Azure Power Global Limited (NYSE: AZRE) Q4 2020 Earnings Call Transcript

Azure Power Global Limited (AZRE) Q4 2020 earnings call dated Jun. 15, 2020

Corporate Participants:

Nathan Judge — Investor Relations

Ranjit Gupta — Chief Executive Officer

Murali Subramanian — Chief Operating Officer

Pawan Agrawal — Chief Financial Officer

Analysts:

Maheep Mandloi — Credit Suisse — Analyst

Hilary Cauley — JMP Securities — Analyst

Philip Shen — ROTH Capital Partners — Analyst

Apurva Bahadur — Jefferies — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Azure Power Fiscal Fourth Quarter 2020 Earnings Conference Call.

We have with us today from the management, Mr. Nathan Judge, Investor Relations; Mr. Ranjit Gupta, Chief Executive Officer; Mr. Murali Subramanian, Chief Operating Officer; Mr. Pawan Kumar Agarwal, Chief Financial Officer.

[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 — Investor Relations

Thank you, and good morning, everyone, and thank you for joining us. On Friday evening, the Company issued a press release announcing its fiscal results for the fourth fiscal quarter of 2020 ended March 31, 2020. A copy of the press release and the presentation are available on the Investor section of Azure Power’s website at azurepower.com.

As mentioned, we have the full management suite here and Ranjit will start with the call by going through recent key highlights; Murali with then follow with comments about how the business has been resilient during the COVID-19 pandemic as well as an industry update; Ranjit will reiterate our longer term guidance and our reduced equity needs; and then Pawan will then follow with an update on the quarter; and then we will wrap up the call with Ranjit reiterating our fiscal year 2021 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 in presentation on our website for a more complete description.

Also contained in our press release, presentation materials 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 presentation and press release.

It is now my pleasure to hand it over to Ranjit. Ranjit?

Ranjit Gupta — Chief Executive Officer

Thank you, Nathan.

Thank you, Nathan, and a very good morning, everyone. Though it has been only four months since our last earnings call, it seems like an eternity. The world has been ravaged by the COVID-19 pandemic and none of us have been left untouched by the havoc it’s wreaked on our lives and our economy. I begin with a wish that we all come out of this relatively unscathed and with a prayer for those less fortunate than us.

Starting on Page 3, we are pleased to report that Azure 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 despite a 54 day halt in construction of our plants under construction due to an imposed COVID lockdown, we expect that all our plants will be completed before the expected revised COD. Due to migration of labor back home from sites and cities across India, return to normal construction speed is slow, but we are protected by the SCOD extensions provided by our procurers.

On the Sustainability front, Azure has been very busy due to the COVID impact on its communities. We enhanced our budget for corporate social responsibility by almost 70% and started relief operations for the needy folks around our projects. So far, we have distributed around 115,000 face masks. We have distributed personal protective equipments to frontline health workers and over half a million meals. This exercise continues as we speak.

The other big effort at our end was to become water neutral in the coming years. On that front, the current situation has delayed our plans, but we are still hopeful of constructing water harvesting facilities in 25 of our projects before the current monsoon season. Azure remains focused on not only doing good work on the sustainability front but also tracking and reporting it.

As the country-wide lockdown in India dropped power demand and impacted revenue collections of distribution companies, the Government of India took steps to protect the Renewable Energy industry. In a spate of orders over March and April, the government rebuffed force majeure notices from various procurers, reconfirmed the Must Run status of Renewable Energy, instructed DISCOMs specifically to pay Renewable Energy dues, and allowed submission of generation invoices through digital means.

Recently, the government announced a $12 billion liquidity package to enable the weaker distribution companies to pay power dues to Conventional and, RE, renewable energy generators.

Another important step by the government has been a push to amend the Electricity Act of 2003 and the Tariff Policy of 2006. Industry has also submitted their suggestions, and when passed, the new Act and Tariff Policy will significantly reduce risk in the Indian power sector.

Ever since Murali and I joined about a year ago, we have made it a priority to be transparent as possible and to enhance our disclosure to investors. This quarter, we have taken yet another step and will be providing several new data points which we believe will help investors understand and value our business more appropriately.

Beginning this quarter and going forward, we will be reporting cash flow to equity for our operating assets. For this past year, CFe from operating assets was around $43 million, up 15% from 2019. We continue to expect significant growth as we commission more projects.

We continue to expect to need about $600 million of equity to build out the 4 gigawatts in our pipeline as the 1,307 megawatts under construction or development already have equity in place. We remain committed to find the lowest cost sources to fund this and we are pleased to announce that since February, we have been able to find opportunities which are lower cost than issuing shares that reduces the additional equity need by about $150 million.

We will continue to pursue opportunities to find additional equity from the lowest cost sources and we don’t expect that we will be issuing any shares before fiscal year ’22, unless of course, issuing stock would be the lowest cost source of equity for our projects. This stock price, however, would need to be substantially above current levels. As an example of our commitment, we have hired advisors to explore selling a second set of assets, in addition to the first set of assets we announced in February.

Despite the disruption to financial markets from COVID, we have been able to access capital at very attractive rates. We recently secured project financing at an interest rate below 9% fully hedged in INR terms for our Rajasthan 8 project. We are in extensive discussions with lenders to complete our near term debt financing needs and believe that we will continue to be able to secure lending at attractive rates, given the quality of our assets and projects.

Also, our largest shareholder, CDPQ, acquired a majority stake in the company earlier this year. This new investment by CDPQ is a recognition of Azure Power’s leading solar development platform in India and by having a majority shareholder with a long-term approach and a AAA credit rating, we will have better access to external capital, further improving our future growth and return prospects.

Finally, as some are aware, there is a delay in the PPA signing for the 2 gigawatt LOA we received in December 2019, and some delay in issuance of the LOA for the 2 gigawatt greenshoe option we elected under the same auction.

Recently, the other winner in the same auction received a LOA for the capacity they elected under the greenshoe option and we are hopeful that we will receive the LOA for our greenshoe capacity soon, as well. The delay, which is now about six months in receiving the PPA for the first 2 gigawatts and the LOA for the second 2 gigawatts of greenshoe capacity has opened up a gap in our construction timelines and we are in discussion with our Board for considering bidding for a limited amount of capacity to fill this gap.

Rest assured that we will only win projects that, with conservative assumptions, will deliver returns that exceed our cost of capital. If we are successful in securing projects at attractive returns above our cost of capital, our annual equity needs will remain as per our presentation. We remain firm in our commitment that we will not grow our portfolio for the sake of growth.

With that, I will pass it over to Murali.

Murali Subramanian — Chief Operating Officer

Thank you, Ranjit. Good morning, everyone. Looking at Page 4, despite the significant impact COVID-19 has had to the economy, the financial markets and even electricity demand, we have been one of the few companies that has not seen any material adverse impact.

We believe that this really illustrates the quality and predictability of our cash flows. Our plants remain fully operational and we believe we will be able to meet the expected revised scheduled commissioning dates for capacity under construction. With superior access to capital and operations, we should further differentiate ourselves to our competition during this challenging time.

On Page 5, we provide some more granularity around the status of each of our ground-mount plants under construction. All of ground-mount projects we are working on are expected to be completed by the expected revised COD dates, that’s the Commercial Operations Date. The COVID-19 pandemic is recognized or has been recognized as a force majeure event and we do not expect to incur any financial penalties for any delays related to the virus.

Marginal cost increases associated with slower build out, as the local economy limps back to normal, is expected to be offset by the cost efficiencies we have been able to drive in our procurement due to softening of material prices resulting from COVID.

Looking at industry and regulatory developments on Page 6, we still see significant demand for new renewable energy in India despite recent events. There were 17 gigawatts of new tenders released during this past quarter and we are tracking a significant amount of potential new tenders that will likely come up for auction in the next 12 months. The Government has committed to maintain a trajectory of Renewable Energy growth as per targets declared by the Indian Prime Minister of a 175 gigawatts of Renewable Energy and 100 gigawatts of Solar by 2022.

We are also seeing more auctions focused on supply with higher capacity factors, such as wind/solar hybrid, round-the-clock power, as well as dispatchable power such as peaking power. Distribution companies want a flatter supply curve of power for grid reliability and capacity that can dampen variability of renewable generation.

Longer term, we believe that technologies such as hybrid and storage will be the norm and there is an opportunity here for us to participate in the near term and to earn returns above our cost of capital.

The Ministry of New and Renewable Energy or MNRE has also confirmed a blanket extension in COD dates for solar projects related to COVID-19 for a period or for a duration of the recent lockdown, plus 30 days for normalization. In addition, an extension can be requested for any supply chain disruptions related to the pandemic. Our revised CODs are provided in the appendix of our presentation, but generally are about one quarter later than originally scheduled, as of now.

Our plants remain fully operational during the recent lockdown in India as electricity generation is designated as an essential service in the country and we have been receiving payments towards electricity supplied from all our customers in normal course. The Ministry of New and Renewable Energy, the MNRE, has sent a directive to all state distribution companies to reiterate that all renewable energy facilities in India have been granted must run status. The MNRE has further clarified that any curtailment, but for grid safety reasons, would amount to deemed generation.

Turning to Safe Guard Duty, refer to as SGD, and the proposed replacement Basic Custom Duty also refer to as BCD, the Directorate General of Trade Remedies has initiated a review investigation to determine whether there is a need to continue or revise the duty structure, and we expect that they will provide a finding before the SGD expires on July 29, 2020.

As a reminder, all our projects are protected under change in law provisions and we do not expect any material impact on our returns from either BCD or SGD.

On the operations front, our assets continue to perform as expected. We have put in place a systematic program for increased digitalization across the assets, and some of the key features of this program, as mentioned in the past, include drone based thermal imaging, enhanced analytics in our plant monitoring platform for predictive analysis and root cause failure determination, robotic waterless module cleaning systems, automated plant perimeter security management systems, and spares/inventory management systems.

We expect to see improvement in asset performance and reduction in operations costs on account of these initiatives in the coming quarters and years.

With that, I will turn it back to Ranjit to discuss long term guidance as well as comments on our equity needs.

Over to you, Ranjit.

Operator

Mr. Ranjit?

Murali Subramanian — Chief Operating Officer

He’s probably having connectivity issues. Let me complete for him. Murali, continuing here.

If you turn to Page 7, our view of long term megawatts and cash flow growth remain unchanged. Once our 1,307 megawatt under construction are completed, we expect that cash flow to equity from operating assets will be about double the FY’20 level once these assets have been operational for a full year.

Looking out further, as we commission the 4 gigawatt in our pipeline, we expect that cash flow to equity from operating assets will be nearly four times the levels reported in this past fiscal year.

Page 8 discusses our equity needs for the next five years. We are pleased to highlight that we have identified opportunities to reduce the additional equity needed to fund our 4 gigawatt pipeline by about $150 million, since we provided this number in February. As a reminder, this additional equity need of $450 million is spread out over a five year period.

As I mentioned before and would reiterate again, we will pursue the lowest cost of capital and as we view it today, issuing shares is one of our highest cost options. We believe there are a multitude of lower cost options to satisfy our equity needs including internal cash flow generation, optimizing cash flow through cost reductions, refinancing, reducing our working capital requirement, investment grade Green Bond that lower borrowing cost and reduce equity needs through higher leverage, asset sales, corporate debt at parent level with international lenders, and bringing in strategic investors.

As a path to continue reducing our equity needs, we have engaged a banker to explore selling a second group of assets in addition to the first set. COVID-19 could slow the asset sale exploration but currently we see good level of initial interest for these assets.

One other point of corporate housekeeping. We are considering filing a blanket shelf that would be effective for at least three years. We are considering doing this now as there are cost savings and time synergies tied with filing of shelf with our annual report. As a reminder, we do not expect to issue shares before at least fiscal year ’22 and we continue to look for opportunities to push this date out even further.

I would now like to turn it over to Pawan Agrawal our Chief Financial Officer to go through the fiscal fourth quarter results. Thank you.

Pawan Agrawal — Chief Financial Officer

Thank you, Murali. On page 9, we show that as of 31st March, 2020, we are operating 1,808 megawatts on a PPA or AC basis or about 25% more than what we had at the end of fiscal last year. And on a DC basis, we added 41% more capacity as compared to last year. We are pleased that we have one of the best counterparty profiles of any large renewable company in India with about 59% of our operating assets having PPAs with the higher grade offtakers such as SECI, NTPC, GUVNL and BESCOM.

The quality of our offtakers is really illustrated by our days sales outstanding. Currently, the majority of our accounts receivables that are past due are concentrated in only 10% of our operating assets and we are making progress in getting back payments from these customers. If this 10% were excluded, only $6 million, or about 4% of our revenue was past due even during the COVID time.

Even though our customer profile is strong, it should continue to improve even further over time as we complete our committed and under construction capacity of 5,307 megawatts, 98% of which is with SECI, one of the highest rated counter parties in India.

Just to walk you through the improvement of our counterparties as we finish our portfolio, 59% of our current operational portfolio of 1,808 megawatt is with the highest grade offtakers, and this will increase to 73% once we complete the 1,307 megawatts which we’re currently constructing. This will further improve to 88% once we complete another 4 gigawatts of pipeline and when our portfolio reaches to 7,115 megawatts.

Focusing on project cost per megawatt operating for the projects built during fiscal year 2020, excluding the impact of safeguard duties, which represented about $40,000 per megawatt, our cost per megawatt on a DC basis decreased by 27% to $430,000.

We are proud of our ability to drive costs lower. Of the $0.13 per watt year-on-year decline in project costs, only $0.03 of this was related to lower module costs. Most of the reduction in our project cost reflects our innovation, our drive for efficiency gains and our pursuit of optimization.

Turning to Page 10, looking at the P&L, we had numerous adjustments this quarter which resulted in a net loss of $5.2 million. If you were to take these out, we would have reported a profit of about $2.1 million. A couple of modeling items that we would like to point out is, as it related to first quarter ’21.

One other point I would like to highlight is that we remain very focused on cost control and we continue to expect that we will be able to reduce our G&A costs by at least 10% in fiscal 2021. We also expect to incur about $3 million per quarter in tax expenses, most of which is related to the two Green Bonds that we had.

One of the major headwinds this quarter was the volatility of Forex. The INR depreciated 9% over the past fiscal and about 5% in the fourth quarter. We recognize that foreign exchange variability results in a longer term higher cost of capital for us, so as a management team, we are committed to mitigate Forex risk in our business and are taking steps to help insulate our returns and profitability from this.

We pressed [Phonetic] hedges for most of our capacity that we expect to construct over the next 12 months to provide greater certainty to our capex and returns. While so far we have been primarily hedging our foreign currency borrowings, going forward we also intend to hedge the imported components of our capex as well.

On interest rates, the current environment is actually more favourable to us than pre-COVID. Much of our project financing is priced off of benchmark base rates, all of which have fallen significantly in recent months. As an example, we finalized a project financing below 9% in INR terms which compares to our average debt cost of over 10%. In addition, our Green Bonds are trading above par and have some of the lowest yields of any Indian renewable energy company which we believe really illustrates the quality and resilience of our assets and cash flows.

Given this more favourable interest rate environment, we will continue to refinance existing loans to save cash flows and capture equity value even if refinancing leads to a one-time charge in the P&L. We do expect that we will be incurring a charge for refinancing this quarter, and as a result our interest expense in first quarter ’21 will be about $35 million. As a reminder, the present value of the equity uplift for every 1% reduction in our effective interest rate is to the tune of $300 million.

We are producing more cash as well. On Page 11, we show the primary drivers to the 15% year to year increase in CFe from operating assets to $43 million. One item that we would like to point out related to CFe is on amortization. For reported CFe for FY’20, we include actual amortization in our CFe calculation which was about $8 million as most of our debt is in Green Bonds which do not amortize. However, for our long term CFe guidance, we assume that our debt will be amortize over a 20 year life and our debt amortization assumptions are much higher than what we are actually currently paying under the Green Bonds.

Turning on to the balance sheet outlined on Page 12, we had around $130 million of unrestricted cash and cash equivalents at the end of the fourth quarter and our days sales outstanding was 126. We reiterate what we said in our recent 6-K filed on June 12th that our liquidity position remains sufficient to continue normal operations through at least the end of fiscal year 2021, ending 31st March, 2021, even if only the highest debt-rated counterparties, such as Government-of-India-owned SECI, continue to make payments for electricity received.

It’s important to note that while all Banks and FIs in India allowed a moratorium on the servicing of loans due to the COVID pandemic, your company stood tall and didn’t avail any moratorium given our strong liquidity position. In fact we prepaid some of our loans during this period, which clearly reflects how well we are positioned.

As of the end of last month, or 31st May, 2020, we had about $105 million of cash and cash equivalents as we spent some money on under construction projects and prepaid part of our debt. Our days sales outstanding as on the same date was around 134 days.

On the Green Bonds, we expect to report their results by the end of this month. Their performance, as they represent about two-thirds of our operating assets, were in line with the operations of the overall portfolio.

We would like to highlight that both our Green Bonds received a one notch credit rating upgrade from Moody’s in March after CDPQ acquired a majority stake in our company. And even though the economy was facing the negative impacts related to COVID-19. However, Moody’s did revise the outlook for our second Green Bonds to Negative in June, which was in line with Moody’s revision of the Government of India’s sovereign credit rating given the portfolio’s large exposure to sovereign offtakers and the debt rating on RG2 being only one notch below India’s Sovereign Credit Rating.

I would now like to turn it over to Ranjit to provide some commentary on FY’21 guidance. Thank you.

Ranjit Gupta — Chief Executive Officer

Thank you, Pawan. We are reiterating our FY 2021 guidance at this time as can be seen on Page 13. There are only two weeks left in the first fiscal quarter of fiscal 2021 and we expect fiscal first quarter 2021 revenue will be between INR3.8 billion to INR4 billion and our PLF will be between 22% to 23%.

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

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Maheep Mandloi from Credit Suisse. Please go ahead.

Maheep Mandloi — Credit Suisse — Analyst

Hi, everyone. Good evening in India, and good morning everywhere else. Thanks for taking the questions. Ranjit, if you can probably first start with the — talking about the $150 million reduction in equity needs for the 4 gigawatt projects. What is driving that as you think about it? And a quick associated question is, you spoke about potential construction delays if the LOA is delayed and requiring — or requiring you to participate in new auctions. So, if you can probably talk about what’s driving that construction delay if LOA is delayed and what’s the deadline on that LOA before you move on to…?

Ranjit Gupta — Chief Executive Officer

Sure. Thank you. Thanks for the question, Maheep. So, as far as the $150 million is concerned, and I would refer to Slide 8 of our presentation, where we mentioned that the primary sources of our additional equity are basically internal cash generation and optimizing cash and so on. So some part of this $150 million will come from asset sales and some part will come from other efficiencies that we are building into our financing. So that is how we expect to generate this $150 million of the $600 million that we need, right.

As far as the delay in LOA or the delay in PPA is concerned, it’s a process and these projects, which we are currently constructing were supposed to commission sometime in the middle of next year, and then from the 4,000 megawatts that we have won, the 4 gigawatts that we have won, the projects were to start commissioning sometime in the middle of 2022. However, because there has been some delay in the signing of Power Purchase agreements, we expect that those commissioning dates will shift towards the end of 2022.

So therefore, we will have a gap in our construction schedule, and in an effort to fill that gap, we are considering taking part in auctions, of course, like we have reiterated in our earnings release, like we have mentioned in our one-to-one conversations with investors, we are not in this for growth. Just because we have a gap doesn’t mean we’ll fill it with projects that do not meet our cost of capital. We do not have to go out and win projects simply because they will add to our megawatts.

That is absolutely not the intention. We will be happy if we don’t win anything, because of the fact that we can’t get the returns that we want and we are idle for a few months that will not kill us, a bad project will. So, we will only dive in if it makes sense.

Maheep Mandloi — Credit Suisse — Analyst

Got that, thanks. And then just on the last part, on potential returns expected in the market. Can you talk about how the competitive landscape is in the market today, especially for the hybrid and storage projects which you plan to target in the future? And then I’m asking also because like one of your competitors had pulled out one of their lowest PPA projects in Rajasthan a few months ago. So, does that indicate a return to more rational bidding behavior or do you still see competition from lower cost of capital from players out there?

Ranjit Gupta — Chief Executive Officer

So, Maheep, the supply and demand of auctions typically has some impact on the tariffs that are discovered. If for a few months you don’t see any auctions people become a little bit more competitive, if you see some auctions, people are less competitive. So otherwise typical, the returns that people expect have been the same over several quarters. So we don’t — we don’t see any change in that. The typical investors, the typical people who are taking part in these auctions of the companies that are our peers in this business.

They remain funded practically in the same way as they were funded, 12 months ago or 18 months ago or 24 months ago. And there is no reason for them to change what they expect from a particular auction. So we don’t — we don’t see any change there. As far as hybrid projects are concerned, we do not see that there will be much change in the return profile there.

On the storage projects, depending upon what kind of storage is going to be used and what exactly is the requirement of the auction, there could be certain arbitrage there for developers, because not everybody fully understands how exactly that has to be priced and therefore people might want to be a little safe. So — but overall as far as any established technology is concerned, the return expectation remains the same.

Maheep Mandloi — Credit Suisse — Analyst

Got it. And then just one last from me and then I’ll jump back in the queue, could you probably just talk about the installation guidance for the year, we have a nice 300 megawatt range. What’s driving the lower and the higher end, especially given the visibility you have in the construction this year? Thanks.

Ranjit Gupta — Chief Executive Officer

So the, basically at the point — at this point, right I mean, the COVID related delays could impact our commissioning. The last time also the reason was that our project were supposed to commission almost at the end of the financial year. So it’s a 300 megawatt project, if it gets commissioned before the financial year, then it’s like 300 megawatts plus. If it slips into the next year as in by two weeks if it slips, then we are like 300 megawatts short. So that is the reason for the large range.

And like I mentioned in my remarks and Murali did, there has been a slow restart because of the fact that many of the labor had migrated back home. So, they are slowly trickling back onto sites and we are seeing some delay and start up. Our projects have started up, the construction has begun. But obviously, it does not add the pace that we expect.

However for the projects that are to commission in the first quarter of next calendar, which is the last quarter of the current fiscal, there is still time, there is still time to make up, right. If over the next month or two months if things remain stable and the workers return, we could still meet the timelines that we have put down in our presentations.

Maheep Mandloi — Credit Suisse — Analyst

Got it. All right. Thank you.

Operator

Thank you. The next question is from the line of Joseph Osha from JMP Securities. Please go ahead.

Hilary Cauley — JMP Securities — Analyst

Hi, this is actually Hillary on for Joe. Thanks for taking our questions. I guess, first, wanted to touch on the second group of asset sales being considered. If you could provide just a little more detail about what we might see kind of grouped in with that. And then if that — once that’s kind of complete, is that pretty much everything that you’d be willing to consider selling or will we possibly see some additional sales after that?

Ranjit Gupta — Chief Executive Officer

That’s been a very important question, thanks for asking. When we had spoken about this last time also, we had mentioned that we will look at all non-strategic assets, right. The assets that do not make sense for us, the way that Azure looks at itself over the next few years, right. And we had mentioned that that basically means maybe very small assets, assets which are 4 megawatt, 10 megawatt, 20 megawatt because now we are going out and doing 4 gigawatts. We are doing a 600 megawatt project, 300 megawatt project.

So therefore those smaller projects are potentially non-strategic. We will obviously also look at projects that are further away in remote areas we might — where we find that it is more difficult to drive operational efficiencies. We could look at projects that have higher tariffs in the long run. We would want to see a host of projects that are large with low tariffs selling to the best counterparties in the country.

However, there are of course constraints because many of our projects are part of the restricted group. So therefore, and I mean whatever is the second set of assets that we have seen, we have collected at this point in time, which are non-strategic for us, going forward depending upon how the RGs play out when we go and refinance our portfolios, which are due in the next year, in calendar 2022, towards the end of calendar 2022 and calendar 2024, towards the end of 2024. At that time, maybe some other projects could potentially be thrown up.

And it will also depend, of course, on what are the other options that we have available at that point in time. So objective for us is not to reduce the size of the company. The objective for us is to increase the size of the company and our projects are good projects. So the reason to free up would be to free up equity would be only if we find that that is the cheapest source of capital for us. Only then we will go out and do that. So there are many factors that will play into these decisions.

Hilary Cauley — JMP Securities — Analyst

Okay, great. And then, if you could perhaps just kind of touch, I know a quarter or two ago, we kind of talked about what multiple you might expect to see for these asset sales. But I was just kind of wondering if you could provide updated thoughts and where we might see those come in? Thank you.

Ranjit Gupta — Chief Executive Officer

Those discussions are still ongoing. It will be difficult for us to give a number right at this point, especially when we are still trying to discover the best possible price for ourselves.

Hilary Cauley — JMP Securities — Analyst

Okay, thank you.

Operator

Thank you. Next question is from the line of Philip Shen from ROTH Capital Partners. Please go ahead.

Philip Shen — ROTH Capital Partners — Analyst

Hi, everyone. Thanks for the questions. The first one is a follow-up on the sale of assets? Ranjit, I believe you mentioned that of the $150 million of equity that you have been able to generate that there is a mix between asset sales and efficiencies from financing. Would it be possible to break out what is the percentage between the two?

Ranjit Gupta — Chief Executive Officer

So, a large portion is going to be from the asset sales, and a smaller portion from other efficiencies. And fill the holes — I mean, also we have to see, for example, like we mentioned that this $600 million is something that is required over the next five years. I mean our projects, that 4 gigawatts that we have — that we have secured, those are to be constructed by the summer of 2025, right.

So, the numbers that we are talking about $150 million, the — I know the breakup of that will also change, right, as we discover what exactly is the asset — proceeds that we get from the sale of assets and what we are getting from the other efficiencies we drive. At the moment, we can see this number to be $150 million and obviously we want to be conservative in our estimates.

Murali Subramanian — Chief Operating Officer

I’m going to add to that point, we also hope that we have achieved some cost reductions in construction and if we can sustain that momentum over the next three, four years of cost reduction, then that would also contribute to — towards this $150 million reduction.

Philip Shen — ROTH Capital Partners — Analyst

Got it. Okay, thanks. I think on the — on the, pardon me one second, sorry. On the Q1 or the prior quarter call. Sorry for — other people are calling me, so I got distracted here. On the F-Q3 call, you highlighted that you guys sold [Technical Issues] how many megawatts are in contention there?

Ranjit Gupta — Chief Executive Officer

Sorry, Phil, I missed the last part of your question.

Philip Shen — ROTH Capital Partners — Analyst

No problem. So, now that you are considering another round of asset sales, what is — how many megawatts that you considering [Phonetic] of asset sales? You know I think in the prior round, you had 600 megawatts? Thanks.

Ranjit Gupta — Chief Executive Officer

No, no, we didn’t — in the prior round, it was not 600 megawatts. The 600 megawatts that we had mentioned, Phil, were the projects that we exit, right, in a sense that those were projects that were secured, but when we did the analysis, we figured that those projects, we did not want to build, because of the fact that they were not going to give us the returns that we wanted.

So over the time that we have been here, we have exited about 600 megawatts of projects. So — and that was 600 hundred megawatts. And, as far as the sale of assets is concerned, so we’ve got the first set of assets for which we had appointed a banker at the beginning of this calendar year. And recently we have appointed a banker for the second set and we are exploring these asset sales. Once we have some numbers then we’ll — and credible counterparties, we’ll go to the Board and seek permission for those transactions.

Philip Shen — ROTH Capital Partners — Analyst

Okay. Apologies for the confusion, but that said, can you talk about the megawatts in both the first and second round of asset sales?

Ranjit Gupta — Chief Executive Officer

I would prefer not to talk about the megawatts at this point in time please.

Philip Shen — ROTH Capital Partners — Analyst

No problems. No problem. Shifting gears to the 2 gigawatts that — where you have not received the PPAs yet. Can you comment on the timing of when you might expect to receive that PPA? I know it’s been clearly delayed meaningfully. And perhaps can you also comment on when you might receive the LOA for the 2 gigawatt greenshoe? In the prior calls, you’ve been confident that you would receive the LOA soon. But what is — when do you expect to receive these things based on where you stand now?

Ranjit Gupta — Chief Executive Officer

All right. So that’s very important milestone for us. So, as far as the power purchase agreements are concerned, Phil, the date by which those power purchase agreements were to be signed was 10th of June, 2020, so last week. So there is a delay at the moment, it is five days for us for signing of the power purchase agreements or begin signing of those power purchase agreements. We believe that it will be at least a quarter or two quarters delayed overall.

So, we have been assured by SECI that they are working furiously towards signing these PPAs and we hope to hear some good news in the coming quarter. So that’s what we are hoping to see. The good thing with these power purchase agreements, which is a very heartening for us is that these PPAs or these 4 gigawatts come with a built-in ISTS waiver, correct. So basically, at this point in time in the renewable energy sector, largely the only “subsidy” that remains, is a waiver of interstate transmission charges and currently this waiver expires in December 2022, right.

And so, as far as these assets are concerned, these 4,000 megawatts are concerned, they come with an inbuilt waiver till the time that these projects are completed, which is 2025 or 2025 end and so on. So therefore we are not really — there is no timeline issue for us really as far as these power purchase agreements are concerned, and a quarter or two of delay will not really throw us off in any which way or increase our risk in any which way.

In fact, maybe a quarter delay would only help the return because as we are seeing every quarter, every two quarters brings a reduction in the capex for building these projects. So our tariff is protected, our ISTS and change in law is protected. So therefore, we don’t really hurt with the delay in these power purchase agreements.

As far as the LOA is concerned, the LOA like we mentioned in the earnings call, the other company that has won the auction alongside us, they got the greenshoe option LOA last week. So therefore we are more comfortable and more confident that we should get our LOA also soon, sooner than later.

Philip Shen — ROTH Capital Partners — Analyst

Great. That detail is really helpful. And then another follow-up there. Can you talk about the reasons for the PPA delay? Is it due to coronavirus or is it due to something else? I think — and then also, can you comment also on the LOA. It sounds like that should come around soon and given I believe Adani was the peer that received their LOA. Thanks.

Ranjit Gupta — Chief Executive Officer

Absolutely. So like you mentioned that they received it. So we are hopeful of getting ours too. As far as the first part is concerned, the delay in the power purchase agreement, definitely COVID has played a huge role, because of the fact that none of the distribution companies were really working. They were grappling with their revenue collections. So, their focus is not on signing these power purchase agreements. So that has caused some delay.

And once SECI gets on top of this, we’ll figure out exactly what the reasons might be once this — over the next few weeks we’ll find out exactly what the reasons are, and are they getting any push back from the states, and why if there is any push back, they are getting this push back.

Philip Shen — ROTH Capital Partners — Analyst

Great. Thank you, Ranjit and everyone else. I’ll pass it on.

Operator

Thank you. [Operator Instructions] The next question is from the line of Apurva Bahadur from Jefferies. Please go ahead.

Apurva Bahadur — Jefferies — Analyst

Hi, thank you for the opportunity. So, just wanted to understand this quarter results had some payments related to stock options and management change. I believe, these are one-off and should not see this going forward or is there anything built in for future as well?

Pawan Agrawal — Chief Financial Officer

Hi, Pawan here. So, the payment related to management transition definitely is one-off item. And that will not be there in the subsequent P&L. So however on SAR [Phonetic], that is something that has been — that has to be marked to market based on the share price. And as you know that both Ranjit and Murali, they have been — their stakes are very highly correlated to the long-term growth of the company.

So, large part of their compensation is via stock appreciation right. And the way accounting works, every quarter they need to provide for, based on Blackstone’s [Phonetic] formula, I think they provide for in our books of accounts. So, charges related to Azure or stock options for the management team. Those will have — those will continue on they will be based on how the guys performs.

Apurva Bahadur — Jefferies — Analyst

Okay. And — okay. So, actually the amount will vary based on the MTM?

Pawan Agrawal — Chief Financial Officer

I might tell you that these are accounting entries, right? So both Ranjit and Murali are smart guys, they are exercising. And yes, they are so they will be paid in money. But yeah, the way a fair accounting work, yes, as the share price goes up, the impact will be there on each reporting period [Phonetic].

Apurva Bahadur — Jefferies — Analyst

Okay. Just wanted to check, I think you gave a guidance for $3 million of tax expense per annum, is that correct?

Pawan Agrawal — Chief Financial Officer

Yes. So both are Green Bonds; Green Bond 1 and Green Bonds 2. I think they are approved out of Mauritius and they’re rendered [Phonetic] in Mauritius and then the payment happens from Indian entity to the Mauritian entity and then by the Mauritian entity to the bondholders. So as per the tax laws, we have to pay tax, withholding tax on the payment from the Indian entity to the Mauritian entity. So that is the withholding tax which is a significant part of $3 million guidance that we gave.

Apurva Bahadur — Jefferies — Analyst

Okay. And what would be the run rate for the company level for tax rate for us?

Pawan Agrawal — Chief Financial Officer

The run rate I think it would be around — because see, in terms of our profit, our taxation for another portfolio that is not very material because when you get huge amount of depreciation as a part of our STB accounting. So broadly the tax payments primarily include payments for our withholding tax per the bond family.

Apurva Bahadur — Jefferies — Analyst

Okay. Got it. One more question. I think we had exited a couple of projects of 600 megawatts last quarter. So based on the current pipeline, is there scope for any more such exists or is this all?

Ranjit Gupta — Chief Executive Officer

So, materially all the projects that we wanted to exit we have exit. Now the projects that we have in hand there are — there aren’t — there isn’t much that we need to do. If we decide not to do something, it could be a small project, on the rooftop side or it could be a small project, a part of the project in Assam, those decisions we take on an ongoing basis, but the material thing which is like 600 megawatts of our portfolio of 1,900 megawatts that we — when we entered, we had a portfolio of nineteen-odd hundred megawatts that we were building 600 megawatts we decided to exit. That has happened. So nothing material is expected anymore.

Apurva Bahadur — Jefferies — Analyst

Okay. Just last question, and this is on the manufacturing PPA side. So just wanted to understand from you, so basically I understand that the LOA has to be issued and the PPA is SECI’s probably responsibility to get, but given the current auction trends and how low even the RTM bids have been, at INR2.91 and the current state of DISCOMs, how feasible would it be for the states to sign for these — this tender?

Ranjit Gupta — Chief Executive Officer

So, you are right. There is always tariff shopping that keeps going on between the distribution companies. There was a tariff of INR2.65 or INR2.70 and then INR2.50, INR2.60 and the distribution companies keep jumping from one to other. So, in fact this sort of — even before the manufacturing bid was floated, that is in October of last year, the government had changed the standard bidding guideline for solar and provided for bundling of PPAs, so that states do not do tariff shopping and SECI is working on that because otherwise, if they come out with a INR2.65 bid and the next bid is INR2.80 and the next bid is INR2.70, they are — they find it difficult to convince the states.

So by doing bundling, they will be able to provide a stable tariff to all states and then the states are also comfortable that they are not losing money just because they’ve waited for two months or they have not lost money because they’ve been early by two months. So that is what SECI is doing, so that it takes care of these short-term variations in the renewable energy pricing.

Of course, in real terms, this doesn’t really matter so much, because at 200 megawatt, 300 megawatt PPA, which the states typically do at a particular time, a difference of INR0.10, INR0.15, INR0.20 will have zero impact on their final retail tariffs or final industrial tariffs. But optically, it looks bad for the space, and therefore they try and get the cheapest power and do tariff shopping and to prevent that, SECI had come up with a change in the guidelines, which allows them to bundle tariffs.

Apurva Bahadur — Jefferies — Analyst

Okay, it’s very helpful. Thank you so much. All the best.

Ranjit Gupta — Chief Executive Officer

Thank you.

Operator

Thank you. Ladies and gentlemen, as there are no further questions. I now hand the conference over to Mr. Nathan Judge for closing comments.

Nathan Judge — Investor Relations

Thank you, everyone, and we will be available after the call if you have any follow-up questions. Thank you very much.

Operator

[Operator Closing Remarks]