Enviro Infra Engineers (Enviro), a water infrastructure player focused on water and sewage treatment plants, has hit the Street with its IPO. The offer is a mix of fresh issue and offer for sale (OFS) to the tune of ₹572.4 crore and ₹78 crore respectively, adding up to ₹650.4 crore.

Enviro proposes to use the IPO funds in the following manner — ₹30 crore for funding existing projects, ₹120 crore for repayment/ prepayment of certain borrowings, ₹181 crore towards working capital requirements and ₹241.4 crore towards funding unidentified acquisitions and general corporate purposes.

With offerings including water supply scheme projects (WSSP) and water and wastewater treatment plants (WWTP) — sewage treatment plants (STP), common effluent treatment plants (CETP) and sewage systems (SS), Enviro covers a wide spectrum of customer requirements in this sector.

Rising concerns about groundwater depletion, unpredictable rainfall, drop in freshwater reserves and untreated water discharge has brought in renewed focus on this industry. And with several government schemes namely, Atal Mission for Rejuvenation and Urban Transformation (AMRUT), National Mission for Clean Ganga (NMCG), Namami Gange and Jal Jeevan Mission (JJM) amongst others, the tailwinds for this industry appear structural.

The issue is reasonably valued at a PE of 24 times (FY24 earnings) and EV (enterprise value) to FY24 revenue of 1.5 times. Its competitors — Va Tech Wabag, Vishnu Prakash R Punglia and EMS — are trading at a TTM PE of 43 / 27 / 25 times and EV to TTM revenue of 3.5 / 2.4 / 4.6 times respectively.

Considering the Revenue/ EBITDA/ PAT growth during FY22-24, which came in at a strong CAGR of 81 / 84 / 77 per cent respectively, a sizeable orderbook and a good track record in project execution, the company appears to be in firm footing. Investors could consider subscribing to the IPO given the reasonable valuation, good financials and structural tailwinds at play.

Adding a positive note is the fact that no shareholders who bought into the company via a private placement in September 2023 are participating in the OFS.

Business model

Classified based on the delivery models, Enviro provides its offerings under two models — Engineering, Procurement and Construction (EPC) and Hybrid-Annuity Model (HAM).

Under the EPC vertical, the company starts right from designing the plants to the typical EPC work. And the responsibility of the company ends with constructing the plant here.

The HAM vertical is where Enviro enters a public-private partnership — the government brings in 40 per cent of the capital outlay, while the private entity (here, Enviro) brings in the remaining. HAM combines both EPC and Build-Operate-Transfer (BOT) models and the company gets to operate the asset built, resulting in annuity-like revenues, typically for 15 years, beyond which it will be transferred back to the customer (here, government). The annuity covers the O&M expenses incurred too. These are capital-heavy and front-loaded projects and typically require external financing. Post IPO, around ₹30 crore of funds raised would be directed towards an existing under-construction HAM project as indicated earlier, and with a net cash balance sheet (post IPO) that helps in bidding for HAM projects, Enviro plans to bid and execute more such projects, going forward. This, in turn, is expected to aid a better margin profile.

The company also provides O&M services, which contribute to around 5 per cent of the revenue currently, while EPC contributes to around 80 per cent on an average and HAM plugs in with 15 per cent.

Enviro bids for tenders floated by government/ government authorities/ municipal corporations for WWTPs or STPs.

The business is working-capital intensive, with cost of materials consumed and consumables standing at around 55 per cent of revenue. Receivables turnover days declining from 67 in FY22 to 40 in FY24 alongside a reasonably flat inventory and creditors turnover days helps in working capital management. With government being its customer, the healthy trend in the company’s receivables is positively surprising.

Enviro operates an asset-light model, in line with most players in the industry, as observed from the lean fixed assets adding up to hardly 6.3 per cent of the balance sheet.

The company had executed few projects through joint ventures with other players in the past, which is expected to go down with increasing size of projects handled and technical expertise

The company’s waste-to-energy initiative as part of its projects, by setting up solar power plants and/ or compressed bio-gas plants, also in-house, is also expected to help save on power costs.

Clientele includes NMCG, Jal Nigam, Municipalities and Public Works Department, among others. Having executed/ executing projects in 10 States, Enviro also has a fairly wide footprint.

Operating margins

Revenue from operations, EBITDA and PAT have all doubled in FY24 on a year-on-year basis on a considerable base and have also grown at a good CAGR during FY22-24, as mentioned earlier. EBITDA and PAT margins have been consistently in the range of 22-25 per cent and 14-17 per cent since FY22, which puts Enviro in the top-quartile amongst its competitors in this regard.

The operating cashflows were comfortably more than 80 per cent of EBITDA in FY22 and FY23. However, the same dropped to negative figures in FY24 and Q1 FY25, mainly on the back of an accelerated execution of projects leading to a sharp increase in unbilled revenue starting from FY24. But no projects stuck in execution for more than a year since March 2022, demonstrates consistent and sturdy execution capabilities, and bodes well for quicker cash conversion.

Orderbook as of Q1 FY25 stood at ₹1,906.3 crore, which is 2.6 times its FY24 revenue, signalling strong bill to book ratio.

Net debt to equity stands at 0.58 times as of Q1 FY25, which is reasonable. The company will become net cash positive post the IPO.

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