shareholder value. Supporting this commitment are two basic principles to which we strictly adhere to. No. 1, all projects must earn a return above our cost of capital.

And No. 2, we will pursue with the lowest cost of capital. We do want to reiterate our commitment to capital discipline. Put simply, we will not do any project that does not earn a return over our cost of capital.

The delay in receiving PPA for the four gigawatts has opened up a gap in our construction time lines, and we have been recently bidding for new projects. However, we will not win projects just for growth's sake or to create work for ourselves. Rest assured that we will only win projects that, with conservative assumptions, will deliver returns that exceed our cost of capital. In fact, we chose to not chase after megawatts in a recent auction that reached a record low ground mount solar tariffs of INR 2.36 per unit or about $0.031, as the expected returns did not meet our minimum threshold.

We recognize that any particular project has a large impact on the companywide cost of capital, and even one project can undermine investor confidence, resulting in much larger reverberation to our company. In addition, we will only bid on projects that have the best counterparties. NTPC is AAA-rated and is central government owned. SECI is also central government owned and has a AA+ rating.

Gujarat and Bangalore have the highest ratings of any states DISCOM and typically pay their bills within 15 days or less. There is significant growth potential with just these parties and we will be assured prompt payments. As we resume bidding for new projects, we have been focused on where we have advantages to our competition. We have identified several sites where we can reduce our construction costs, including through expansion of existing operating projects to leverage common infrastructure and capitalize on operating and maintenance synergies.

In addition, our access to lower cost capital is superior to most of our peers, which we believe will increasingly provide a greater competitive advantage going forward. Looking at the current market today, we would highlight that construction costs have fallen pretty meaningfully in just six months. Module prices have come off around 10% and we are now expecting our total project costs will be around 8 to 10% lower than our December expectations. Along with falling project costs, declining benchmark rates and tightening bond yields bodes well for lower financing costs, as mentioned earlier.

So, while headline tariffs are indeed lower, they make sense as costs are falling as well. As many of us continue to work from home, we have benefited from being able to talk to our investor and shareholder community a lot more than when we were able to travel. Please rest assured that every interaction is important to us, and we strive to consider all suggestions and requests we get for enhancing value of your company. We continue to improve our disclosures, which will enable you to better understand your company.

With that, I will pass it over to Murali.

Murali Subramanian -- Chief Operating Officer

Thank you, Ranjit. Good morning, everybody. This is Murali here. If you see Page 5, Azure's business has remained very stable during the COVID-19 pandemic.

And so far, there have been no material adverse impacts from the economic and financial market disruption. Our plants remain fully operational and have continued to see customers making payments as normal. The plant's performance for the quarter has matched expectations despite the temporary drop in electricity demand in the early part of the pandemic-induced lockdowns in the months of April and May, and despite the monsoon activity in the month of June. And we haven't had any abnormal downtime related to non-availability of spares despite the lockdown.

Further, we have restarted our work related to our plan of digitalization of our operations, especially around drone-based panel monitoring, performance analytics, robot module cleaning and the like. Activity has begun in earnest at our under-construction projects, and we are seeing the workforce starting to return to sites. Compared to our last call, the activity has picked up significantly though we are not yet back to our targeted activity levels. However, we are making much better progress.

The Ministry of Power has given a five-month extension for completion of renewable energy plants and transmission projects, which is additional two months extension from before. Another important development we expect soon is the alignment of plant commissioning dates with the dates of power evacuation, which dates -- power evacuation will be available, which aligns construction programs of the plants with the commissioning of the evacuation infrastructure. All the ground mount projects we are working on are expected to be completed by the expected revised COD dates, and we don't expect to pay any delay related penalty for COVID-related delays. Further, the time of commissioning of our under-construction projects does not impact our revenues we expect during the 25-year PPA because revenues begin at the date of commissioning.

Looking at industry and regulatory developments on Page 6, we still see significant demand for new renewable energy in India despite recent events. During the quarter, there was nearly six gigawatts of new tenders released and five gigawatts of solar capacity auctioned. We did see lower tariffs this quarter, which directly reflect the lower construction costs as discussed earlier. There was a six-month extension to the ISTS waiver until June 2023, but the central government has indicated that this would be the final extension granted.

Related to our four gigawatt pipeline, the orders specifically mentioned and reconfirmed that our projects would be exempt from any ISTS charges or losses even beyond 2023. The central government has also begun disbursements of the $12 billion liquidity infusion scheme to help state utilities pay their bills. The disbursement will go directly to the generators from PFC and REC, financial institutions of India -- government of India, circumventing the DISCOMs. Fortunately, our customer profile is better than average, so we are not likely to see much direct benefit from this but it should provide investors additional comfort that the central government considers timely payment important and will take steps to help, if needed.

On to duties, the safeguard duty, SGD, was extended for another year at 14.9% for six months and then to 14.5% for the next six months. In addition, we expect that the basic custom duty, BCD, could be imposed soon and this would be in addition to the SGD. We do not expect any material impact to our returns on our projects as they are protected by change-in-law provisions. Further, I'm happy to report that we have started receiving payments against SGD deposited by us in the Rajasthan 5 project and the Maharashtra 3 project commission last year.

We have also received payments for recovery of GST in the Telangana, Andhra Pradesh and Uttar Pradesh projects. These payments are a testament to the robust regulatory framework in place in the renewable energy sector in India. In fact, the Ministry of Power is implementing some changes to speed up the process of recovery even further. They are looking to apply a standard formula that reduces ambiguity and paperwork related to recovery, which we expect will reduce our working capital requirement.

In the new PPAs, there is already a standard formula available, which enhances tariff for every unit of extra capex expanded on duties that qualify for recovery under change in law. We continue to see lenders willing to increase loan sizes to fund SGD given higher certainty of recovery. With that, I will turn it to Pawan to discuss the quarterly results. Pawan, to you.

Pawan Agrawal -- Chief Financial Officer

Thank you, Murali. Turning to Page 7. As of June 30, 2020, we were operating 1,809 megawatts on a PPA or AC basis, which is about 12% more than the end of first quarter of June 2019. And on a '19 -- on a DC basis, we added a 21% more capacity as compared to the same quarter last year.

This increase in capacity, combined with about 160-basis-point improvement in our PLF and a recovery of about $1 million related to safeguard duty and GST refunds, drove a 16% increase in revenue from the same quarter last year. Costs were much lower this quarter than we have seen in a very, very long time. In fact, our O&M and G&A expenses were about a quarter less than the same period last year despite operating 21% more DC capacity. There are several things causing this.

First, we are 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 overheads or G&A of at least 10% in FY '21 versus FY '22. Second, due to COVID-19, some activities were deferred on to future periods. Travel was significantly lower during this quarter and legal expenses were less because there were fewer obligations and court hearings.

We do expect that we will see an uptick of about $1.4 million in O&M and G&A from the first quarter of fiscal 2021 levels as we have seen a resumption of activity back toward more normal levels. Also, for Q2, we also expect that we will incur about 3 to $5 million of additional compensation expense in second-quarter 2021 related to stock appreciation rights granted to our CEO and COO, which is directly tied to the 30% increase in the stock price during the current quarter so far. Given all these variables, we are expecting G&A to be between 8 to $10 million in second quarter of FY '21, although this will be a function of the share price. As a rule of thumb, for every $1 increase in the share price, our G&A will increase by about $0.5 million.

After adjusting for deferred expense of $1.4 million, our non-GAAP EBITDA was about $42 million, up 26% from the first quarter of fiscal 2020. Another item on our income statement this quarter was the $3.5 million onetime charge that we took to refinance some international debt. This refinancing will lower the impact of gains or losses from foreign exchange on our income statement going forward. We expect losses from forex to be around $0.5 million per quarter, which reflects the cost of entering into hedges.

After taking into consideration the adjustments noted above, we reported a net profit of USD 2.7 million or about 19% higher than last year. Moving on to Page 8 which reconciled this year-to-year changes in our cash flow to equity from operating assets. Our CFE rose 45% year to year to $27.7 million. Most of the increase reflected higher revenues, but another large contribution was driven by lower cost on our platform.

On Page 9, at the end of the June quarter, we had 105.5 million of cash in hand. Combined with the 290 million of undrawn project debt commitments, we continue to have a strong liquidity position. Our plants under construction have full equity funding. We continue to expect that we will not use -- will not issue shares before fiscal year 2022.

We would also like to highlight the value of our hedges related to our green bonds as we believe many investors and analysts miss this substantial value of close to 100-odd million. We have seen some net debt calculations that take our gross rate of roughly 1.2 billion and subtract only the 105 million cash that we have in our hands. However, another 98 million hedging asset, which is classified under other assets in our balance sheet, that should also be taken into consideration to bring net debt down to around 1 billion. The hedging asset will go directly to offset our debt when our green bonds mature in 2022 and 2024.

Before I pass it over to Ranjit to discuss guidance, I want to make a moment -- I want to take a moment and discuss our DSO on Page 10. Our DSO did increase this quarter to 139 days from 126 days last quarter. However, as with previous quarters, all of this increase was because of two effects: a 50-megawatt asset in Andhra Pradesh and a 130-megawatt asset in Karnataka. Excluding these two assets, where we have seen delays in payments happening which represent about 10% of our total portfolio currently and this percentage will go down significantly as we construct new portfolio because new projects are from SECI, primarily from SECI, our DSO would have been about 90 days.

We continue to work on resolving payment issues with Andhra Pradesh and Karnataka. And once we have these counterparties caught up, our DSOs would improve meaningfully. I would now like to turn it over to Ranjit to provide some commentary on FY '21 and long-term guidance. Over to you, Ranjit.

Ranjit Gupta -- Chief Executive Officer

Thank you, Pawan. On Page 11, we are reiterating our FY 2021 guidance at this time as over 90% of the revenues is expected to come from projects already commissioned and operating which have not been materially impacted from the COVID-19 pandemic. Our remaining revenue is subject to when plants under construction are completed, and completion time lines are currently more difficult to forecast due to COVID-19, though we continue to make progress with our plants under construction. Without any contribution from plants under construction in financial year '21, revenues from operating facilities should be around INR 14.6 billion to INR 15 billion.

For second quarter '21, we expect revenue to be between INR 3.2 billion and INR 3.4 billion and the PLF to be between 18 to 19%. Turning to our long-term guidance on Page 12, a couple of things we would point out. Our capex budget for next year is likely to be lower than fiscal 2021 given the timing of signing PPAs. As a result, we have put in a placeholder for some projects to be built in FY '22, although as stated earlier, we will only do good projects that make sense and this placeholder is not really a commitment.

With this, we will be happy to take questions. Thank you very much.

Questions & Answers:

Operator

[Operator instructions] The first question is from the line of Philip Shen from ROTH Capital. Please go ahead.

Philip Shen -- ROTH Capital Partners -- Analyst

Hi, everyone. Thanks for the questions, and congrats on doing some nice -- providing some nice results in this tough time. A quick question on the four gigawatts that you have secured now in LOAs. Can you share the plan for when you expect to sign the PPAs? Sorry if I missed it in your prepared remarks.

And then, you also talked about a potential construction gap. What might be some derivative issues that that causes? How do you expect to manage through that gap? Are you able to kind of put people on hold or furlough people and then kind of rehire them back? Or how do you expect to manage through that?

Ranjit Gupta -- Chief Executive Officer

Thanks, Phil, very important questions. On the first question, the power purchase agreement, we received LOA only in about three or four weeks ago or less than three weeks ago. So, SECI, once final -- this is the final LOA in the 12,000 megawatts, 12-gigawatt manufacturing tender. So, once this LOA was placed, SECI started the process of tracing this power, right? So in the first tranche, they are trying to place more urgently the power off the 12 gigawatts that is supposed to be commissioned in 2022 calendar.

We expect that they have just started. And unfortunately, because of pandemic, many of the distribution companies are also, officers working from home kind of thing. So, normally, this process takes -- from the time you get a LOA, normally, this process takes three months in a regular power purchase agreement construct. Because of the fact that this is a larger capacity and given that this is a time of pandemic, I would think that this will be between three to six months from the time that we have received our LOA.

That is what I expect. And because -- earlier, we were expecting to sign the first LOAs by June 2020 or so, because of the fact that the LOA got delayed and there is a delay, we expect that there'll be a little bit of a gap opening up in our construction schedule. Basically, what happens is that in the earlier plan, we were expecting that the first 1,000 megawatts will come sometime in the summer of 2022, whereas now they will come toward the latter half of 2022. So, there is maybe a three to six months delay which could happen in the commissioning of these first set of projects.

So that opens up a gap of three to six months for us. And if we can find the right projects, we will go out and take part in auctions and secure capacity. If we don't, it's not such a big deal, really, because we will still be busy with planning four gigawatts of capacity. So, as such, we don't really need to put anybody on furlough or rehire or anything of that sort.

We have a very lean team on the construction side anyways, so that time would be well used for safety trainings, for technical trainings, for project management trainings and preparing for the four gigawatts. So, the time is not long enough really for us to worry about it. It is just that there is a gap. And if we can fill it with the right projects, great.

If we cannot fill it, that's not a big deal.

Philip Shen -- ROTH Capital Partners -- Analyst

OK. That's very helpful. As it relates to the DSOs, I know it's related to two specific projects. What's the path to resolving them? It's extending your DSOs substantially.

And can you share a little bit of color on the specific situation with these projects and how you expect the situation to resolve?

Ranjit Gupta -- Chief Executive Officer

Right. So, in the prepared remarks, Pawan mentioned two projects, the 50 megawatts in Andhra and 130 megawatts in Karnataka. In fact, out of the 130 megawatts, 50 megawatts pays us regularly. So, it's only 80 megawatts that is delayed.

In that 80 megawatts also, right, in the month of July and the beginning of August, we've got some substantial payments. So, therefore, when we are hopefully reporting September end numbers, our DSOs will be anyway better. Of those two distribution companies, GESCOM and HESCOM, we are in regulatory cohort to settle the matter. We had received a positive result with the third-party, which is now paying us on time at the beginning of the year, and we are hopeful that we will get a positive result with the second authority also.

So, therefore, we expect that that issue should get resolved maybe toward the latter half of this year. And as far as the third one is concerned, HESCOM, they do actually have some payment issues from their back-end, from their consumers. So, we are working with them to try and get payments. Like I mentioned, they paid 2 million just a couple of weeks back.

And we work for relationship building. We are building a stronger relationship with them so that they pay us on time, and that's what we are trying to do. As far as the Andhra Pradesh thing is concerned, that is 50 megawatts. It's a very small capacity for us.

They -- that is a larger industry issue. And that will take time to solve. So I'm comfortable with Karnataka. I think Karnataka is under control.

And over the next two months, we will have a better handle on Karnataka. But the 50 megawatts, I'm not so confident of. And I think it will take a little bit longer. It could get into the next year beginning before we are able to resolve Andhra.

But overall, that 50 megawatts, and by next year, we'll have 3,000 megawatts operating, so it's a very minuscule part of our portfolio. But nevertheless, that continues to be an issue which will take time to resolve.

Philip Shen -- ROTH Capital Partners -- Analyst

OK. Great. One more, if I may. As it relates to module pricing, you highlighted that it has come down meaningfully.

In the recent weeks, module pricing and pricing in the whole supply chain is actually going higher. Have you guys started to experience higher module pricing recently? And also, could you update us on the type of modules you're using these days? Do you expect to use, for example, any mono PERC modules, or do you continue to use multi? Do you expect to maybe use even newer technology modules in the coming six to 12 months?

Ranjit Gupta -- Chief Executive Officer

OK. So, two questions. Phil, the first one, yes, even we have had our suppliers reach out to us for changing the contracts that we have signed with them over the last couple of weeks. So, there is one contract where we are constructing right now, so we need to get those modules, anyways.

But for that, we have opened many -- much of the letter of credits were open. So, we did not see much impact there. In another project, we were able to push out our deliveries by a few weeks because people, including the Chinese folks, expect that in the next few weeks, this situation will resolve itself. So, yes, we did hear from our suppliers, but we don't think it's a serious issue.

It's a temporary issue related to some supply constraints on the Chinese side. As far as the modules are concerned, Phil, we have -- these are the projects that we are constructing now are all mono PERC, 400 watt peak and above. We have shifted to mono completely for our new assets. We are also looking at bifacial.

We are also looking at higher capacities. We just got an offer yesterday or today, I think for 535 watt peak module. So typically, we will -- there are huge advantages for going with the latest technology, so we are always looking at what are the best modules that are available in the market at a particular given time, and we try and get those modules for ourselves because they bring us huge advantages in our BOS costing also.

Philip Shen -- ROTH Capital Partners -- Analyst

Great. Thank you, Ranjit. I'll pass it on. Thank you.

Operator

We take the next question from the line of Maheep Mandloi from Credit Suisse. Please go ahead.

Maheep Mandloi -- Credit Suisse -- Analyst

Just on the SECI four-gigawatt project --

Ranjit Gupta -- Chief Executive Officer

Maheep, we are unable to hear you?

Maheep Mandloi -- Credit Suisse -- Analyst

Can you guys hear me?

Ranjit Gupta -- Chief Executive Officer

Yes. Yes, we can hear you now.

Maheep Mandloi -- Credit Suisse -- Analyst

Yes. So, just on the SECI four-gigawatt project, can you just talk about the construction gap on the -- how much of the employees in the construction are permanent versus temporary? And if you use any third-party EPC or subcontractor. I just wanted to see how much of that construction gap would directly impact you versus some of it, which could be shared by your subcontractors or partners.

Ranjit Gupta -- Chief Executive Officer

So Maheep, as far as the subcontractors are concerned, really, there is -- there's absolutely no issues at all because we are talking about completion of the construction of the 1,290-odd megawatts that we are doing now and the construction of the four gigawatts, right? So there is a gap there, which we are trying to fill if we can. So, we will -- obviously, once the power purchase agreements for the four gigawatts are signed, we will accordingly plan their construction, and the subcontractors and EP contractors will be awarded as and when we need to deliver those projects, right? So as far as the contractors are concerned, there is absolutely no issue. The issue, like I said, is only that about -- between three to six months is the gap that we are seeing opening up, and that is on account of we were expecting to get our PPAs signed the first round by June of 2020, which means that you would have had to deliver those projects by June of 2022. Now, instead of June of '22, if you -- if our PPA gets signed, for example, in September or October or November, we'll have to deliver in September, October and November of 2022, right? So it's not such a big deal, and we have -- I mean, maybe Murali can correct me, but not more than 20, 30 folks in construction team, so it's not really an issue.

I mean, the idea is not to get into contracts because you want to keep our team busy. We have plenty of work that we can get our team to do. And like I mentioned, we can get them trained up and so on and so forth. The idea is that we have an organization, we have the capital available, and we exist for building projects and operating projects.

So, if there is a gap and if that gap can be filled by projects that meet our returns, meet our cost of capital, then we will like to do projects because that's what we do. We are a developer, we build projects and operate projects. Otherwise, there is no real imperative for us at all to fill that gap.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it. And then, we saw the news recently on -- that you were selected for a 300-megawatt auction for NTPC. It was like one or two weeks ago. So, I just wanted to see if you have any more news to share on that on, say, the timing of the LOA or the PPA on those -- on that win? And will that be -- that kind of a project be the something which fills in that three to six months gap two years down the line?

Ranjit Gupta -- Chief Executive Officer

Absolutely. Absolutely. So, if we get the LOA for that, we have -- as you might have read, we have not announced this yet because we don't have the LOA in hand. There is -- once the auction is held, then it goes through the board process of NTPC and so on, and they have to get their internal approvals before they give us an LOA.

So, therefore, we haven't announced it as yet. But yes, if we get the LOA and we get the PPA signed after that, I know once the LOA is given, with signed PPA with us, then yes, that project will be delivered sometime between March 2022 to June 2022, which will help us fill that gap that I was referring to.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it. And then, the -- PP on that one is around INR 2.48. So, I just wanted to see if that's in line with your expectations or are you seeing more competition on the PPAs as more auctions come online now?

Ranjit Gupta -- Chief Executive Officer

Maheep, because we have this four gigawatts in the bag and we have our 3,000 megawatts that we expect to complete, competition really is not a big concern for us because it's just -- because competition brings the prices down. We don't need to go there and do projects that don't make sense for us. So, we are not -- to that extent, we are not worried about the competition. If the competition is too high and prices -- the tariffs become unsustainable, we will not bid.

We will consolidate our position. So the competition doesn't bother us. What bothers us only is that we want to be at the cutting edge of whatever is happening in the market, right? So we obviously -- if somebody is going to be competitive at INR 2.50 and we find that we are going to be competitive at only a INR 2.60, there is a problem, right? We need to figure out where we are going wrong. Are we not using the latest technology? Are we not using the best practices of construction? Are we using some different kind of equipment on our sites? That is the only thing that we have to worry about.

So, we track competition only to make sure that we are not left behind on the cost of construction or the cost of financing or the cost of procurement, but not so that we can beat the competition regardless of what our returns are. So that's where we are. I mean, we -- the tariffs that we have won the auction at, it makes sense for us. And like we have mentioned in the earnings release, we are targeting to do it co-located with another project, which will give us the advantage of cost and make the project viable for us.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it. And then, just two quick ones from me, and then I'll leave the questions for others. The equity needs for the 2.4 gigawatts or -- sorry, the capex needs for the four gigawatts was around $2.4 billion previously? And -- so do you see some improvements there now that you see 8 to 10% improvement in the system cost, which would potentially reduce your equity needs for that project? And a quick one, just trying to understand the utilization rates. You had a 23.1% utilization in the quarter on the run rate, 1,800 megawatts available in this quarter and the previous quarter, so that implies like around 900 gigawatt hours of energy generated.

So, I just wanted to see if I'm missing anything there in that calculation versus the energy reported in the quarter?

Ranjit Gupta -- Chief Executive Officer

So on the first one, as far as the capex is concerned, there is -- we have not changed that number as yet because it's still far into the future. But for sure, you are absolutely right, we are seeing a reduction in the capex, which is reflected in the tariffs that are being discovered in the last couple of tenders. So, we are very bullish. We are very happy to see that happen.

And we are hopeful that by the time we start building the four gigawatts, maybe two, three quarters from now, we will see that positively impact our returns and impact the requirement of equity such that we need lesser equity. As far as the second part of the question is concerned, I'll let Murali take that question. I didn't fully understand, perhaps Murali will be able to answer this better

Murali Subramanian -- Chief Operating Officer

The question if there is an error because we did report that 23% plus capacity utilization. So, whatever the energy corresponding to that that is definitely on. So, I'm just trying to see why you think there might be a mistake? If we made up error of, if at all. I don't think there is a mistake, but if it is there, then we'll probably correct.

Maheep Mandloi -- Credit Suisse -- Analyst

No. No. Maybe, I'll just probably follow-up later on. Thank you.

Operator

The next question is from the line of Puneet Gulati from HSBC. Please go ahead.

Puneet Gulati -- HSBC -- Analyst

Yeah. Hi, good evening. I have one question with respect to the extension dates that you put. Is it a blanket extension, or do you have to go for each of the projects and ask for an extension date with respect to COVID?

Ranjit Gupta -- Chief Executive Officer

So Puneet, this is a blanket extension. In fact, it very clearly says that from the 25th of March to 24th of August, for these five months, the Ministry is giving this extension, which does not require any paperwork to be submitted by the developer. I can share the OMs with you off-line if you're interested.

Puneet Gulati -- HSBC -- Analyst

OK. That's great. And secondly, with respect to the SGD and GST related issues, how much payment should we still be expecting from the off-takers?

Ranjit Gupta -- Chief Executive Officer

It will depend upon the SGD and GST amount. So, for example, in case of the SECI projects, they are going to pay us back that money over a 13-year period as an annuity. So, every year -- so we've got some upfront payment for the time that we paid the money in July or June or August in last year till June this year. There was a -- for that one-year period, we got some money upfront in the month of July.

And then, now, every month, we are starting to get the annuity payment from SECI. So similarly, depending from -- if it is SECI, then this is a model that we will follow. If it is a state, like in case of Maharashtra, and there -- I think it's over a longer period of time. But whatever it is, it will be like some money that you get every month based on size of the generation or just a pure way annuity.

Puneet Gulati -- HSBC -- Analyst

OK. So, average tariff to that extent would go up, at least from SECI?

Ranjit Gupta -- Chief Executive Officer

Exactly. Exactly. Exactly.

Puneet Gulati -- HSBC -- Analyst

OK. My last question is -- and for the new PPAs, you said there is already an enhancement of tariff that will be done. There will be no onetime. It will all -- be all enhancement of tariffs.

Ranjit Gupta -- Chief Executive Officer

So in the last few auctions, there is already -- there's already a provision that for every INR 1 lakh increase in the capex per megawatt, there is going to be a INR 0.005 increase in the tariffs. So, all we need to demonstrate them is that this is the amount of money you have spent and there is a tariff. So, there is no formula that the ERC has to determine and get into to rates and this and that and other. It's all defined.

Puneet Gulati -- HSBC -- Analyst

So how does this work? I mean, there will be a percentage impact because of these extra duties. You will have to show what the duty amount that you paid is.

Ranjit Gupta -- Chief Executive Officer

That's it. If I was going to pay $100 for a particular -- for a megawatt of module, I have paid $102. That means I have paid $2 more. $2 more is equal to x lakhs is equal to x paisa.

Period.

Puneet Gulati -- HSBC -- Analyst

OK. Great. Great. That's all for me.

Thank you so much. All the best.

Operator

[Operator instructions] The next question is from the line of Pavel Molchanov from Raymond James & Associates. Please go ahead.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question. Two questions for me. The first one, a bit high level. One of the challenges, I know that you are and everybody else is dealing with in India is the unpredictability of lockdown policies from state to state.

So, Bihar, Maharashtra, Gujarat, Andhra, everybody has their own rules that are changing very frequently. How are you navigating this regulatory complication vis-a-vis your projects, and in some cases, getting our workforce actually to come to work?

Murali Subramanian -- Chief Operating Officer

Can I take that?

Ranjit Gupta -- Chief Executive Officer

Yes.

Murali Subramanian -- Chief Operating Officer

So you're right. There have been differences between the states in terms of how they are imposing the lockdown and what is allowed and what isn't allowed. Having said that, I think over the last couple of weeks, most states have started almost reducing the quarantine days to two or three days, removing the containment zones, reducing them. So, most of the factories have started working.

Now, personnel movement has eased significantly in the last four weeks across the country. There is -- in case of Assam and Bihar, you're right, there is still some problems. But more or less, we haven't been badly affected because most of our projects are in Rajasthan. All the projects under construction are in Rajasthan, and Rajasthan was among the early states to ease the lockdown.

As far as our operating assets go, the people are housed in and around the project itself, so we've not had any trouble over there to operate the projects. In the first two, three weeks, we had trouble moving spares, but that we quickly figured a way around that. And so, we managed to stock up on inventory, etc. So, again, we didn't have too much trouble over there.

So things have sort of limped back the normal -- to some degree of normalcy, I may say, not normal, that would be incorrect. Some degree of normalcy. And we don't -- hopefully, we don't envisage any significant breakdown in the personnel movement or workforce movement of factory production going ahead.

Pavel Molchanov -- Raymond James -- Analyst

OK, that's helpful. Following up --

Ranjit Gupta -- Chief Executive Officer

Probably that's the reason why we got a five-month extension, right? So there is, in a way that from March 25 when the initial lockdown was imposed till 24th of August, which is next to next week, right? For that period of time, really, if we have done zero work, right, that would have been OK, but of course, we've been working for the last two or three months, not at full pace, but work has been getting done on site. And -- but we get this full five months. Because even beyond lockdown, the government recognized that there were containment zones and there were discrepancies in various states, and they were not fully harmonized and so on. That's why we got this five-month extension.

Pavel Molchanov -- Raymond James -- Analyst

Understood. Following up, can I ask -- is there an update on the sale of the micro-grid business?

Ranjit Gupta -- Chief Executive Officer

Pawan?

Pawan Agrawal -- Chief Financial Officer

Sorry. Hello?

Ranjit Gupta -- Chief Executive Officer

Pavel's question was about the sale of the micro-grid business. An update.

Pawan Agrawal -- Chief Financial Officer

Well, see, very honestly, we haven't told which assets we are looking for sale. But yes, our assets is progressing well. Because of COVID, there have been some delays because of -- because the team wanted to visit site. They needed to conduct their due diligence.

And from our side also, like -- still we don't have any equity needs on an immediate basis. So, we are also taking our own time to get the best deal and then supporting them logistically whatever is needed to be done. So difficult for us to comment on this at this stage. We can only say that we are seeing very good interest and the potential buyers, they are doing their diligence.

Deal process is on, but it's taking some bit of extra time because of COVID situation. So, what all we can comment is that possibly we'll get money well before we need equity, which is quite some time away.

Pavel Molchanov -- Raymond James -- Analyst

Got it. Thanks very much

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Nathan Judge -- Head of Investor Relations

Ranjit Gupta -- Chief Executive Officer

Murali Subramanian -- Chief Operating Officer

Pawan Agrawal -- Chief Financial Officer

Philip Shen -- ROTH Capital Partners -- Analyst

Maheep Mandloi -- Credit Suisse -- Analyst

Puneet Gulati -- HSBC -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

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