EMS Limited - Tapping in the growth in the water management space

[Utkarsh_Rai]

Initiating a second thread on EMS Limited, because the previous one here is locked.

EMS Limited is a multi-disciplinary EPC company, headquartered in Delhi that specializes in providing turnkey services in water and wastewater collection, treatment and disposal. EMS provides complete, single-source services from engineering and design to construction and installation of water, wastewater and domestic waste treatment facilities. - Screener.in

Financials -

Note:

1. Current P/E is higher than the historical P/E (~24) of the stock. This can mainly be attributed to the increased national budget allocation towards water supply and waste management projects.
2. Low on debt.
3. Decent ROE.

Profit and Loss -

Note:

1. Consistent top-line and bottom-line growth.

   • Top-line growth from the past 2 financial years has been around 48%. Bottom-line has grown around 39% in the same time period.
   • The TTM top-line growth is around 43%.
   • In the February 2024 con-call, the management has guided towards a growth of 35-40% in the current FY.
   

2. OPMs are decreasing with scale. Still significantly higher than competitors, ION Exchange and VA Tech who have averaged around 10-13% OPM.

Promoters -

Couldn’t find anything interesting about the promoters Mr. Ramveer Singh and Mr. Ashish Tomar other than what is mentioned on the company website, here.

Business Overview -

The operations of the company can be broken down into the following broad categories.

1. Sewage Networks

   • 60-70% of the order book.
   • Commands higher margins. This is the main reason behind the higher margins enjoyed by EMS limited compared to its peers.
   • Promoters say, since there is a lot of work to do in this sector, they’ll maintain this share of sewage work in the order book and thus continue enjoying the higher OPMs.
   

2. STP and other construction.

   • 30-40% of the order book.

3. O&M is currently 10% of annual revenue but according to the promoters this should increase with time.

According to ICRA, by the end of January 2024, the pending order book of the company stands at ~2093cr, which is to be completed in the next 2-3 years.

Recently the company was awarded two more orders,

1. First from UP Jal Nigam, an STP project worth 119cr, where EMS would have a 26% share in a JV.
2. Second from Uttarakhand Power Corporation. An infrastructure project to reduce energy loss during power distribution. EMS has a 95% in the project.

The company’s main revenue comes from north India, mainly from Rajasthan, Uttarakhand, Uttar Pradesh and Bihar. The company is also bidding in MP, Jharkhand and West Bengal. They have also shared the intent to expand to other states, but haven’t given anything concrete yet.

The company directly deals with the government and does not do any subcontracting for the work. Only labour is sourced from contracting. The equipment is sourced via rentals and thus company capex is very low.

Company’s projects are usually funded by the central government or agencies like, Asian Development Bank, World Bank, etc. So the company doesn’t generally face any payment or funding related issues.

The company has announced acquiring Brijbihari Pulp and Paper Pvt Ltd. It is not clear how this acquisition fits into the competencies of the company.

Key Risks -

1. Business relies on government spending and thus is susceptible to policy changes.

2. The company is a little defensive about project choices and wants to ensure higher margins. Increase in competition might hamper the order wins and margins of the company. As of now, the company is awarded only 12% of the orders it bids for.

3. Troubles with the law

   • The company was recently investigated for GST irregularities.
   • The company was black-listed by two government agencies for the death of 5 labourers due to lack of adequate safety equipment (only read it here).
   • Another unrelated black-listing order was quashed by the Bihar High Court.

Disclosure - Invested from lower levels.

[murali603]

At the current valuation of M.cap/Sales ~8 is very expensive being a B2G company with lot of Govt business & receivables risk.

Va Tech is well positioned interms of orderbook as well valuations

[Utkarsh_Rai]

Thank you for your insight. I’m invested in wabag also.

In this case, can higher mcap to sales of EMS be justified by its higher OPM? Because of higher OPM, the PE of both the companies is around 30.

Also doesn’t Wabags 80% orderbook comprise of government orders, so that risk is similar?

All that said, Wabag indeed has better revenue visibility because of it’s much larger orderbook. But there have been some execution issues.

[Utkarsh_Rai]

The company did provide a clarification over the BrijBihari acquisition in its q1fy25 con call, listen at timestamp 52:00 (it’s in Hindi). They said the acquisition is more of an asset acquisition and not an operational acquisition.

The companies intent is to use the asset as a mortgage collateral.

There are two options for a mortgage collateral,

1. Do a 50cr FD and submit the FD receipt as collateral.
2. Use some asset as a collateral.

The promoter said that the first option is not that financially viable as the return would be 5-7% with a 30% tax rate vs the asset that he has acquired for 50cr (directly from the bank), whose fair market value is around 100cr (according to promoter Mr. Ramveer Singh).

[Akb]

Hi, I am unable to understand how this company alone can generate OPMs 10pc ++ higher than their peers large or small, the answers given in the call on overheads and procurement don’t seem convincing. Surely atleast one of their peers would know how to operate like them?

[Noobinvestor]

EMS Q1FY25 Concall Highlights:

Financial Performance:

• Consolidated net profit after tax increased by 63.12% year-on-year to Rs.37.16 crore.
• Revenue from operations grew by 49.58% year-on-year to Rs.206.28 crore.
• EBITDA improved significantly to Rs.52.53 crore, up 57.13% year-on-year.
• Standalone profit increased by 68.21% year-on-year to Rs.36.84 crore.
• Standalone revenue from operations grew by 80.62% year-on-year to Rs.203.72 crore.
• Standalone EBITDA grew by 66.58% year-on-year to Rs.51.79 crore.

Operational Performance:

• Secured three new projects in the last quarter of FY24: Vikas Nagar (over Rs.530 crore), Dehradun (Rs.141 crore), and Uttar Pradesh (around Rs.120 crore).
• Order book currently exceeds Rs.1800 crore of unexecuted work.
• Order pipeline is over Rs.4000 crore, with most results expected within 1-2 months.
• Company executes work in-house with separate design and execution teams and doesn’t subcontract.
• Operates on an asset-light model with no debt on the balance sheet.
• Maintains EBITDA margin of 24-26%.
• Order win rate is around 10-15%.
• Cash flow from operations negatively impacted by high retention money and 3-month payment cycle, but expected to improve in the future.
• Acquired a 75% stake in Bridge Bihari Pulp and Paper Private Limited for collateral purposes.
• Employee costs are around 2.5% compared to 8-10% for larger companies in the industry.
• Procurement is done on an advance payment basis, resulting in cost savings.

Future Outlook:

• Foresees continued growth in infrastructure development, particularly in water supply and sewerage.
• Expects a significant increase in water sector works from government entities.
• Aims to grow top-line by 30-35% year-on-year.
• Will focus on maintaining margins while exploring growth prospects in new sectors like building and road construction.

Concerns:

• Cash flow from operations has been negative for the past four years due to high retention money and long payment cycles.
• Order inflow has slowed down in recent months due to the recent elections.
• Transparency surrounding the Bridge Bihari acquisition raised questions from investors, prompting the company to promise further disclosures.

Other Important Points:

• Company considers itself an engineering company rather than just an EPC player.
• Company primarily focuses on the water sector but is open to exploring other infrastructure segments for growth.
• Company prioritizes maintaining margins over increasing order win rate.
• Company enjoys a strong reputation for timely project execution and avoiding cost overruns.

[anshu_saurabh]

There seems to be lot of red flags.

Everybody wants to know reason behind 25-26% margin, but very generic replies from management.
Cash flow always seemed like an issue for this company.
Employee cost mentioned in DRHP give another red flag.
Acquisition of Paper and pump company in which one director is common.

Disclaimer: Invested and loosing faith.

[Mohit_baid]

This is not the condition of only Delhi, multiple Indian states face such issues signaling how much more work is needed in this area, I don’t see a slowdown anytime soon.

Eco India: Why Delhi needs to increase its reliance on treated wastewater to meet its water needs

EMS Ltd’s location-wise revenue breakup.

Credit rating will help bring in more clarity -

ICRA Limited

[Utkarsh_Rai]

For the salary part, there is one more issue. i found a 5cr discrepancy in the employee expense amount for FY23 mentioned in the DRHP and the audited financial reports for fy24.

DRHP

FY24 audited financial report

Can somebody explain this?

[Mohit_baid]

EMS Growth Path: Ashish Tomar on Waste-Water Management & EPC Strategy

[Rajandeep_Singh]

In this latest interview,

1. promoter kept saying they will bid for more land projects also, Water projects only wont give them growth they desire. This is weird to listen, Kept saying we will bid for highways and bridges.
2. Decrease of orderbook was blamed on margins that they are only looking for projects which has their historical margin 25%.
3. Acquisition of Pulp Business only to get land as an asset.

He is looking at 30-35% growth with 25%+ margin which is good , he was candid in interview but didnt instill any confidence in me as an investor.

[Prabhat_Mohanty]

Going through the interview of the promoter, it is very confusing. On the one hand he is expecting margin of above 25% , on other hand he intends to go for road and bridge projects. Everyone knows that here the competition is intense and there are very seasoned promoters with proven track record competing in this field. And because of this margin is under the squeeze here. That is the reason for which many established hands in this sector are going slow on aggressive bidding. So going will not be easy for new promoters in this field. I would expect the company to concentrate on its core competence and as such there is huge opportunities in water and related sector. This is my belief.

[Mohit_baid]

The promoter definitely looked a little dull.

From what I understood this move isn’t too far off what they already do, as he mentioned they already re-build roads once the piping work is complete, and as they already have everything required for the construction of roads it can be another stream of income for the company without any huge CAPEX/Funding.