Verdict: Avoid waste of money on it
Antony Waste Handling is launching a Rs. 300 crore IPO between Mon 21st Dec 2020 to Wed 23rd Dec (after a failed attempt in Mar 2020), 28% of which now comprises fresh issue of Rs. 85 crore and balance 72% is offer for sale (OFS) of 68 lakh equity shares by US hedge fund Elliot on its 13 year old investment, in the price band of Rs. 313-315 per share. Issue dilution of 34% is higher this time, over 26% in March, as fresh issue size increased by Rs. 50 crore, with listing on 1st Jan 2021.
Solid Waste Management Company, in a Competitive Industry:
Company earns 2/3rd revenue from collecting urban municipal waste and 1/3rd through sweeping and processing. 22% of these contracts do not have escalation clause, indicating high inflation risk, as duration is long over 7+ years. Entry barriers to business are low as many municipalities undertake waste collection themselves due to surplus labour at their end and negligible technical know-how (of Mumbai’s 24 wards, only 4 are outsourced). Thus, competitive intensity remains high.
What changed from March IPO? FY20 growth displaced in H1FY21
4 new waste collection contracts lead to 59% YoY growth in FY20 revenue to Rs. 450 crore, which was stagnant between FY17-19 at ~Rs. 280 crore. PAT for owners, excluding minority interest, rose 56% YoY to Rs. 42 crore in FY20. However, FY20 diluted EPS is wrongly stated as Rs. 27.48 in RHP, instead of ~Rs.16.5, as diluted EPS cannot rise 125% when PAT jumped 56%.
Despite new contracts, H1FY21 revenue declined 5% YoY to Rs. 207 crore, as tonnage handled during covid dropped. Negative operating leverage lead to sharper fall in PBT of 39% YoY from Rs. 49 crore to Rs. 30 crore. Non-operating interest income averages 20% of PBT, implying core margins are ~300 bps lower. Deferred tax credit in H1FY20 lead to effective tax rate of 3%, which will normalise to 22-25% for full year. Thus, FY21E PAT will be lower than FY20 as well, as annualised H1FY21 number.
Accounting red-flags from March IPO remain (i) qualified audit report for Rs. 70 crore overdue/ disputed receivables/ financial assets (ii) Rs. 132 crore intangible assets for right to charge for services provided for non-assured tonnage is material at 57% of net worth and 19% of total assets (iii) 25%+ of original purchase price of plant and equipment is repair and maintenance expenses, year after year (iv) penalty charges, for failing to deliver service as per contract, also tall at Rs. 5 crore in H1FY21, representing 13-14% of PBT.
Investment of Rs. 40 crore in waste-to-energy project in Pimpri Chinchwad has been added to an object, along with partial debt repayment of Rs. 39 crore from total Rs. 209 crore.
Over-Valued on Fundamentals:
Rs. 891 crore market cap discounts H1FY21 annualised earnings by 21 times, which is very aggressive for company’s size, high receivables, dependence on municipalities (who are themselves depend on state/central government for majority spends), low barriers to entry. RoE declining from 36% (FY17) to 20% (FY20) and 8.5% (H1FY21) is equally concerning. When short term profitability challenges exist, taking limited long term view on topline, especially for small business, is quite wishful.
Bull Market Frenzy:
Bull markets find takers for anything and everything. But quality at reasonable price is important. Themes such as micro irrigation, water, education, building product retailing etc. have previously caught investors on the wrong foot. While some may view Antony Waste Handling as an ESG play, there are better choices available.
Also, do not get lured into IPOs by grey market premium, which we strongly discourage as they swing widely, not regulated by SEBI and trap retail investors. To know how it operates, read more on grey market premiums here, which details their unofficial dealing.
Weak fundamentals and expensive valuation keep this IPO an avoid, like in March. Still, if one wishes to ride frenzy ignoring fundamentals, no wasting time reading this!
Disclosure: No Interest.