Note: Blue Lotus Capital, an asset management company focusing on private investments in public enterprises (PIPE) strategy. The fund has so far invested in four companies, including water control gates maker Jash Engineering Ltd, skincare chain Kaya Ltd, alloy wheels maker Enkei Wheels (India) Ltd and commercial vehicles maker SML Isuzu Ltd.

OVERVIEW OF INDIAN WATER AND WASTEWATER ENGINEERING INDUSTRY

Rapid urbanization and industrialization along with erratic monsoons have created water shortage in many parts of India. Efficient management of water resources, reduction in wastage as well as treatment of waste water forreuse have emerged as key factors to counter this water shortage scenario.Approximately 60% of industrial effluents and 75% of municipal sewage generated in India is untreated causingserious pollution to external environment. Having only 4% of World’s fresh water resources, there is an urgentneed to improve the waste water treatment infrastructure in the country.

Municipal waste treatment is the largest segment in the sector followed by industrial effluent treatment and household water treatment. Municipal water treatment forms ~60% of total waste water treatment sector.

Commonly used waste water treatment techniques include chemical dosing, sand filters, carbon filters, usage ofsofteners, micron filters, reverse osmosis, ultraviolet sterilizers, and ozonator.Urban Infrastructure and Governance (UIG) and Urban Infrastructure Scheme for Small and Medium Towns(UIDSSMT) are two of the major waste water treatment programs initiated by the government. Both programsare designed as sub programs under the larger Jawaharlal Nehru National Urban Renewal Mission (JNNURM)mission. Under JNNURM 122 sewerage projects costing nearly 15800 crores have been approved, of which 35have been completed. Common Effluent Treatment Plant (CETP) scheme is a technical and financial support scheme initiated by the Ministry of Environment and Forest (MoEF) to address the industrial effluent program in the SME sector. Under this program assistance is provided to set up effluent treatment plants in SSI clusters. This can be a great opportunity for companies in this sector.

During 2015 (as per latest data release), the estimated sewage generation in the country was 61754 MLD as against the developed sewage treatment capacity of 22963 MLD. Because of the hiatus in sewage treatmentcapacity, about 38791 MLD of untreated sewage (62% of the total sewage) is discharged directly into nearbywater bodies. Waste water treatment sector in the country is estimated to have grown by a CAGR of ~12%during the period FY 2012-16 to reach ~INR 450 Bn. Revenue growth in sector has slowed down considerablyover the past few years due to uncertain economic scenario (leading to lower corporate spending) as well aslower spending by municipal and other government bodies (due to government effort in cutting expenditure torein in fiscal deficit).

OVERVIEW OF COMPANY

The Company is engaged in manufacturing of water control gates, flap valves, knife gates valves, energy dissipating valves, water hammer control valves, fine and coarse screens, screening conveying equipment,screening washing and compaction equipment, industrial valves for bulk solids handling, hydro power screwgenerator, screw pump and process equipment like detritors, clarifiers, clariflocculators, thickeners, decantersaerators, trickling filters, dissolved air flotation (DAF) units, rotary drum slackers, rake classifiers, pressure sandfilters, etc. for water, water waste and effluent treatment plants. They have end-to-end manufacturing equipment for water control systems.

The company was originally set up as a proprietary concern to enable focus on products related to water control gates. The proprietary concern was converted into ‘Private Limited Company’ on September 29, 1973 under the name of “Jash Engineering Industries Private Limited” and fresh Certificate of Incorporation dated January 29, 1976 was issued by the Registrar of Companies, Gwalior, Madhya Pradesh. Later, the name of our Companywas changed to “Jash Engineering Private Limited” and fresh Certificate of Incorporation dated January 29, 1976 was issued by the Registrar of Companies, Gwalior, Madhya Pradesh.The Company was later convertedinto “Public Limited Company” pursuant to shareholder’s approval on July 15, 1994 and fresh Certificate of Incorporation dated September 21, 1994 issued by Registrar of Companies, Gwalior, Madhya Pradesh.

The company raised Rs.58 Crorethrough IPO in October 2017 in NSE SME platform.

The expense distribution of the â‚¹58-crore IPO is: the company was to use â‚¹23 crore for capital expenditure and working capital purposes and â‚¹4 crore for general corporate purposes; â‚¹31 crore was to be mopped up through the OFS.

Three ISO9001:2008 certified facilities in Central India with total built up area of 350,000+ sq.ft.

STRENGHTS AND OPPORTUNITIES

1. Largest Control Gate manufacturer in the world and only major cast iron gate supplier with its own foundry.
2. Empanelled with several municipal corporations across the globe(25+ countries- US,UK,Hong Kong, Middle East, Singapore etc.) . (New company will have to spend a lot of time and resources to achieve this)
3. Industry leader in India (and no major competitors) and exports to over 30 countries.
4. The shortage of usable water in India (as well as the world) is likely to keep demand for the company’s products high.
5. The equipment and services sector offers the highest margin across the water industry value chain (5-20+%).
6. The company is trying to de-risk geographical focus and trying to get more revenue from outside India:

Year	Revenue 2018	Revenue 2017
Within India	78%	93%
Outside India	22%	7%

 

FINANCIAL STATEMENT ANALYSIS

1. Promoters have 53.6% shareholding.
2. The comparison of the Net Profit with the Cash from Operations:(Rs. Crore)

Year	2018	2017	2016	2015	2014	2013
Net Profit	0.3361	10.26	7.275	7.63	7.73	1.49
Cash From Operations	(8.18)	20.51	6.07	7.33	22.7	(6.45)

 

3. The sales have grown by a CAGR of 21% however the expenditure has grown by 22%, hence the Net Profit has not had been able to grow much. The Net Profit has remained at an average 4.58% from FY13- FY18.
4. The company does not have significant debt, the average Debt-to-Equity ratio has been 0.16 from FY13 - FY18.
5. The company has acquired fixed assets worth:(Rs. Crore)

 

Year	2017	2016	2015	2014	2013
Purchase of FA	24.33	1.77	2.5	2.88	9.87

6. The company had 26.95 crore worth of loans from related parties at 31 March, 2017.
7. The total remuneration paid to directors. KMP and other related parties amount to 20.45 crore in FY17.
8. The company does not have any pledged shares.

CURRENT SCENARIO

1. The company’s US unit; Jash USA purchased Rodney Hunt,a 175 year old company based in Massachusetts, USAin September, 2016. There were certain difficulties in fulfilling the orders that came with this acquisition and the cost of fulfilling these orders was very high and hence the NP fell to 0.33 crore (0.19% of sales).
2. However, according to reports the company has resolved these issues is set to make 200 crore revenue in 2018-19 ( Q1 FY 19  Revenue 50 crore). The US plant is operational;however, it is used only when delivery is required to be given within 12 weeks, otherwise supplied from Indian plant.
3. The company has strong order book of 223 crores (120 – Indian, 77 – USA, 26 – Rest of the World). Additional orders worth 16.5 crore in pipeline.
4. New plant in Prithampur to become operational in Nov/Dec 2018.

THREATS AND WEAKNESSES

1. US operations not very stable.
2. Geographic restrictions as products are hard to transport.
3. Business is based on Purchase Orders and not Long Term Contracts.
4. The company has contingent liabilities worth 3.79 crore related central sales tax.
5. Need for Capex and large working capital requirements in order to grow, which has not allowed the Net Profit Percent to grow beyond 6-7%.

CONCLUSION

The company has good management track record and sales CAGR of 21% over past 5 years is also good, however the expense of operating in this sector is very high and despite having 60 years of experience and almost no major competitors, the company has not been able to grow profit percent beyond 6-7%. Nonetheless, if the company can find a way to stabilize costs, it will surely flourish, as usable water becomes more and more scarce every day.

CA.Binoy J.Kattadiyi