IPO Size: Rs. 221 cr

• Entirely Fresh Issue for working capital requirements of Rs. 150 cr

Price band: Rs. 279-294 per share

M cap: Rs. 785 cr, implying 28% dilution

IPO Date: Wed 22^nd Jan to Fri 24^th Jan 2025, Listing Wed 29^th Jan 2025

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Karnataka-based Water EPC Company

Denta Water and Infra Solutions is an 8 year old company, engaged in water management projects like ground water recharging and lift irrigation. Karnataka State Government is the most important customer, contributing 84% of H1FY25 revenue of Rs. 98 cr. As of 30.11.24, order book stands at Rs. 752 cr, representing 3.2x of FY24 revenue.

Poor Promoter Track Record

One of the three promoters, C Mruthyunjaya Swamy, was the former secretary of the Public Works Department, Karnataka. He was gifted the 25% stake currently held, by the other promoter in Jun 2023. There have been grave allegations from untraceable person against the said promoter, as also legal proceedings from Enforcement Directorate and Lokayukta Police (for corruption), which were subsequently disposed of.  

Unusually High Margins

FY24 revenue stood at Rs. 239 cr, with 34% EBITDA margin and 25% PAT margin. These margins are unheard of in the engineering, procurement and construction (EPC) business, and look murky. They are much higher than EMS and Enviro Infra’s 25% EBITDA margin, which were hitherto considered industry leading.

Single Digit PE Multiple

On FY24 EPS of Rs. 31, IPO is priced at a historic PE multiple of 9.5x. On FY25E EPS of ~Rs.35, current year PE multiple is only at 8.4x. Company is debt-free with 36% RoE and working capital under 2.5 months. On these factors, IPO is grossly undervalued. But there is more to it, than meets the eye:

• Company is only 8 years old, with presence limited to Karnataka. Only political linkage can explain its fast growth and superlative margins
• 2 CFOs have resigned in FY25 (2.5 months remaining for the fiscal to end) and 1 director resigned in FY24
• None of the 3 promoters, holding 90% combined stake, are on company’s board
• Political connection can be a double-edged sword, carrying high risk, which sometimes dims valuation multiples. In Denta’s case, promoter’s patch track record is a huge risk for the company and its business operations.