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Equity Research: IEIL
IEIL looks strong for further up move with strong order book and growing CAGR.
The late G.S. Ranganathan founded Ion Exchange (India) Ltd. (IEIL), which was incorporated in 1964. He was employed by the UK-based Permutit Company, which on his advice established IEIL as a 60% subsidiary. The paid-up share capital has been held by resident Indians since 1995 as the foreign holding was gradually reduced. The Company established resin manufacturing in India in 1965 and presently controls 44% of the country's resin market. In 1982, IEIL expanded into the chemical filtration of water.
The business operates in the Engineering, Chemical, and Consumer Products areas. The chemical industry has a 22-24% EBIT margin compared to 14–15% for the engineering sector. While the Chemical division is driven by opex, the EPC business is driven by green field capex from the end user industry. The Company is active along the full value chain of water and waste water treatment, from initial treatment to zero liquid discharge. In India, only few businesses offer services for all aspects of water and waste water management.
IEIL manufactures resins in Ankleshwar, Gujarat and water chemicals in Hyderabad, Telangana. They are doubling the resin capacities through the green field capex at Roha, Maharashtra which will be operational in FY24. The Company has in-house manufacturing of membrane at Verna, Goa which is used in different technologies of water and waste water treatment. The Company is undergoing brownfield Capex of Rs. 59Cr. which will be operational in Q4FY23. They have fabrication and assembly plants in Tamil Nadu, Maharashtra in India and UAE, Bangladesh and Indonesia overseas.
The business of the company is seasonal, with Q4 showing the largest revenue and EBIT margin. The company was able to leverage fixed costs and increase EBIT margin in the most recent quarter because to the overall scale of operations being significantly greater. Additionally, the beneficial change in product mix results in a greater profit margin in Q4. When comparing the contribution to revenue, Q1 is the least.
Shareholding:
Industry Reasearch:
Global sales of water and wastewater treatment systems increased by 6.3% between calendar years 2021 and 2022, reaching US$801 billion. It is anticipated to increase from US$901 billion in CY2022 to US$1,057 billion in CY2027, with a CAGR of 4.7%. Rapid urbanization in rising Asian countries like China, India, Vietnam, and Indonesia is a major driver of the demand for water and wastewater treatment technologies in APAC. Systems for recycling and reuse are in demand as the manufacturing and service industries expand. Other factors influencing the market's expansion include rising living standards, a shortage of water, and the establishment of stricter water-related laws and regulations, particularly for effluent discharge. Initiatives to clean up the rivers in India, China, Indonesia, and the Philippines have resulted in the strictest regulation compliance enforcement and the installation of recycling and reuse systems with the provision of subsidies or incentives for implementation.
Indian Wastewater treatment solutions segment is forecasted to grow at a CAGR of 9.8% from Fiscal 2021 to Fiscal 2031 and Indian water & environment industry is projected to register a healthy CAGR of 9.5 percent during the period 2022-2026. The industrial segment is expected to grow faster than the municipal segment during the forecast period. Backed by investments and regulations, the industrial segment is anticipated to grow at a CAGR of 12.7% from Fiscal 2021 to Fiscal 2031, The municipal segment is expected to record a CAGR of 8.2% across the same period. Steel industry used to be a major contributor in the past, but its share in the market has declined over the years owing to the lack of investment in the industry. Highest growth expected as per end user industry is majorly in Pharmaceuticals - 18% CAGR, Food & Beverage - 19.7% CAGR and Chemicals - 15.3% CAGR. India is lagging in terms of Sewage treatment capacity. Total sewage generation is 75,582 MLD, of which India has the capacity to treat 46% of the sewage while only 29% of sewage is treated. There is huge head room to grow for the sewage treatment companies as industrialization increases and the Government focuses on reducing open sewage disposal.
Business Segment:
1. ENGINEERING (61% OF FY22 SALES, 12-15% EBIT MARGIN)
Global Market size of Engineering Segment is Rs. 4.8 Lakh Cr. While in India it is Rs. 43,000 Cr and in Industrial segment it is Rs. 9,000 to 9,500 Cr. Of the total Engineering segment sales, IEIL derives ~11% of revenue from membranes, ~18–22% from O&M services, and the rest from remaining EPC related contracts.
a) INDUSTRIALSEGMENT
Ion Exchange integrates process technologies and design, engineering & project management expertise into design & build projects – on turnkey, BOOT or EPC basis.
The Company provides customized solutions for water, waste water, recycle, ZLD to core industries such as power plants, chemicals, refineries, fertilizer and steel plants. It provides comprehensive turnkey solutions for Municipal Water, Waste Water and Solid Waste Management.
Normal execution period of contracts is 2 years. (Mix of large and small). Mid-sized contracts take 1-1.5 years for execution whereas for small contracts it takes 3-6 months for execution. Company has 40% private contracts in its current order book.
b) COMPREHENSIVE SERVICES- O&M CONTRACTS
1. Annual Maintenance - They provide Water & Waste Water equipment for efficient performance and zero downtime, scheduled inspection visits and scheduled maintenance & services.
2. Comprehensive service contract- IEIL takes complete responsibility for supply of treated water in required quantity and quality at the customer’s place. The Company also provides solutions for Boiler & Cooling Water Treatment Programs and Consultancy & Surveys.
In 1987, Ion Exchange pioneered and promoted the concept of reverse osmosis membranes in India and started manufacturing membranes. The Company’s manufacturing facility in Goa manufactures a wide range of Reverse Osmosis and Nano Filtration membranes. Ion Exchange offers its Membrane under the brand HYDRAMEM - High performance membranes. Currently, 20–25% of production is captively consumed, while external sales contribute ~11% to revenue.
Conventional Industrial Water Treatment – Brackish water Hydramem membranes are used for purification of process water. Hydramem membranes give best in class salt rejection recoveries with optimum permeate water flow.
Sea Water Desalination – With their increased efficiency and lower power requirements Hydramem Sea Water elements offer desalinated water at lower costs.
Recycling of Treated Effluents – Hydramem Fouling Resistance Membranes provide superior organic fouling resistance, longer life and less frequent cleaning.
Textile Industry – INDION Salt Recovery system from Textile dye bath effluent based on specialty NF membrane technology recovers brine for its reuse in dyeing process & recovers water to be recycled in various plant processes.
Dye Desalting – Hydramem NF membranes efficiently removes undesirable impurities from variety of dyes and enhances their functional properties.
2. CHEMICAL (34% OF FY22 SALES, >20% EBIT MARGIN, >50% OF FY22 PAT)
Water treatment chemicals are used for raw and waste water treatment conditioners in boiler, cooling water treatment and membrane cleaning etc. Industry Chemicals are used to increase life of boilers and to reduce maintenance cost, corrosion, scaling chemicals, PH conditioning. The Company is engaged in the manufacturing water treatment chemicals such as ion exchange resins and other specialty chemicals.
Specialty Chemicals include performance chemicals used in processing of Paper, Sugar, Ceramic, Pharma and Refinery products. The Company also has a FDA approved pharma grade resin facility.
IEIL offers products under the registered trademark of INDION RESINS which include complete range of cation and anion resins for water and waste water treatment, purification of bio-diesel, sugar, food and beverages & host of specialty applications like pharmaceutical excipients, catalysts, nuclear grade resins, brine softening, heavy metal removal, adsorbent grade resins etc.
India’s Resin market size is Rs. 300 Cr. The Company has 44% market share of Resin in India. Resins are being imported in India and Thermax Ltd. is the major competitor.
The Company exports to USA, Canada, Middle East, Japan, Korea and has a low single digit global market share. Du Pont USA (2021 Revenue of USD 16.13 Billion) and LANXESS European company (2021 Revenue of EUR 7.1 billion) are the major producers of resin and covers almost 62% of global market share.
R&D is an ongoing process and the Company has vast experience of working with many companies to make tailor made solutions (Value added product) and come up with new solutions for customers which improves client stickiness.
3. CONSUMER PRODUCTS (8% OF FY22 SALES)
Ion Exchange is the pioneer of the RO technology, in India. With its National & International presence, the Company offers its products in Consumer products business under the brand Zero.
Besides Zero B products which cater to individuals, hotels, spas, educational institutions, hospitals, laboratories, railway and defence establishments, this division also provides several technologically advanced products to residential, commercial and rural segments.
IEIL has focused on niche products (having a unit price of up to Rs. 3 lakh vs generic RO price of Rs. 18,000–22,000/piece) that provide hydrogen and mineral-rich water. The Indian water purifiers market was worth USD 754.2 million in 2020 and is further projected to reach USD 1997.2 million by the year 2027, growing at the CAGR of 19.3% during the forecast period (2020- 2027).
Strong foothold with Marquee Clients:
Industrial – NTPC, NPC, Reliance, IOCL, JSW, CPCL, L&T, Arcelormittal, Nippon Steel, Nayara Energy, IRCTC, BHEL, Tata Group.
Institutional – Leela, Military Engineering Services, Taj Hotels, Holiday Inn, Hyatt Regency, Oberoi Hotels, Apollo Hospitals, Escorts Heart Institute, DLF, Puravankara.
International – Cargill, Technip France, Unilever Group, Jurong, Thyssenkrupp (Uhde), Jacobs, Kawasaki, Mitsubishi, PDO Oman, Emirates Steel, IKPP Indonesia.
International Presence:
The Company markets its products through 650+ dealers in FY22. (320+ in FY18)
Exports contributes 30% to the total revenues.
Ion Exchange (India) Limited has 18 subsidiary companies in India and abroad as on March 2022. Ion Exchange LLC, USA, Ion Exchange Asia Pacific Pte. Ltd., Singapore, Ion Exchange Projects and Engineering Ltd. India (91% owned) are the major subsidiaries which are 100% owned.
The Company has a chemical resin and membrane facility which is utilized captively. The Company has long term relationships with major clients and has been providing solutions to them for tailor- made products which improves client stickiness.
The Company has a 44% market share in the resin market in India itself. The Company expects to increase its global market share which is in the low single digit.
It has two facilities for in-house R&D and two applications and testing centers. The company has over 50 patents to their credit and 100+ products commercialized.
The company has a global presence apart from presence in major cities in India with 36+ sales & service centers and 100+ Channel Partners.
Key Growth Drivers:
The Company had got major contract of Rs. 1200 Cr. in in Uttar Pradesh Q4FY21 under the Jal Jeevan Mission for the rural water drinking supply to 1,000 villages in two districts of Uttar Pradesh that is Varanasi and Aligarh. Under this contract, the Company is involved in extracting and treating groundwater, and supplying drinking water to households.
Every village has its own different contract hence it’s a major contract with compilation of various small contracts. The scope of work might increase in the contract going forward as there are various moving parts in the contract. The contract order is in a staggered manner and the current value of this contract stands at Rs. 1200 Cr.
Outstanding contract order which is yet to be executed is valued at Rs. 1435 Cr. Of this amount, we expect Rs. 350 Cr to be realized in FY23 and major chunk of more than Rs. 900 Cr. in FY24. This contract has a timeline of 18-21 months. The Company will be getting recurring O&M business of 10 yrs. from this contract. (O&M stands for Operation and Maintenance)
Depending on the attractiveness of the projects, IEIL may bid for more states for similar services.
The Company has a total order book of Rs. 3,012 Cr. (Rs. 600 Cr. in Dec 2020, 4.8x growth) of which outstanding UP SWSM is Rs. 1,438 Cr (~40% of total order book) and the outstanding Sri Lanka order is of Rs. 255 Cr.
IEIL has a bid pipe line of Rs. 9,000 Cr (majorly international) of which as per management 30% of their bid is at advance stage which translates to Rs. 2,800 Cr. If the conversion happens the total order book will be Rs. 5,812 Cr. (3.37x of FY22 revenue of Rs. 1,877 Cr.)
Currently, O&M services contribute ~18–20% to revenue from the Engineering business. As the order book grows, scope for O&M services will also improve.
The Chemical business contributes 36% to the revenue and has 24-28% EBIT and contributes 50% to the total profits of the entire business. The current capacity for Resins- 38,000 TPA, is running at 72-76% utilization levels. The facility is expected to get optimally utilized at 95% by FY24.
The Company is doing a green field Capex of >Rs. 300 Cr in Roha, Maharashtra to enhance resin capacity. The Capex will have 2 phases. Phase 1 (P1) will double the existing capacity of 38,000 TPA in Cation and Anion Resin each and in Phase 2 (P2) further 36,000 TPA will be added to each resins. The existing capacity will be 3x of post the P2 expansion. IEIL had frontloaded the cost for strengthening the infrastructure on the back of increased order backlog and expects increased pace of execution in the coming quarters. This Capex can achieve 2.5- 3x of asset turnover which translates to Rs. 825- 950 Cr in revenue (40- 48% of FY22 sales) at full utilization. The Company expects to increase its global market share which is in low single digit and the Company is expecting the expanded capacity to be fully utilized within 2-3 years.
IEIL is undergoing brown field Capex of Rs. 54 Cr in the Membrane business which runs at 90% utilization level. The expanded capacities will be live by Q4FY23. Expected revenue from this Capex would be Rs. 70-80 Cr (4- 4.4% of FY22 sales) at full utilization. IEIL witnessed turnaround in the Consumer business. As per our conservative estimates we expect this division to grow by 30% CAGR till FY24 from a low base of Rs. 157 Cr (FY22) which translates to Rs. 265 by FY24 Cr. (Management has guided for upwards of 55% CAGR growth for FY23). IEIL has focused on niche products (with a unit price of up to Rs. 3 lakh vs generic RO price of Rs. 15,000–20,000/piece) that provide hydrogen and mineral-rich water. This segment became profitable at the EBIT level in Q1FY23 and is likely to see improvement in future. We expect the topline will grow by 24% CAGR till FY24 (the management has guided 40% growth for FY23 YoY). The EBIT margins will be in the range of 15-19%.
The Company stands at a cash surplus of Rs. 600Cr.+ (March 22), which includes Rs. 54 Cr. margin money related to specific EPC contracts in an escrow account and Rs. 197 Cr. margin money deposited with banks. The Company possesses unblocked cash of Rs. 296 Cr, which is sufficient enough for Phase 1 green field Capex in the Chemical division. The Company will be consolidating all its subsidiaries in H2FY23. This will help The Company to form a simple structure and evade the complex related party transaction. Capital expenditure on water and waste water infrastructure in India is set to increase by 83% over the next five years, hitting an annual run rate of USD 18 Bn by 2023. In 2001, per capita water availability was 1,820 cubic meters which is projected to decline to 1,140 cubic meters by 2050. Almost 62,000 MLD of sewage is generated across urban India and there are just 816 STPs installed that treat 32,277 MLD or 37.5% of sewage per day. The Govt. of India plans to spend Rs. 200 bn in the next 5 years for the Clean Ganga project. Global water treatment chemical market size is expected to grow from $39.1 billion in 2021 to $64.1 billion in 2026. Current coverage of Nal Se Jal is Rs. 8.7 Cr. households Of this Rs. 5.5 Cr. households were provided tap water in the last 2 years itself. Allocation of Rs. 65,000 Cr. has been made with an aim to cover 3.8 crore households in 2022-23. All these factors provide strong push for the industry in which IEIL operates.
Management Profile:
1. RAJESH SHARMA, MANAGING DIRECTOR
He has an experience of more than 4 decades in providing Total Water Management solutions to all sectors. Mr. Sharma joined the Company in 1974 and has held various positions in sales, marketing and management. Before taking over the office of Managing Director in April 2000, he was the Deputy Managing Director. He established the company’s international business division, including its 100% EOU and has developed business relationships with leading engineering contracting companies and business & technology partnerships with leading companies in Europe, Japan, South East Asia and the Far East. Mr. Sharma has chaired technical seminar sessions organized by various Associations and also presented papers in India and abroad on water and wastewater treatment and water conservation topics. He holds 5.62% of total equity share and takes total remuneration of Rs. 6.6 Cr. which is 4.2% of FY22 Net profits of Rs. 162 Cr. Commission is ~23% of total remuneration.
2. AANKUR PATNI, EXECUTIVE DIRECTOR
He is associated with the Company for the last 20 years. Mr.Patni is a Chartered Accountant. He is currently associated with 8 Companies and is a director with Rockmen Merchants Ltd, Global Composites and Structurals Limited, Ion Exchange Infrastructure Limited, Aquanomics Systems Limited, Astha Technical Services Limited, Ion Exchange Projects and Engineering Limited, Total Water Management Services (India) Limited. He holds 2.01 % of Total equity shares and takes total remuneration of Rs. 3.02 Cr (1.85% of FY22 Net profits). The commission is ~25% of total remuneration.
Financials:
Valuations:
It is expected that the topline will grow by 22% CAGR till FY24 (the management has guided 41% growth for FY23 YoY). The EBIT margins will be in the range of 14-16%. As per estimates it is expected that EPC to grow by a CAGR of 21% till FY24 which translates to Rs. 1447 Cr by FY24 and the Chemical business to grow by 15% CAGR till FY24 which translates to Rs. 852 Cr by FY24 (FY22 Rs. 558 Cr.) whereas Consumer division will grow by 32% on a low base which translates to Rs. 285 by FY24 Cr.
Key Risks:
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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