A lot of talk is around the govt’s hyped ‘Nal se Jal’ scheme. And one company that is being talked about in relation to the scheme is Ion Exchange (India) Ltd. I would be detailing more about the company in the blog “Ion Exchange (India) Ltd- A proxy for industrial capex in India”. Exchange(India) Ltd’ Analysis
Capex= Capital Expenditure(Done to expand facility or setting up new plant)
'Ion Exchange(India) Ltd' Analysis - About the company
The company was set up as a 60% subsidiary of Permutit , UK in 1964. {Purmutit was a pioneer in water treatment and was acquired by Siemens Water technology corp in 1995.}
Ion Exchange (India) Ltd became a wholly owned Indian company in 1985. Given that the company was a subsidiary of a global leader, it had an initial advantage of technological superiority. Zero B was a well-known brand of the company which lost leadership to Tata & HUL products.
In the recent past, Ion Exchange has focused mostly on B2B segment. The company offers a wide range of solutions across the water cycle from pre-treatment to process water treatment, wastewater treatment, recycle, zero liquid discharge, sewage treatment, packaged drinking water, seawater desalination etc.
The company is also engaged in manufacturing ion exchange resins, specialty chemicals for water and wastewater treatment as well as non-water applications.
Focused mainly on industrial projects and don’t do municipal projects given the weak commercial terms. Average project size is less than ₹100cr that is quite obvious given the relatively smaller size of the company. For larger sized projects they usually do it with some other partners.
Ion Exchange (India) Ltd is a research-driven company spending about 1% of sales on R&D every year. The company has over 50+ patents in its name. Just to validate, I could get my hands on a few of these patents ‘IRON SPECIFIC RESIN‘ “Indion’ resins made by Ion Exchange, Ltd. (India), INDION 224, INDION 244, and INDION 254 (Ion Exchange (India) Ltd.).
They have 5 plants spread across India.
'Ion Exchange(India) Ltd' Analysis - Business Segment
Engineering
The engineering segment contributes about 60% of sales and has been the key revenue growth driver for the company. In this segment, the company designs build and maintains medium and large sized water and wastewater treatment plants which include seawater desalination, recycling, and zero liquid discharge plants.
For the engineering segment, order book with the company as on March’19 stood at ₹860cr (excluding Srilankan project) compared to ₹550cr in FY18. The current orderbook is with better margins. Typical EBIT margin for this segment is around 5-7%.
In the engineering segment, the company won 2 large projects in the recent past:
1. Srilanka: In 2014, Ion Exchange won project worth $194mn (`₹1200cr) to build water supply infrastructure in Srilanka. The official procedure was completed in 2017 and the company is given roughly 3 years to complete the project. Of the 1200 cr, Ion Exchange has completed work of about ₹344 cr(₹144 cr in FY19) of the project and the maximum part of the project will get completed during FY20 and the remaining in FY21.
2. Vedanta- Ion Exchange(India) Ltd signed a contract of ₹439 cr with Vedanta in August 2018. The management had later clarified the amount to be ₹372 cr. This project is expected to be executed in 2 years.
Historically the company has been doing small sized projects only. As of date, the company has only these 2 large sized ones which is driving the growth. Hopefully, they acquire similar large sized projects for the future.
Chemicals
The chemical segment is witnessing the highest growth and has the largest margins. Derived from crude oil, so the margins were subdued in the second half of FY19. Ion Exchange(India) Ltd ‘s chemical products cater to Sugar & Refinery Processes, Chemicals, Textile, Food & Beverage and Automobiles. Chemicals are the profit margin drivers for the company.
This segment is further subdivided into resins & chemicals and is operating at a capacity utilization of 70%.
Consumer
Being a pioneer in retail water purification with brand name ” Zero B”(launched in 1986), the company is left far behind the market leaders Tata’s “Swach” or HUL’s “PureIt”. One of the reason is the huge marketing spend required to maintain brand leadership. What I have understood is that the management is quite conservative in terms of spending that is seen in their averseness to taking larger as well as municipal projects.
The consumer business has gone nowhere in the last 6-7 years and is loss-making.
The company wants to focus on rural market with its Zero B brand water purifiers.
The segment caters to needs of individual homes, institutions and commercial establishments. The division launched two new products this year – the Zero-B Kitchenmate and the Zero-B AutoSand filter. The range of products provides safe drinking water, waste treatment, recycle, swimming pool solutions backed by countrywide channel partners and service centers.
They also supply water to IRCTC under the brand name “Rail Neer”. For FY18, this project generated revenue of ₹14.4 cr and turned profitable.
'Ion Exchange(India) Ltd' Analysis - Clients Served
'Ion Exchange(India) Ltd' Analysis - Financials
Ion Exchange(India) Ltd- Sales trend
Ion Exchange(India) Ltd- Financial Analysis
Since there are numerous subsidiaries and joint ventures, it is better to look at the consolidated numbers.
The growth has been more or less stagnant(except in FY17) given the very limited industrial capex in India.
The company consistently improved the profit margin for past 5-6 years and more importantly the Cash flow from Operations is much higher than Net profits. The margins are much better at an standalone level but due to losses in the subsidiaries, the consolidated margins have dropped.
The management expects the subsidiaries to break even in next 2 years.
The company has huge receivable which stands at about 40+% of sales which gets balanced by similar amount of trade payable. Hence, a very comfortable cash conversion cycle.
In addition, the return ratios have witnessed steady upward trend.
Also, the company has a cash of about ₹290cr as on 31st March’2019. This is basically advance received for 2 of its larger projects which are the Srilankan and Vedanta project. Prior to 2017, the amount of cash was quite low given that the company was working on smaller projects. Probably smaller ticket size project fetch much lower advance amount.
'Ion Exchange(India) Ltd' Analysis - Growth drivers
Increasing environmental norms for factories to be a ZLD(Zero liquid discharge) one. It is quite complicated and requires expertise.
Govt focus on ‘Nal se Jal’
Water being a universal solvent, find usage in almost all industry.Around 6% of total water consumption in India is towards industrial usage.
Visible execution of some large sized projects in the near term.
'Ion Exchange(India) Ltd' Analysis - Subsidiaries
Ion Exchange(India) Ltd has 16 subsidiaries to cater to the demand in various countries. Seven of them are in India, 2 each in Bangladesh & Singapore, 1 each in Thailand, Oman, USA, Malaysia, South Africa. To add to that 1 Joint venture and 5 associate company, a total of 22 subsidiary/associate companies.
Given a large number of subsidiaries, JV & associate companies, it is very important to look at the related party transactions. In terms of Sale of goods, the value stands at around ₹76cr for FY18 which is roughly a little more than 7% which won’t be such a big concern.
Most of the large-sized transactions are with ‘Ion Exchange Projects And Engineering Ltd’ which provides Project Management services and design services to the parent company for its ongoing contracts. The parent company also has given a loan of ₹42 cr to this particular subsidiary of the total ₹58 cr lent to several of the subsidiaries. After going through the financials of ‘Ion Exchange Projects And Engineering Ltd’ I could not find anything suspicious. Attaching the financials for you.
Another point I felt is the unnecessary creating so many subsidiaries, at least 5 of the subsidiaries had revenue of below ₹1 cr for many years. I don’t see the point of the complicating things. {Reason explained by the co: The company bids for projects abroad. Most of these bidding requires companies to have local presence. That is why they have so many international subsidiaries. I think this makes sense}
'Ion Exchange(India) Ltd' Analysis - Conclusion
Rakesh Jhunjhunwala hold 5.46% stake in the company which he has increased further in the September quarter 2019.
Mukul Mahavir Prasad agarwal holds 1.71 % stake.
Ion Exchange (India) Ltd has not issued any fresh equity for at least a decade now. But they have been issuing ESOPs to its employees. Promoter hold 44% stake in the company and nothing is pledged.
Currently, there has been lot of talks around the ‘Nal se Jal’ project. There has been similar enthusiasm regarding the water treatment business since the last 4 years but according to the management, nothing has happened on ground. So, the focus will be on the international market where the margins are higher.
If the ‘Nal se Jal’ actually comes to play, Ion Exchange will be one taking the most advantage given their business spread across the entire water value chain.
Also, in terms of domestic market, they are focused on the industrial segment (ZLD and water purification), that segment depends on the economic growth of the country.
The management of the company is quite conservative in terms of spend and that is quite visible in the limited growth the company has shown till date(5 year CAGR=7.9%). As of now, the tailwinds seems on the company’s side with the 2 engineering project gaining steam as well as chemical business gaining traction. Even the management has given a guidance of 50% revenue growth for the year but it should not be taken seriously given earlier growth target of 35-40% for FY19 which in reality came to just about 11%. It is advisable to use your own wisdom rather than believing in the managements of any company.
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