By 2030, water demand in India is projected to be twice as much as the supply. Before this becomes a major challenge, private and public sector facilities aim to set up comprehensive water and wastewater treatment and distribution infrastructure.
To add to this, various government initiatives, such as the Atal Mission for Rejuvenation and Urban Transformation, the National Mission for Clean Ganga, and the Jal Jeevan Mission, are already pushing the growth of this industry.
Given that the water and wastewater treatment industry is poised for growth, we are comparing three listed companies, namely, VA Tech Wabag, Ion Exchange, and EMS, that could be primary beneficiaries.
VA Tech Wabag is a complete water treatment solution provider. Its activities include the design, supply, installation, construction, and operational management of drinking water, wastewater, industrial water treatment and desalination plants.
The company operates in over 25 countries and has executed over 1,400 projects since 1995.
It focuses on research and development (R&D) and has over 125 intellectual property (IP) rights for water treatment technology solutions.
Headquartered in Mumbai, Ion Exchange is a pioneer in water, wastewater treatment, and environment solutions and caters to various industries, institutions, homes, and communities.
The company has completed over 100 thousand installations across the globe and is one of the leading companies in the water management industry.
It has seven manufacturing and assembly facilities in India, Bangladesh, UAE, and Indonesia.
EMS is a multi-disciplinary EPC company that offers turnkey solutions in water and wastewater collection, treatment and disposal.
It offers end-to-end solutions from engineering and design to installation of water, wastewater, and domestic waste treatment facilities.
The company also undertakes EPC works in various other sectors, including power transmission, civil construction, electrical transmission and distribution, and construction of buildings.
EMS has majorly undertaken government projects, and the majority of its clients are urban local bodies of UP and Bihar, like UP Jal Nigam, Bihar Urban Infrastructure Development Corporation Ltd. (BUIDCo), and the Municipal Commissioner for various districts.
Between the three companies, Ion Exchange has a higher market cap of ₹71.4 billion (bn), followed by VA Tech Wabag and EMS, which have a market cap of ₹44.8 bn and ₹27.3 bn, respectively.
However, in terms of the order book, VA Tech Wabag is leading with an order book of ₹118.6 bn, followed by Ion Exchange and EMS, which have an order book of ₹33 bn and 20.9 bn, respectively.
VA Tech Wabag is the world's third-largest private water operator and 5th largest desalination player. Being a reputed and well-recognized player, along with a high focus on R&D and comprehensive service offering, has helped the company secure higher orders from its clients.
For Ion Exchange, orders from Sri Lanka, UP and Delhi Jal Nigam are the major contributors to the order book.
In the case of EMS, the company has a large pipeline of government orders with respect to wastewater schemes and water supply schemes.
Coming to the performance of these companies on the stock exchange, then in the last year, VA Tech Wabag has given multibagger returns of 116.8%, whereas Ion Exchange gas has given 51.2%.
EMS was listed on the stock exchange on September 21, 2023, and it has given close to a 78% return since its listing.
VA Tech Wabag earns majority of its revenue from EPC contracts, and the rest is through the operation and maintenance of the projects. In terms of geographical distribution, India accounts for the majority of its revenues, followed by exports.
Ion Exchange has a diversified revenue profile. Close to 60% of the revenues are generated from EPC contracts, 30% of the revenue is from chemicals manufacturing and the remaining 10% is generated from selling consumer products.
A strong export presence, diversified clientele, healthy order execution, and healthy demand from chemicals segments have helped Ion Exchange grow its revenues.
EMS, on the other hand, generates all its revenues from offering EPC services to its clients.
It has made its mark in the water supply and treatment segments, which helped the company secure repeat orders from government and municipal bodies. This, along with faster order execution, has supported the revenue growth of EMS.
In terms of revenue, the VA Tech Wabag has the highest revenue among the three companies. Its net sales are 5x of EMS’ sales and 1.4x of Ion Exchange's sales.
However, in terms of revenue growth, EMS and Ion Exchange are leading with a five-year compound annual growth rate (CAGR) of 11%.
On the other hand, VA Tech Wabag’s revenue has grown at a CAGR of 1.3% during the same period. Delay in order execution is the primary reason for slow growth in revenue.
However, in the last three quarters, the company's revenue has grown consistently on account of faster order execution. To add to this, it has a very high order book, which ensures revenue visibility in the medium term.
It is important to look at a company’s profitability metrics to understand whether it is able to generate profits from its operations.
VA Tech Wabag's earnings before interest tax and depreciation (EBITDA) saw a degrowth of 27.2% in the last five years. The net profit also fell by 34.3%, and the profit margins contracted.
The primary reason behind the fall in profits is the slow execution of orders, high-value, low-margin orders, and exposure to foreign orders, which led to forex-based losses.
However, in the medium term, the company's profits are expected to improve on the back of faster execution and its improved focus on procuring high-margin orders.
For Ion Exchange, the EBITDA and net profit have grown at a CAGR of 18.8% and 24.2%, respectively.
The profit margins also improved significantly. Faster order execution, healthy demand from end-user industries in chemicals segments, and high margins from the chemicals business are driving this growth.
The EBITDA growth and net profit growth for EMS was 11.7% CAGR in the last five years.
High demand for water and wastewater treatment and faster execution of orders have helped the company grow its profits.
If we compare the three companies, then Ion Exchange is clearly leading in terms of EBITDA and net profit growth. With respect to margins, EMS is leading with higher gross profit and net profit margins.
VA Tech Wabag is a debt-free company. It has no major financial obligations primarily because it follows an asset-light model.
This encouraged the company to invest in equity in HAM projects. So far, the company has ₹150 million (m) in such projects.
It plans to invest ₹350-400 m annually in HAM projects in the future, which can be easily liquated after three years of operation of such projects.
Currently, the company has a bank balance of ₹1.4 bn.
Ion Exchange is also a debt-free company. However, it plans to raise money through debt to expand its chemicals manufacturing facility.
It plans to invest ₹4 bn in capex for the greenfield expansion. Given its zero debt status, a little debt will not harm its balance sheet as it has a healthy cash balance of ₹3.3 billion with an interest coverage ratio of 22.5x.
EMS has a debt-to-equity ratio of 0.1x, with a long-term debt of ₹454 m as of March 31, 2023. It has a high bank balance and liquid investment of ₹1.7 bn, indicating sufficient liquidity.
With no major capex planned, the company can easily repay its debt with internal accruals.
In terms of debt management, all three companies are performing well and have sufficient liquidity to meet their debt and capex requirements.
We can measure the efficiency of a business by looking at its return ratios.
Two important ratios are return on capital employed (RoCE) and return on equity (RoE). These ratios tell us how much return a company generates from its capital. A high ratio which is consistently improving is always better.
The five-year average RoCE and RoE of VA Tech Wabag are 14.2% and 6.4%, respectively. The return ratios fell drastically as the company's profitability was affected in the last five years.
For Ion Exchange, the five-year average RoCE and RoE are 37.9% and 25.5%, respectively. The return ratios of Ion Exchange are lower than their five-year average due to higher input costs for its chemicals and consumer products business, which affected the profit margins.
However, with profit margins expected to improve in the medium term, the return ratios will also improve.
For EMS, the five-year average RoCE and RoE are 36.9% and 27.4%, respectively. In the last five years, the return ratios fell due to delays in a few HAM projects.
If we compare the three companies, then Ion Exchange is better at generating profits from the capital invested than VA Tech Wabag and EMS.
To measure the actual worth of a company, it is important to look at its valuation ratios. They also tell us whether the company is overvalued or undervalued.
Two common valuation ratios that every investor must look at are price to earnings (P/E) and price to book value (P/B).
The P/E of VA Tech Wabag is 67.5x. For Ion Exchange and EMS, the ratio stands at 35.4x and 25.6x, respectively.
Clearly, VA Tech Wabag is overvalued when compared to the other two companies. However, if we compare the three companies with the industry average, then VA Tech Wabag and Ion Exchange are overvalued, whereas EMS is undervalued.
In terms of P/BV, Ion Exchange is overvalued with a multiple of 7.7x, followed by EMS, which has a multiple of 3.6x. VA Tech Wabag has a price to book value multiple of 5.6x.
In terms of revenue growth, profit growth, and return ratios, Ion Exchange outpaced VA Tech Wabag and EMS.
This is primarily because Ion Exchange has a diversified revenue profile with a presence in the EPC segment, chemicals manufacturing, and consumer products.
Having a diversified revenue profile helps the company to nullify the underperformance of one segment with the better performance of the other.
Being a leading player in the water management industry, it has a huge unexecuted order book lined up, providing revenue visibility in the medium term.
It is also investing in a greenfield plant to expand its resin manufacturing capacity.
The company plans to expand its operations to new geographies and develop new products to grow its revenue and profits.
After Ion Exchange, EMS is leading in terms of revenue growth and profitability.
EMS is a relatively new player in the industry, as it commenced its operations in 2010.
Despite being a new player, it has completed several projects, mainly from government bodies.
The quality of its operations and fast execution have helped EMS secure repeat orders from government agencies.
It plans to secure new orders from different state municipalities to expand its operations.
VA Tech Wabag, on the other hand, is focusing on implementing new orders and expanding its business to new areas.
It has already tied up with Bio-CNG plants in India, GCC, Africa, and European countries to provide them with clean water for production.
The company is also in discussions with hydrogen developers to collaborate as their water partner. There is a lot of potential here, given the government’s focus on green hydrogen.
It already supplies clean water to the semiconductor industry and plans to expand further and remain a dominant player globally.
Given the growing demand for clean water and wastewater treatment around the globe, all three companies have a fair chance of getting on the top.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
