IPO dates: November 22-26, 2024IPO price: Rs 140-148IPO size: Upto Rs 650 croreImplied market cap: Upto Rs 2,598 croreLot size: 101 sharesFace value: Rs 10Retail portion: 35%Enviro Infra Engineers, an EPC contractor of water supply and waste water treatment projects, plans to raise upto Rs 650 crore from the primary market. Of this, Rs 573 crore of fresh issue will be utilised to fund a project SPV, to prepay part debt and to meet working capital requirements. The promoter group stake will fall to 70% after the IPO from around 94%. The company reported negative operating cash flow (OCF) or cash outflow in FY24 and is expected to do so even for FY25. The debt-equity (D/E) ratio has gradually increased to one over the past three years from 0.3 while interest coverage ratio has contracted to 5.8 at the end of the June 2024 quarter from 11.2 in FY22. With capital infusion through the IPO and debt prepayment, the interest coverage and D/E ratios are expected to improve.Also, once more projects become operational, OCF is likely to become positive from FY26. Given the government’s thrust on improving water related infrastructure in the country, the water management segment holds potential. Keeping these factors in mind, the IPO looks suitable for long-term investors.BusinessThe company bids for tenders floated by state governments and urban local bodies to develop wastewater treatment plants and water supply projects. As of June 2024, its order book was worth 1,906 crore. The company has inhouse team for designing, engineering and construction, which reduces dependence on third party outsourcing thereby improving operating margin before depreciation and amortisation (EBITDA), which is better than some of the peers. It started bidding for hybrid annuity model (HAM) projects in FY23. HAM contributed around 10% to revenue in FY24 while 86% was from EPC (engineering, procurement, construction). Under HAM, the government pays 40% of the project cost during the construction phase and the remaining 60% is paid in annuity along with interest over a 15-year period. FinancialsBoth revenue and profit tripled to Rs 728.9 crore and Rs 108.6 crore respectively between FY22 and FY24. EBITDA margin improved to 23.2% from 22.4% during the period. The company’s long term credit rating improved to A-/Stable in FY24 from BBB/Positive in FY22. It is likely to improve further once project cash flows improve thereby reducing the future funding cost.ValuationConsidering the equity after the IPO and annualised profit for the June 2024 quarter, the company demands a price-earnings (P/E) multiple of 21.6. Peers including EMS and VA Tech Wabag trade at P/Es of 24 and 42.