We initiate coverage on Ion Exchange (India) Ltd as a BUY with a price objective of Rs 539, representing a potential upside of 93% from the CMP of Rs 278.90.
Ion Exchange, despite having a tepid performance over the last few years, is up for exciting times. Execution of the Sri Lanka project is expected to take its revenue growth trajectory higher along with a hefty improvement in margins from the Engineering segment. The US FDA nod for pharma resins is a shot in the arm as it is expected to be the next lever of growth in the chemicals segment.
As a result, we expect overall revenues to grow at a CAGR of 16% over FY16-19, from Rs 869.5 crores in FY16 to Rs 1,371 crores in FY19. Higher EBITDA margins from the Sri Lanka order is expected to help consolidated net earnings to grow at a healthy CAGR of 50% from Rs 16.9 crores in FY16 to Rs 57.2 cr in FY19. Return ratios- RoE and RoCEare also expected to improve sharply to 23.4% and 30% respectively.
We initiate coverage on Ion Exchange (India) Ltd as a BUY with a price objective of Rs 539, which represents a potential upside of 93% from the CMP of Rs 279. At the CMP of Rs 279 the stock is trading at 7.3X its estimated earnings for FY19. We have assigned a PE multiple of 14X on FY19 EPS of Rs 38.5 to arrive at the target price.
Ion Exchange has a health order book of ~Rs 2,040 crores (including the desalination order of $200 mn from Sri Lanka) executable over FY17-19.
Waste water management is projected to grow at a CAGR of 8- 10% through 2015-2020 while the capital expenditure on water and wastewater infrastructure in India is set to increase by 83% over the next five years. Ion exchange, being one of the largest incumbents, is expected to be its biggest beneficiary.
The EBITDA margin from the engineering segment is expected to take an upturn led by higher margins from the Srilanka contract from 2.8% reported in FY16 to 6.1% in FY19.
Robust outlook for the water chemical industry globally (5.8% CAGR over FY14- 19).
Execution of the Srilankan project expected to swing revenues from the engineering division.
US FDA nod for the manufacturing of resins to aid in maintaining growth trajectory in the chemicals segment (15% CAGR over FY17-19) besides improving margins.