The initial public offer (IPO) of Antony Waste Handling Cell (Antony), a firm specialising in collection, transportation and management of Municipal Solid Waste (MSW) for almost 19 years now, could be a good candidate for the Environmental, Social, and Governance (ESG) funds, which are gaining popularity of late.

Through the IPO, Mauritius-based private equity firms Leeds, Tonbridge, Cambridge and Guildford are looking to collectively divest 22 per cent stake in the company. The offer also comprises a fresh issue worth ₹35 crore.

At a price band of ₹295-300 apiece, the company is valued at 10.1 to 10.6 times FY20 earnings (annualised). The enterprise value of the company is about 6.1 times its FY20 EBITDA (annualised) at the upper price band.

But the valuation isn’t too cheap, considering weak revenue growth, dependence on States for receivables, increasing working capital requirement and increasing competition in the space.

Hence, it is therefore, advisable for retail investors to desist from subscribing in the initial offer and consider the performance of the company over the next couple of quarters before investing in the company.

Business

Dealing with only MSW, Antony has 17 on-going projects currently, comprising 11 MSW collection and transportation projects, four mechanised sweeping projects and two MSW processing projects. The company currently works with municipalities in Mumbai, Pimpri-Chinchwad, Mangaluru, Nagpur, NOIDA and Delhi.

The company is likely to benefit from the Centre’s thrust on Swachh Bharat and Smart Cities. However, the presence of international players could intensify competition in the bidding process.

Apart from the new projects, 11 of the existing 17 projects are due for renewal in the next five years and shall be subject to bidding.

The company’s processing unit in Kanjurmarg that contributes to nearly 45 per cent of the consolidated revenues is a longer-tenure contract (remaining life of 15 years).

Over FY17 to FY19, the company’s topline grew by a meagre 1 per cent to ₹284 crore. However, with three new projects (in Pimpri-Chinchwad, NOIDA and Nagpur) added to its kitty, the company’s revenues spiked to ₹218 crore in the first half of FY20.

Thanks to the escalation clauses in most of the contracts, operating margins of the company remained healthy at 27 to 30 per cent, which cover the increase in labour and power and fuel costs (constituting 25 and 14 per cent of overall cost respectively).

Hence, albeit weak topline growth, operating profit managed to grow by 6 per cent CAGR over FY17 to FY19 to ₹91 crore.

However, the net profit de-grew to ₹34 crore in FY19 from ₹41 crore in FY17, due to a spike in vehicle hiring charges and taxes.

Risks

About 90-95 per cent of revenues flowing from top five clients, assumes significant concentration risk.

That apart, Antony’s sole dependence on State Municipalities for revenues, makes it a risky bet at the current juncture, given the ballooning fiscal deficit of States.

Positive operating cash flows over FY17 to FY19 depict smooth and prompt payments in the past. But the pending litigations in the prospectus highlight instances of disputed claims in the past on account of delayed payments.

Similar concerns have been raised in the audit report, over such pending litigations amounting to ₹28 crore (10 per cent of FY19 revenues).

Any setback in receivables could further deteriorate its working capital condition, which is already stretched, thanks to its expansion plans.

The company’s working capital requirement spiked from ₹38 crore in FY17 to ₹43 crore in FY19. This further increased to ₹64 crore for the half year ended September 2019, owing to a recently-awarded contract for set up and operation of a Waste to Energy (WTE) plant by Pimpri-Chinchwad Municipal Corporation. This apart, the company is eyeing several other projects with Municipalities in Madhya Pradesh, West Bengal, Uttar Pradesh and Jammu & Kashmir regions.

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