Update: 17th March 11:15 am: Despite extension of issue closing by 5 days, susbcription remained unchaged at 50%. Hence IPO has been withdrawn.
Update: 7th March 10:55 am: Citing market conditions and poor susbcription of only 50% on final day, issue closing extended to by 5 days to Monday, 16th March 2020, with price band lowered marginally to Rs. 294-300 per share. Our view on the issue remians unchanged - avoid.
Verdict: Don’t waste your money here!
Antony Waste Handling Cell is entering the primary market on Wednesday 4th March 2020, to raise Rs. 206 crore, via a fresh issue of equity shares, worth Rs. 35 crore and an offer for sale (OFS) of up to 57 lakh equity shares of Rs. 5 each, both in the price band of Rs. 295 to Rs. 300 per share. Issue, split 50:15:35 among institutional, HNI and retail investors respectively, represents 25.7% of the post-issue share capital and will close on Friday 6th March, with listing likely on 17th March.
Why the urgency to launch the IPO in these market conditions?
SEBI issued final observation (as good as a go-ahead for IPO) to the company on 8th March 2019, which is valid for one year. Hence, company is doing the issue between 4-6th March (7-8 being holidays) to avoid the lapse of SEBI approval. Financial statements in the red herring prospectus (RHP) are presented upto 30th Sep 2019, which will require re-filing if IPO not launched till 31st March 2020. Also, OFS portion of 94 lakh shares as stated in DRHP (dated 24 Dec 2018) has been reduced by as much as 40% to 57 lakh shares only now, to make the issue of a size to meet public shareholding norms.
Despite these exigencies, issue is also ill-timed. With the global market sentiments hitting rock-bottom due to fear of coronavirus ,spreading to over 68 countries (and claiming 3,000+ deaths), IPO dates are more-or-less coinciding with the mammoth Rs. 10,341 crore IPO of SBI Cards (5th largest in Indian IPO history behind Coal India, RPower, GIC Re, ONGC) open between 2-5 March. Thus, this dwarf size issue may very well get side-lined.
Antony Waste Handling Cell is a 17 year old company, providing municipal solid waste (MSW) management services to municipal corporations in Mumbai, Thane, Delhi/NCR, Pune, Mangalore, Nagpur, Jaipur etc. through a fleet of 1,089 vehicles and 6,579 full-time employees. It operates a 1.4 MW landfill gas-to-energy plant at Kanjur, Mumbai and a 0.4 MW waste to energy (WTE) project in Pimpri Chinchwad, near Pune.
Despite being in business for over 17 years, company has credit of only about 25 projects, as most are long duration ones. However, only 76% of these contracts have an escalation clause (for wages and fuel) while 24% are without escalation, indicating high inflation risk borne by the company, given the long term nature of contracts.
Moreover, many municipalities keep the waste collection work to themselves, as they have surplus labour at their end and no requirement of complex technical know-how for waste collection. To give an example, of the 24 municipal wards in Mumbai, waste collection of only 4 wards have been outsourced to private firms, while 20 are being handled by Municipal Corporation of Greater Mumbai (MCGM) itself. Of these 4 wards, 2 are managed by the company. Thus, although MSW is a growing business due to urbanisation and rising consumerism, there are not many competitive advantages or specialised skill sets involved, with low barriers to entry.
Objects of Issue and Shareholding:
Of the Rs. 35 crore fresh issue, Rs. 30 crore will be used to partly repay gross debt of Rs. 192 crore. Current debt equity ratio of 1:1 is quite high, and will decline to 0.6:1 once equity expands.
51.1% promoter holding will drop to 48.9% post IPO. US hedge fund Elliott, owning 48.5% stake through its 4 arms (Leeds, Tonbridge, Cambridge, Guildford), is partly exiting its 12 year old investment, made in multiple tranches via preference shares (now converted to equity). Post listing, its stake will shrink to 25.1%.
Trade Receivables: Of the non-current trade receivables of Rs. 37.3 crore (30-9-19), Rs. 28.51 crore due from various municipalities are under dispute and long outstanding. For this, auditor has qualified the audit report (not very common for listed companies and even rare for those coming up with an IPO) stating that Rs. 28.51 crore needs to be provided for towards these receivables, based on expected credit loss methodology under Ind AS, which would lower net profit (H1FY20 Rs. 38 crore, FY19 Rs. 34 crore). However, management is hopeful of recovery and not provided for anything.
Further, page 248 of the RHP highlights trade receivable (non-current), trade receivable (current) and other financial assets (non-current) aggregating Rs. 252 crore as at 30.9.2019, to include Rs. 53 crore recoverable from 8 Municipal Corporations (Ulhasnagar, Bhiwandi, Jamnagar, Navi Mumbai, Amritsar, Kalyan, Mangalore, Great Mumbai) overdue for substantial period of time and currently under negotiations/ litigation. Till date company has undertaken 25+ projects, of which, 17 are ongoing and 8 are under litigation! This not only raises serious questions on company’s revenue recognition principles and project sourcing but increases apprehensions on bagging new orders from these municipalities under dispute. Each and every municipality is an important client for the company, as top 5 account for 90% of its revenues, highlighting concentration risk as well. For the Rs. 53 crore stated above, company is obviously hopeful of recovery and hence these receivables are ‘considered good’ in the books of account.
We are also very alarmed at the trade receivables, as loss allowance stood at Rs. 55 crore, as per credit risk on page 213 of RHP, for total receivables of Rs. 150 crore, as of 30-9-19, implying 33% loss allowance towards its receivables.
Given the substantial litigations, no wonder the legal and professional fee bill is headed north. Pg 211 of RHP states this expense head soared from Rs. 3.6 crore in FY17 and FY18, to Rs. 5.8 crore in FY19 and jumped to Rs. 6.9 crore in H1FY20. Really worrying!
Intangible Asset: Company recognises its right to receive payment towards assured tonnage under service concession arrangement as a non-current financial asset, which stood at Rs. 157 crore (30-9-19). Residual amount under service concession arrangement representing the right to charge for services provided, for which, there is no assured tonnage, is recognised as an intangible asset, which stood at Rs. 119 crore, as of 30.9.19. We are not very comfortable with this intangible asset, as it is (i) sizeable (at 50% of net worth and 20% of total assets) in nature, (ii) rising (up from Rs. 105 crore as of 31-3-19) and (iii) backdrop of past experiences with receivables and outstanding litigations with municipalities. Also, high intangibles may lead to irregular impairment charges, as was the case in Q1FY19, with depreciation/ impairment expense stood at Rs. 9 crore, as against Rs. 13 crore and Rs. 18 crore for FY18 and FY19 respectively.
Repair and Maintenance Expenses: Pages 197 and 211 of RHP state that repairs and maintenance expenses on plant and equipment (for FY18 and FY19) aggregated nearly 28-34% of the opening gross block i.e. original purchase price of equipment. FY19 repairs and maintenance cost on plant and equipment stood at Rs. 20.3 crore, when gross block (for plant and equipment) as of 1.4.18 was Rs. 69.09 crore, implying for every Rs. 10 lakh worth of equipment purchased, annual repair cost on the same is Rs. 2.5-3 lakh, year after year! Opening gross block is considered for this analysis, as repairs and maintenance costs on new fleet is negligible in the initial years. Even on average balance of plant and equipment, repairs and maintenance comes to 25-33% of original cost, which is quiet steep. Mind you, these repairs and maintenance expenses are besides the annual depreciation charge on the asset.
High Penalty Charges: For failing to deliver service as per terms of contract, company faced Rs. 6.3 crore penalty in FY19 (Rs. 4 crore and Rs. 5 crore in FY17 and FY18 respectively). In absolute terms this amount may appear low. However, given FY19 PAT of Rs. 34 crore, this amount becomes material at 18% of reported net profit.
These few financial facts either doubt managerial capabilities to run the business efficiently or question financial reporting principles adopted by the company. We clearly have reservations on such sort of company financials!
Stagnant Financials improving before IPO:
Between FY17 to FY19, topline has been stagnant, at close to Rs. 280 crore annually. While company attributes this stagnation to Ind-AS accounting adopted wef 1.4.17 and states 8% organic growth, 8% number is as good as inflation during these years, indicating only escalation clause at play, without any revenue increase due to higher tonnage of waste handled. In H1FY20 though, the most recent financials before the IPO, revenue shot up by nearly 50% to Rs. 219 crore, despite only 2 new orders – Noida (from Nov 2018) and Borivali/Dahisar wards (from Dec 2018). On about 33% EBITDA margin, reported PAT of Rs. 34 crore for FY19 shot up to Rs. 38 crore in H1FY20. Excluding share of minority interest, net profit for company was Rs.27 crore for FY19 (9.6% margin) and Rs. 28 crore for H1FY20 (12.7% margin), resulting in an EPS (dilutive) of Rs. 11.30 for H1FY20, vis-à-vis Rs. 12.35 for FY19.
Company’s net worth (30-9-19) stood at Rs. 177 crore. Current equity has expanded to Rs. 12.79 crore (2.56 crore shares of Rs. 5 each) from Rs. 7.15 crore (30.9.19) post conversion of preference shares held by the selling shareholder.
At Rs. 300 per share, company’s market cap will be close to Rs. 800 crore, leading to PE multiple of 13x on current year earnings, based on annualized H1FY20 EPS (dilutive) of Rs. 11.30. Since there are no listed peers, this is not comparable. The IPO is mainly to provide part exit to a foreign investor invested for over a decade and no growth capital is being raised by the company. Company’s RoE has been declining from 36% in FY17 to 25% in FY18 to 18% in FY19 to finally 16% in H1FY20, which is not a good sign.
Company is very bullish on the Waste to energy (WTE) project, for which more investment will have to be made for the contract won near Pune, to set up 1,000 MW WTE plant. Its financial muscle to invest further is not the brightest, given leveraged balance sheet and no fund raise in the IPO to finance this specific project. Countries like Sweden etc. have made WTE a thriving business, but given India’s quality of waste and ability to finance such high-capex projects, its prospects are yet to be proven here.
Company is also being touted as the first ESG (environment, social, governance) play to list domestically, but due consideration must be given to the weak financials and operational challenges facing the company. Sector opportunity exists, but can the company make a thriving and sustainable business, given many municipalities are themselves cash-starved and dependent on central/state government funding, is the question to be asked. Since barriers to entry are extremely low, can it scale quickly to become a national player with competitive moats? Many questions are yet to be answered.
Do not get carried away with the industry prospects or unique/niche presence of the company. There are multiple financial and operational concerns with the company. Hence, we advise to ‘avoid’ wasting your money here.
Grey Market Premium (GMP) of Antony Waste: Grey Market Premium of Antony Waste is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.
Disclosure: No Interest.