Water infrastructure company IPO: Strong fundamentals and robust grey market premium – Is it worth investing?

The company achieved an impressive RoE of 36 per cent and RoCE of 77 per cent in FY24, and has a current order book of Rs 750 crore.

About the Issue  

Denta Water & Infra Solutions Ltd is preparing to launch its Initial Public Offering (IPO) for equity shares. Below are the issue details.

Objects of the Issue  

Since the offer is exclusively a fresh issue, it is noteworthy that the company will use the proceeds for its growth and expansion plans, rather than the funds flowing to promoters.

The company plans to allocate the net proceeds raised from the fresh issue for the following purposes:

1. To meet working capital requirements of the company

2. General corporate purposes

Promoter holding 

Sowbhagyamma, Sujith TR, C Mruthyunjaya Swamy and Hema HM are the promoters of the company. The promoters and promoter group currently hold a pre-issue shareholding stake of 100 per cent in the company.

Company profile  

Established in 2016, Denta Water and Infra Solutions Ltd has become a key player in the field of water engineering, procurement, and construction (EPC) services. With a strong track record in infrastructure project installations, including groundwater recharging through recycled water, the company has significantly contributed to meeting the rising demand for water-related solutions in India.

Denta Water’s notable achievements include pivotal projects such as the Byrapura and Hiremagaluru LIS Project, Karagada LIS Project, and others, primarily executed through lift irrigation systems. The company also played a vital role in the first phase of the KC Valley project, helping Bengaluru earn recognition as the second-largest city globally in terms of treated wastewater.

The company's involvement in the Government of India's ‘Jal Jeevan Mission’ further underscores its commitment to critical water management initiatives. As of November 30, 2024, the company has completed work worth Rs 348 crore out of a total contract value of Rs 1,100 crore, with an outstanding order book of Rs 752 crore.

Financials 

The company has consistently demonstrated notable growth in revenue and profits over the past few years. Between FY22 and FY24, it achieved a Compound Annual Growth Rate (CAGR) of 42 per cent in revenue and 26 per cent in net profit.

Annualized figures from H1FY25 indicate a considerable decline in revenue and profit compared to FY24. However, based on past trends, management remains optimistic about a stronger performance in the second half of the year.

The company has repaid a majority of its debt, leaving only a marginal amount outstanding.

Valuation & Returns

The issue is priced with a P/BV ratio of 3 times, calculated using its Net Asset Value (NAV) of Rs 98.16 as of September 30, 2024. Considering the company's annualized FY25 earnings and fully diluted equity capital, the price-to-earnings (P/E) ratio is calculated at 12x.

The company delivered an outstanding return on equity (RoE) of 36 per cent and a return on capital employed (RoCE) of 77 per cent for FY24. As a result, the company has significantly outperformed its listed peers in terms of both valuation and returns.

Outlook

According to the Government of India Census 2022, the growing population, rapid urbanization, and strong industrial growth are driving an unprecedented demand for advanced water management solutions.

Hence, India's water infrastructure sector is set for significant growth, driven by increasing awareness and supportive government initiatives. Additionally, the company's focus on groundwater recharge and recycled water usage aligns seamlessly with global environmental sustainability trends.

Considering the company's established expertise, proven track record for timely execution, strong order book, and solid financial performance, we recommend investors consider subscribing to the issue with a long-term investment outlook.