EMS coming up with IPO to raise upto Rs 329.28 crore

EMS

• EMS is coming out with a 100% book building; initial public offering (IPO) of 1,56,06,118 shares of Rs 10 each in a price band Rs 200-211 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on September 8, 2023 and will close on September 12, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 20.00 times of its face value on the lower side and 21.10 times on the higher side.
• Book running lead manager to the issue is Khambatta Securities.
• Compliance Officer for the issue is Deepak Kumar.

Profile of the company

The company is are in the business of Sewerage solution provider, Water Supply System, 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 supply of water (collectively, Projects). The treatment process installed at STPs and CETPs is compliant with Ministry of Environment, Forest and Climate Change of India norms and the treated water can be used for horticulture, washing, refrigeration and other process industries.

The company has an in-house team for designing, engineering and construction which makes it self-reliant on all aspects of its business. It has a team of 61 engineers who are supported by third-party consultants and industry experts to ensure compliance and quality standards laid down by the industry and government agencies & departments. It also has its own team for civil construction works thereby reducing dependence on third parties. The scope of its services typically includes design and engineering of the projects, procurement of raw materials, execution at site with overall project management up to the commissioning of projects. Post commissioning, operations and maintenance of these plants for a certain period of time is generally a part of the award in recent times. It has a team of dedicated engineers and personnel focused on operations and maintenance of completed projects.

In addition to the execution of projects independently, the company also enter into joint ventures with other infrastructure and construction companies to jointly bid and execute projects. Joint ventures or partnerships enable it to achieve pre-qualification, both technical and financial, with its joint venture partner at the time of the bid and where the bid is successful, it also execute the project with its joint venture partner considering the technical skill and qualification of the joint venture partner required to execute a particular project.

Proceed is being used for:

• Funding of working capital requirements of the company.
• General corporate purposes.

Industry overview

Robust infrastructure is an essential sign of a developing nation. Development of roads, bridges, airports and railways is crucial for economic development of the country. Out of all modes of transport, road is the only mode which has the ability of last mile connectivity. Transportation of freight as well as of passengers by road is one of the most cost-effective modes of transport. With a total 63.32 lakh kilometres (kms) of road network, India ranks second in the world after USA. This road network supports movement of 60% of freight traffic in the country and 87% of the total India’s passenger traffic. The Indian road network comprises of National Highways, Expressways, State Highways, Major District Roads, Other District Roads and Village Roads. To get the country in fast forward mode, development of National Highways has been the key focus area, however state highways, district and rural roads continue to be a large part of overall road network.

The construction industry in a country is an important indicator of its development. Broadly, the construction sector can be classified into infrastructure, real estate and industrial construction. Wherein, infrastructure can further be spread across different sectors such as roads and highways, telecom, airports, ports, power, oil and gas and railways. The construction sector contributed around 8.4% to the national GVA (at constant price) in FY23. Increase in Infrastructure demand & Government initiatives shows the potential for catapulting India to the third largest construction market globally.

India is the world’s second most populous country with 1.38 billion people. Out of this, 65% of the population lives in rural area and 35% are connected to the urban centers according to United Nation (2019). The metropolitan cities of the country are seeing major expansion as a result of economic expansions and reforms. This expansion in urban population is unsustainable without efficient planning of cities and provision of utility services especially clean and affordable water. Water allocation in cities are usually done from common pool with multiple sectoral demand. It is expected that by 2050, about 1450 km3 of water will be required out of which approximate 75% will be used in agriculture, 7% for drinking water, 4% in industries, 9% for energy generation. However, because of growing urbanization, the need for drinking water will take precedence from the rural water requirements. Many of the cities are situated by the bank of rivers from where the fresh water is consumed by the population and the waste water is disposed back into the river, thus contamination of the water source and irrigation water. This has raised serious challenges for urban wastewater management, planning and treatment.

Pros and strengths

In house designing, engineering and execution team: The company has been focusing on design capabilities for complex and critical projects such as process description, process calculations, hydraulic calculations, design codes and standards, master drawing schedule, drainage design, STP facilities layout, process flow diagram, hydraulic flow diagram, mass balance diagram, process & instrumentation diagram, tentative single line diagram and electrical load list. This capability enable it to correctly bid with project specifications and provide quality services in a timely and cost-effective manner. Its engineering expertise and technology driven processes has enabled it to deliver on the projects in accordance with the designs and specifications of the particular project whether it’s a WWSP or WSSP.

Use of traditional technologies in the construction and installation of WWSP or WSSP: The designing and engineering of projects is technically complex, time consuming and resource intensive because of unique project requirements. The company constantly upgrades its technical abilities to offer its clients the full range of services at lower cost and without compromising on quality. Treatment process at most of the STPs and CETPs installed by it are compliant with Ministry of Environment, Forest and Climate Change of India norms and the treated water can be used for horticulture, washing, refrigeration or other process industries. The company intends to invest in the latest technologies to provide added value to its customers and concentrate on receiving big orders from clients.

Scalable and Asset Light Business Model supported by its Strong Financial Position: The company’s business model relies on the strength of its brand, project execution and management capabilities as well as its well-established relationships with its clients, architects and contractors. Leveraging these capabilities and relationships, it seeks to transition to a combination of Designing and execution based business model. As part of this model, it focus on development management or joint development agreements or joint ventures, which requires lower upfront capital expenditure compared to direct approach. Its focus on its development management model and commitment to leverage its brand, project execution and management capabilities, will continue to contribute to the growth and development of business.

Robust Order Book: As on July 31, 2023, the company is operating and maintaining 18 projects including WWSPs, WSSPs, STPs & HAM aggregating of Rs. 1,74,492.00 lakh & 5 O&M projects aggregating to Rs 9,928.00 lakh. Consistent growth in its Order Book has materialized due to its continued focus on Projects and its ability to successfully bid and win new Projects. Its experience in designing, engineering, construction, operations and maintenance of Projects, technical capabilities, timely performance, reputation for quality and timely delivery, financial strength as well as the price competitiveness has enabled it to successfully bid and win projects. Its capabilities as an established player allows it to focus on Projects with EPC/ HAM and O&M components. Post the commissioning of the project, O&M provide steady cash flows and add significantly to the company’s margins.

Risks and concerns

Dependent on the Government projects: As 100% of the company’s projects are works related to tenders floated by government or semi government agencies funded through World Bank. Hence its business is highly dependent on working with government entities or agencies. In addition, it may be subject to additional regulatory or other scrutiny associated with commercial transactions with government owned or controlled entities and agencies. Environmental protection policies, legislation and regulation greatly influences government expenditures on its water reuse and ZLD (“Zero Liquid Discharge”) solutions and are subject to change due to changing political, social and economic factors. Legislative and regulatory changes in connection with the environment, water supplies and water treatment and discharge may change the demand for its services and could have a material adverse impact on its business, financial condition and results of operations.

Require significant amount towards working capital requirements: The company requires a significant amount towards working capital requirements which is based on certain assumptions, and accordingly, any change of such assumptions would result in changes to its working capital requirements. A significant amount of working capital is required to finance the purchase of materials, equipment, mobilization of resources and other work on projects before payment is received from clients. As a result, it will continue to avail debt in the future to satisfy its working capital requirements. Its working capital requirements may increase if it undertakes larger or additional projects or if payment terms do not include advance payments or such contracts have payment schedules that shift payments toward the end of a project or otherwise increase its working capital burden. 

Substantially dependent on design and engineering teams: The company relies on its in-house team for timely and efficient execution of its projects. In addition to design and engineering, its teams carry out detailed inspection of the relevant project area to record and highlight important features and identify any issues that may be of importance in terms of implementation and operation of such project. While its teams have the necessary skill and experience in carrying its pre-bidding engineering studies, it may not able to assure the accuracy of such studies. Any deviation during the implementation and operation of the project as compared to its pre-bid estimates or wrong report submitted by its research team on the basis of their inspection could have a material adverse effect on its cash flows, results of operations and financial condition.

Business is subject to seasonal fluctuations: The company’s business operations may be affected by seasonal factors which may restrict its ability to carry on activities related to its construction projects, laying of water pipes and fully utilize its resources. In particular, the monsoon season may restrict its ability to carry on activities related to its projects and fully utilize its resources and may slow activities on construction projects, which shifts its revenue and accordingly profit recognition to subsequent quarters. Adverse seasonal developments may also require the evacuation of personnel, suspension or curtailment of operations, resulting in damage to construction sites or delays in the delivery of materials. Such fluctuations may adversely affect its revenues, cash flows, results of operations and financial conditions. It has not experienced any delay of projects or any penalty imposed by the government in past. 

Outlook

Incorporated in 2012, EMS previously known as EMS Infracon, is engaged in the business of providing water and wastewater collection, treatment, and disposal services. 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. On the concern side, the company requires several statutory and regulatory permits, licenses and approvals to operate its business. Many of these approvals are granted for fixed periods of time and need renewal from time to time. The company cannot assure that it will always finish the construction or development of its projects in accordance with the requisite specifications or that the construction of its projects will be free from any and all defects.

The issue has been offered in a price band of Rs 200-211 per equity share. The aggregate size of the offer is Rs 312.12 crore to Rs 329.28 crore based on lower and upper price band respectively. On the financial front, the company’s revenue from operations increased by Rs 17,831.09 lakh or 49.55% to Rs 53,816.17 lakh for Fiscal 2023 as compared to Rs 35,985.08 lakh for Fiscal 2022. The company’s profit for the year increased by Rs 2,977.01 lakh or 37.66% to Rs. 10,88163 lakh for Fiscal 2023 compared to Rs. 7,904.62 lakh for Fiscal 2022. Meanwhile, the company’s primary focus is to strengthen its prospects in executing WWSP and WSSP projects. It has started with 4 MLD size of project & increased its capacity to 60 MLD i.e. the maximum capacity of Minimal Liquid Discharge for STPs. It will continue to focus on the designing, construction, operation and maintenance of Projects while seeking opportunities to further increase the size of its projects. It will continue to bid for WWSPs and WSSPs both on EPC and HAM basis. Execution of high capacity projects has lesser competition, better margins, economies of scale and better utilization of sources.