Rising Above the Tide: Can EMS Ltd grab the Opportunity in India’s water Crisis

India has a water problem.

Be it in water supply (read shortage) or waste (or rain) water treatment, collection or disposal. Cities flood during monsoon only to face severe scarcity in the dry months, while aging infrastructure struggles to keep up with growing demands. Once lifelines of culture and commerce, the rivers flowing through India’s cities now bear the heavy burden of pollution, waste and untreated sewage. The story is almost the same in every major city in the country.

Only ~28% of waste water is treated and the rest is dumped into nearby rivers and waterbodies

Here’s a few numbers to drive home the fact:

1.?As per the latest report of the Central Pollution Control Board (CPCB, page 55), as of 2020, the country generated 72,368 million litres per day (mld) of waste water.

2.??Against this we had a treatment capacity of 26,869 mld available, out of which 20,235 mld is actually utilized. This means only ~28% of waste water is treated and the rest is dumped into nearby rivers and waterbodies. However, a further 8393 mld of capacity is under construction (3,566) and proposed stage (4,827).

3.?As of 2024, say we take the waste water generated to be constant and assume the proposed capacities to be complete and fully operational; both of which are unlikely assumptions. We would still have 72,368 mld of waste water against 36,668 mld of treatment capacity which is only ~50% of the gap.

4.?Looking at the city scale, the gap is even more stark.

5.??Furthermore, there is an uneven distribution of treated capacity with the top 10 states contributing 86% of the total capacity.

6.?Also, most sewage treatment plants in the country rely on outdated technologies that have a treatment efficiency of around?65 per cent and are cumbersome to set up and manage.

7.??Add to this the effluent discharges from various industries which are even harder to treat.

8.??Operation and maintenance of existing plants and sewage pumping stations is also a very neglected field. With nearly 39% plants not conforming to the general standards. Plants are usually run by personals that do not have adequate knowledge of running them and know only operation of pumps and motors.

9.??Population projections (by NITI Aayog) suggests that wastewater generation will increase by about 75% to 80% in the next 25 years, which by volume works out to be 50000 MLD to 55000 MLD, and thus taking the total estimated wastewater generation to 1.3 lakh MLD.

10.?This volume is about 3.5 times the existing installed treatment capacity, which testifies the necessity of scaling up of treatment capacity, robust system for wastewater collection, and a well-accepted framework for reusing the treated wastewater (TWW).

What is the Government doing about this? Quite a bit, actually.

The government is cognizant of the issue and has increased focus on bolstering our water infrastructure capabilities. Most major schemes and their latest budgets are listed below:

About EMS and what it does?

Established in 2010, EMS Ltd. is an EPC company engaged in the business of providing turnkey solutions water supply, sewerage, waste water treatment and its subsequent maintenance. Its work includes design, construction, operation and maintenance of Sewage treatment Plants (STPS) & Water Treatment Plants (WTPs), laying of pipelines for supply of water etc.

The company recently has been foraying into design and construction of power transmission, real estate and road/allied works. However, its primary business is rooted in water works. As of Q1 FY 25, the split b/w the segments were 75% water work and 25% non-water work.

The company has completed 68 projects as of year-end FY23.

The Financials

The company has clocked an impressive revenue and PAT CAGR of ~25% and ~21% respectively in the last 5 years. The company anticipates a 25-30% growth in revenue in the current FY 25, aiming to reach the 1000 crore mark.

As of Q1 FY25, the company clocked 206 crores of revenue, a jump of 50% YoY, but a decline of ~15% sequentially. The management explained that Q1 and Q2 are typically slower quarters due to the monsoon rains (plus the elections in June this year). Majority of the revenues are typically booked in the 3rd and the 4th quarter.

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What’s in the future aka Orderbook?

The orderbook of the Co at the time of the latest con call was (21st Aug’24) was 1800 Crs to be executed in the next 2 to 2.5 years. Management also mentioned they had participated in a bid pipeline worth Rs. 4000 Crores, the outcome of which would be known by the next quarter.

The company as of date is 100% dependent on State and Union government projects. Majority of the current work comes from Uttarakhand, followed by Rajasthan, Maharashtra, UP and Bihar.

20% PAT in EPC business. But how?

In this space, companies enter government contracts primarily through a competitive bidding process where they have to submit a financial bid. In this respect, the company explained they have a 10-15% success rate compared to its peers which have a 20-30%.

But why?

When questioned about this, EMS’s management explained that its lower success rate is due to its resolute attitude toward its margins.

Comparing margin profile of EMS with two of its listed peers based on a 5-year average of each metric.

The management further outlined key factors driving its high margins:

a)?60% - 70% of its business comes from sewerage network work like laying pipelines and design work, which have higher margins.

b) The company has low levels of debt compared to its listed peers, leading to lesser finance costs and higher financial stability. The below chart compares the long-term and short-term borrowings with its listed peers.

c)?Mostly targeting urban projects which are funded by institutions such as Asian Development Bank, World Bank or the country’s Central government which have high payment security. Also, EMS does not engage in any sub-contracting work for other companies; only works on direct government tenders.

d)?EMS operates an asset-light model, primarily renting its equipment rather than owning it. Plus, it only gives out labour contracts and rest of the work is done inhouse (no subcontracting to others).

e)?The management emphasizes that EMS is more of an engineering company than a traditional EPC/construction firm, allowing it to achieve better margins through high-value design and execution capabilities.

f)?The management iterates that there is more work coming from tier 2 cities which are developing. Also, that only 30-40% of Tier 1 cities have proper sewage networks, leaving a significant 60-70% yet to be developed.

Note: In the above examples, we have only compared EMS against its listed peers. Other competitors include LC Infra, DR Agarwal, Infracon, L&T, Shapoorji, Mega Engineering etc.

With such plush margins, why venture into roads and real estate?

As stated earlier, the company has entered into bidding for EPC projects within the road and real estate space. In fact, the company is currently working on a real estate project for ?325 Crs, developing housing colonies for the RBI. The payment for the same is supposed to be received somewhere into the 3rd quarter.

But does all this mean a dilution of focus from the profitable water supply and treatment segment?

Not really. The management clarifies that although it is looking at other avenues of growth, water and sanitation will be their primary focus. Also, they are only bidding for selective projects which does not dilute their margin profile or hurt profitability.

The management further guides that if they successfully bid for selective road and real estate projects, revenue can go 2000+ Cr by FY28. Although nice to hear, we’d like to take this with a fist of salt.

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?So, all looks good. Where’s the catch?

Let’s start with working capital cycle which is stretched.

As of FY24, EMS’s cash conversion cycle stood at almost 4 months, which might seem fairly extended, and this number has consistently been above the 3-month mark in the previous years. This is not a red flag though and here’s why:

High cash conversion cycle is intrinsic to the nature of the business. Revenues are billed based on percentage of completion basis and hence have longer payment cycles. Also, the company has to post 10-15% of the project cost with the government as a security/performance guarantee which is released after the commissioning of a project.

The Curious case of Brijbihari Pulp and Paper Private Limited

A while back, the EMS acquired 75% of Brijbihari Pulp and Paper, a duplex paper manufacturing company based out of Ghaziabad. For a purchase consideration worth Rs. 60 crores that is decided but yet to be paid.

When questioned on the same, the management explained that the acquisition is strategic. Primarily to use the company’s property as collateral for securing bank guarantees (BGs), which act as performance guarantees against the EPC operations.

However, the shareholders of this acquired company seem to be a promoter group company Brijbihari Concast Private Limited and Mr. Ramveer Singh himself. Mr Singh not only holds 50% in Brijbihari Pulp but is also a director in Brijbihari Concast, which holds the other half of Brijbihari Pulp.

Furthermore, the company was incorporated recently in January of 2023 and it seems that the company might not have done much in terms of operations between now and then.

This is due to the fact that the preparation of audited financials for the FY 2022-23 were still under process as of September 2023. For a company incorporated in January 2023, its FY23 (FY ending March) results for less than 3 months of operation would not be a big task. Also, the company did not have any credit facilities such as working capital loans from any banks which is common for paper companies.

EMS has decided to buy the company for 60 crores in H1 2024; a company which presumably had operations (or not) for just a year. This raises suspicion whether shareholder money is diverted to the promoters via the acquisition. (page 315 DRHP)

Interestingly, 2-3 years ago the company had acquired another NPA unit named Mascot, at almost 60%-70% of market value from a bank auction. This could not be independently verified by us though.

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Before discussing Related party Transactions lets meet the promoters:

1.?Ramveer Singh: Mr. Ramveer Singh, aged 60 years is the founding Promoter and designated Chairman and Director of the Company. An engineer by profession, he has more than 35 years of experience in civil, construction industry and business development. In past he has joined the partnership firm M/s Satish Kumar after taking VRS from Uttar Pradesh Jal Nigam in 2006 & later incorporated a private limited company in the year 2010, named EMS Infracon Private Limited (now renamed to EMS Ltd.)

2.?Mr. Ashish Tomar, aged 34 years is Mr. Ramveer’s son. A civil engineer by profession, he is also a founding Promoter and is currently designated as Managing Director of our Company. He is currently looking after Projects execution areas of our Company.

3.?Ms. Kritika Tomar, wife of Mr. Ashish Tomar aged 29 years and is currently designated as Whole Time Director of our Company. She is associated with the company from October 17, 2022 & looks after the administrative work of the company.

*Ages are dated as of September 2023

The profiles reveal a distinctly promoter-driven company. As of FY24, the company had 437 permanent employees, including ~65 engineers.

Not much to worry in related party transactions

1. As per the latest AR, the related parties to the Cos are the promoters, their relatives, the directors and the KMPs (CS, CFO etc.) of the Co. (details available in the FY 24 AR page no. 270)
2. The parties also includes the firms which the directors and relatives have interests in and also the Cos subsidiaries.
3. Prior to 14th November’23, the Co had most of the purchase and job work (>50%) done from Neercare India Pvt Ltd. But all payable/receivable balance has been cleared by FY24 end.
4. Post IPO, Neercare had relieved all interests in EMS Ltd by having nil shareholding. Consequently Mr. Neeraj Srivastav, director in Neercare, and also erstwhile director in EMS Ltd, has resigned from his position in the Co.
5. Revenue from RPT has been to the tune of 57 Crs for the year FY 24, which is ~7% of the Co’s total revenue.
6. The company gives and takes loans from promoters. All loans both to and fro have been almost duly paid back in full. Only one interest free unsecured loan worth ~23.5 Crs from subsidiary entity, EMIT group India is on the Cos balance sheet as part of the total borrowings of ~71 Crs.
7. Salaries of 6 Crs each was paid to Ramveer Singh and Ashish Tomar and 1.2 Cr for Kritika for FY 24 (AR page no. 54). Combined they comprise of ~8.5% of the company’s profits, which is moderate.

Apart from the mentioned, there haven’t been any other significant financial transactions between RPs.

Certain other aspects of EMS Ltd

1. Resignation of Employees in the last 1 year

·?????? On 29th May 2024, Mr. Gajender Parihar, CFO, resigned from his post citing personal reasons. Mr. Ashish Tomar’s designation was elevated to the post of MD cum CFO of the company.

·?????? As mentioned earlier, Mr. Neeraj Srivastav who was an erstwhile independent director, also resigned.

·?????? Two other CSs, Mohit Nehra and Deepak Kumar also resigned within 3 months of their appointment. Upon fact checking, they are likely trainees and were on internship. Longer tenured CS Anup Kumar Pandey, also resigned within less than 1 year of service.

2. Death of 5 workers and incorrect disclosure of bid

The Co has been black listed in past by the two government bodies. However, the same black-listing has been lifted with the retrospective effect. They were due to this:

and this:

The details of both the matters can be found in page 36 and 37 of the Co’s DRHP.

A diamond in the rough? Not really. But it has promise.

Valuation ratios as of 25th Oct’24:

Highlights from the Q1 FY25 results:

1. Revenues surged by ~50% y-o-y
2. EBITDA increased by ~56% to 50 crores, with margin improving by 100 basis points
3. Both PAT and PAT margins showed improvement. PAT increased by over 60% whereas PAT margins increase

Summary & My Take

·???The water crisis in our country is real and growing. However, the government is cognizant and is increasing focus to improve the infrastructure.

·???The company with a vintage of 14 years and 60+ projects is well positioned to capitalize on these opportunities.

·???With an order book of Rs.1800 crore, bids placed for Rs. 4000 crores and its uncompromising nature towards margins the company is likely to maintain its growth trajectory in the future. As of Sept 2024, unexecuted orderbook has increased to Rs. 2345 crores.

·???However, due to its picky nature in terms of margin and player selection (well-funded projects from Central Govt., World Bank etc.), it faces more competition and lower success rate than its peers. However, if the Co successfully enters the EPC space for road, power and real estate the impact may offset to an extent.

·???Although, related party transactions haven’t been significant to raise red flags; cases like BrijBihari Paper emphasize periodic monitoring of the same. Same stands for its stretched cash conversion cycle.

·??Valuations are bit stretched by current standards. But if the company can keep the momentum going in the coming quarters, the stock price may shoot up.