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Ion Exchange – Leading Waste Water Treatment Company in India


Company Name – Ion Exchange (India) Limited (Ion Exchange)


Current Share Price – INR 3,168 (April 3, 2023)


Market Cap – INR 4,939 cr


 

1. What is interesting about the stock?


Water is a very important component in everyone’s life. The Water Industry Segment cater to Drinking/Water waste recycling for Individual, Agriculture, and Industry. Some of the key factor which signifies the importance of this segment:

  • Rapid industrialization, growing population coupled with urbanization, and stricter enforcement of environmental regulations to decrease pollution and conserve diminishing freshwater reserves will increase demand for wastewater treatment and recycling plants across all sectors – industries, institutions, homes, and communities.

  • Increased awareness about hygiene and sanitation during the pandemic has reinforced the importance of access to safe and reliable water not only in India but across the globe.

  • Initiatives such as Green Hydrogen production, blended fuel, and encouraging the use of biomass pellets in thermal power plants.

  • Across the globe, customers are increasingly showing a preference for integrated water and environment management solutions along with carbon neutrality, net zero goals, and commitment of nations to COP26 emission goals will accelerate the demand for innovative, efficient, green technologies built on the backbone of carbon neutral water-energy nexus

Incorporated in 1964, Ion Exchange (India) Limited was founded by the late G.S Ranganathan. The Company operates in three key segments Engineering, Chemical. and Consumer products. The Company has a presence in the entire water and wastewater treatment value chain from preliminary treatment to zero liquid discharge (ZLD).


Engineering segment designs, manufactures, and sells medium-to-large size equipment for water and wastewater treatment plants including recycling & zero liquid discharge plants. These are offered as standard and pre-engineered plants as well as customized, designed & build projects undertaken on a turnkey, BOOT, or EPC basis.


Chemicals segment is engaged in manufacturing water treatment chemicals, ion exchange resins, and other specialty chemicals. Water treatment chemicals are used in boiler, cooling water treatment, coagulation, and flocculation, membrane cleaning, etc. while the resins are used for softening, and demineralization in water treatment, and various non-water separation processes.


Consumer Products segment is the pioneer of the revolutionary RO technology, in India, and its brand ‘Zero B’ is providing a one-stop water treatment solution for homes, corporate, defense, and society.


Industry Overview


Going forward, the Indian water and wastewater treatment solutions market is forecasted to grow at a CAGR of 8.8% from FY21 to reach INR 465 billion in FY#1. Indian water and wastewater treatment solutions market can be categorized into:

  • wastewater treatment solutions and

  • water treatment solutions.

The wastewater treatment solutions segment is forecasted to grow at a CAGR of 9.2% from FY21 to FY31 while the water treatment solutions segment is forecasted to grow at a CAGR of 8.3% during the same period.


The India water purifier market size reached USD 2.8 billion in 2022. Going forward, market size is expected to reach USD 5 billion by 2028, exhibiting a growth rate (CAGR) of ~10.5% during 2023-2028. The global water purifier market is around USD 30 billion in 2022.


The Indian chemicals industry stood at USD 178 billion in 2019 and is expected to reach USD304 billion by 2025 registering a CAGR of 9.3%. An investment of INR 8 lakh crore (USD 107 billion) is estimated in the Indian chemicals and petrochemicals sector by 2025. Specialty chemicals constitute 22% of the total chemicals and petrochemicals market in India. The demand for specialty chemicals is expected to rise at a 12% CAGR in 2019-22.


India is lagging in terms of Sewage treatment capacity. Total sewage generation is 72,368 MLD, of which India can treat 44% of the sewage while only 28% of sewage is treated. There is huge headroom to grow for the sewage treatment companies as industrialization increases and the Government focuses on reducing open sewage disposal.


The industrial wastewater treatment solutions segment is expected to witness higher growth than the industrial water treatment solutions. The higher growth is expected to be driven by regulations and end-user sustainability initiatives.


Countries where the industrial water recovery ratio is very low, such as India and China, will have great potential for the ZLD market. In China, the government is stepping up efforts to tackle industrial water pollution and is looking for ZLD technologies that can handle higher volumes of industrial production. In addition, India and China are trying to adopt ZLD for industrial parks and thermal power plants.


Government Initiative

  • The National Mission for Clean Ganga, 2014 is a flagship program launched with a budget outlay of INR 200 billion to control pollution, and conserve and rejuvenate the Ganga River.

  • The Pradhan Mantri Krishi Sinchayee Yojana (PMKSY), 2015 program was launched to increase the cultivable area with complete access to irrigation facilities, reduce wastage of water and increase water use efficiency in the agriculture sector.

  • The Jal Jeevan Mission, 2019 objective of the mission is to provide “functional household tap connections” (FHTC) to every rural home by 2024.

  • India’s first river linking project approved in 2021 would connect the Ken River in Madhya Pradesh with Betwa in Uttar Pradesh.

Why invest in Ion Exchange?

  • Expertise and experience of over 50 years

  • Strong revenue growth visibility – order book and bid pipeline. The order book stood at approximately INR 3,650 cr (2x TTM revenue) and also has a bid pipeline of INR 8,400 cr (typical success rate of 20%).

  • It has over 50 patents to its credit and 100+ products commercialized. The Company also has an FDA-approved pharma-grade resin facility. Actively working on semiconductors and related industries in India.

  • Company has a strong brand and a good clientele with long-term relationships.

2. Key Historical Financials

  • Company revenue growth in the last five years was a CAGR of 9% whereas net profit growth was 41%

  • Revenue growth was 9% in FY22 and 32% in Q3FY23 on a YoY basis

  • EBITDA margin improved from 9% in FY20 to 14% in FY22

  • Cash flow conversion (CFO/EBITDA) was poor in FY22 due to an increase in receivables and inventory

  • ROCE/ROE is healthy, and the working capital cycle is negative which is a good sign, even though many of the projects are of government.

  • The Company is aggressively and actively increasing capacity which will boost sales as well as profit.

3. What is my view on company valuation?


The share price has jumped 5.5x over the last 3 years mostly driven by the P/E multiple expansion (3x).


Ion Exchange trades at a P/E (TTM) multiple of 25x vs a 5-year median multiple of 18x. Competitors like Va Tech and Antony trade at P/E (TTM) multiple of 13x and 9x respectively. So, the valuation looks expensive even if the Company grows by 15% in the next few years.


Long-term investors can evaluate the Company at lower levels.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • The Company received an order from Sri Lankan Government Authority, National Water Supply and Drainage Board (NWSDB) in 2016. Out of this total contract, INR 250 cr. is the outstanding contract which is at a standstill due to economic crisis and political unrest. However, the management is confident of completing the project, with no credit risk as the payment is routed through Exim Bank.

  • Competition risk from L&T, Va Tech, Antony, etc. The Company operates in the EPC industry which is fragmented.

  • The steel and cement price movements could have an impact on the Engineering business. Similarly, the petrochemical prices (Crude derivatives are a major RM cost) and other commodity price movements on the chemical front would have an impact on the chemical segment. The container unavailability due to any foreseen event can erode revenue and margins. The Company is vulnerable to exchange rate fluctuations.

  • Company has many subsidiaries and associated companies which makes the structure complicated, although the Company has initiated merger/consolidation and other processes for simplicity and better control and efficiency of capital.

  • Promoter holding is at 27% (low)

 

About the Author


I am a student of the Indian Stock Market.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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