AWHCL — An Opportunity to Invest in Waste
A pure-play bet on waste management. Steady financials and macro tailwinds indicate a long growth runway. We are LONG.
Incorporated in 2001, Antony Waste Handling Cell Limited (AWHCL) is a leading player in the Indian Municipal Solid Waste Management (MSW) industry. AWHCL engages across the full spectrum of MSW services - solid waste collection and transportation, waste processing and finally, its disposal throughout the country. It is also a leading operator in the landfill construction and management sector.
A sector set for a steep upswing
India's per capita waste generation lags the world average (740 grams vs 450 grams) and in that context, with increasing population and accelerated urbanization, India’s waste generation per capita could see a steep upswing. Furthermore, the MSWM market is expected to grow at 14.4% CAGR over the next 5 years from INR 50 bn to INR 98 bn in FY2025 helped by the fact that at present approximately 75% of the municipal solid waste in India is not scientifically processed. Government-driven campaigns such as the Swachh Bharat Abhiyan and the Smart City Mission coupled with growing budgetary allocation continue to catalyze the sector. An estimated commitment of INR 1.4 Lcr over the next five years from these campaigns should add a nice kicker to fuel growth. Finally, the government subsidies for projects such as Waste-to-Energy (WTE) have invited private-sector participation and as such India’s WTE sector is estimated to grow sharply to 1,075 MW by 2031 and 2,780 MW by 2050.
AWHCL is one of the top five players in the Indian MSW industry which is largely consists of local, national and MNC players. Larger national players are mainly the Infrastructure & Environment services companies such as Ramky Enviro Engineers, which have presence across the MSWM value chain, and others who have presence in only part of the MSWM value chain - like Metro Waste Handling, BVG, A2Z, SPML Infra, Terra Firma & Essel Group. AWHCL, however, is a pure-play waste management bet and sits fairly attractively vs peers clocking higher growth rates and a much more attractive growth runway. AWHCL’s 19% 3Y CAGR revenue growth and 16% EBITDA growth is higher than Ramky’s 14% for topline and 8% EBITDA growth. Other players have delivered a growth rate around 10% while still searching for sustainable profitability. As such, AWHCL’s pure-play waste management story appears to be ideally positioned to gain traction and capitalize on the industry tailwinds. A massive untapped geographical potential coupled with the ability to realize operational synergies from scale, bodes well for the growth outlook.
Strong visibility for revenues along with diversification upside
AWHCL has been operating in the MSW management services industry for over 19 years and has undertaken more than 25 projects. The company currently has a strong portfolio of 20 ongoing projects, comprising 13 C&T projects and three MSW projects and four Mechanized sweeping projects. These contracts typically have varying time periods. For instance, C&T projects span for a period of 7-8 years, while the MSW processing contracts have a period of around 20-25 years. In that context, the business model is highly de-risked with a staggered revenue stream, offering a high degree of cash flow visibility. AWHCL is currently operating at 66% capacity utilization, leaving significant growth room without undertaking any major capex for the ongoing projects. It is also worthwhile to note that AWHCL is currently operating a 0.97 MW WTE plant at Kanjurmarg and is also developing a 14 MW WTE plant at Pimpri-Chinchwad which will position the company well to exploit the tailwinds in the emerging WTE space.
Improving financials and strengthening balance sheet de-risk the investment profile
Revenue has grown at a CAGR of 16.10% over the last 5 years, with EBITDA margins of 28-30% during this time period. In our view, the margins have modest expansion capacity on account of benefits of scale from higher tonnage and wider secular catalysts stemming from the demographic pattern. Leverage is fairly accommodative with net debt-to-equity of 0.2x resulting in 5.6x interest coverage as at Q3FY22. Cash Flow generation looks strong with FCFF of INR 930 mn in FY21 & average FCFF/Revenue of 7.34% over the last 6 years is a sign of high quality. Revenue for Q3 FY22 stood at INR 1,613 mn, increasing by 5% on a q-o-q basis and 31% on a y-o-y basis. Having executed a host of complex municipal solid waste management projects, the company has an established track-record as a comprehensive service provider equipped with technical expertise and financial resources to handle large-scale projects.
Potential risk factors to be watched carefully
Working capital management has been somewhat of an issue in the management of solid waste. Receivable days of the company have increased from 60 days (Q3FY2021-IPO) to 74 days (Q3FY2022) over the last 12 months. Furthermore, disputes pertaining to the value of escalation claims and service claims somewhat dents what is otherwise an optically strong picture. On the cost front, the fuel price is around 20% of its total cost and with rising oil prices, there can be a meaningful drag on margins. Although 100% of the company's contract has escalation clauses, almost half of them have fixed escalations with the majority of the contracts carrying an annual/half yearly reset time, thereby giving a staggered impact on recovery. In the Q3FY22, the company reported a margin of around 22% vis-a-vis historical averages of 28-30%.
Valuation on absolute and relative terms looks fairly attractive
AWHCL currently trades at 14.03x P/E and 1.54x EV/Sales on LTM basis. There are no like-for-like pure play domestic comps in this space. However, global comps like Waste Connection (NASDAQ: WCN) trades at 36.8x P/E and 5.17x EV/Sales, while Cleanaway (ASX: CWY) trades at 42x P/E and 2.84x EV/Sales. AWHCL’s promoters own 46% of outstanding shares and around 16% is held by institutions. Also, the company’s debt has been receiving rating upgrades owing to which its average cost of borrowing has come down to 8.88% from 12.40% in the last 9 months period, indicating a fairly meaningful endorsement in the company’s asset and cash flow profile by the stakeholders.
Vintage business with a strong balance sheet and low debt makes AWHCL ideally positioned to capitalize on an under-penetrated market. However, dependency on government and commodity prices are the potential risk factors to be considered. We are LONG.
Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.