Effwa Infra NSE SME IPO review (May apply)

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Review By Dilip Davda on July 3, 2024

•    The company is engaged in EPC, and project management works related to water pollution and sewage related services. 
•    It posted growth in its top lines for the reported periods, but the sudden boost in its bottom line for FY24 raise eyebrows and concern over its sustainability. 
•    The company is operating in a highly competitive and fragmented segment. 
•    Based on super earnings for FY24, the issue appears fully priced. 
•    Well-informed investors may park moderate funds for the medium term.

ABOUT COMPANY:
Effwa Infra & Research Ltd. (EIRL) is engaged in the business of engineering, consultancy, procurement, construction and integrated project management services in water pollution control, encompassing sewage and industrial effluent treatment, solid waste treatment and disposal, ventilation systems, hazardous waste management, and water treatment plants. Additionally, it also functions as consultants and advisors, providing a range of services encompassing project organization, management, equipment procurement, funding, and project execution. Its expertise spans the entire project lifecycle, from registration and design to implementation, supervision, and finalizing contract terms.

EIRL is ISO 9001:2015 Certified focusing on Engineering, Procurement, Construction, Commissioning, Operation & Maintenance Services for Effluent and Sewage Treatment with Recycling, Water Treatment, Integrated Municipal Solid Waste Management, Hazardous Waste Incineration & Bioremediation of Lakes. The Company also offers end-to-end project management solutions towards environmental preservation. Its focus lies in ensuring environmentally friendly waste processing practices, including Effluent Treatment Plant management (ETP), Sewage Treatment and Reclamation (STP), Water Treatment and Distribution (WTP) and Hazardous Waste Management.

EIRL works on the concept revolving around 4R i.e., Reducing, Recycling, Reusing and Rehabilitation to provide technological solutions for a range of industries, thus, enabling them to achieve Zero Liquid Discharge through recovery and recycling of water from effluent streams. It caters to industries such as textile, leather, paper, food processing, dairy, chemicals, dyes and intermediates, steel, mining, power, pharmaceutical and bulk drugs, sugar, distilleries, fertilizers, pesticides, ceramics, petrochemicals, and many others. Its emphasis on achieving ZLD demonstrates a commitment to minimizing environmental impact and maximizing resource efficiency, which can be attractive to environmentally conscious businesses and regulatory bodies.

EIRL offers comprehensive services across various industries and sectors, covering the entire project lifecycle from "concept to commissioning". Its services include the preparation of project feasibility reports, technology selection, project management, process design, basic and detailed engineering, procurement, inspection, supply chain management, cost engineering, planning and scheduling, facilitation of statutory and regulatory approvals for Indian projects, construction management, and commissioning. Additionally, it provides services such as equipment design, environmental engineering services, materials and maintenance services, plant operation, and safety services.

The company operates in the Domestic Market as well as International Market, across Eight States including a Special Economic Zone. These regions include Andhra Pradesh, Chhattisgarh, Gujarat, Maharashtra, Odisha, West Bengal, Madhya Pradesh, Rajasthan, and the Special Economic Zone includes Adani Port based on sales made for the financial year ended March 31, 2024, 2023 and 2022.

The company has successfully completed over 45 water management infrastructure projects as on March 31, 2024, catering to a diverse clientele including public sector undertakings (PSUs), municipal corporations, state governments, and private enterprises. Over the years, it has cultivated a specialized team comprising 12 engineers dedicated to the design, engineering, and construction of Wastewater Treatment & Recycling Systems, focusing on Zero Liquid DisZLD) system with conveyance systems for secondary treated sewage water and fresh water. 

In addition to its design team, it has a workforce of 76 engineers spanning Civil, Mechanical, and Electrical Instrumentation & Automation, Piping, Safety & Quality Control Disciplines, tasked with the seamless execution of projects. Recognizing the importance of adhering to stringent compliance and quality standards mandated by government agencies, it collaborate with third-party consultants and industry experts as needed, ensuring that projects meet regulatory requirements. As of March 31, 2024 it had a workforce of approximately 118 including 90 qualified engineers. As of May 31, 2024, the company had an order book worth Rs. 526.25 cr. for 10 projects. Debtors holding above 131 days raises concern. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo book building route IPO of 6252800 equity shares of Rs. 10 each to mobilize Rs. 51.27 cr. at the upper cap. It has announced a price band of Rs. 78 - Rs. 82 per share. The issue constitutes 5316800 fresh equity shares issue (worth Rs. 43.60 cr. at the upper cap), and an Offer for Sale (OFS) of 936000 equity shares (worth Rs. 7.67 cr. at the upper cap). The issue opens for subscription on July 05, 2024, and will close on July 09, 2024. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27.01% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity shares issue, it will utilize Rs. 33.00 cr. for working capital, Rs. 0.41 cr. for capex on office equipments, and the rest for general corporate purposes. 

The issue is solely lead managed by Shreni Shares Ltd., and Bigshare Services Pvt. Ltd., is the registrar to the issue. Rikhav Securities Ltd. is the market maker for the company. 

Having issued initial equity shares at par value, the company issued further equity shares at a price of Rs. 20 - Rs. 35 (based on Rs. 10 FV) between March 2016 and March 2017. It has also issued bonus shares in the ratio of 20 for 3 in February 2024. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 2.24, and Rs. 2.33 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 17.83 cr. will stand enhanced to Rs. 23.15 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 189.81 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 104.62 cr. / Rs. 4.60 cr. (FY22), Rs. 115.41 cr. / Rs. 5.13 cr. (FY23), Rs. 145.51 cr. / Rs. 13.80 cr. (FY24). The sudden boost in bottom lines for FY24 raise eyebrows and concern over its sustainability going forward. 

For the last three fiscals, it has reported an average EPS of Rs. 5.26, and an average RoNW of 29.99%. The issue is priced at a P/BV of 3.93 based on its NAV of Rs. 20.84 as of March 31, 2024, and at a P/BV of 2.52 based on its post-IPO NAV of Rs. 32.60 per share (at the upper cap). 

If we attribute FY24 super earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 13.76. Based on FY23 earnings, the P/E stands at 36.94. The issue appears fully priced. 

For the reported periods, the company has posted PAT margins of 4.41% (FY22), 4.46% (FY23), 9.51% (FY24), and RoCE margins of 24.76%, 22.89%, 40.99% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown VA Tech Wabag, EMS Ltd.  as their listed peers. They are trading at a P/E of 33.2 and 24.3 (as of July 03, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 30th mandate from Shreni Shares in the last three fiscals (including the ongoing one), out of the last 10 listings, 1 opened at par and the rest listed with premiums ranging from 11.11% to 141.94% on the date of listing.

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