Concord Enviro IPO review (May apply)

•    The company is a global player for water/wastewater treatment and other solutions involving ZLD technology.
•    While it posted steady growth in its top lines for reported periods, it marked setback in bottom line for FY23.
•    For 5M of FY25, it posted dismal earnings, indicating pressure on margins with rising competition.
•    Based on its recent financial data, the issue appears fully priced discounting all near term positives.
•    Well-informed investors may park funds for medium to long term.

PREFACE:
Despite humble urge from the regulator for non-clubbing/bunching of more than 2 IPOs a day for opening for subscription, we are set to mark bunching of five mainboard IPOs that are opening on December 19, 2024, and here again very short time was spared for analysts to understand the pros and cons for the IPOs. Well, this is the first IPO from the set of 5 IPOs that are scheduled to mark opening on December 19, 2024, others to follow are TransRail Lighting, DAM Capital, Sanathan Textiles, Concord Enviro. We have one more set of 3 mainboard IPOs lined up for opening on December 20, 2024, and they are Ventive Hospitality, Senores Pharma, and Carraro India. No doubt, this provided an ample choice of selection for investment, it also makes it difficult to manage funding. Let us hope that the regulator is definably turns strict on this matter and brings some amicable solution.

ABOUT COMPANY:
Concord Enviro Systems Ltd. (CESL) is a global provider of water and wastewater treatment and reuse solutions, including zero liquid discharge (“ZLD”) technology. It has in-house capabilities to develop solutions across the entire value chain including designing, manufacturing, installation and commissioning, operation and maintenance (“O&M”) and digitalization solutions including Internet of Things (“IoT”). The sources through which it generates revenue include (i) sale of systems and plants (ii) operations and maintenance of installed plants, and (iii) supplying consumables and spares for installed plants. Its business operations include:
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Systems and Plants: the manufacture and sale water and wastewater treatment, reuse and ZLD of systems and plants and turnkey solutions and includes effluent treatment plants, anaerobic digestors, membrane bio-reactors, sewage treatment plants, membrane-based systems including ultra-filtration (“UF”), nano-filtration (“NF”), reverse osmosis (“RO”), desalination systems and waste heat evaporators (“WHE”).;
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O&M: operations and maintenance; and
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Consumables and Spares: the manufacture and sale of consumables and spare parts (including membranes, plants chemicals and consumables).

It has also implemented digitalization solutions (including IoT) to provide data capture and analysis platforms that enable real-time monitoring, troubleshooting and preventative maintenance of installed systems and plants.

CESL is an integrated provider of wastewater treatment and ZLD solutions, with focus upon energy optimization and recovery helping industries achieve water conservation and sustainability goals. (Source: 1Lattice Report) Its reach extends to diverse regions, with exports to countries in North America, Latin America, Africa, Middle East and Southeast Asia and a large customer base of 310 customers across the globe as of August 31, 2024.

The company also provides solutions to customers on a turnkey basis. Its integrated solutions incorporate own custom designs for systems and plants including effluent treatment plants, anaerobic digestors, membrane bio-reactors, sewage treatment plants, membrane-based systems including ultra-filtration (“UF”), nano-filtration (“NF”), reverse osmosis (“RO”), desalination systems and waste heat evaporators (“WHE”). In addition, it offers customers a comprehensive suite of O&M services including providing consumables and spare parts. It has also implemented digitalization solutions (including IoT) to provide data capture and analysis platforms that enable real-time monitoring, troubleshooting and preventative maintenance of its installed systems and plants.

As of August 31, 2024, the company serviced over 289 domestic customers and 21 international customers across a diverse set of industries such as pharmaceuticals, chemicals, food and beverage, defence and energy, automotive and auto ancillaries, steel and textiles, and has a presence in two countries. It services both Indian and Multinational customers such as Diageo Mexico Operaciones, S.A. De C.V., Grasim Industries Limited, AB Mauri, Anthem Biosciences Private Limited, Bhopal Glues and Chemicals Private Limited, Kasyap Sweetners Private Limited, LANXESS India Private Limited, Puja Spintex Private Limited, SFC Environmental Technologies Private Limited, SMS Limited and Tagros Chemicals India Private Limited. Further it is currently executing projects for multinational companies like Diageo Mexico Operaciones, S.A. De C.V. that include implementing a ZLD solution for their distillery in La Barca, Jalisco, Mexico and a ZLD solution for another customer at their factory in New York, United States of America.

CESL two manufacturing facilities, one located at Vasai in Maharashtra, India, and the other at Sharjah in the UAE. It develops solutions through in-house R&D team, which comprises 25 employees as of August 31, 2024, which designs industry-specific membranes for systems and develops new technology and processes. As of August 31, 2024, it had been awarded four patents in India and had filed nine additional patent applications. Its R&D is focused on reducing the operational cost of carbon footprint of ZLD. The company achieves this through energy recovery by anaerobic digestion, ammonia removal and reducing energy required for ZLD by employing WHE and industry specific membranes. (Source: 1Lattice Report)

Its major international customers are Diageo Mexico Operaciones, S.A. De C.V. and AB Mauri. It has a history of high customer retention and derive a significant proportion of revenue from repeat business (recurring business generated from a customer in the last three fiscal years) which is built on its successful execution of prior engagements. (Source: 1Lattice Report). As of August 31, 2024, it had 1141 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route combo IPO of equity shares worth Rs. 175.00 cr. (approx. 2496434 shares at the upper cap), and an Offer for Sale of 4640888 shares (worth Rs. 325.33 cr. at the upper cap). Thus the overall size of the IPO is 7137322 shares at the upper cap of price band worth Rs. 500.33 cr. The company has announced a price band of Rs. 665 – Rs. 701 per equity shares of Rs. 5 each. The issue opens for subscription on December 19, 2024, and will close on December 23, 2024. The minimum application to be made is for 53 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 34.49% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, the company will utilize Rs. 25.00 cr. for investment in wholly owned subsidiary, Rs. 10.51 cr. for investment in subsidiary Rochem Separation Systems (India) Ltd., Rs. 3.21 cr. for funding capex on plant and machinery of the company, Rs. 50.00 cr. Investment in subsidiary CEF, Rs. 20.00 cr. for Investment in working capital of CEF, Rs. 10.00 cr. for Investment in JV Roserve Enviro Pvt. Ltd., Rs. 23.50 cr. for investment on technology for other growth initiatives, and the rest for general corporate purposes.

The joint Book Running Lead Manager (BRLM) to this issue are Motilal Oswal Investment Advisors Ltd., Equirus Capital Pvt. Ltd., while Link Intime India Pvt. Ltd., is the registrar to the issue. Motilal Oswal Financial Services Ltd., and Equirus Securities Pvt.  Ltd., are the syndicate members.

Having issued/converted initial equity shares at par value, the company issued further equity shares at a fixed price of Rs. 3166.67 (based on Rs. 5 FV) in December 2009. It has also issued bonus shares in the ratio of 17 for 1 in November 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.15, Rs. 0.23, Rs. 0.28, Rs.  0.30, Rs. 0.35, and Rs. 183.82 per share. 

Post-IPO, its current paid-up equity capital of Rs. 9.10 cr. will stand enhanced to Rs. 10.35 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 1450.81 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 337.57 cr. / Rs. 16.48 cr. (FY22), Rs. 350.50 cr. / Rs. 5.49 cr. (FY23), and Rs. 512.27 cr. / Rs. 41.44 cr. (FY24). For 5M of FY25 ended on August 31 2024, it earned a net profit of Rs. 0.52 cr. on a total income of Rs. 208.02 cr. 

For the last three fiscals, the company has posted an average EPS of Rs. 13.90 and an average RoNW of 8.14 %. The issue is priced at a P/BV of 3.97 based on its NAV of Rs. 176.62 as of August 31, 2024, and at a P/BV of 2.92 based on its post-IPO NAV of Rs. 240.41 per share (at the upper cap).

If we attribute FY25 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 1168.33, and based on FY24 earnings, the P/E stands at 35.01. The issue appears fully priced on the basis of its recent earnings. Its borrowings of Rs. 167.53 cr. as of August 31, 2024, raises concern.

According to the management, due to year end investments by its clients, the major portion of its revenue and earnings happens in second half of the fiscal.

For the reported periods, the company has posted PAT margins of 5.00% (FY22), 1.60% (FY23), 8.34% (FY24), 0.25% (5M-FY25), and the RoCE margins of 10.23%, 6.96%, 14.07%, 2.08% for the referred periods respectively. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It has adopted a dividend policy in June 2022, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Praj Ind., Ion Exchange, Triveni Engg., VA Tech Wabag, and Thermax, as their listed peers. They are trading at a P/E of 53.0, 48.2, 33.2, 40.0, and 89.1 (as of December 18, 2024). However, they are not truly comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
The two BRLMs associated with the offer have handled 28 pubic issues in the past three fiscals, out of which 9 issues closed below the offer price on the listing date.