EMS Ltd. IPO review (Apply)

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Review By Dilip Davda on September 5, 2023

•    EMSL is in the business of Sewerage solutions and related services provider.
•    It has posted static performance for FY21, and FY22 on account of the pandemic impact.
•    It is on fast-forward mode now as indicated by FY23 earnings. 
•    As of July 31, 2023, it had orders worth Rs. 1845 cr. on hand.
•    Investors may apply in this lucratively priced IPO for short to long-term rewards.

PREFACE:
On July 18, 2023, the company issued 1600000 equity shares at a price of Rs. 211 per share worth Rs. 33.76 cr. as pre-IPO placement and has reduced its fresh equity issue size from Rs. 180 cr. to Rs. 146.24 cr. 

ABOUT COMPANY:
EMS Ltd. (EMSL) is in the business of Sewerage solution providers, 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 (collectively, "Projects"). The treatment process installed at STPs and CETPs is compliant with the 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 bids for tenders issued by CPWD, State Governments and Urban Local Bodies ("ULBs") for developing WWSPs and WSSPs on an EPC or HAM basis. It has an in-house team for designing, engineering and construction which makes it self-reliant on all aspects of business. The scope of its services typically includes design and engineering of the projects, procurement of raw materials, execution at the 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. 

As of July 31, 2023, It is operating and maintaining 18 projects including WWSPs, WSSPs, STPs & HAM aggregating Rs. 1744.92 cr. & 5 O&M projects aggregating Rs. 99.28 cr. The company is debt-free and operates on an asset-light model of the business. As of July 31, 2023, it had 316 employees on its payroll. Additionally, it uses contract labourers as and when required. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden combo book-built process issue of fresh equity shares worth Rs. 146.24 cr. (approx. 6930840 shares at the upper cap), and an Offer for Sale (OFS) for 8294118 equity shares (worth Rs. 175.01 cr. at the upper cap). The company has announced a price band of Rs. 200 - Rs. 211 per share of Rs. 10 each. Thus the overall size of the IPO will be 15224958 shares worth Rs. 321.25 cr. The issue opens for subscription on September 08, 2023, and will close on September 12, 2023. The minimum application to be made is for 70 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 27.42% of the post-IPO paid-up capital of the company. 

From the net proceeds of the fresh equity issue, the company will utilize Rs. 101.24 cr. for working capital and the rest for general corporate purposes. The company has allocated not more than 50% for QIBs, not less than 15% for HNIs, and not less than 35% for Retail investors. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 40 - Rs. 211 between March 2017 and July 2023. It has also issued bonus shares in the ratio of 3 for 1 in March 2023. The average cost of acquisition of shares by the promoters is Rs. 2.45, and Rs. 2.50 per share. 

Post-IPO, EMSL's current paid-up equity capital of Rs. 48.60 cr. will stand enhanced to Rs. 55.53 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 1171.70 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, EMSL has (on a consolidated basis) posted a total revenue/net profit of Rs. 336.18 cr. / Rs. 71.91 cr. (FY21), Rs.363.10 cr. / Rs. 78.93 cr. (FY22), and Rs. 543.28 cr. / Rs. 108.67 cr. (FY23).

For the last three fiscals, EMSL has reported an average EPS of Rs. 42.54 and an average RoNW of 22.06%. The issue is priced at a P/BV of 2.03 based on its NAV of Rs. 103.80 as of March 31, 2023, and at a P/BV of 1.64 based on its post-IPO NAV of Rs. 128.69 per share (at the upper cap).

If we attribute FY23 earnings to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 10.78. Thus the issue appears to be reasonably priced. 

EMSL's PAT margins were 21.76% (FY21), 21.97% (FY22), and 20.18% (FY23) as well and its RoE were 23.83%, 20.79%, and 22.27% for the said periods respectively. 

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

COMPARISON WITH LISTED PEERS:
As per the offer document, EMSL has shown VA-Tech Wabag as their listed peer. It is currently trading at a P/E of 135.23 (as of September 05, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 8th mandate from Khambatta Securities in the last three fiscals (including the ongoing one). Out of the last 6 listings, all are listed at premiums ranging from 0.61% to 88.12% on the day of listing.

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