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Denta Water and Infra Solutions

• Denta Water and Infra Solutions is coming out with a 100% book building; initial public offering (IPO) of 75,00,000 shares of Rs 10 each in a price band Rs 279-294 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on January 22, 2025 and will close on January 24, 2025.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 27.90 times of its face value on the lower side and 29.40 times on the higher side.
• Book running lead manager to the issue is SMC Capitals.
• Compliance Officer for the issue is Sujata Gaonkar.

Profile of the company

Established in 2016, Denta Water and Infra Solutions, commonly known as “Denta Water” has emerged as one of the key players in the field of water engineering, procurement, and construction (EPC) services. With a meritorious track record in infrastructure project installations, including groundwater recharging through recycled water, the company has been a contributor to addressing the rising demand for water-related solutions in the country. Their notable achievements encompass pivotal projects like the Byrapura and Hiremagaluru LIS Project, Karagada LIS Project, and others, primarily executed through lift irrigation systems. Notably, Denta Water played a substantial role in the first phase of the KC Valley project, contributing to Bengaluru's reputation as the second-largest city globally in terms of treated wastewater quantity. 

The company's significant involvement in the “Jal Jeevan Mission” of the Government of India reflects its commitment to critical water management initiatives. Furthermore, the company secured contracts for lift irrigation projects in various regions, such as Makali, Makali Hosahalli, Krishnapura, Karnataka and neighbouring villages in the Channapatna Taluk of Ramanagar District, Karnataka. Their growth is inherently linked to the nation's infrastructure development, with a focus on design and engineering consultancy that aligns with the ongoing and anticipated projects in the Karnataka Government's water management sector. As water remains a critical resource, the company is poised to continue making substantial contributions to the industry’s growth and development in the future.

The company is a growing water and infrastructure solutions company engaged in design, installation and commissioning of water management infrastructure projects with expertise in ground water recharging projects. In addition, it also undertakes construction projects in the field of railways and highways. It is one of the few companies in India having experience and expertise in design, installation, commissioning, operations and maintenance of ground water recharging using recycled water. 

Proceed is being used for:

• Meeting working capital requirements of the company
• General corporate purposes, subject to the applicable laws

Industry Overview

Water reuse and recycling have become increasingly important strategies in India due to the growing water scarcity and pollution challenges faced by the country. Several initiatives and practices have been implemented to address these issues and promote sustainable water management. Industries are encouraged to implement water recycling and reuse practices to minimize their impact on freshwater sources. Many industries, such as textile, paper, and chemical, have adopted technologies to treat and reuse their wastewater for production processes. Many cities in India have established wastewater treatment plants to treat and recycle domestic and industrial wastewater. These plants use various treatment processes to remove pollutants and pathogens from wastewater before releasing it into water bodies or reusing it for non-potable purposes such as irrigation and industrial processes.

In India, the urban sewage generation was 72,368 MLD in 2020-21, whereas the existing sewage treatment capacity was 31,841 MLD. The operating capacity is 26,869 MLD, which is much less than the load generation. Only 28% of total sewage generation, or 20,236 MLD, was processed, implying that 72% of waste water is left untreated and is disposed of in various water bodies such as rivers, lakes, or subterranean water. There has been some capacity expansion, such as 4,827 MLD sewage treatment, but there is still a 35,700 MLD gap, or 49%, between waste water generation and treatment. According to a 2018 NITI Aayog assessment, India is one of the world's most water-stressed areas, with 600 million Indians under high water stress. According to the analysis, by 2030, water demand may be twice as high as supply, resulting in acute water scarcity for millions of people and a 6% drop in the country's GDP. As a result, knowing and managing water demands and resources efficiently is becoming increasingly important.

Meanwhile, ground water in the fluctuating water level zone is replenished annually, with rainfall being the primary contributor. As a result, sustainable ground water resource exploitation necessitates a realistic quantitative evaluation of ground water availability in this zone based on generally reliable scientific concepts. The National Water Policy of 2012 emphasized the scientific evaluation of ground water resources on a regular basis. Water availability changes affected by a variety of reasons, including climate change, must also be examined and accounted for during water resource planning. It supports direct use of rainwater, desalination, and prevention of accidental evapotranspiration to supplement utilizable water supplies to fulfill the rising demand for water. According to the National Water Policy 2012, safe drinking water and sanitation should be prioritized over other domestic needs (including animal needs), achieving food security, supporting sustenance agriculture, and meeting minimum eco-system needs. After addressing the demands, available water should be allocated in a way that promotes conservation and efficient usage.

Pros and strengths

Established expertise in water management projects: Since incorporation, the company has completed 32 water management infrastructure projects for Government of Karnataka (GoK). It has established its credentials as a water management solutions provider, particularly, in the field of ground water recharge projects (GWR projects) and lift irrigation projects. The company has successfully completed projects involving the filling up of numerous tanks and check dams, showcasing its proficiency in managing water resources efficiently. Owing to its technical expertise in GWR projects, it is now able to procure direct contracts as well as sub-contracts from the successful bidders. As on November 30, 2024, the company has procured direct contracts (as consortium partner) worth Rs 7,740 million, direct contracts (independent) worth Rs 469.97 million and sub-contracts worth of Rs 4,657.19 million in GWR projects.

In-house expertise in designing and engineering of water management infrastructure projects: The company has a competent team with expertise in projects such as ground water recharging, lift irrigation etc. The company has an in-house design and engineering team which focusses on design capabilities for geographical complexities and critical aspects of the projects such as identification of potential ground water recharging sites, hydraulic flow calculations, drainage laying design, process flow diagram, hydraulic flow diagram, and water balance. This capability enables it to correctly bid with project specifications. The company’s engineering expertise and core capability of the designing and implementation aspects of GWR projects has enabled it to deliver projects in accordance with the requirements envisaged by the principal employer of these projects. It has diverse capabilities that enable it to offer tailor-made solutions for meeting exigencies due to extreme changes in project, design and installation.

Strong order book: The company is a growing water and infrastructure solutions companies engaged in design, installation, commissioning of water management infrastructure projects with expertise in GWR Projects. As on November 30, 2024, it has 17 ongoing projects being implemented either directly by it or under consortium arrangements with other entities and the company’s share in the aggregate contact value comprises of Rs 11,004.36 million, out of which Rs 10,667.52 million is in relation to water management projects. As on November 30, 2024, out of total contract value of Rs 11,004.36 million it has completed work amounting to Rs 3,479.85 million and its outstanding order book is of Rs 7,524.51 million. The total number and value of the projects to be completed in prescribed time are captured in the order book. Continuous project addition is essential for the company to provide revenue visibility in future.

Efficient business model: Due to its business knowledge and expertise, the company been able to set up an efficient business model. It understands that it is important for any business to efficiently manage its business operations which gradually leads to better financial and operational performance. The company’s asset light business model result in efficient utilization of capital resulting in lower debt and regular income allowing it to have higher return on capital employed. For example, as on September 30, 2024, the company has total working capital borrowing in the form of non-fund limits availed for obtaining bank guarantees amounting to Rs 570.15 million, which it is required to furnish to the entity engaging it for various projects.

Risks and concerns

Significant revenue comes from few customers: The company has garnered 69.10%, 59.47% and 69.73% of its total revenue from top 10 customers in FY24, FY23 and FY22 respectively. The company expects that it will continue to be reliant on its major customers for the foreseeable future. Accordingly, any failure to retain these customers and/or negotiate and execute contracts with such customers on terms that are commercially viable, could adversely affect its business, financial condition and results of operations. It has not had any instance of termination of contracts by any its customers in the past three fiscal years and the six months’ period ended September 30, 2024. In addition, any defaults or delays in payments by a major customer or insolvency or financial distress of any major customer may have an adverse effect on business, financial condition and results of operations. Its reliance on a select group of customers may also constrain its ability to negotiate its arrangements, which may have an impact on its profit margins and financial performance.

Dependent on a limited number of suppliers for raw material: The company is reliant on a limited number of suppliers for the supply of raw materials for its operations. The company has procured 40.01%, 50.92% and 72.63% of its raw material from top 10 suppliers in FY24, FY23 and FY22, respectively. If one or more of its suppliers’ ceases supply to the company for reasons including due to commercial disagreements, insolvency of the supplier or supply chain issues, it may be unable to source its raw materials from alternative suppliers on similar commercial terms or within a reasonable timeframe. This may adversely impact its production and eventually its business, results of operations, financial conditions and cash flows. In such a scenario, it may also breach contractual terms of delivery and installation which it has entered into with its customers, which may have an adverse impact on its results of operations, financial conditions and cash flows.

Experiencing time overrun in 10 out of 17 of its ongoing projects: The company is experiencing time overruns ranging from 1 month to 1 year approximately in 10 out of 17 of its ongoing projects due to delay in clearance of the site. The company has made application to the requisite authorities for extension of the time for execution and completion of the projects. It cannot assure the requisite approvals will be granted in a timely manner. While it has not been subject to any penalty or liquidated damages, in these projects, there can be no assurance that such penalties or liquidated damages will not be imposed on it in the future. This could adversely affect its results of operations and financial condition.

Business is subject to seasonal fluctuations: The company’s business operations are dependent on the location where the project to be executed is situated, the weather conditions there which could include factors such as heavy rains, landslides, floods including during the monsoon season, each of which may restrict its ability to carry on project activities and fully utilize its resources during the season. Its ability to transport the required manpower and machinery to such location are also critical to its timely completion of the projects. During periods of curtailed activity due to adverse weather conditions, particularly unseasonal rains, it may continue to incur overhead and financing expenses, but its revenues from operations may be delayed or reduced. Adverse seasonal developments may also require the evacuation of personnel, suspension or curtailment of operations, resulting in damage to project sites or delays in the delivery of raw materials. Any such fluctuations may adversely affect its total income, cash flows, results of operations and financial conditions.

Outlook

Denta Water and Infra Solutions is a growing water and infrastructure solutions company engaged in designing, installing, and commissioning water management infrastructure projects with expertise in groundwater recharge projects. The company has an established track record for timely execution coupled with Strong order book. On the concern side, the company relies heavily on the Government of Karnataka for its business. 83.98% of its revenue from operations in six months’ period ended September 30, 2024, is from Government of Karnataka. Moreover, the company derives a significant part of its revenue from some customers. If one or more of such customers choose not to source their requirements from it or to terminate its contracts, its business, cash flows, financial condition and results of operations may be adversely affected.

The company is coming out with a maiden IPO of 75,00,000 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 279-294 per equity share. The aggregate size of the offer is around Rs 209.25 crore to Rs 220.50 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by 36.87% to Rs 2,385.98 million for Fiscal 2024 as compared to Rs 1,743.24 million for Fiscal 2023. The increase in revenue is on account of increase in revenue from ongoing projects and the completion of the projects during the year. Moreover, the company’s profit for the year increased by 19.18% to Rs 597.25 million for Fiscal 2024 as compared to Rs 501.12 million for Fiscal 2023.

The company continues to maintain and strengthen its position in implementation of GWR Projects. It will continue to focus on construction of existing projects while seeking opportunities to expand its portfolio of GWR Projects. As of November 30, 2024, it has completed 32 GWR projects and presently executing 11 ongoing GWR projects. It intends to draw on its experience, market position and ability to execute and manage multiple projects across various geographies, to further grow its portfolio of water management projects. GWR projects are currently envisaged by the Government of Karnataka, however its focused approach in this segment will enable it to benefit from future market opportunities and expand into new markets, and combined with its technical experience and pricing, will be critical in competing in the industry.