ION Exchange (India) Limited — Q3 FY25 earnings call

Call held 27 Jan 2025

Management summary

ION Exchange reported a strong 25% YoY growth in consolidated operating income for Q3 FY25, driven by robust performance in its engineering and consumer product divisions. However, profitability was impacted by an 'onerous contract' and muted execution of the UP Jal Nigam project, leading to lower EBITDA growth and margin compression in the engineering segment. The company is progressing with its Roha plant expansion and expects future orders from sunrise industries, while addressing challenges in working capital and project execution.

Highlights

  • Consolidated operating income for Q3 FY25 was INR 6905 million (₹690.5 crores), an increase of around 25% year-on-year.

  • The engineering division's revenue for Q3 FY25 was INR 4301 million (₹430.1 crores), an increase of around 34% year-on-year, largely due to improved execution of large EPC contracts.

  • The chemical segment reported a revenue of INR 1993 million (₹199.3 crores), an increase of around 6% year-on-year, showing improvement in both turnover and margins.

  • The consumer product division's revenue increased by around 23% year-on-year to INR 772 million (₹77.2 crores), driven by greater penetration and product acceptance.

  • The company expects to see good flow of orders from sunrise industries like green hydrogen, biotechnology, semiconductors, and data centers in the next few quarters.

Concerns

  • Consolidated EBITDA for Q3 FY25 increased only 7% YoY to INR 754 million (₹75.4 crores), with the margin standing at 10.92%, a decrease compared to revenue growth.

  • The engineering division's EBIT for Q3 FY25 increased only 7% YoY to INR 257 million (₹25.7 crores), despite a 34% revenue increase, indicating margin compression.

  • An 'onerous contract' continues to negatively impact overall engineering margins by roughly 150 to 200 basis points, and its substantial invoicing is expected to complete only in H1 FY26.

  • The UP Jal Nigam contract execution remained muted due to funding constraints from the government and slow approval processes, leading to delays in collection of receivables.

  • The consumer product division reported a loss of INR 29 million (₹2.9 crores) in Q3 FY25, compared to a loss of INR 15 million (₹1.5 crores) in the same period last year.

Key financials

2 periods

Q3 FY25

  • Operating Income
    ₹690.5 Cr
    YoY +25%
  • EBITDA
    ₹75.4 Cr
    YoY +7%
  • EBITDA Margin
    10.9%
  • Net Profit (PAT)
    ₹49.6 Cr
    YoY +5%
  • PAT Margin
    7.2%

9M FY25

  • Operating Income
    ₹1,902.6 Cr
    YoY +22%
  • EBITDA
    ₹208 Cr
    YoY +16%
  • EBITDA Margin
    10.9%
  • Net Profit (PAT)
    ₹145 Cr
    YoY +18%
  • PAT Margin
    7.6%

What they filed

Q1 FY27: revenue up 20.1%, net profit down 93.7% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue644 691 835 583 734 +14%734 +6%863 +3%700 +20%
EBITDA68 75 86 63 68 +0%59 −21%20 −77%32 −49%
Net profit51 50 63 48 50 −1%21 −59%24 −62%3 −94%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Share of Revenue (Q3 FY25)
₹706.6 Cr Total
  • Engineering Division ₹430.1 Cr 60.9%
  • Chemical Segment ₹199.3 Cr 28.2%
  • Consumer Product Division ₹77.2 Cr 10.9%

Order book

high confidence

Total value

₹3,405 Cr

as of 2024-12-31 quantified

Execution

two to three years

Pipeline

other

bid pipeline

Cancellations & deferrals

  • deferred: Execution of the UP Jal Nigam contract remained muted due to funding constraints and slow approvals.
  • renegotiated: An onerous contract is having a negative impact on overall engineering margins and is spilling into the next financial year.
The total order book for the engineering division stood at INR 3405 crores, with a normal conversion ratio of about 15% and an average execution period of two to three years. The bid pipeline is INR 8648 crores.

Source: Prepared remarks

Capital allocation

medium confidence
  • Capex Capex disclosed 20% internal accrual and 80% debt
    • Roha plant expansion ₹400 Cr
    And if I recall correctly, 20% was supposed to be financed through internal accrual and 80% was through debt.
  • Debt Debt disclosed
    No, it's not the case our contribution for the total project remains at 20% of the project cost. But since the project is not yet commissioned, the interest expense is getting capitalized in the book, so as and when the commercial production starts, it will get reflected in the P&L.
  • M&A Mapril (Portuguese) Acquisition · Integrated

    Used as a base to push products (chemicals, engineering) in Europe, leveraging preference for European companies.

    Seeing good developments for engineering contracts and added volumes from resin/chemical sales, with further discussions for volume improvement.

    Yes, we have made progress, subsidiary gr now being used as a base to push all our products, chemicals, as well as engineering. The response that we seem to be getting from the European market is a preference to have a European company, rather than coming out of any other location, that seems to be giving us the advantage that we were hoping for, and the pace at which we were expecting the engineering side of business to pick from that subsidiary, there we are seeing good developments happening.

Guidance & targets

Revenue

  • Engineering Division Growth Revenue · FY25 · High confidence 15% to 20%
    For FY25, Engineering should see 15% to 20% growth and in terms of margin, unfortunately because of the way things have been and as far as we can see, we will be lower than the last year.

    — Aankur Patni

  • Overall Company Growth Revenue · FY25 · High confidence 15% to 20%
    For financial year 24-25, 15% to 20% growth is what we are looking at, for 25-26 I am not calling out a number as yet, you will have to look at our order books and the general trajectory of growth, but I will come out with more clearer guidance on it in the coming period.

    — Aankur Patni

  • Roha Plant Revenue Start Revenue · Q2 FY26 · High confidence from the second quarter
    The Roha revenues should start from the second quarter, we still have to go through the final process of commissioning the plant.

    — Aankur Patni

  • Chemical Segment Growth Revenue · FY25 · High confidence 10% to 15%
    overall chemical segment number, I can tell you that we are looking to close the year with roughly around 10% to 15% growth.

    — Aankur Patni

  • Consumer Segment Revenue Target Revenue · Medium confidence 500 crores
    which gives us the visibility to reach that 500 crore number from the 300 crore number today that you are talking about?

    — Aejas Lakhani

Profitability

  • Engineering Division Margin Profitability · FY25 · High confidence lower than last year by roughly one percentage point
    For FY25, Engineering should see 15% to 20% growth and in terms of margin, unfortunately because of the way things have been and as far as we can see, we will be lower than the last year. The visibility that we have suggests, that the overall dip should be roughly about the percentage point.

    — Aankur Patni

  • Overall Company Margin Profitability · FY25 · High confidence slightly short of last year's levels
    Overall for the company, I don't think we will be able to reach the same levels in terms of percentage as we did last year. We will be falling slightly short of it.

    — Aankur Patni

Capacity

  • Roha Plant Optimal Utilization Capacity · next 3-4 years · Medium confidence three to four years
    We are looking at using up that additional capacity over a period of three to four years, and therefore there would be its impact on our overall top line.

    — Aankur Patni

What to watch in Q4 FY25

UP Project Funding and Execution Pace

next month / coming months
Current Muted execution due to funding constraints and slow approvals
Target Positive movement on funding and pick-up in execution pace

Why it matters

Resolution of funding issues is critical for revenue recognition and improving working capital from a significant government project.

The expectation is that, in next month we should get some positive movement on the funding for this UP project. And consequentially, we do expect then the execution of this contract to pick up in the coming months.

Risks & concerns

  • Onerous contract impacting engineering margins

    high

    An ongoing onerous contract is depressing engineering margins by 150-200 basis points and is expected to continue impacting until H1 FY26.

    Management acknowledged

  • Muted execution and funding delays for UP Jal Nigam contract

    high

    The UP Jal Nigam contract faces funding constraints from the government and slow approval processes, leading to muted execution and delays in receivables collection.

    Management acknowledged

  • Initial cost burden from Roha plant commissioning

    medium

    The new Roha facility will incur employee and OPEX costs, along with depreciation and interest burden, before full ramp-up and optimal utilization.

    Management acknowledged

  • Litigation regarding IEEF subsidiary

    medium

    The Enviro Farms matter, a SEBI-related litigation, is ongoing with an appeal at the Securities Appellate Tribunal, with the next hearing scheduled for February 10.

    Management acknowledged

  • Increased working capital days

    medium

    Working capital days have been inching upwards, partly due to advances carried from customers and delays in collection from the UP project.

    Analyst acknowledged

Q&A highlights

7 direct
Engineering order inflow and sector visibility Direct
On a global level, it is across the board, but yes, the inquiry book that we carry would be heavier on the core sectors, even in terms of order conversions it is across the board, the bigger ticket ones have not seen much of traction during the current period that's why you see that the order book per se, has not built up that much.

Clarifies that while core sectors have heavy inquiry books, conversion of larger orders has been muted, impacting current order book growth.

Asked by Deepak

Engineering EBIT margin decrease (150 bps YoY) Direct
There are two impacts which I can talk about. One is to do with this contract which you just mentioned about, that continues to have an impact of roughly 150 to 200 basis points and upwards on the overall engineering revenue. While that's depressing the margin quite a bit, there is as also the mix of projects that varies from year-to-year, in some years the mix favors a slightly higher margin, the other years, the mix may favor slightly lower margin. But the primary reason for the depressed margin numbers is the impact of the onerous contract.

Directly attributes the margin compression to an 'onerous contract' and project mix, quantifying the impact of the onerous contract.

Asked by Deepak

IEEF subsidiary litigation update Direct
The Enviro Farms matter which is a SEBI related matter. We have appealed the matter at securities appellate tribunal, and SEBI has filed a reply in the matter, and the matter is now listed for 10th February for hearing.

Provides a specific update on the ongoing litigation, including the next hearing date, which is a key risk factor.

Asked by Mike

Onerous contract completion timeline Direct
Let me first answer the second one, we are expecting substantial invoicing for this contract to get completed in the first half of the FY 25-26.

Gives a timeline for the completion of the problematic 'onerous contract', which is a significant drag on engineering margins.

Asked by Mike

UP project execution delays and funding constraints Direct
Yes, the project is facing constraints in terms of funding from the government, and as we had spoken about this in the last quarters call that, there was an expectation of improved funding and speed of execution on this contract. Unfortunately, the constraint on funds remain, as also relatively slow process of approvals and documentation, which is hampering the pace at which we are being able to invoice.

Highlights the persistent issues with government funding and approvals impacting the UP project, which affects revenue recognition and working capital.

Asked by Chetan Vora

Confidence in better margins next year despite ongoing drags Partial
For UP project the margins would accrue as we execute the project. Further the other onerous project-will have a relatively lower percentage in the pie of the overall engineering revenue, I am not expecting this contract to continue to drag right through the next year. So, once the remaining portion of this this contract is executed then that would give us a higher margin number compared to where we stand today.

Management expresses confidence in margin improvement by next year, citing reduced impact from the onerous contract and expected UP project execution, despite acknowledging initial drags.

Asked by Aejas Lakhani

Working capital days inching upwards Direct
In terms of the working capital increase compared to a few years back. The shift has been the quantum of advance that we have been carrying from the customers. And there were a few large contracts where there were significant amount of advances sitting in the books which had made the working capital slightly lopsided.

Explains the reasons behind the increase in working capital, attributing it to advances carried from customers and large contracts, and notes it's more normalized now.

Asked by Nishanth Gupta

Roha plant revenue contribution and chemical segment capacity utilization Direct
The Roha revenues should start from the second quarter, we still have to go through the final process of commissioning the plant. In terms of the overall chemical segment number, I can tell you that we are looking to close the year with roughly around 10% to 15% growth.

Provides clarity on the expected start of revenue generation from the Roha plant and reiterates the growth outlook for the chemical segment.

Asked by Omkar Jhaginder

3 min read 7 chapters

Detailed narrative

Consolidated Performance Overview

For Q3 FY25, Ion Exchange reported a consolidated operating income of INR 6905 million (₹690.5 crores), marking a 25% year-on-year increase. EBITDA grew by 7% YoY to INR 754 million (₹75.4 crores), with a margin of 10.92%. Net profit stood at INR 496 million (₹49.6 crores), up 5% YoY, achieving a PAT margin of 7.18%. For the nine months ended FY25, operating income was INR 19026 million (₹1902.6 crores), an increase of 22% YoY, with EBITDA at INR 2080 million (₹208 crores) and PAT at INR 1450 million (₹145 crores).

Engineering Division Performance and Order Book

The engineering division's revenue for Q3 FY25 was INR 4301 million (₹430.1 crores), a significant 34% increase year-on-year, primarily driven by improved execution of large EPC contracts. However, EBIT for this segment grew by a more modest 7% YoY to INR 257 million (₹25.7 crores), indicating margin pressure. The total order book for the engineering division at the end of Q3 FY25 stood at INR 3405 crores, with a bid pipeline of INR 8648 crores. Management expects 15-20% growth for the engineering division in FY25, but margins are anticipated to be lower than last year by approximately one percentage point.

Chemical Segment and Roha Plant Update

The chemical segment recorded a revenue of INR 1993 million (₹199.3 crores) in Q3 FY25, a 6% increase year-on-year, with EBIT also growing by 6% to INR 523 million (₹52.3 crores). The company is progressing with its Roha plant expansion, a ₹400 crore project, with over 50% of the cost spent as of December. Commercial production is expected to commence in Q1 FY26, potentially stretching to Q2. The additional capacity is projected to be utilized over three to four years, with an asset turnover of roughly 2.5 times on ₹275 crores. The chemical segment is targeted for 10-15% growth for the full year.

Consumer Product Division Growth

The consumer product division demonstrated strong growth, with revenue increasing by 23% year-on-year to INR 772 million (₹77.2 crores). This growth is attributed to greater market penetration and acceptance of the company's product offerings, particularly in the premium residential segments. Despite the revenue growth, the segment reported a loss of INR 29 million (₹2.9 crores) in Q3 FY25, compared to a loss of INR 15 million (₹1.5 crores) in the prior year. The company is investing in expanding its field force and distribution channels to achieve a target revenue of ₹500 crores for this segment.

Margin Outlook and Project Impacts

Consolidated EBITDA margin for Q3 FY25 was 10.92%, lower than the revenue growth rate. This was primarily due to an 'onerous contract' in the engineering division, which is impacting margins by an estimated 150-200 basis points and is expected to continue until H1 FY26. Additionally, the execution of the UP Jal Nigam contract remained muted due to government funding constraints and slow approvals, affecting invoicing pace. Management anticipates overall company margins for FY25 to be slightly short of last year's levels, but expects improvement in engineering margins in FY26 as the impact of the onerous contract diminishes.

Working Capital and UP Project Challenges

The company noted an increase in working capital days, attributing it to the quantum of advances carried from customers and large contracts. Specifically, delays in collection from the UP Jal Nigam project have contributed to this. Management is hopeful for positive movement on funding for the UP project in the coming month, which should accelerate execution and improve receivables. The company has received extensions from the government for the UP project and continues to apply for further extensions due to the prolonged nature of the contract.

Mapril Acquisition and International Market Strategy

The Portuguese Mapril acquisition is progressing well, serving as a base to expand the company's product offerings, including chemicals and engineering solutions, into the European market. The strategy leverages the European market's preference for local companies. The subsidiary has shown good developments in securing engineering contracts and has contributed to increased volumes from resin and chemical sales. Management remains optimistic about further volume improvements and the overall success of the acquisition in the coming months.

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