The ₹321 crore initial public offering (IPO) of EMS Ltd opened for subscription on September 8 and will conclude on September 12. The water treatment and waste water management company has fixed the price band in the range of ₹200-211 per share for the issue.
About the issue: The issue includes a sale of fresh equity shares amounting to ₹146.24 crore and an offer-for-sale (OFS) of up to 82.94 lakh equity shares amounting to ₹175 crore by promoter Ramveer Singh.
Subscription status: The issue received a decent response from investors. At 12:25 pm on its first day of bidding, the IPO was subscribed 74 percent against its offer. It has received bids for 78.42 lakh shares against 1.06 crore shares on offer. The categories for both non-institutional investors (NII) and retail investors were fully subscribed. However, the qualified institutional buyers' (QIBs) portion has not received any bids till now.
Grey market premium: Shares are commanding a premium of ₹120 apiece in the grey market today, indicating a strong listing at around 57 percent premium.
However, it is important to note that grey market premiums are just an indicator of how the company's shares are stacked up in the unlisted market and are subject to change rapidly.
Objective: Proceeds from the fresh issue will fund working capital requirements and other general corporate purposes. The company will not receive any proceeds from the OFS portion.
Lot size: Potential investors can bid for a minimum of 70 shares and in multiples of 70 shares thereafter. Hence, at the upper price band, one lot will cost investors ₹14,770.
Reservation: The company has reserved 50 percent of the net offer for the qualified institutional bidders (QIBs), while non-institutional investors (NIIs) will get 15 percent of the offer. Retail investors will get the remaining 35 percent of the offer.
Anchor investors: A day before its IPO, EMS mopped up ₹96.37 crore from six anchor investors, namely- NAV Capital Emerging Star Fund, Abakkus Diversified Alpha Fund, Saint Capital Fund, Meru Investment Fund PCC - CELL 1, BofA Securities Europe SA - ODI, and Morgan Stanley Asia (Singapore)- by allocating 45.67 lakh equity shares at a price of ₹211 per equity shares.
About the firm: Incorporated in December 2010, EMS is engaged in the business of providing water and wastewater collection, treatment, and disposal services for government authorities and local bodies. The company provides Sewerage solutions, Water Supply Systems, Water and Waste Treatment Plants, Electrical Transmission and Distribution, Road and Allied works, operation and maintenance of Wastewater Scheme Projects (WWSPs) and Water Supply Scheme Projects (WSSPs) for government authorities/bodies. 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 the supply of water.
EMS has its own civil construction team and employs over 57 engineers, supported by third-party consultants and industry experts. The company has executed 67 projects over the past 13 years and has an order book of ₹1775 crore. Most of its projects have been executed across Bihar, Uttarakhand, Madhya Pradesh, Rajasthan and Haryana.
Financials: For the year ending March 2023 (FY23), the company's net profit rose over 37 percent to ₹108.62 crore, compared to ₹79.04 crore in FY22. Meanwhile, its total revenue from operations jumped 49.5 percent to ₹538.16 crore for FY23 against ₹359.85 crore for FY2021-22. The EBITDA for FY23 also increased over 32 percent to ₹149.01 crore in FY23 versus ₹112.51 crore in the previous year while the EBITDA margin came in at 20.18 percent in FY23, while the PAT margin was 20.18 percent.
Over FY20-23 as well, EMS reported a healthy financial profile characterised by robust profitability and lower debt on the balance sheet. EMS posted an 18.2 percent CAGR rise in consolidated operating revenue while consolidated EBITDA increased by 15.8 percent in this period. However, the EBITDA margin contracted by 181bps during the period and reported PAT increased by 14.1 percent CAGR during FY20-23.
Book-running managers: Khambatta Securities is the sole manager to the issue, while KFin Technologies has been appointed as the registrar to the Issue.
Important dates: Finalisation of share allocation is expected on 15th September, 2023. Meanwhile, the shares will be listed on both BSE and NSE on September 21.
Brokerage views
Most brokerage firms have recommended subscribing to the issue on the back of its growth potential and infra-based niche business model, strong fundamentals and healthy financials. However, negative cash flows, heavy dependence on government projects and working capital requirements are key risks for the firm.
Choice Broking: Subscribe
Unsustainable expansion in urbanisation seems to be putting pressure on urban wastewater management, planning and treatment. Backed by the government’s proactive policies, the domestic water & wastewater treatment market is expanding rapidly and has a strong outlook in the medium term. With a strong focus on the sewage treatment segment, EMS is rightly placed to benefit from the market expansion. Its robust order book & profitability, healthy balance sheet and demanded discounted valuation make this issue attractive. Thus, we assign a “SUBSCRIBE” rating for the issue.
Anand Rathi: Subscribe
The company has a strong in-house designing, engineering and execution team. They have a strong execution capability with industry experience. At the upper price band, the company is valuing at a P/E of 10.7 times FY23 earnings with a market cap of ₹1,171.7 crore post-issue of equity shares and a return on net worth of 22.31 percent. Thus, we assign a 'subscribe' rating for the issue.
Arihant Capital Markets: Subscribe for long-term
EMS Ltd's strong order book of ₹1,744.9 crore as of 15th July 2023 shows potential revenue visibility and it is expected to grow at a CAGR of 30 percent over the medium term. The company is currently bidding under ₹500 crore projects and expected to bid ₹1500 crore to ₹2000 crore projects going forward. The majority of projects are funded by World Bank which assures payments and working capital days stand around 90 days. The company is very selective in bidding for high-margin projects and the conversion ratio is around 10-15 percent. The higher margins project led to maintaining an EBITDA margin of 30 percent and a PAT margin of 20 percent going forward. The majority of IPO funds will be utilised for working capital requirements of projects indicating strong execution of projects over the medium term. At the upper band of INR 211, the issue is valued at an EV/EBITDA of 6.2x based on FY23 EBITDA and PE of 9.1x based on FY23 EPS of INR 23.2. We are recommending “Subscribe for Long Term" for this issue.
Ventura Securities: Subscribe
One notable aspect of their business strategy is their flexibility in project execution. In addition to independently undertaking projects, they actively engage in joint ventures and partnerships with other infrastructure and construction companies. These collaborations are instrumental in achieving pre-qualification, both in technical and financial aspects, during the bidding process. Successful joint ventures enable them to leverage the specific technical skills and qualifications of their partners, thereby enhancing their ability to execute complex projects effectively. Hence, we have assigned a ‘subscribe’ rating to the issue.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
