Ion Exchange (India) Ltd – Clear growth

Ion Exchange (India) Ltd (IEL) pioneered water treatment in India and is today the country’s premier company in water and environment management, with a strong international presence. Formed in 1964, as a subsidiary of the Permutit Company of UK, it became a wholly Indian company in 1985 when Permutit divested their holding. The Company is also in the business activities of Chemicals, Engineering and Consumer Products.

The Engineering segment is likely to grow at over 20% over the next few years due to increased order execution of Sri Lanka order and higher government allocation & increased focus towards AMRUT, Namani Ganga and coupled with fast changing regulatory landscape across geographies focused on water treatment industry. We expect the water treatment industry to grow many-fold & IEL is expected to benefit from it. IEL in October 2017 commissioned an Integrated Automated Reverse Osmosis Membrane plant in Goa. The Engineering segment contributes to about 60% of consolidated revenues.

Chemicals segment which contribute to about 30% of consolidated revenues grew at ~8% as against market growth of ~6% over the last few years due to product diversification & entry into new geographies. With WHO-GMP approvals in place to start the pharma-raisins plant (USFDA approved) in addition to higher utilization of the old plant will help the segment to grow at double digits over the next couple of years. IEL has a wide range of chemicals & raisins products which contribute equally to the segment. Being one of the first entrants IEL is a market leader in water treatment chemicals in India with ~20% market share. Water treatment chemicals are used in boiler and cooling water treatment , ion exchange resins are used in softening and demineralization in water treatment and other specialty chemicals that includes performance chemicals in paper, sugar, refinery and pharmaceutical industries enables it to enjoy rich profitability in this segment.

Under its consumer products business, IEL provides a one stop water treatment solution at a residential and community level under its Zero B Brand that comprises 10% of its revenue. The company is the pioneer of revolutionary RO technology in India. IEL executes small & medium sized water/waste water management projects for power, steel & refinery plants. The Company manufactures membrane & engineering accessories for EPC, Engineering companies. It also makes pre-engineered standard plants for pharma, chemical, sugar, cement & textiles players.  IEL also takes up annual maintenance contracts, operation & maintenance contacts for mid-sized projects which not only allows a steady income but also customer stickiness.

During 2014-17 IEL won a few low margin orders as demand in the water treatment industry was muted. These projects are expected to be completed by end of FY18. In FY16 the company won a water treatment project in Sri Lanka worth Rs.1200 cr. The Sri Lankan project is expected to contribute to ~25% of consolidated revenue over the next couple of years. The designs approved & revenue booking started we expect revenue ramp up soon.

About 2/3rd of revenues come from India while the balance is overseas revenues. This could increase marginally with the SLC order execution. Subsidiary performance has been subdued but we expect things to improve gradually from here.

Both the Engineering & Chemicals segments have short to negative working capital cycles. The Company receives advances from customers for projects. We expect the negative working capital cycle to continue.

Water management projects are expected to increase manifold over the next few years in India & we expect Ion Exchange (India) Ltd to be a major beneficiary. We value IEL at 15X FY19E EPS & recommend a BUY with a target price of Rs.716/sh.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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