Ion Exchange (India) ltd came out with its spectacular results for Q2FY20 where the revenue grew by 68%, EBITDA grew by 104% and PAT by 127% Year on Year(YoY), an ideal result so as to say. I will dig deeper into the results in the blog “Ion Exchange (India) Ltd- Q2FY20 Analysis”. Please go through my previous blog “Ion Exchange (India) Ltd- A Proxy for industrial CAPEX in India!” to have better understanding of the company’s business.
Ion Exchange (India) Ltd- Q2FY20 Analysis
Ion Exchange (India) Ltd- Business Description
I will briefly talk about the business segments of Ion Exchange (India) Ltd:
1) Engineering: Under this segment, the company bids for project and on winning, they designs build and maintains water and wastewater treatment plants. Contributes about 50%-60% of revenue. It is a low margin business. They basically do EPC for F&B, pharmaceutical, automotive and chemicals etc through its pre-designed, pre-engineered product range for water and waste treatment as well as for the heavy segments in core sectors like power, refinery, steel, bulk chemicals, and municipal infrastructure.
2) Chemicals: Company manufactures water chemicals and ION exchange resin(Resins). The chemical business is the key driver of the profitability of the company. While water chemicals contribute 60% of the chemical business, the rest comes from Reins. Resins have strong demand particularly from exports due to the environmental pollution problem faced in China as well as the US-China trade war. The resin plant is operating at 90% capacity utilization. Co. is in the process to expand the capacity for both the chemicals. They have multiple patents on resins.
3) Consumer: The company sells water purifier under the popular brand name “Zero-B”. This segment is loss making. In order to break even the management is trying to increase volume and are eyeing till Q4FY20 to reach that level.
Ion Exchange (India) Ltd- Q2FY20 Analysis
Ion Exchange (India) Ltd- Order book status
This is a part of the Engineering division.
The much-hyped ₹1200 cr Srilankan Project began in 2017, Ion Exchange has completed billing of ₹344cr by FY19. Of the remaining ₹856 cr, the company has completed ₹143 cr in H1FY20 {₹102 cr in Q2FY20 and ₹41 cr in Q1FY20).
That leaves roughly above ₹700+ cr to be completed. Of which the co. plans to complete ₹350 cr in FY20 and remaining ₹350cr in FY21. That provides good visibility for revenues(₹157cr) for the current year from this particular project.
As of 30th September 2019, the total order book remains at {₹756cr + ₹713cr(Srilankan Order)}= ₹1469 cr which is quite healthy.
The company doesn’t have any big project post the completion of SriLankan and Vedanta order(₹372 cr).
I am sure management will be trying to get similar or larger projects but that depends on a lot of variables. In such businesses, a company needs to always build up order pipelines. Any delay may lead to a drop in revenue and hence the share price.
Ion Exchange (India) Ltd- Q2FY20 Analysis
Fig.1. Ion Exchange India Ltd- Segment wise EBIT margin
Chemical segment is more margin accretive compared to Engineering business but revenue growth is driven by the engineering biz. As you can see that the engineering segment EBIT stands at 6.9% compared to 14.5% of that of Chemical business(Almost double). Also, there is sustained increase in the chemical business margin validating the robust demand scenario.
The consumer product business has started to see traction given the company’s focus on the untapped Rural market but it is still loss making.
Ion Exchange (India) Ltd- Q2FY20 Analysis
Fig.1. Ion Exchange India Ltd- Q2FY20 Financial Analysis
As you might have observed in Fig.2 that despite the significant jump in revenue, the gross margins have declined from 38.6% to 30.8% QoQ and from 35.1% to 30.8% YoY. That is because of the increasing contribution of revenue from lower margin Engineering segment. This segment share of revenue stands at 65% as of Q2FY20 compared to 56% and 51% Q1FY20 and Q2FY19 respectively.
For the current quarter, the consolidated EBITDA margin continue to be less than the Standalone ones.s
Ion Exchange (India) Ltd- Q2FY20 Analysis- Future growth drivers
As I already have mentioned that the company dont have any large sized project post the ongoing ones completion. However, the management in the conference call mentioned that they are in talks to get some large orders but will have to wait and see when it materializes.
There is lot of environmental push from the govt pushing the manufacturing plants to be Zero liquid discharge. In order to do so, these manufacturing plants would require the expertise of Ion Exchange. Adherence is already picking up, and gradually it will open up a very big opportunity for the company.
Also, if you look at the my previous blog on ION Exchange (India) Ltd, the company has improved its profit margins over the last few years. This is to do with the increasing scale of the company as the fixed cost increase slower than the overall sales of the company.
Ion Exchange had pioneered the concept of sea water desalination and has built very large and impressive references over the years. Although it sounds promising given the water scarcity in India but it requires lot of political will that India lacks.
Another interesting trend is growing environmental awareness among people and their shift towards reusability. Waste water treatment and waste to energy segment once it starts growing will see Ion Exchange (India) Ltd at the forefront.
There was purchase of 1,75,000 shares by Promoter group on 31st Oct 2019 in the open market roughly representing 1.18% stake increase by them. This is a very positive sign implying faith by the company’s promoter in the business.
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