EMS

Water/sewerage solution provider

Healthy order book and strong order pipeline, considering government initiatives, augur well

EMS, promoted by Ramveer Singh and Ashish Tomar, provides Sewerage Solution, Water Supply System, Water and Waste Treatment Plants, Electrical Transmission and Distribution, Road and Allied works for government authorities /bodies. It also undertakes operation and maintenance of Wastewater Scheme Projects (WWSPs) and Water Supply Scheme Projects (WSSPs).The company is an established player with proven capabilities and undertakes WWSPs/WSSPs projects under EPC/ HAM and O&M.

WWSPs include Sewage Treatment Plants (STPs) along with Sewage Network Schemes and Common Effluent Treatment Plants (CETPs) and WSSPs include Water Treatment Plants (WTPs) along with pumping stations and laying of pipelines for supply of water. The treatment process installed at STPs and CETPs is compliant with Ministry of Environment, Forest and Climate Change of India norms and the treated water can be used for horticulture, washing, refrigeration and other process industries.

The scope of its services typically includes design and engineering of the projects, procurement of raw materials, and execution at site with overall project management up to the commissioning of projects. The company, which started with four MLD size of project, has over the period has increased its capacity to execute 60 MLD (the maximum capacity of Minimal Liquid Discharge for STPs). It has executed projects in the range of 4-24 MLD in case of STPs, 9 MLD in case of CETPs, 80 MLD in case of WTP, Common Feeder 41 MLD and 17-41 MLD in case of SPSs.

Since incorporation, it has completed 67 projects (including 17 projects by proprietorship firm which was taken over by the company in June 2012) primarily in Bihar, Uttarakhand, Madhya Pradesh, Rajasthan and Haryana. It has executed many projects awarded by government bodies such as Uttar Pradesh Jal Nigam (UPJN), Construction and Design Services (C&DS), Military Engineering Services (MES), and Indian Railway Construction Limited (IRCON). It has completed 4 O & M in the last 4 years. The company intends to gradually expand its business operations to other regions of the country, i.e., North-East and South India. About 49% of its FY2023 revenue came from projects in Uttar Pradesh, 23.11% from Rajasthan, 17.48% from Bihar, 10% from Uttarakhand, 0.30% from MP and 0.08% from rest of India. About 100% of its revenue is currently generated from business transactions with government entities or agencies.

Post commissioning, operations and maintenance of these plants for a certain period of time is generally a part of the award in recent times. It has a team of dedicated engineers and personnel focused on operations and maintenance of completed projects. Post the commissioning of the project, O&M provides steady cash flows and adds significantly to the company’s margins.

Currently, the company is executing 18 ongoing projects (including WWTPs, WSSPs, EPS and HAM projects),aggregating into an outstanding Order Book of Rs 1774.87 crore, up from Rs 1389.08 crore as of end of March 31, 2023 and Rs 863.62 crore as of end of March 2022. Apart from this, it is also executing 5 O&M projects of Rs 99.28 crore in Uttar Pradesh, Uttarakhand, and Bihar. Of the current order backlog of Rs 1774.87 crore, building orders were Rs 408.33 crore, CETP orders were Rs 85 crore, Sewer Works were Rs 1169.89 crore, and Sewer cum Water Works were Rs 81.7 crore.

WWTPs and WSSPs are mostly funded by World Bankand partly funded by the Central/State Government under schemes like the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and National Mission of Clean Ganga (NMCG) for projects in urban areas. Similarly, WSSPs are also partly funded by Central Government schemes like the Jal Jeevan Mission (JJM) for rural areas of the country. Both WWTPs and WSSPs are also partly funded by states or Urban Local Bodies (ULBs) under their respective schemes.

The company that has not executed any HAM projects in the past but is executing one HAM project as of date for the UP Jal Nigam. Ithas entered a joint venture with Ercole Marelli ImpiantiTecnologici S.R.L. (EMS), Italy. Of the total value of contract of Rs 292.51 crore, the share of EMS is 60% and that of EMIT is 40%.

The Issue, Object of the Issue

The Initial Public Offer comprisesan issue of fresh equity shares,aggregating up to Rs 146.24 crore, and an offer for sale of up to 8294118 equity shares of Rs 10 face value each. The entire offer for sale is by Ramveer Sing, the promoter shareholders. Ramveer Singh, post issue will hold 67.85%.

Of the net proceeds from the issue, about Rs 101.24 crore will be used for funding the working capital requirement and balance for general corporate purposes.

Strengths

More than 3 decades of experience in executing EPC/HAM projects in WWSPs/WSSPs. Track record of successful completion of more than 85 projects till date.

The order backlog of the company as on July 31, 2023, stood at Rs 1744.92 crore (spread across 18 projects), which is 3.2 times of its FY2023 revenue providing healthy revenue visibility. In addition to EPC order backlog, it also has 5 O&M projects aggregating to a value of Rs 99.28 crore providing steady revenue stream.

Water, being a precious thing, along with stringent environmental protection policies/legislation/regulations, greatly encourages water reuse and ZLD (Zero Liquid Discharge) solutions, leading to greater government/industrial expenditure.

Ambitious initiatives of the Indian government including the Jal Jeevan Mission-Har Ghar Jal, AMRUT, NAMAMI Gange Programme, and SWAJAL have expanded the market opportunity for the company. Currently, there is 79% (22,939 MLD) capacity gap between sewage generation and existing sewage treatment capacity in tier I/II cities/towns in the country. Even including 1742.6 MLD of ongoing/planned capacity, there is still a sewage treatment capacity shortfall of 21,196 MLD. Only about 55% of the households of the country as on December 31, 2022, have tap water supply in their homes. Under AMRUT scheme, about 6527 water projects costing Rs 129636 crore (including O&M cost) have been approved by MoHUA so far. Of these 6527 projects, DPR has been approved for 2058 projects (worth Rs 36481.47 crore), notice inviting tenders (NIT) issued for 1025 projects (worth Rs 19157.55 crore). As many as 608 projects (worth Rs 5422.82 crore) were awarded and about 29 projects (worth Rs 102.99 crore) have been completed. So GOI initiatives such as JJM Phase II and urban waste generation and treatment provide e enough growth opportunities for the company in water/wastewater verticals. Similarly, the other major verticals, the company focuses on Railways that also have strong investment lined up.

Weakness

Business growth relies on contracts awarded through tenders under competitive bidding process and the ability of the company to qualify independently/jointly with other partners, availability of enough projects, timely award of the tendered contract as well as ability of the company to win it at competitive bids. The bid success ratio of the company was in the range of 4.2% to 19.1% in the last 5 fiscals. In the last 3 fiscals, it was in the range of 5-13%.

Typically, EPC projects are exposed to various implementation and other risks, including risks of time and cost overruns, and uncertainties, which may adversely affect business, financial condition, results of operations, and prospects.

Undertakes projects in JV or executes projects with sub-contractors and thus any execution delays,atthe JV partner/ client/sub-contracts level, will materially impact the fortune of the company.

Cash flow from operating activities stood negative in FY2023.

In the past, the company has been blacklisted by two government bodies, i.e., Bihar Urban Infrastructure Development Corporation Ltd., (BUIDCo) and UP Jal Nigam (UPJN). In the case of UPJN, the order of blacklisting was withdrawn on September 20, 2019, but the writ petition is still pending. Similarly, in the case of BUIDCo, the court in its order dated July 19, 2021, impugned the order of blacklisting dated 04 March 2021. The risk of debarment / ban on account of a certain pending litigation, which if determined, may adversely affect business, operations and reputation.

So far, the company has not executed any HAM Project in the past. As of date it is executing 1 (one) HAM Project for UPJN at Varanasi.

The business of the company is largely concentrated in four states: Rajasthan, Uttar Pradesh, Bihar and Uttarakhand.

The company has little experience in executing projects under HAM. Thus, failure to achieve financial closures and funding arrangements within the stipulated period for HAM projects may attract a penalty. It may also lead to termination of the contract.

Some of the Promoters Group and Group Companies have objects which would allow them to engage in business that is the same as that of the Company. There are no non–compete agreements between the Company and the Promoters Group and Group Companies, leading to conflict of interest.

Valuation

Consolidated re-stated revenue for the fiscal ended March 2023 stood higher by 50% to Rs 538.16 crore. With OPM contracting by 360 bps to 27.7%, the growth atoperating profit moderated to stand at 32% to Rs 149 crore. Gained further by higher other income and lower interest and depreciation as percentage of sales, PBT was higher by 37% to Rs 146.88 crore. Taxation was up by 34% to Rs 38.20 crore and, thus PAT was up by 38% to Rs 108.67 crore. Eventually, net profit after MI was up by 38% to Rs 107.51 crore as MI stood higher by 49% to Rs 1.16 crore.

The EPS for FY2023 on expanded equity (on the upper price band) was Rs 19.4. The PE on upper price band works out to 10.9 times.

In comparison, Ion Exchange quotes at a PE of 40.7 times of its FY2023 consolidated EPS. Va Tech Wabag, a desalination player in water segment quotes at a PE of 61 times of its FY2023 consolidated EPS. Vishnu Prakash R Punglia, which is into water supply projects, is quoting at 22.4 times of its FY2023 consolidated EPS. Though not comparable on apple-to-apple basis, Thermax and Triveni Engineering Industries, which have presence in water/waste-water treatment projects, quote at PE of 74.3 times and 14.3 times of their respective FY2023 consolidated EPS. WPIL, which is a pump manufacturer as well as undertakes JJM projects, quotes at a PE of 15.3 times of its consolidated FY2023 EPS.