Enviro Infra Engineers IPO analysis

Enviro Infra Engineers IPO (initial public offering) will open for subscription on November 22, 2024 and close on November 26, 2024. We breakdown the strengths, weaknesses and growth prospects of the water management solutions provider to help investors make an informed decision.

Enviro Infra Engineers IPO in a nutshell

• Quality: During FY22-24, Enviro Infra Engineers reported a three-year average ROE and ROCE of 52.2 and 52 per cent, respectively.
  
• Growth: During FY22-24, its revenue and net profit grew by 81 and 84 per cent per annum, respectively.
  
• Valuation: Post-listing, the stock will be valued at a P/E and a P/B ratio of 23.5 and 2.9 times, respectively.
  
• Overview: The growing market for water treatment and increased government spending on water infrastructure will help the company scale its business. However, competition from large companies and high working capital requirements pose a threat.

About Enviro Infra Engineers

Incorporated in 2009, Enviro Infra is engaged in the design, construction, operation and maintenance of water and wastewater treatment plants (WWTP) and water supply scheme projects (WSSP). The company primarily serves government bodies, with 86 per cent of its FY24 revenue coming from the engineering, procurement, and construction (EPC) segment.

As of Q1FY25, Enviro Infra has successfully delivered 28 WWTP and WSSP projects across India, completing 22 in the past seven years.

Strengths of Enviro Infra Engineers

• Strong order book: Thanks to its in-house expertise and track record of timely execution of projects across different Indian states, Enviro Infra has earned an order book of Rs 1,906 crore (as of Q1FY25), almost three times its FY24 revenue.

Weaknesses of Enviro Infra Engineers

• Capital-intensive business : Enviro Infra Engineers requires huge capital to grow its business. As a result, its debt has increased significantly from Rs 18 crore in FY22 to Rs 305 crore, as of Q1FY25. Cash flow from operations (CFO) remains low, with Rs 73 crore generated in the last three years.
  
• Dependence on government: The company's projects come from government contracts, making business operations heavily dependent on government spending on water treatment.

Risk report

Company and business

• Were Enviro Infra's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. Its earnings before tax was Rs 150 crore in FY24.
  
• Will Enviro Infra Engineers be able to scale up its business?
  Yes. Enviro Infra Engineers is well-positioned to scale on the back of the growing water treatment market (7-8 per cent globally), advanced technologies like ultrafiltration and IPO funding to expand operations.
  
• Do Enviro Infra Engineers have recognisable brands with client stickiness?
  Yes. Government contracts are long-term in nature. So, client stickiness is natural in this business.
  
• Does the company have a credible moat?
  No. Many companies, including some large organisations, operate in the same business. Moreover, the government assigns projects on price-based bidding, limiting the pricing power.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over 25 per cent stake in the company?
  Yes. Post-IPO, the promoters' stake will be 70 per cent.
  
• Do the top three managers have over 15 years of combined leadership at Enviro Infra Engineers?
  Yes. Managing Director Manish Jain has been with the company since its incorporation in 2009.
  
• Is the company's management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Enviro Infra Engineers free of promoters pledging their shares?
  Yes. The company is free of promoters pledging their shares.

Financials

• Did the company generate a current and three-year average ROE of more than 15 per cent and an ROCE of more than 18 per cent?
  Yes. The company's three-year average ROE and ROCE were 52.2 and 52 per cent, respectively. In FY24, it reported an ROE and ROCE of 52.8 and 45.6 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative cash flow from operations of Rs 69 crore in FY24.
  
• Is Enviro Infra Engineers' net debt-to-equity ratio less than one?
  Yes. Its net debt-to-equity ratio was 0.3 as of FY24.
  
• Is Enviro Infra Engineers free from reliance on significant working capital for day-to-day affairs?
  No. The business is highly working capital-intensive. Enviro Infra expects to need Rs 753 crore for working capital in FY25 and will also allocate Rs 181 crore from its IPO proceeds to meet this need.
  
• Can the company operate its business without relying on external funding in the next three years?
  No. The business is capital-intensive, with debt increasing significantly over the last three years. Additionally, Enviro Infra has been generating low cash flow from operations during this period. These factors suggest that the company will likely need external funding to support its growth and expansion in the coming years.
  
• Is Enviro Infra Engineers free from meaningful contingent liabilities?
  No. As of FY24, its contingent liabilities as a percentage of equity was around 88.6 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 5.9 per cent.
  
• Is the stock's P/E ratio less than its peers' median level?
  Yes. The stock is valued at a P/E ratio of 23.5 times compared to its peers' median of 42 times.
  
• Is the stock's P/B value less than its peers' average level?
  Yes. The stock is valued at a P/B ratio of 2.9 times compared to its peers' median of 7 times.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

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