India’s recent budget announcement has turned quite a few heads, and for quite a few reasons, some good and some maybe bad. I am sure everyone reading this might have felt the same way.
But today, we are going to talk about an emerging trend in India’s growing industrial landscape—or rather, an already existing trend that has picked up some steam.
The trend we are talking about is water treatment and distribution. Infrastructure as a broad theme was on everyone’s radar, but the water treatment segment within the infrastructure space is emerging as one of the favourites post the budget announcement.
The Department of Drinking Water and Sanitation has received an allocation of Rs 77,390 Cr for FY25, which is only a 0.5% increase from FY24’s allocation of Rs 77,032 Cr. However, FY24’s allocation was a significant 29% leap, and maintaining this elevated level of funding continues to provide a strong impetus for the industry.
Water availability in India is projected to become a significant challenge in the future. Moreover, there is growing concern over pollution’s damage to water resources. The GOI, in response, has developed various initiatives over the years emphasizing water conservation and restoration.
According to a report from the Ministry of Jal Shakti, 70% of the rivers monitored in 2015 were found to be polluted, whereas in 2022, the same number came down to 46%. There is certainly progress, but there is still a substantial gap to fill.
The chart below is a snippet of India’s growing water requirement across different use cases.
*Click on the image to enlarge.
India’s sewage generation from urban areas was at 72,368 MLD for the year 2020-21, while the installed sewage treatment capacity was at 31,841 MLD.
On city-level assessment, the wastewater generation from Class I and Class II cities is estimated to be 29,129 MLD. Against this, the sewage treatment capacity is only 6,190 MLD, which is a significant gap of 79% between sewage generation and sewage treatment capacity. (Read here for more).
*Source: Care Edge’s Industry Research Report (Read Here).
That being said, the Indian government also recognizes this gap and hence the increasing budgetary allocation for water and sanitation.
Out of the total Rs 77,390 crore allocated to the Department of Drinking Water and Sanitation, a significant portion is earmarked for the Jal Jeevan Mission, which has received Rs 69,926 crore.
Launched in 2019 by the Ministry of Jal Shakti, the Jal Jeevan Mission aims to provide functional household taps for every rural household by 2024. According to its official website, the mission has already reached ~78% of its target.
The Swachh Bharat Mission (Gramin), which aims to maintain open defecation-free (ODF) status and improve waste management in rural areas, is also allocated Rs 7,192 Cr.
Some other initiatives are the Namami Gange programme, Atal Bhujal Yojana, Jal Sakti Abhiyan, etc
To summarize, India is indeed facing growing challenges related to water availability and contamination of its water resources, prompting the government to launch initiatives aimed at improving the infrastructure for water availability and wastewater treatment in the country. Given these developments, a specific stock has caught our attention.
EMS Ltd – A Direct Bet On The Water & Sanitation Theme
EMS Limited, established in 2010, is an EPC company primarily focused on delivering turnkey solutions in water supply and wastewater collection, treatment, and disposal.
The company also has a presence in EPC projects in electrical transmission and has recently begun bidding for real estate and road-related works as well. However, its primary focus remains firmly rooted in water and wastewater projects.
EMS clocked revenues to the tune of 793 Cr in FY24, which is a YoY growth of ~47%. Here is a glimpse of its growth in the previous few years.
*Click on the image to enlarge.
Its revenues have consistently grown at an impressive ~25% CAGR from FY20-24, also reflecting the increasing amount of work being done in water and wastewater infrastructure. The management anticipates a ~30% revenue growth in FY25, aiming to reach the Rs 1,000 crore mark.
In Q1 FY25, the company reported revenues of Rs 206 crore, marking a YoY growth of 50%. However, sequentially, this represents a ~15% decline.
Management explained during their recent concall that Q1 and Q2 are typically slower quarters due to the monsoon season, with 60-70% of annual revenues typically being generated in the second half of the year, during Q3 and Q4.
Despite a slower quarter, the company bagged 3 new projects, taking its total unexecuted order book value to 1800 Cr, which it plans to execute in the next 2-2.5 years.
In terms of the bid pipeline, EMS has ongoing bids for orders worth more than 4000 Cr, whose results they expect by the next quarter. The management also stated that its success ratio varies from 10-15%, which is, by the way, much lower than most of its peers’ success ratios, which range between 20-30%.
But, why?
When questioned about this, EMS’s management explained that its lower success rate is due to its uncompromising attitude toward its margins.
*Click on the image to enlarge.
The above chart compares EMS Ltd. with two of its listed peers based on a 5-year average for each metric.
Notably, EMS has the best margins in comparison to its peers. In addition to its picky nature of not compromising on margins, some other factors that could contribute to these higher margins are:
- 60-70% of its business comes from sewage network projects, which is a high-margin business.
- EMS operates on an asset-light model, primarily renting its equipment rather than owning it.
- Among its peers, EMS carries the lowest level of debt, further supporting its financial stability and profitability.
- The management emphasizes that EMS is more of an engineering company than a traditional EPC firm, allowing it to achieve better margins through superior design and execution capabilities.
The management expressed confidence that there is no shortage of work in the sector and expects to maintain its current margins moving forward.
Another interesting insight shared during the concall was that only 30-40% of Tier 1 cities have proper sewage networks, leaving a significant 60-70% yet to be developed.
Why Entering Roads & Real Estate Projects Then?
As mentioned earlier, EMS has recently ventured into bidding for EPC projects related to roads and real estate. But does this mean a potential dilution of its focus on water and sanitation projects, which is what primarily interests us?
Currently, the company is involved in a real estate project worth ₹325 Cr, developing housing colonies for RBI. While they have started bidding on road projects, they haven’t secured any contracts yet.
The management was quick to clarify that their primary focus will remain on water and sanitation projects, which account for about 70% of their business, and they intend to maintain this balance. Additionally, EMS is only bidding on projects that align with their margin profile, indicating that they are exploring growth in other verticals without compromising on their core focus or profitability.
Why Acquired A Paper Manufacturing Company?
The company has also recently acquired a company in Uttar Pradesh that manufactures flex paper. You might wonder why a paper manufacturing company would be acquired when it is in no way related to what EMS does.
When questioned on the same, the management explained during its recent concall that the acquisition is strategic, primarily to use the company as collateral for securing bank facilities like bank guarantees (BGs), which are essential for EPC operations.
Interestingly, EMS acquired the company for about 50 Cr at a significant discount through a bank auction. The acquisition is still in process, and further details are expected to be available once it’s done.
Cash Conversion Cycle Seems Stretched.
As of FY24, EMS’s cash conversion cycle stood at 112 days, which might seem fairly extended, and this number has consistently been above the 3-month mark.
However, it’s not as concerning as it appears. The nature of EMS’s projects typically involves longer payment cycles, and it’s also common for about 15% of the project value to be held as retention money, only released after project completion.
Also, the fact that the company does not have much debt on its books gives some more confidence.
Views & Valuation
Here is a glimpse of EMS’s Q1 FY25 results:
- Revenues surged by ~50% YoY to ₹206 crore.
- EBITDA grew by ~57% YoY to ₹52 crore, with margins improving by about 100 basis points.
- PAT exhibited strong growth, increasing by ~63% YoY to ₹37 crore.
- PAT margins also saw an improvement of 150 basis points.
To summarize, with the government’s increasing focus on drinking water and sanitation, EMS seems well-positioned to capitalize on these opportunities.
With an order book of ₹1,800 crore and bids placed for ₹4,000 crore, the company is confident in maintaining its growth trajectory without compromising margins. Even as it explores new avenues like roads and real estate, EMS is selective, ensuring alignment with its margin profile.
The company expects to grow its topline by 30-35% in FY25. As of now, EMS has a market cap of 4,780 Cr and a TTM PE of 28.6 times. If the company achieves 30% topline growth, its FY25E PE would come down to around 24 times. In comparison, its competitors like Ion Exchange (India) and Va Tech Wabag Ltd are trading at PEs of ~50 times and ~33 times, respectively.
All these factors in consolidation make EMS an attractive bet on the water and sanitation wave. It would be interesting to see if the company can keep the momentum going in the coming quarters.
Disclosure: EMS Ltd. is a part of our Capitalmind Premium Portfolio. This article is intended solely for informational purposes and should not be considered as an investment recommendation.
