Denta Water and Infra Solutions IPO analysis

Denta Water and Infra Solutions Limited IPO (initial public offering) will open for subscription on January 22, 2025, and close on January 24, 2025. Below is a breakdown of the water management company's strengths, weaknesses and growth prospects to help investors make an informed decision.

Denta Water and Infra Solutions IPO in a nutshell

• Quality: During FY22-24, Denta Water and Infra Solutions reported a three-year average ROE and ROCE of nearly 59 and 79 per cent, respectively.
  
• Growth: During FY22-24, its revenue and profit after tax grew by around 41 and 25 per cent per annum, respectively.
  
• Valuation: At the upper price band of Rs 294, the stock is expected to be valued at a P/E and P/B ratio of around 13.1 and 1.9 times, respectively.
  
• Overview: Rising government capex on water infrastructure and demand for water treatment driven by industrial expansion should help the company scale up its business. However, factors like a highly competitive industry and geographical revenue concentration can hinder its growth.

About Denta Water and Infra Solutions

Founded in 2016, Denta Water and Infra Solutions specialises in designing, installing and commissioning water management infrastructure projects, with a focus on groundwater recharge using recycled water. The company also undertakes construction projects in the railway and highway sectors.

Since its inception, Denta Water and Infra Solutions has successfully executed 35 projects. As of November 2024, the company's total order book stood at Rs 752 crore.

In H1 FY25, water management and irrigation projects accounted for nearly 97.5 per cent of the company's revenue. While it has operations across India, Karnataka accounts for a significant chunk of revenue (84 per cent) during the same period.

Strengths of Denta Water and Infra Solutions

• Established track record: Since its inception in 2016, the company has executed 35 water management and infrastructure projects. Further, its current order book stands at Rs 752 crore, which is three times its FY24 revenue, providing greater revenue visibility.

Weaknesses of Denta Water and Infra Solutions

• Revenue concentration: The company derives nearly 84 per cent of its revenue (as of H1 FY25) from Karnataka. Thus, any change in clientele or termination of a contract can significantly hamper its financials.
  
• Surge in unbilled revenue: Denta Water and Infra Solutions' unbilled revenue (revenue that has been earned but is yet to be billed or invoiced) has ballooned over the last three years from Rs 1.2 crore in FY22 to Rs 95 crore as of H1FY25. This has resulted in negative cash flows (as of H1FY25) and high working capital requirements for the company.

Risk report

Company and business

• Were Denta Water and Infra Solutions' earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. The company reported a profit before tax of Rs 81.4 crore in FY24.
  
• Will Denta Water and Infra Solutions be able to scale up its business?
  Yes. There is a growing demand for water and wastewater treatment, driven by the escalating levels of industrial water consumption and discharge. In addition, water scarcity is expected to become a serious issue in the future. This can open up multiple opportunities for companies like Denta Water and Infra Solutions to scale up their business.
  
• Do Denta Water and Infra Solutions have recognisable brands with client stickiness?
  No. This is because the company operates in a highly competitive industry with several new and established players. Moreover, these infrastructure projects are awarded on price-based bidding.
  
• Does the company have a credible moat?
  No. Denta Water and Infra Solutions operates in an industry with low entry barriers, resulting in stiff competition from both small and established players.

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. After the IPO, the promoters will hold a 71.9 per cent stake in Denta Water and Infra Solutions.
  
• Do the top three managers have over 15 years of combined leadership experience at Denta Water and Infra Solutions?
  No. Denta Water and Infra Solutions's top three managers do not have over 15 years of combined leadership experience.
  
• 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 Denta Water and Infra Solutions' 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. Between FY22-24, Denta Water and Infra Solutions' three-year average ROE and ROCE were nearly 59.3 and 78.7 per cent, respectively. In FY24, it reported an ROE and ROCE of around 44.4 and 58.1 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative operating cash flows in FY22 and H1FY25.
  
• Is Denta Water and Infra Solutions' net debt-to-equity ratio less than one?
  Yes, since the company is net debt-free.
  
• Is Denta Water and Infra Solutions' free from reliance on significant working capital for day-to-day affairs?
  No. The company's working capital requirements have increased significantly over the last three years due to a surge in unbilled revenue.
  
• Can the company operate its business without relying on external funding in the next three years?
  Yes, since the business is less capital-intensive. Further, the company is net debt-free and has high margins. However, its working capital requirements have jumped over the last three years.
  
• Is Denta Water and Infra Solutions free from meaningful contingent liabilities?
  No. The company's contingent liabilities stood at nearly 31 per cent of its net worth as of H1FY25.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  Yes. The stock offers an operating earnings yield of 10.2 per cent on its enterprise value.
  
• Is the stock's P/E ratio less than its peers' average level?
  Yes. Denta Water and Infra Solutions' stock is valued at a P/E ratio of 13.1 times compared to its peers' average level of 31.5 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 1.9 times compared to its peers' average level of 4.9 times.

Assessing an IPO requires carefully evaluating a company's strengths, weaknesses and growth potential, just like we've outlined for Denta Water and Infra Solutions. However, wealth creation can only be achieved through a well-researched, balanced stock portfolio.

Our Value Research Stock Advisor can help with that. What do you get? Meticulously researched stock recommendations and ready-to-invest portfolios, updated every month. Subscribe to Value Research Stock Advisor today and take charge of your financial future.

Also read: Should you invest in IPOs?