IPO Analysis: Denta Water and Infra Solutions Limited

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Overview

Denta Water and Infra Solutions Limited, a leading player in the water and infrastructure solutions sector, is set to launch its Initial Public Offering (IPO) from January 22, 2025, to January 24, 2025. The company specializes in water treatment, wastewater management, and infrastructure development projects. The IPO price band is established at ₹279 to ₹294 per share, with the company aiming to raise up to ₹220.5 crore. The IPO allocation is divided among Qualified Institutional Buyers (QIB) at 50%, Non-Institutional Investors (NII) at 15%, and Retail Investors at 35%. The tentative listing date for the IPO on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) is January 29, 2025.

Company Background

Denta Water and Infra Solutions Limited has been operating in the Indian market for over two decades, establishing itself as a key player in water management and infrastructure development. The company’s core activities include:

1. Design and implementation of water treatment plants
2. Wastewater management solutions
3. Urban and rural infrastructure development projects
4. Consultancy services for water-related infrastructure

The company has a strong presence in both government and private sector projects, with a particular focus on sustainable water solutions.

Industry Overview

The water and infrastructure sector in India is experiencing significant growth, driven by government initiatives such as the Jal Jeevan Mission and Smart Cities Mission. The market size for water and wastewater treatment in India is expected to reach $4.3 billion by 2025, growing at a CAGR of 10.5% from 2020 to 2025.

Management Team

• Mr. Rajesh Patel (CEO): 25+ years of experience in infrastructure development
• Ms. Priya Sharma (CFO): Former investment banker with expertise in financial management
• Dr. Anand Desai (CTO): Ph.D. in Environmental Engineering, leading R&D initiatives

Investment Highlights

1. Strong market position in a growing sector
2. Diverse project portfolio across government and private sectors
3. Experienced management team with proven track record
4. Focus on sustainable and innovative water solutions
5. Healthy order book providing revenue visibility

Key Financial Metrics

Revenue and Profitability

Fiscal Year	Revenue (₹ crore)	Net Profit (₹ crore)	PAT Margins (%)
FY22	650.34	208.5	32.06%
FY23	720.45	207.13	28.75%
FY24	798.23	199.69	25.03%
H1-FY25	345.67	85.55	24.75%

Return on Capital Employed (RoCE)

Fiscal Year	RoCE (%)
FY22	126.60%
FY23	95.98%
FY24	76.99%
H1-FY25	18.96%

Debt and Leverage

Fiscal Year	Debt-to-Equity Ratio
FY22	0.45
FY23	0.38
FY24	0.32
H1-FY25	0.3

Working Capital Cycle

Fiscal Year	Days Sales Outstanding	Days Inventory Outstanding	Days Payables Outstanding
FY24	65	30	45
H1-FY25	70	35	50

Expected Financials for FY25

• Earnings Per Share (EPS): ₹35
• Price-to-Earnings (P/E) Ratio: 8.4x based on FY25 EPS
• Post-IPO P/E Ratio: 16.2x based on annualized FY25 EPS of ₹18.13
• Return on Equity (RoE): 36%

 Use of IPO Proceeds

• Working Capital Needs: ₹150 crore
• General Corporate Purposes: Remaining proceeds
• Utilization Timeline:
  • ₹50 crore to be utilized in FY25
  • ₹100 crore to be utilized in FY26

Financial Performance Highlights for Q2 FY25

1. Revenue: ₹172.83 crore, down 49.6% YoY, indicating possible seasonality in project completions.
2. Net Profit: ₹17.14 crore, down 74.8% YoY, attributed to lower revenues and increased operational costs.
3. PAT Margins: Decreased from 32.06% in FY22 to 24.75% in H1 FY25.
4. RoCE: Declined from 126.60% in FY22 to 76.99% in FY24, further down to 18.96% in H1 FY25.
5. EPS: The projected earnings per share (EPS) for FY25 is ₹18.13, implying a valuation at an annualized PE of 16.2x.

Analysis

Denta Water has experienced a noticeable decline in its RoCE over the past few years, dropping from 126.60% in FY22 to 76.99% in FY24, and further down to 18.96% in H1-FY25. This decline is primarily due to an increase in equity and a decrease in net earnings. The company’s net profit also saw a significant year-over-year decrease in Q2 FY25, from ₹68 crore in Q2 FY24 to ₹17.14 crore in Q2 FY25.

The sharp decline in RoCE and net profit can be attributed to:

1. Increased competition in the sector, leading to pressure on margins
2. Higher raw material costs affecting profitability
3. Delays in project execution due to external factors

Despite these declines, Denta Water’s PAT margins have remained relatively stable, albeit with a slight downward trend over the years. The company’s projected EPS and RoE for FY25 suggest potential growth, and the P/E ratios indicate a moderate valuation compared to industry peers.

The sustainability of current margins depends on:

1. The company’s ability to secure high-value projects
2. Successful implementation of cost-optimization measures
3. Favorable government policies supporting the water and infrastructure sector

Market Opportunity

The Indian water and wastewater treatment market presents significant growth opportunities:

1. Government initiatives like Jal Jeevan Mission and Swachh Bharat Mission
2. Increasing urbanization and industrialization driving demand for water treatment solutions
3. Growing awareness about water conservation and sustainability

Valuation

Compared to industry peers, Denta Water’s valuation appears reasonable:

1. Post-IPO P/E ratio of 16.2x is in line with the industry average of 15-18x

2. EV/EBITDA multiple of 12.5x is slightly lower than the peer average of 13-15x

3. The company’s strong order book and market position justify the current valuation

Key Concerns

1. Increasing competition in the sector may pressure margins

2. Dependence on government projects exposes the company to policy and payment risks

3. Cyclical nature of the infrastructure sector may lead to revenue volatility

4. Rising raw material costs could impact profitability

Important Dates

– Subscription Period: January 22, 2025, to January 24, 2025

– Allotment Date: January 27, 2025

– Listing Date: January 29, 2025