Can this wastewater treatment provider’s IPO match the success of its peers?

The company's peers, Enviro Infra Engineers Ltd and VA Tech Wabag Ltd, delivered multibagger returns to investors!

About the Issue:  

Concord Enviro Systems Ltd is preparing to launch its Initial Public Offering (IPO) for equity shares. See the issue details below.

Objects of the Issue  

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the company will not accrue any proceeds from the offer for sale. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes:

1. Investment in the wholly owned subsidiary, Concord Enviro FZE for financing its capital expenditure requirements for the greenfield project to develop an assembly unit to assemble systems and plants for the treatment of water, wastewater and related membrane modules

2. Investment in the wholly owned subsidiary, Rochem Separation Systems (India) Pvt Ltd, for financing its capital expenditure requirements for the brownfield project to expand the manufacturing facilities, storage and supporting activities

3. Funding capital expenditure requirements of the company for the purchase of plant and machinery

4. Investment in the wholly owned subsidiary, Concord Enviro FZE, for prepayment or repayment, in full or in part, of all or a portion of certain outstanding borrowings availed by the subsidiary

5. Investment in the wholly owned subsidiary, Concord Enviro FZE, for funding working capital requirements of the subsidiary

6. Investment in the joint venture, Roserve Enviro Pvt Ltd, to grow pay-per-use/pay-as-you-treat business

7. Investment in technology and other growth initiatives to access new markets

8. General corporate purposes

Promoter holding  

Prayas Goel And Prerak Goel are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 45.56 per cent in the company.

Company profile  

The company is a global provider water and wastewater treatment and reuse solutions, specializing in cutting-edge zero liquid discharge technology. With comprehensive in-house capabilities, it delivers solutions across the entire value chain, including designing, manufacturing, installation, commissioning, operation and maintenance, and digitalization services, such as Internet of Things-enabled systems.

Its revenue streams are diversified, encompassing (i) the sale of systems and plants, (ii) operation and maintenance services for installed plants, and (iii) the supply of consumables and spares for these plants.

The company operates two manufacturing facilities—one in Vasai, Maharashtra, India, and the other in Sharjah, UAE. Its global reach spans North America, Latin America, Africa, the Middle East, and Southeast Asia, catering to a customer base of 310 clients as of August 31, 2024. As of August 31, 2024, the company reported an order book valued at Rs 502 crore.

Financials 

The company has experienced steady revenue growth over the past few years, but its profitability has been inconsistent. After a sharp 67 per cent decline in net profit in FY23 compared to FY22, profitability rebounded suddenly in FY24. However, based on annualized figures for FY25, net profit is projected to drop drastically to around Rs 1.25 crore, marking a substantial decline from FY24 levels.

Although the management has indicated that a significant portion of revenue and earnings typically materializes in the second half of the fiscal year due to year-end investments by clients, the profit figures for the first five months of FY25 raise serious concerns about the company’s financial trajectory.

As of August 31, 2024, the company reported total borrowings amounting to Rs 168 crore.

Valuation & Outlook

The issue is priced with a P/BV ratio of 3.97 times, calculated using its Net Asset Value (NAV) of Rs 176.62 as of August 31, 2024. At the upper price cap, it is priced at a P/BV ratio of 2.9 times, considering its post-IPO NAV.

Considering the company's annualized FY25 earnings and fully diluted equity capital, the price-to-earnings (P/E) ratio reaches several thousand times. Thus, the issue is aggressively priced. Based on FY24 earnings, the P/E ratio stands at 31x.

The company delivered a decent return on equity (RoE) of 14 per cent and a return on capital employed (RoCE) of 14 per cent for FY24.

Risks

A substantial share of the company’s revenue is concentrated among its top 10 customers, highlighting a dependency that could pose risks to financial stability if any key client scales back or ceases operations. The company has also grappled with low-capacity utilization, resulting in elevated production costs and diminished profitability. Additionally, losses reported by certain subsidiaries in recent years have weighed on the company's consolidated financial performance. Meanwhile, sustained investments in R&D aimed at advancing wastewater treatment technologies have further increased expenses, exerting pressure on short-term profitability.

Considering the risks and uncertainties surrounding the company’s future performance, we recommend investors to avoid this issue.