Initial Public Offering. Antony Waste Handling Cell IPO: Should you subscribe?

Investors with high-risk appetite can subscribe to the IPO of Antony Waste Handling Cell (Antony), a company engaged in collection, transportation and management of Municipal Solid Waste (MSW) for more than 19 years now.

Healthy revenue visibility from existing contracts, established execution track record (undertaken 25 projects in the last 19 years) and steady margins are key positives for the company. Besides, the Centre’s flagship projects such as Swachh Bharat Mission can further the growth story for Antony.

At a price band of ₹313-315 , the company is valued at about 14.3 to 14.4 times its FY20 earnings. The enterprise value of the company works out to about 6.8 times its FY20 EBITDA at the upper price band. There are no listed peers.

Theoffer isopen from December 21 to December 23 and comprises a fresh issue worth ₹85 crore for debt reduction and part financing of Pimpri-Chinchwad waste to energy project . A collective divestment of about 27 per cent stake in the company, by Mauritius-based private equity firms Leeds, Tonbridge, Cambridge and Guildford for ₹214-215 crore, is also being done. The market capitalisation works out to ₹891 crore at the upper end of the IPO price band.

The small-cap nature of the stock along with dependence on Municipal budgetary allocations for its receivables (resulting in stretched working capital cycle) are key risks. Hence, only investors with high-risk appetite are advised to take exposure.

Business

The company currently has a portfolio of 18 ongoing projects (as of November 15, 2020). comprising 12 MSW Collection & Transportation projects (67 per cent of total ongoing project value), two MSW processing projects (11 per cent) and four mechanised sweeping projects (22 per cent). Projects have an average tenure of 7-8 years (23 years in the case of MSW processing), which give good revenue visibility.

That apart the Municipal solid waste processing industry is likely to receive a further fillip, with the Centre’s ranking system for Municipalities under the Swachh Bharat Mission (based on cleanliness).

While the company faces competition from multiple players, , its market leadership position (among top five players in MSW industry), and established execution track record can help sustain pricing power and hence operating margins, going ahead.

Scores on margins

Though over FY17 to FY19, the company’s topline grew by a meagre 1 per cent (CAGR) to ₹284 crore, revenues spiked to ₹451 crore in FY20, up 59 per cent y-o-y, with three new projects (in Pimpri-Chinchwad, Noida and Nagpur) that were awarded in late 2018-2019, generating revenues.

The consistent profitability of the business is a positive. The company reported a 20 per cent CAGR growth in operating profit over FY17-20 to ₹140 crore. This is because the company has been able to maintain steady margins (in the range of 27-30 per cent) owing to the built-in escalation clauses in most of the on-going projects of the company. About 77.8 per cent contracts have escalation clauses. In FY17-FY20, the company’s net profits too grew at a CAGR of 15 per cent to ₹62 crore.

The lockdown did impact revenues, which dropped by 5 per cent (y-o-y) in the first half of FY21 to ₹207 crore and net profits, which fell by 23 per cent y-o-y in the first half of FY21, to ₹29 crore.

This was owing to lower MSW tonnage from shops and establishments. However,resumption of commercial activities would aid in revenue recovery. Going ahead, growth is also likely from the commencement of recently awarded Varanasi project (MSW collection and transportation and Mechanized sweeping projects awarded in FY20).

Long-pending receivables (considered recoverable) from Municipal corporations have been brought down to ₹13.5 crore in FY20 (just 3 per cent of revenues), from ₹28.5 crore in FY19.

Key risks

Working capital stress can be a cause for concern. Working capital days spiked to 25 days in FY20, from 16 days in FY18, with the company accepting new projects. Despite collections from long-pending receivables and improved receivable cycle, working capital days remained at 24.7 in the first half of FY21, owing to delays in billing cycle led by supply chain disruptions during the pandemic.

Dependence on Municipalities on budgetary allocation of State governments dosen’t help here. Borrowing due to tight working capital conditions may not bode well given that its current (average) borrowing cost is already high at 17 per cent (credit rating of BBB-).

The company’s debt-equity stands at at 0.7 times at the end of September 2020 (0.8 times in March 2020).The funds raised through this IPO for debt reduction purposes, though, will bring some comfort here (the company’s outstanding borrowings stood at ₹162.4 crore at the end of September 2020).

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