Denta Water IPO review (May apply)

•    The company is an EPC service provider for ground water recharging segment and has created a niche place.
•    It marked steady growth in its top and bottom lines for the reported periods.
•    As of November 30, 2024, it had an order book worth Rs. 752+ cr. 
•    This segment has many local players and all are equally doing well.
•    Well-informed investors may park funds for medium to long term. 

ABOUT COMPANY:
Denta Water & Infra Solutions Ltd. (DWISL) has emerged as one of the key players in the field of water engineering, procurement, and construction (“EPC”) services. With a meritorious track record in infrastructure project installations, including groundwater recharging through recycled water, Denta Water has been a contributor to addressing the rising demand for water-related solutions in the country. Their notable achievements encompass pivotal projects like the Byrapura and Hiremagaluru LIS Project, Karagada LIS Project, and others, primarily executed through lift irrigation systems. Notably, Denta Water played a substantial role in the first phase of the KC Valley project, contributing to Bengaluru's reputation as the second-largest city globally in terms of treated wastewater quantity. 

Company's significant involvement in the "Jal Jeevan Mission" of the Government of India reflects its commitment to critical water management initiatives. Furthermore, Denta Water secured contracts for lift irrigation projects in various regions, such as Makali, Makali Hosahalli, Krishnapura, Karnataka and neighboring villages in the Channapatna Taluk of Ramanagar District, Karnataka. Their growth is inherently linked to the nation's infrastructure development, with a focus on design and engineering consultancy that aligns with the ongoing and anticipated projects in the Karnataka Government's water management sector. As water remains a critical resource, Denta Water is poised to continue making substantial contributions to the industry's growth and development in the future. (Source: Marketysers Global Report)

DWISL is a growing water and infrastructure solutions company engaged in design, installation and commissioning of water management infrastructure projects with expertise in ground water recharging projects. In addition, it also undertakes construction projects in the field of railways and highways. It is one of the few companies in India having experience and expertise in design, installation, commissioning, operations and maintenance of ground water recharging using recycled water.

As per the IISc Report, India is the largest user of ground water (GW), with 50% of its rural population relying on it for basic needs. It is estimated that 17% of ground water blocks is overexploited due to excessive extraction of GW, reducing annual recharge from 447 billion cubic meters to 432 billion cubic meters. And to prevent further depletion, long term water management strategies are crucial, with artificial GWR methods such as the use of rainwater and treated wastewater for improving the GW (Source: IISc Report). The overexploitation and insufficient replenishment of ground water (GW) have resulted in pressing need to conserve fresh water and re-use of treated waste-water. To address this issue, the Government of Karnataka launched a large scale re-cycling (440 ML per Day) scheme to indirectly recharge GW using secondary treated municipal waste water (STW) in drought prone areas of State of Karnataka (Source: IISc Report). As of the date of this Red Herring Prospectus, its water management projects are concentrated in the state of Karnataka and it has completed 32 water management projects (as main contractors and sub-contractors) and are presently undertaking 11 water management projects, which are in various stages of implementation.

The company renders range of services from “concept-to-commissioning” and beyond to various water management projects to clients by leveraging diverse experience, core competencies and using the technical know-how. As of November 30, 2024, we have 17 ongoing projects constituting an aggregate contract value of Rs. 1100+ cr., out of which Rs. 1066.75 cr. is in relation to water management projects; and Rs. 33.68 cr. is in relation to infrastructure projects including railways (improvement of infrastructure) and roadways (roads and bridges construction). Out of the total order book of Rs. 1100+ cr. as of November 30, 2024, it has completed work amounting to Rs. 347.98 cr. and outstanding order book is of Rs. 752.45 cr. As of November 30, 2024, it had 89 permanent employees, and the company also appoints labour contractors as per requirements on project-to-project basis.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 7500000 fresh equity shares issue worth Rs. 220.50 cr. (at the upper cap). The company has announced a price band of Rs. 279 – Rs. 294 per equity shares of Rs. 10 each. The issue opens for subscription on January 22, 2025, and will close on January 24, 2025. The minimum application to be made is for 50 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 28.09% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, the company will utilize Rs. 150.00 cr. for working capital, and the rest for general corporate purposes. 

The sole Book Running Lead Manager (BRLM) to this issue is SMC Capitals Ltd., while Integrated Registry Management Services Pvt. Ltd., is the registrar to the issue. SMC Global Securities Ltd. is a syndicate member for the issue. 

After issuing initial equity shares at par value, the company issued bonus shares in the ratio of 3 for 1 in August 2023. The average cost of acquisition of shares by the promoters is Rs. NIL, Rs. 2.50, and Rs. 7.07 per share. 

Post-IPO, its current paid-up equity capital of Rs. 19.20 cr. will stand enhanced to Rs. 26.70 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 784.98 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. 119.64 cr. / Rs. 38.34 cr. (FY22), Rs. 175.75 cr. / Rs. 50.11 cr. (FY23), and Rs. 241.84 cr. / Rs. 59.73 cr. (FY24). For H1 of FY25 ended on September 30, 2024, it earned a net profit of Rs. 24.20 cr. on a total income of Rs. 98.51 cr. The company posted steady growth in its top and bottom lines for the reported periods, indicating the trends for this segment.

For the last three fiscals, the company has posted an average EPS of Rs. 27.58 and an average RoNW of 45.90%. The issue is priced at a P/BV of 3.00 based on its NAV of Rs. 98.16 as of September 30, 2024, and at a P/BV of 85.47 based on its post-IPO NAV of Rs. 3.44 per share (at the upper cap). There appears to be some error in post-IPO NAV data shown in the IPO ad.

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 16.22. Based on FY24 earnings, the P/E stands at 13.14. Thus the issue is fully priced. According to the management, as per historical data, they always have better second half compared to first half.

The company reported PAT margins of 32.06% (FY22), 28.75% (FY23), 25.03% (FY24), 24.75% (H1-FY25) and RoCE margins of 126.60%, 95.98%, 76.99%, 18.96% for the referred periods, respectively. 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document. It has already adopted a dividend policy in November 2023, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown VA Tech Wabag, and EMS Ltd., as their listed peers. They are trading at a P/E of 36.9, and 27.3 (as of January 17, 2025. However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER’S TRACK RECORD:
The BRLM associated with the offer has handled 1 pubic issue in the past three fiscals, out of which no issue closed below the offer price on the listing date.