Water Treatment Sector Outlook Parag Lavane

A PROJECT REPORT ON
EQUITY RESEARCH ON WATER

TREATMENT INDUSTRY &
VALUATION OF ION EXCHANGE LTD
TOWARDS FULFILLMENT OF THE REQUIREMENTS

OF POST GRADUATE DEGREE IN MASTER OF MANAGEMENT STUDIES
OF MUMBAI UNIVERSITY
SUBMITTED BY
PARAG S. LAVANE
MMS- ROLL NO: M0934

BATCH 2009-2011
UNDER THE GUIDANCE OF

Prof. V.NARAYANAN
FR. C. RODRIGUES INSTITUTE OF MANAGEMENT STUDIES, VASHI

STUDENT DECLARATION
I, Mr. Parag S. Lavane, studying in the Second Year of Master of Management Studies
Course at Fr. C. Rodrigues Institute of Management Studies, Vashi, Navi Mumbai, hereby
declare that I have completed the project titled “Equity research on water treatment
industry & Valuation of Ion Exchange ltd” as a part of the course requirements for MMS
Programme.
I further declare that the information presented in this project is true and original to the
best of my knowledge.
Date:
(Signature of the student)
Place:
CERTIFICATE FROM THE INTERNAL GUIDE
I, Mr.V.Narayanan hereby certify that Mr.Madhu Rampelli a student

for the Master of Management Studies Course at Fr. C. Rodrigues
Institute of Management Studies, Vashi, Navi Mumbai, has completed
a project on “Equity research on water treatment industry & Valuation
of Ion Exchange ltd” under my guidance during this year.
His work and output has been found to be satisfactory.
Date:
Place: (Signature of the

Guide)
ACKNOWLEDGEMENTS
I wish to express my sincere thanks to Prof. V. Narayanan (FCRIMS), for

his valuable inputs, guidance and encouragement.
Also I wish my sincere thanks to Mr. Ruchir Khare, Kotak Securities for his
valuable guidance.
I also wish to thank Ms. Savita Yadav (Library Madam) for her help and all
my friends who helped me for the completion of the project.
EXECUTIVE SUMMARY
The reason behind taking this subject as the equity research topic is
that Water Treatment Companies are right now supposed to belong to the
very niche segment of Capital Goods Sector. Water Treatment companies
have already created their market space and the market for such companies
is becoming very competitive day by day because of entry of new local as
well as some international players. The research done on these companies
till now is too little so the information available is also scanty. I have tried
my level best to include every little bit of information to unearth this sector
from economics as well as social perspective, as availability of water also
shows social condition of particular nation. All the information in this
report belongs to the secondary research done by me. The purpose of
choosing Ion Exchange as Equity Research Company is that it is the only
Listed Indian Company operating only in the Water Treatment Segment
since a long period of time.
Industry Analysis
Introduction........................................................................1
Why water is so important? ...............................................2
Availability of water...........................................................3
Global Water Market..........................................................6
[I] Municipal Water and Waste Water Treatment Market.............7
[II] Industrial Water and Waste Water Treatment Market.............8
[III] Emerging Sub-segments.......................................................10
Business Verticals............................................................12
Equipment Suppliers....................................................................12
Engineering, procurement and construction (“EPC”)..................13
Key Demand Drivers for the Industry..............................14
Global Markets Overview................................................14
Asian Water Market.....................................................................14
Middle East and North Africa (“MENA”) Water Market............15
European Water Market...............................................................16
Water Industry in India.....................................................17
Demand and Supply:....................................................................17
Eleventh Five-Year Plan:.............................................................19
Industry Structure.............................................................21
Industry Trends.................................................................22
Desalination Outlook........................................................23
Ion Exchange Ltd Analysis and Valuation.......................24
Key Fundamentals .......................................................................28
Segmental Performance Of Ion Exchange...................................28
Risks, Threats , Concerns for Ion Exchange....................29
Market Analysis...............................................................30
Shareholding Pattern........................................................31
..........................................................................................32
Source: www.ionindia.com..............................................32
Projected Profit and Loss A/C..........................................33
FCFF Valuation(More details in the Excel Sheet)...........34
Water Treatment Industry Analysis
Introduction
The water market of India is more than $1 billion of the total water market water
treatment market share is over $600million. The growing concern for treating municipal
wastewater and Industrial wastewater has led this industry to grow. In India water market is
growing very fast with an average annual growth rate of 15-20 percent per annum. The growth
can be attributed to various factors.
• Indian cities generate nearly 20 million m3 /day of sewage but only one-tenth of the waste
is treated.
• The rapid industrialization has increased the water demand in various industries.
• Water requirements of major water-consuming industries have grown 40 times.
• Agricultural sector uses 85 percent of the available fresh water.
Features of Indian Market
• The market is both fragmented and unorganized.
• Of $600 million wastewater treatment equipments, Imports constitute approximately $100
million.
• The major supplier of wastewater treatment equipment is USA with the share of 40%.
• The business opportunities lie in sanitation, urban water supply improvement and
municipal waste treatment.
• Apart from the supply of the equipments, companies can also profit themselves by
providing consulting and design services to the Indian water industry.
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Why water is so important?

Water is the essential component of all life. It comprises 70% of the Earth's surface, 75%
of the human body, 90% of blood and sap. 97% of Earth's water is in the oceans, 2% is frozen in
icecaps, 1% is fresh, but much of this is inaccessible, deep in the Earth. From what is left, we use
98% for industrial purposes and agriculture, only 2% for the nutrition and health of every living
organism.
Healthy water carries nutrients, minerals, dissolved salts and trace elements the building
blocks of growth, and healing energies; it disposes of waste and is constantly cooling, cleansing
and purifying itself. Our bodies depend on water (as blood) as a catalyst, a transport system, to
maintain our correct body temperature, to supply nutrients and electrical impulses. Dehydration is
a common source of illness we need to drink 1 to 2 litres of good water every day, more
especially as we grow older. Tea, coffee and alcohol all dehydrate the body; therefore, if we take
them we need to drink more good water to compensate.
We need to protect and care for our water our survival depends on it. As population
increases and industrial growth proliferates, good water is getting perilously scarce.
Global Water Consumption
The total global freshwater use is estimated at nearly 4,000 cubic kilometres per year. The
agricultural sector represents approximately 70% of the global water usage, with industrial and
domestic demand representing the remaining 20% and 10%, respectively. Out of the total
agricultural demand, about 55% of traditional irrigation water is wasted. Developed countries
demand the most industrial water at 40% of their total demand, while developing countries still
have the highest demand for agricultural use but considering the pace at which developing
countries like India and China are moving towards industrialization and urbanization eventually
the domestic and industrial demand for water is likely to increase.
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(Source: World Water Development Report)
Availability of water
The global supply of freshwater is relatively fixed, and unevenly distributed. Total global
water reserves are estimated to be 1.4 billion cubic kilometers, of which nearly 97.5% is salt
water in oceans, and the balance 2.5% forms the available fresh water reserves. Groundwater and
surface water, which together constitute approximately 0.76% of the total water on the planet, are
the most easily accessible and used sources of water. Rest of the fresh water is either locked up in
the form of glaciers and permanent snow cover, or is inaccessible to humans.
Water – Increasingly Becoming Scarce Across the World
Page 3
(Source: World Water Development Report)

These accessible freshwater resources are distributed unequally around the world, and are
subject to varying patterns of usage and discharge. For example, North America enjoys an
enviable ratio of 15% of the global water supply for only 8% of the global population whereas
Asia is acutely strained with only 36% of the global water supply for 60% of the global
population. It is expected that the number of people living in water scarce conditions would
double in 20 years and those in water stressed geographies may increase up to six times.
In the past 15 years, global water consumption has risen at more than double the rate of
population growth, due in part to industrial demand. For example, it takes 300 liters of water to
produce 1 kilogram of paper, and 215,000 liters to produce 1 metric ton of steel. Changes in our
diet are also driving water consumption; it takes 15,000 tons of water to produce a ton of beef,
while it only requires 1,000 tons of water for a ton of grain (Source: Canadian Freshwater
website).
The amount of freshwater on Earth is finite. But the demand for water continues to
escalate at an unsustainable rate, fuelled by population growth and industrial expansion. And
supply of clean, potable water and sanitation are among the key challenges of the 21st century.
Demographic processes such as population growth, age distribution, urbanization and migration
are also adversely affecting water availability and quality through increased water demands and
consumption and through pollution resulting from water use. Changing climate is also causing
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significant impacts on the availability of water, as well as the quality and quantity of water that is
available and accessible.
Freshwater looks like it will become the oil of the 21st century - scarce, expensive and
fought over. While over 70% of the Earth’s surface is covered by water, most of it is unusable for
human consumption. According to the Government of Canada’s Environment Department
freshwater lakes, rivers and underground aquifers represent only 2.5% of the world’s total
freshwater supply. Unfortunately, in addition to being scarce, freshwater is also very unevenly
distributed. The United Nations has compared water consumption with its availability and has
predicted that by the middle of this century between 2 billion and 7 billion people will be faced
with water scarcity. It gets worse: In the developing countries, 80% of illnesses are water-related.
Due to the shortage of safe drinking water in much of the world, there are 3.3 million deaths
every year from diarrheal diseases caused by E. coli, salmonella and cholera bacterial infections,
and from parasites and viral pathogens. The use of nanotechnologies in four key water industry
segments - monitoring, desalinization, purification and wastewater treatment - could play a large
role in averting the coming water crisis.
Traditionally, there has been very little focus by various governments on improving water
infrastructure which has created a significant backlog of investment in the sector. As per Global
Water Markets 2008 data only 58% of the world’s population is believed to have access to piped
water supply, while a mere 36% of the global population is connected to a sewer network.
Investment is also required in the operation and maintenance of physical infrastructure so that it
meets appropriate standards and functions efficiently. While developing nations require huge
investments to bridge the gaps, the developed nations need to refurbish, maintain and upgrade
their existing run down infrastructure and meet the stringent environmental regulations.
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Global Water Market

As per Global Water Markets 2008, the global water industry is estimated to be US$ 463
billion in 2007. In the market for water related services the major clients are governments and
government owned utilities which provide water to the people, or the industries which treat water
either for input requirements or to meet output water conditions. The water utilities (Municipal)
and Industrial market comprises of almost 75% of the market or about US$ 350 billion market in
2007 and expected to grow to US$ 530 billion by 2016 (CAGR - 5%).
(Source: Global Water Markets 2008)
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While the overall growth in global markets is likely to be around 5%, some of the
emerging markets are expected to outperform the other countries and show higher growth than
CAGR of 5% from 2007 to 2016. Developing nations require huge investments to bridge the gaps
and reduce the deficit. Developed nations need to refurbish, maintain and upgrade their existing
run down infrastructure and meet the stringent environmental regulations. The world business
council for sustainable development estimates the total cost of replacing ageing water supply and
sanitation infrastructure in industrial countries may be as high as US$ 200 billion p.a.
Top 15 Fastest Growing Markets Globally

Water treatment industry can be further classified into four kinds of water plants, namely
water treatment, desalination, wastewater treatment and water recycling. Designing and
engineering of projects in the water and wastewater treatment segment is technically complex and
technology is a critical part of such projects.
[I] Municipal Water and Waste Water Treatment Market
In general, local public entities are responsible for organizing drinking water and
wastewater collection, treatment and distribution services. The total piped municipal water supply
is 0.312 cubic kilometres per year. This meets around 42% of domestic demand, 15% of
industrial demand and 0.2% of agricultural demand. Overall, only 58% of the world’s population
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is believed to have access to piped water supply, while only 36% of the global population is
connected to a sewer network.
Water is very capital-intensive utility service; most of the capital is required to maintain
and extend the distribution network. The total expenditure on Municipal water and waste water is
estimated to be US$ 326 billion in 2007 and is slated to go upto US$ 490 billion by 2016.
(Source: Global Water Markets 2008). The capital intensity of the sector is increasing, driven on
the one hand by the cost of rehabilitating aging networks, and on the other hand by the need for
more technology in water treatment to meet the challenges of declining raw water quality.
Operations and Maintenance of these networks and water treatments plants involves even higher
expenditure.

In many countries private players are playing an active role in operating and maintaining
the water supply facilities for municipalities and water utilities. Operation and maintenance pie is
also getting bigger with increased adoption of innovative models of service delivery like DBO
(Design-Build-Operate), BOT (Build-Operate-Transfer), TOT (Transfer-Operate-Transfer) and
BOOT (Build-Own-Operate-Transfer). These offerings are based on a holistic life cycle model,
extending from project development to long-term operation.
[II] Industrial Water and Waste Water Treatment Market
Industries uses twice as much water as households and this water usually requires a higher
degree of treatment both before and after it is used. Water is an important production factor for
industries like power, food and beverages, pulp and paper, pharmaceuticals, refineries etc. The
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spectrum of industrial water ranges from cooling and boiler feed water in power stations and
process water for a wide range of industrial uses to ultra pure water for the electronics and
pharmaceutical industries. Service offerings in this segment include providing industrial
customers with the utilities necessary for their processes (steam, industrial heating and cooling,
process water, demineralised water, among other things) and optimizing consumption and,
secondly, reducing the impact of their industrial processes on the environment, which may
include treating effluents, recycling and recovering waste, and maintaining durable and efficient
waste elimination channels.
Overall, however, the industrial water market is considered to be smaller than the
municipal water market. The industrial water market is less homogenous than the municipal water
treatment market. Although the same water treatment technologies (reverse osmosis, ultra-
filtration, ion exchange, and membrane degasification) are used across many different industries,
each application will be specific to the industrial process in which it is used. The players having
relevant technical expertise and reference list are preferred by industrial customers. As a result,
the industry is polarised between large international groups on the one hand, and niche players
with successful applications serving particular market segments on the other.
1. Power Generation is a key sector which requires high-purity water for boiler feed. Over
80% of the electricity produced on earth is generated using a boiler to create steam, which
in turn generates power. Electricity demand, especially in developing countries, is forecast
to expand worldwide from 3,700GW to 6,400GW in the next 20 years. This is expected to
accelerate growth in the makeup water market to 8-10%.
2. Refineries: Demand comes from high purity water requirements for applications such as
boiler feed. Boilers in refineries are used to distil volatile fractions out of crude. Refineries
are also expected to treat wastewater to comply with discharge standards. Desalination
and water reuse are becoming particularly relevant technologies in the refinery sector.
3. Oil and gas: The oil and gas industry is both a major user and a major producer of water.
The water brought to the surface in the process of extracting oil needs to be treated and
disposed of. Also water is required to create steam to force into the ground to reduce the
viscosity of heavy oils, or in the fracturing process.
4. Chemical industries: The industry requires high purity water for boiler feed, process water
applications and proper wastewater treatment of effluent contaminated with chemicals.
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5. Pulp and paper: The quality and application of the process water is an important way in
which paper manufacturers can differentiate their products. It also has cost implications in
terms of energy consumption. The industry is also a major producer of wastewater.
6. Food and Beverage: The sector has high water usage and is subject to stringent safety
standards as regards waste disposal. As a result, industrials are increasingly investing in
process water as well as wastewater treatment, in order to comply with relevant
regulations.
7. Pharmaceutical companies employ state-of-the-art treatment equipment to produce high

quality water. The technologies used range from ion-exchange to membrane technologies,
electro-deionisation (EDI) and distillation.
8. Steel industry: The conversion of iron or steel into sheet, wire or rods requires hot and
cold mechanical transformation stages frequently employing water as a lubricant and
coolant. Production of coke from coal in coking plants also requires water cooling and the
use of water in by-products separation. Cooling waters thus are inevitably contaminated
with products especially ammonia and cyanide which require treatment before it can be
disposed of or reused. As a result this sector holds a great potential for water and waste
water treatment providers.

[III] Emerging Sub-segments
Desalination Market
Desalination is the process of removing salt and other dissolved ionic compounds from
water. It is primarily used to make seawater potable, but it is also used to reduce the salinity of
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brackish water, and to create high-grade process water from potable water. There are two main
categories of desalination: thermal and membrane. There are two thermal desalination
technologies: multi-stage flash (MSF) and multi-effect distillation (MED). There are two
membrane desalination technologies: reverse osmosis (RO) and electro-dialysis (ED, which is
primarily used for low salinity waters).
The market for seawater desalination divides in two, between the mature markets of the
Middle East and the Mediterranean, for whom desalination is well established as a important
source of water, and the new markets opening up around the world in the US, Mexico, Chile,
Australia, China and India. Capital expenditure on desalination projects stands at around USD 5.1
billion a year. For the past three years, it has been growing at a compound annual rate of 17.9%
per year.
The word desalination usually used in oil-rich, water-poor countries in the Middle East.
And while it is true that several such countries Saudi Arabia, the United Arab Emirates and
Kuwait are among the largest markets for desalination, there are desalination facilities in more
than 100 countries. The continued proliferation of desalination facilities has created a global
market of more than $8 billion in 2008 (Source: Freedonia Group), with continued rapid growth
anticipated.
(Source: www.freedoniagroup.com)
Water Reuse Market
The U.S. Environmental Protection Agency (EPA) defines wastewater reuse as, “using
wastewater or reclaimed water from one application for another application.” Water is indirectly
reused when wastewaters are discharged, either as untreated waste or as treated effluent, into
natural watercourses, from which they are abstracted for further use after undergoing "self-
purification" within the stream. However, more direct reuse is also possible: the technology to
reclaim wastewaters as potable or process waters is a technically feasible option for agricultural
irrigation (mostly for non-food crops, pasture lands), urban reuse (irrigation of public parks,
school yards, creating artificial wetlands, recreational lakes) and some industrial purposes (such
as for cooling water or sanitary flushing). Current annual capital expenditure on water reuse
projects is estimated to be in the region of USD 1.1 billion per year. This figure is growing at a
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rate of around 19% per annum, which corresponds to an expansion of capacity from 15.2 million
m3/d at the start of 2007 to 28.5 million m3/d at the end of 2011 and 59.7 million m3/d at the end
of 2016.
Business Verticals
There are broadly three business verticals in the water industry: the construction of water
plants, operation and management of water plants, and distribution and supply of raw water to
end-consumers. A typical water/waste water treatment project involves feasibility study, design,
equipment supply, construction and commissioning of the plant. Sometimes the players also take
up the responsibility of operating and maintaining the plant and distributing the water to the
consumers.
Equipment Suppliers
Equipment suppliers refer to the manufacturers of various water related equipment used in
the entire water cycle such as pumps, valves, technology products like filtration membranes,
process equipment etc. Majority of equipment suppliers like to confine themselves to supply of
equipment and undertake process related guarantee for those items backed by their in-house
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technology capabilities. They normally do not prefer to take up the responsibility of EPC
business, particularly the construction part of it.
Engineering, procurement and construction (“EPC”)
EPC refers to design and engineering of the plant, procurement and supply of equipment,
construction of the plant and installation of equipment, commissioning of the plant and
demonstration of desired performance parameters.
EPC companies normally are of two types:
2.1 Technology and Engineering Specialists who normally take civil and erection
contractors with them to provide complete EPC services to the clients. Such companies have in-
house capabilities to demonstrate the performance of the plant.
2.2 Large civil contractors also take up EPC responsibilities by roping in a water
specialist Company and are dependent on them regarding performance of the plant. On many
occasions the water treatment plant is clubbed with intake of water transmission and distribution
where the construction companies have the major share but technology companies play a vital
role in that partnership.
Water treatment operations and management (“O&M”)
O&M refers to the operation and maintenance of water and waste water treatment plants.
Municipal Corporations, these days, are looking for specialized private O&M contractors who
sometimes are the O & M business arms of water specialist companies. For industrial water
treatment plants O&M is usually done by the customer themselves.
Design-Build-Operate (“DBO”)
Many municipalities go for DBO contract where the contractor takes the responsibility of
operating the plant constructed by them on EPC basis. In such cases, the contractor receives
payment from the customer for the EPC part as turnkey contract and thereafter, the O&M
payment settlement takes place monthly on per cubic metre of treated water basis.
Build-Own-Operate-Transfer (“BOOT”)
Under BOOT arrangement, the BOOT contractors organize funds and invest in
construction of the plant and operate it for the entire concession period of 15-20 years. The capital
cost and operating cost of the plant is combined in such a way that it can be recovered through a
rate per cubic metre of water/waste water treated.
Transfer-Operate-Transfer (“TOT”)
This is a relatively new arrangement increasingly undertaken in some of the developed
countries under which the TOT contractors invest in the refurbishment of the existing facilities
and in return gets the right to operate it for a concession period, usually 5 to 7 years to enable the
project contractor to recover its investment, together with the operating and maintenance costs. At
the end of the concession period the asset is transferred back to the original (public) entity. But in
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most cases, it is difficult to assess the exact cost of refurbishment in the beginning due to lack of
historical information about the existing facilities and as result it leads to underestimation of the
cost and the payment received from the subsequent O&M services may not fully recover the cost
of refurbishment for the contractor. To address this risk, many TOT players get into an
arrangement whereby they are paid fully for the refurbishment once it gets completed and are
paid separately for operating the plant post refurbishment.
Key Demand Drivers for the Industry
Increasing population & urbanization:

Demographics: World’s population is growing by about 80 million people a year,
implying reduced availability of water per capita each year.
Urbanization: The urban population in Africa and Asia is expected to double by
2030 putting more stress on the existing water infrastructure.
Social: Shift from agrarian economies to more of an industrialized focus increases
the standard of living which in turn results in increased water consumption.
1. Newer and advanced Technologies: As water scarcity becomes acute, there will be an
increased demand for large scale (and cost effective) desalination, water-reuse
technologies and improved purification technologies. Demand for ‘ultra-pure’ water from
the industrial water treatment segment, especially in high-tech industries like
semiconductor manufacturing will continue to drive innovation in the water purification
industry. Desalination is gaining acceptance not only in water scarce region like Middle
East, North Africa and Spain but also in non-traditional markets like India, China and US.
2. Tightening Environmental Regulations: Tightening of environmental regulations is

increasing the demand for better technologies and products. Government laws
increasingly protect consumable water by specifying level of water purity and permissible
levels of pollutants or chemicals in water (e.g. lead or copper traces). Regulations around
carcinogen content, minerals concentration and high nitrogen and phosphorus in effluents
create the need for increased treatment of industrial effluents before discharge in rivers
and the sea.
3. Private Sector Participation: Building water infra-structure is very capital intensive in

nature. Poor management of water infrastructure by many of the municipal bodies in
emerging countries due to lack of financial and technical constraints. Grater private
participation sought via BOOT, DBOOT, TOT, O&M contracts etc.
Global Markets Overview

Asian Water Market
The rapid economic development in Asian region has led to a boost in urbanization and
water demand. Meanwhile the available water resources have been more and more contaminated
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by industrial waste. These tendencies call for an improvement of existing water treatment
facilities in order to meet the quality requirements of both potable and industrial water. Also,
water and sanitation coverage in many of the Asian countries is significantly lower than the
developed world. According to the first regional study on the economic impacts of poor
sanitation, undertaken in South-East Asia by the World Bank Water and Sanitation Project,
Cambodia, Indonesia, Philippines and Vietnam lose an estimated USD Nine billion a year
because of poor sanitation (based on 2005 prices), or approximately 2% of their combined GDP.
Hence most countries are putting large-scale water infrastructure in place. Companies
present in the Asian region can benefit from the multibillion public investments into the water
processing sector. The government is also subsidizing water reuse technologies such as
membranes, filters or ground water improvement. The large investment volumes will lead to the
increase in BOT/PPP projects.
Middle East and North Africa (“MENA”) Water Market
The entire MENA region currently faces an enormous water resourcing challenge. The
MENA is the most water scarce region in the world. Worldwide, the average renewable water
resources per capita is close to 8,549 m3/person, whereas in the MENA region, only around 1,505
m3/person is available. Moreover, with the population expected to grow from around 300 million
today to around 500 million in 2025, per capita availability is expected to halve by 2050. The
agriculture sector is the prime water consumer at the regional level, with an annual average
consumption of 86% of total water available. The remaining 14% is shared between domestic and
industrial sectors at about 8% and 6% respectively. (Source: Food & Agriculture Organization of
the United Nations -http://www.fao.org/nr/water/aquastat/dbase/index.stm).
The entire region, however, is on the way to improve efficiency and to improve water
services. Here the threat of a water crisis has also been acknowledged and made into an important
political topic. This means that water ministries will have to allocate their capital more effectively
and to invest into efficient water processing systems. Many important markets like Saudi Arabia
and UAE offer a suitable legal framework for water processing investments and are eager to
reform their ways of supply. They are also in a strong financial position and are likely to execute
the majority of their projects. Even though this region is subject to high competition and therefore
low margins meanwhile players may benefit from market size and upcoming need for investments
in water infrastructure. The Middle East market is not price sensitive and is open to use of
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advanced technology which augurs well for the growth of water market in this region. On the
other hand the focus of the World Bank and other Multilateral Agencies on bridging gaps in the
North African region would lead to higher growth rates in this region.
European Water Market
Europe’s water sector has strong fundamentals. The combination of high tariffs, increased
regulatory standards and generous European Union funding gives it a solid foundation for growth
over the next decade. While the western European countries have extensive systems but these will
need refurbishment in the near future at the same time some eastern European countries are
establishing significant water infrastructure to comply with strict EU environmental regulations
before their accession into the EU.
Outdated infrastructure combined with strict EU regulations in the new EU member states
as well as in countries aspiring to become EU members bears chances for EPC contractors and
O&M providers especially regarding water treatment plants. Growing demand for safe potable
water accelerates governmental decisions to refurbish current water treatment plants or even to
build new ones. In addition increasing attention to improve waste water treatment capacities,
Eastern European governments have decided to enlarge current budgets for environmental
protection. There is an essential precondition for countries in the region to catch up with
environmental regulations released by European authorities which opens up new opportunities in
this sector.
Overview of the Indian Economy
India, the world’s largest democracy in terms of population (approximately 1.16 billion
people) had a GDP on purchasing power parity basis of approximately USD 3,267 billion in
2008. This makes India the fourth largest economy in the world after the United States of
America, China and Japan in purchasing power parity terms (Source: CIA World Factbook
website).
India is also amongst the fastest growing economies globally and has grown at an average
growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage
points. India achieved 9.7% GDP growth in 2006-07 and 9.0% in 2007-08. The economic growth
decelerated in 2008-09 to 6.7% (Source: Economic Survey 2008-09). The growth in the Indian
economy is leading to growth in per-capita income levels, which in turn is fuelling increased
levels of demand for housing, power, transportation and water supply.
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Infrastructure Sector
India will require a sustained momentum in infrastructure investment in order to maintain
its current pace of growth. The Eleventh Five Year Plan envisages an infrastructure investment of
20,56,150 crore (at 2006-07 prices), equaling USD 514 billion, to be shared between the Centre,
states and private sector in the ratio of 37.2%, 32.6% and 30.1%, respectively. Set forth below is
the estimated level of investment in the infrastructure sector over the Eleventh Five Year Plan:
X P la n T o ta l X I
S ecto r 2 0 0 7 - 0 8 2 0 0 8 -0 92 0 0 9 -1 0 2 0 1 0 - 1 1 2 0 1 1 -1 2
( A n t i c ip a t e d E x p .) Plan
E le c tr ic ity 2 ,9 1 ,8 5 0 8 1 ,9 5 4 1 ,0 1 ,5 5 31 ,2 6 ,3 8 01 ,5 8 ,0 2 71 ,9 8 ,6 1 1 6 ,6 6 ,5 2 5
R o a d s a n d B r id g e s 1 ,4 4 ,8 9 2 5 1 ,8 2 2 5 4 ,7 8 9 5 9 ,2 0 0 6 8 ,3 7 0 7 9 ,9 7 1 3 ,1 4 ,1 5 2
T e le c o m m u n ic a tio n s 1 ,0 3 ,3 6 5 3 1 ,3 7 5 3 8 ,1 3 4 4 8 ,5 9 3 6 1 ,6 4 6 7 8 ,6 9 0 2 ,5 8 ,4 3 9
R a il w a y s ( in c l . M R T S ) 1 ,1 9 ,6 5 8 3 4 ,2 2 5 4 0 ,9 6 4 4 9 ,5 2 5 6 0 ,3 9 3 7 6 ,7 0 1 2 ,6 1 ,8 0 8
Ir r i ga tio n ( i n c l. W a te r sh e d ) 1 ,1 1 ,5 0 3 2 7 ,4 9 7 3 5 ,9 1 6 4 7 ,1 8 9 6 2 ,2 6 6 8 0 ,4 3 3 2 ,5 3 ,3 0 1
W a t e r S u p p ly a n d S a n it a ti o n 6 4 ,8 0 3 1 9 ,2 9 8 2 2 ,7 8 1 2 7 ,3 2 3 3 3 ,2 6 6 4 1 ,0 6 3 1 ,4 3 ,7 3 0
Po rt s 1 4 ,0 7 1 1 2 ,4 0 9 1 4 ,8 2 2 1 7 ,3 7 4 1 9 ,9 8 0 2 3 ,4 1 0 8 7 ,9 9 5
O th ers 2 1 ,3 0 3 1 1 ,6 9 3 1 2 ,6 2 1 1 3 ,6 8 2 1 5 ,1 7 0 1 7 ,0 3 5 7 0 ,2 0 1
T o ta l ( R s c ro r e ) 8 ,7 1 ,4 4 52 ,7 0 ,2 7 33 ,2 1 ,5 7 93 ,8 9 ,2 6 64 ,7 9 ,1 1 75 ,9 5 ,9 1 3 2 0 ,5 6 ,1 5 0
T o ta l ( U S $ b i lli o n ) @ R s 4 0 / $ 2 1 7 .8 6 6 7 .5 7 8 0 .3 9 9 7 .3 2 1 1 9 .7 8 1 4 8 .9 8 5 1 4 .0 4
(Source: Annual Plans and other documents of the Planning Commission and CSO for the
Tenth Plan period)
The current economic slowdown provides an opportunity for countries like India that have
a substantial degree of unmet infrastructure requirements. The Government's focus, sustained
increased budgetary allocation and increased funding by international and multilateral
development finance institutions for infrastructure development in India is expected to result in
several large infrastructure projects across India. There are also various initiatives being taken to
encourage private sector participation, such as tax breaks for investments in infrastructure.
Water Industry in India
Demand and Supply:

India with 2.4% of the world‟s total area has 16% of the world‟s population; but has only
4% of the total available fresh water. In India, per capita fresh water availability has dropped
from 4000 m3/year in 1962 to 1647 m3/ year in 2007 (Source: Food & Agriculture Organization
Page 17
of the United Nations -http://www.fao.org/nr/water/aquastat/dbase/index.stm). The per capita

water supply in Indian cities is only 146 litres per day when compared to availability of 500 litres
per capita per day in the US. According to the World Health Organisation statistics, only 21% of
the total population (49% in urban areas and 10% in rural areas) had access to piped drinking
water in 2006 and 28% of the total population of India (52% in urban areas and 18% in rural
areas) had sustainable access to improved sanitation facilities in 2006. (WHO Definition:
Improved sanitation includes connection to a public sewers, connection to septic systems,
pourflush latrines, simple pit latrines and ventilated improved pit latrines.)
Status of Water Supply, Waste Water Generation, and Treatment in Class I Cities / Class
II Towns in 2003-04
Class I cities Class II towns Total

Number (as per 2001 census) 423 498 921
Population (mm) 187 38 225
Water Supply (MLD) 29,782 3,035 32,817
Water Supply (LPCD) 160 81 146
Wastewater Generated (MLD) 23,826 2,428 26,054
Wastewater Generated (LPCD) 127 65 116
Wastewater Treated (%) 29% 4% 27%
Wastewater Untreated (%) 71% 96% 73%
(Source: The Eleventh Five Year Plan documents)
Of the total wastewater generated in the metropolitan cities, barely 30 per cent is treated
before disposal. Thus, untreated water finds its way into water systems such as rivers, lakes,
groundwater and coastal waters, causing serious water pollution.
In India the water sector is witnessing strong demand drivers. Of the total water usage,
86% is devoted to agriculture, 8% to domestic/municipal use and 5% to industry (Source: Food &
Page 18
Agriculture Organization of the United Nations -

http://www.fao.org/nr/water/aquastat/dbase/index.stm). As projected by Ministry of Water
Resources, Government of India (GoI), by 2050 demand for water will surpass the supply from
utilisable water resources in India. In the country, water demand is expected to rise from 552
BCM in 2000 to 1093 BCM by 2025.
At present the agriculture sector dominates water use owing to its importance in the Indian
economy, but with higher level of development, more water will be demanded for domestic and
industrial purposes. The domestic demand per capita is expected to rise substantially as the
country develops economically and level of urbanization rises. The demand from industrial sector
is also expected to grow rapidly in tandem with significant capacity additions and growth plans of
user industries like power, steel, refineries etc.
Government Spending on Water Infrastructure
Under the scheme of the Constitution, 'water' is basically a State subject and the Union
comes in only in the case of inter- state river water disputes. The 74th Amendment of the
Constitution delegated 18 functions, including water supply, to urban local bodies (ULB), and
accorded constitutional status to these institutions as the third tier of the government.
Eleventh Five-Year Plan:
The GoI has significantly increased its focus on water supply and sanitation facilities. This
is also evident in steep increase in plan expenditure allotted for water supply and sanitation. The
total planned expenditure for Water Supply and Sanitation is expected to be at Rs. 143,730 crores
as exhibited in the following chart:
Page 19
(Source: The Eleventh Five Year Plan Documents, Planning Commission)

Large Government funds allocated to water and sanitation
Government has been increasingly focusing on water and sanitation evidenced by larger
funds allocated to this segment under the current five year plan as compared to previous plan.
Government is targeting 100% water supply and sanitation to the urban population by the end of
Eleventh Plan. This would entail an cash outlay of Rs.1,29,200 crores. Under JNNURM
(Jawaharlal Nehru National Urban Renewal Commission), 463 projects requiring an investment
of approximately Rs.50,000 crores were sanctioned. Around 76% of these projects aim at
improving urban water supply and sanitation. Government has allowed 100% FDI in the
infrastructure sector, including water treatment systems. This is a strong incentive for global
players to test Indian waters.
Huge funds allocated for urban water infrastructure
Est. Amt Amt.

Sub-sector Source of Funding
(Rs. Crores) (Rs. Crores)
Urban water supply 53,666 Central Sector Outlay 70,000
Urban sewage and treatment 53,168 State Sector Outlay 35,000
Urban drainage 20,173 Institutional Funding 10,000
Solid Waste Management 2,212 External Support Agencies 10,000
Others 18 FDI and Private Sector 4,237
Total 1,29,237 Total 1,29,237
(Source: Ministry of Urban Development, GoI)
Page 20
Industry Structure
The Indian market can be segmented into different verticals, each with different business
dynamics and opportunities. Within the sector, opportunities exist across the value chain: study,
consulting, design, EPC/DB, equipment vendors, PPP projects etc.
Competition:
Water industry is highly fragmented and unorganized in nature and largely concentrated in
certain geographical pockets. There is significant competition, but players differ significantly in
terms of project capabilities:
• Companies engaged exclusively in water treatment having proprietary technology to
undertake turnkey water contracts and which may sub-contract civil construction work
• Large EPC Construction companies with execution ability to undertake large projects, but
no water expertise. These companies may subcontract the water treatment work in large
projects to water specialty companies
Page 21
• Handful of players with execution experience across disciplines and ability to implement
complex projects
Construction companies in India are typically civil engineering companies which

undertake construction work on a contract basis, in sectors like roads, ports, urban infrastructure,
power projects etc. All construction projects have eligibility criteria of two types - technical and
financial. Customers look for experience of design, engineering and construction capability of
treatment plants of similar magnitude and complexity under technical eligibility. Sometimes it
calls for experience with specific technology application and demonstration of performance in
running a plant over a certain period. The financial eligibilities are mainly related to revenue and
net worth of the companies.
Companies who have the requisite financial strength and experience typically meet these
eligibility criteria and undertake projects independently. Smaller companies generally have to
enter into joint ventures to meet the eligibility criteria and to spread the financial and business
risk. Build, Operate and Transfer (“BOT”) and Build, Own, Operate and Transfer (“BOOT”) are
also increasingly seen as modes of executing projects. Foreign engineering and construction
companies typically participate in the infrastructure development in India through joint
development ventures with Indian construction companies.
Industry Trends
While the water situation in India is grim, reforms on the regulation front have begun to
take shape and success of these can throw up potentially huge investment opportunities. Water
treatment and supply projects have been granted „infrastructure‟ status. This makes water supply
projects eligible for bank finance and a 10-year tax holiday. The GoI has allowed 100% foreign
direct investment in the infrastructure sector including water treatment system. Private
participation in water engineering as a whole and the water treatment segment in particular is
expected to witness a significant boost in the future. In accordance with the recommendations of
the Rakesh Mohan Committee on Infrastructure, private participation in the Indian water sector is
increasingly being encouraged via two modes:
1. Privatization through either BOOT projects or management contracts: This is particularly
popular in industrial and urban water supply related undertakings. The government has
also started subcontracting O and M of existing water and wastewater treatment plants to
private operators given the economies in terms of fixed costs.
Page 22
2. Infrastructure reforms with incentives for private participation: The recent indirect fiscal
benefits such as zero customs duty and zero excise duty, announced by the Government to
bring down capital costs related to infrastructure projects are steps in that direction.
Growth Drivers
• Huge gap in safe water supply and sanitation infrastructure availability in the country.
• Large budgetary allocation from the Government in water supply and sanitation.
• Increased funding from multilateral agencies like World Bank, ADB, etc. with emphasis
on private participation.
• Stricter disposal norms for industrial waste water.
• Need to recycle treated waste water to solve the problem of disposal and fresh water
availability simultaneously.
• Increasing trend to outsource O&M services.
• BOT / BOOT concession projects which are cash intensive but provide higher margins in
the long run.
• Improvement in technology leading to lower costs and higher affordability.
Desalination Outlook
The most traditional techniques for desalination have involved thermal processes. The
most common contemporary thermal processes, multi-stage flash (MSF) distillation and multiple
effect distillation (MED), are highly reliable and capable of producing remarkably pure water
from the saltiest seawater sources. However, these techniques especially MSF consume large
amounts of energy. These techniques tend to be economically viable only when water shortages
are most severe and when local energy supplies are abundant such as in Saudi Arabia, the UAE,
Kuwait and a few other countries in the region. Elsewhere, shortages of quality water can also be
daunting. This is true in China, Spain, Australia and parts of the United States where populations
have outgrown native water supplies or local water supplies contain so much salt and other
dissolved solids that they are not fit for use.
These difficulties are perhaps most severe in Middle Eastern and North African nations
not endowed with plentiful oil and gas reserves but beset with similarly arid conditions and lack
of indigenous water supplies.
Page 23
Membrane-based methods to outpace other techniques

Membrane-based technologies are growing more rapidly than the overall fast-growing
desalination market. Membrane systems have been the technology of choice for brackish water
desalination in the US, Europe and elsewhere. Seawater reverse osmosis (SWRO) is expected to
be one of the fastest growing niches in the global desalination market for a number of key
reasons. First, the US, Spain, China, Australia and several other countries are using more
seawater as the source water for desalination processes. Most of the largest municipal facilities in
these countries will be using membrane-based techniques. Second, many countries in the
Africa/Mideast region such as Algeria, Israel and Saudi Arabia are relying on membrane
desalination to supply their growing water needs.
RO, MED desalination to register fastest growth
Overall, RO (reverse osmosis) and MED techniques are expected to account for a large
majority of new capacity, and the products used in conjunction with these technologies are
projected to register the fastest growth. Technological improvements to membranes extending
their functional lives and reducing their vulnerability to fouling will drive demand for RO
systems, and for the membranes, pretreatment filters, chemicals and other products used in these
systems. Growth for MED systems -- including evaporators, pumps and other products will be
driven by improved energy efficiency, especially when compared with MSF. Energy cost
reductions via the use of energy recovery systems and plants designed to use power plant waste
energy will also serve to make desalination systems more economically feasible.
Ion Exchange Ltd Analysis and Valuation
Ion Exchange India pioneered water treatment in India and is today the country's premier
company in water and environment management, with a strong international presence. Formed in
1964, as a subsidiary of the Permutit Company of UK, became a wholly Indian company in 1985
when Permutit divested their holding. The company currently employs 1,000 people - multi-
disciplinary teams of highly experienced professional managers technologists and scientists,
supported by a widespread infrastructure in India and abroad.
IE has a sustained focus on:
Page 24
• Technological advancement through R&D - innovation is hallmark as numerous patents

testify
• Affiliations with the best specialist water treatment companies internationally.
• Human resource development - melding technology with people trained to manage it
responsibly.
IE has businesses in the following segments, in the environment management field.
Group Businesses (SBUs)
Ion Exchange Singapore Asia Pacific Pte. Ltd. (Subsidiary)

To service the Pan Asian region for total water
management has set up Ion Exchange Asia Pacific Pte.
Ltd. in Singapore www.ieiasiapacific.com
Ion Exchange Services Ltd. (Subsidiary)
Page 25
IE investment in building an all-India service

infrastructure, started almost two decades ago, is today
serving us in good stead. Company’s service company
network, the largest in the water treatment industry in
India, and recently extended to several countries overseas, offers a comprehensive range
of technical and value-added services.
www.ion-services.com
Ion Exchange Enviro Farms Ltd. (Subsidiary)

Like core business, diversification into organic agri-
horticulture, through Ion Exchange Enviro Farms Ltd., is a natural
extension of activities and shares our vision of a better world.
An agri-business subsidiary, this company harnesses Ion Exchange India's four decades of
water and environmental management experience into organic agri-horticulture. The company is
among the first corporate in India to undertake scientific bio-intensive organic farming on a
commercial scale. Its thrust areas of business are enviro farms, contract farming and produce
marketing.
By focusing on select farms the company was able to reduce operating costs while at the same
time improve throughput and yields. Apart from Organic Mango and Cashew the company has
also developed expertise in growing Organic bananas which have a potential to grow In both
sales and profits on a 12 month basis.
However the overall productivity from farm output is yet to reach the optimum levelsdue
to erratic climatic and environmental factors beyond our control. The company alsoplans to focus
on Organic nursery for additional income generation.www.ionenviro.com
Ion Exchange Waterleau Ltd. (Joint Venture)

Joint venture with Waterleau, Brussels specializes in
environmental solutions and services with proprietary
technologies encompassing air, water & waste water , bio
solids, waste & soil remediation
The Company provides Technology, R&D, designing, engineering projects and project
management, manufacturing, fabrications, erection and commissioning, O&M servicing.
Page 26
Orders bagged by Local Projects
 Prestigious order from Reliance Infrastructure Limited for their 6 x 660 MW Sasan
Ultra mega Power Project
 Water treatment plant package for Satpura Thermal Power Station expansion
project of M. P. Power generating Co. Ltd.
 The order for Water Treatment Plant package was awarded to IEI from B. C.
Jindal Group company for their 2 x 600 MW power plant at Angul, Odisha.
 Order form BHEL, Noida for side stream filtration plant for 2 X 500 MW Anpara
D project
Page 27
 Desalination plant for Simapuri Energy Phase 2
 Madhucon Projects Limited, for Phase II power plant package
 From Ship Building Centre - Vishakapattinam for MB Polisher Unit
 Order from BHEL Anpara Thermal Power Station for train of AVGFs(18 nos.).
Key Fundamentals
Net Profit Surged 359% Y-0-Y in FY10
Ion exchange recorded 359% Y-o-Y growth in its FY10 NPAT to Rs. 6.61 Crore
despite a huge slowdown in the FY 2008-09. The revenue for the FY10 rose by 15% Y-o-Y.
With CAGR of 11.34% since FY05 when company made huge investments in the R&D division.
The revenue in Engineering Projects increased 7% to Rs. 77.20 crore, Chemicals increased 37% to
Rs. 40.27 crore and Consumer Products revenues increased 19% at Rs. 21.28 crore. The resultant
operating profit was up 28% Y-o-Y at Rs. 28.04 crore. Interest cost increased to 26% Y-o-Y at Rs.
13.59 crore and depreciation increased 7% to Rs. 5.82 crore leading PBT increase by 187% to Rs.
10.22 crore. Effective tax rate decreased 400 bps to 35%. The PAT ended 359% higher at Rs. 6.61
crore.
PBIT margins of Ion exchange increased hooping by 256 bps during the year to 5.61%
mainly due to
Segmental Performance Of Ion Exchange
Segment wise Operational Performance

The business of your company can be segmented into:
1. Engineering and Projects
2. Chemicals
3. Consumer Products
Engineering and Projects
Page 28
Engineering Segment achieved turnover of Rs. 327 crores as compared to Rs.259 crores
for the previous year. Margins were eroded due to unanticipated cost overrun in some of the
projects
Engineering and Projects segment revenue for the quarter increased 7% Y-o-Y to Rs.
77.20 crore and the PBIT improved 12% from Rs. 1.23 crore to Rs. 1.38 crore with PBIT margin
increasing 10 bps from 1.7% to 1.8%.
Chemicals
The segment achieved turnover of Rs.120 crores compared to Rs. 119 crores of the
previous year.
Consumer Products
The segment achieved turnover of Rs. 71 crores as compared to Rs. 68 crores of the
previous year. The segment sustained business volume inspite of the slowdown in the Institution
segment with 10% growth in the domestic segment. The revenue generated in Service business
increased by 45%, not only contributing to the topline but also improving the satisfaction levels of
our customers in the process.
In the year under review, the domestic water purifier business attracted a large number of
new entrants resulting in intense competition and ever-changing dynamics in the market place.
Performance for the year ended March 2010
For the year ended March 2010, the net sales increased by 17% to Rs. 501.34 crore.
Marginal Increase in the interest cost by 6.42% to Rs. 13.59 crore and marginal increase in the
depreciation by 7% to Rs. 5.82 crore and more increase in the EBIDTA by 19% has led PBT
increase by 187% to Rs. 10.22 crore. Effective rate of tax decreased from 75% to 35.3% leading
net profit to grow 359% at Rs. 6.61 crore
Risks, Threats , Concerns for Ion Exchange
As you are aware, throughout 2008-09 and the first half of 2009-10, industry as a whole
witnessed volatility in prices of both global as well as local raw materials such as steel, cement,
petroleum products etc. This had a significant impact on the operations of most of players in
industry including the water industry. The second half of 2009-10 saw the corporate environment
recover from recessionary conditions, and prices, though not yet stable, have not negatively
impacted operations. With the changing macro-economic scenario and changes in the water
treatment industry, company remains vigilant of its market share with continued focus and
reinforcement on credibility, quality, services and technology fronts to ensure competitiveness vis
– a – vis major Indian and global players. This year your management, in the wake of the volatile
market scenario, has consciously decided to refrain from bidding on certain low margin projects.
Other mitigation plans that Ion Exchange has executed include cost reduction, value engineering
without compromising quality, and tie-ups with vendors for assured supplies at competitive prices.
Regulatory policies and changes in the law of the land, though completely beyond the control of
Page 29
the company, affect business operations. A periodic internal certification process to provide
regulatory compliance assurance has been evolved to mitigate regulation related risks. Ion
Exchange being a technology driven company is continuously on the lookout for reputed and
reliable new alliances and international partners to capitalize on the gains of technological
innovations. Significant investment is also planned on research and development, technology
upgradation and adoption of new technologies. Fluctuations in exchange rate have been also
identified as one of the risk that could impact export earnings as well as raw material imports.
However, the company has adequate hedging methods in place to mitigate this risk. The company
has a conservative forex management policy and does not speculate in the forex market.
Market Analysis
The growth of the stock with respect to the BSE SENSEX is shown in the following chart.
The performance of the same is shown in the beta calculation of this stock.
Source: www.bseindia.com
Page 30
Above chart basically shows changes in the Market capitalization, Net sales and net
profits have occurred over a period of time for Ion Exchange.
Simple Moving average for 50 days and 200 days is shown in the following chart.
Shareholding Pattern
Page 31
Source: www.ionindia.com
Financials and Valuations

Projected Free Cash Flow
2010 2011E 2012E 2013E
Revenues INR 500.13 INR 560.15 INR 627.36 INR 702.65
-Operating Expenses INR 465.12 INR 520.94 INR 583.45 INR 653.46
EBIT INR 35.01 INR 39.21 INR 43.92 INR 49.19
Tax Rate 26.81% 26.81% 26.81% 26.81%
EBIT (1-t) INR 25.62 INR 28.70 INR 32.14 INR 36.00
+ Depreciation INR 5.82 INR 6.25 INR 6.72 INR 7.22
Page 32
-Capital Expenditures INR 5.10 INR 5.48 INR 5.89 INR 6.32
- Change in WC INR (16.08) INR 3.34 INR 3.74 INR 4.18
= FCFF INR 42.42 INR 26.13 INR 29.24 INR 32.71
Projected Profit and Loss A/C

2010 2011E 2012E
Sales Turnover 513.93 561.877 600.792
Excise Duty 13.8 11.263 6.836
Net Sales 500.13 550.614 593.956
Other Income 1.59 5.744 6.38
Stock Adjustments 2.39 4.035 5.22
Total Income 504.11 560.393 605.556
Raw Materials 357.64 398.847 431.834
Power & Fuel Cost 5.68 6.649 7.32
Employee Cost 46.22 50.47 55.162
Other Manufacturing Cost 1.31 1.364 1.46
Selling and Admin
Expenses 50.8 57.566 62.182
Miscellaneous Expenses 12.83 16.486 17.332
Preoperative Exp.
Capitalised 0 0 0
Total Expenses 474.48 531.382 575.29
Operating Profit 28.04 23.267 23.886
EBITDA 29.63 29.011 30.266
Page 33
Interest 13.59 13.681 14.506

PBDT 16.04 15.33 15.76
Depreciation 5.82 6.133 6.554
Other Written Off 0 -0.128 -0.202
Profit Before Tax 10.22 9.325 9.408
PBT Margin 2.04% 1.69% 1.58%
Change in PBT 187.17% -6.47%
Extra-ordinary Items 0 0.004 -0.102
PBT(Post Extra ordinary
Items 10.22 9.329 9.306
Tax 3.6 3.802 3.92
Reported Net Profit 6.61 5.519 5.376
Net Profit Margin 1.32% 1.00% 0.91%
Equity Dividend 1.91 2.051 2.15
Corporate Dividend Tax 0.32 0.361 0.384
FCFF Valuation(More details in the Excel Sheet)
Page 34
INPUTSFORVALUATION
All Figures inCr
Current revenues ofthe firm= INR 500.13
Current capital invested in the firm= INR 63.42 Debt+Equity
Current depreciation= INR 5.82
Current capital expenditures for the firm= INR 5.10 FromAnnual Report
The change in Working Capitalin last year = INR (16.08)
The value of current debt outstanding = INR 50.69
The number of shares outstanding= INR 12,726,000.00 FromAnnual Report 1,27,25,861
HighGrowthPeriod
The growth rate in revenues for the next 5years = 12.00%
Operating expenses beas a %of revenues in the fifth year 97.00% Taken as highest amount of expenses in a particular yearin the history
Debt used in financing investments 75% INR 2,010.00 INR 2,009.00
Growth rate in capital expenditures &depreciation 7.43% INR 5.10 INR 5.48
Working capital as a percent of revenues 5.56% 7.43%
Taxrate oncorporate income 26.81%
Betausedtocalculate cost of equity 0.4695 Calculationof Rm(CAGRof SENSEXfor last 10years) 16.59%
Current long termbond rate = 7.95%
Market riskpremiumyou want to use= 8.64%
Cost of borrowing money = 35.00%
Stable Period
Growth rate in revenues = 6.00%
Operating expenses as a %of revenues in stable period = 92.00%
Capital expenditures as a percent of depreciation in this period 87.65%
Debt planed to use in financing investments 80.00%
Interest rate of debt in stable period = 26.81%
Betausedtocalculate cost of equity 0.4695
ESTIMATEDCASHFLOWS
Base 1 2 3 4 5 6 7 8 9 10
2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Growth in Revenue 12.00% 12.00% 12.00% 12.00% 12.00% 10.80% 9.60% 8.40% 7.20% 6.00%
Growth in Deprec'n 7.43% 7.43% 7.43% 7.43% 7.43% 7.14% 6.86% 6.57% 6.29% 6.00%
Revenues INR 500.13 INR 560.15 INR 627.36 INR 702.65 INR 786.96 INR 881.40 INR 976.59 INR 1,070.34 INR 1,160.25 INR 1,243.79 INR 1,318.42
Operating Expenses
%of Revenues 97.00% 97.00% 97.00% 97.00% 97.00% 97.00% 96.00% 95.00% 94.00% 93.00% 92.00%
- $Operating Ex
IN
penses
R 485.13 INR 543.34 INR 608.54 INR 681.57 INR 763.36 INR 854.96 INR 937.53 INR 1,016.83 INR 1,090.64 INR 1,156.73 INR 1,212.94
EBIT INR 15.00 INR 16.80 INR 18.82 INR 21.08 INR 23.61 INR 26.44 INR 39.06 INR 53.52 INR 69.62 INR 87.07 INR 105.47
TaxRate 26.81% 26.81% 26.81% 26.81% 26.81% 26.81% 26.81% 26.81% 26.81% 26.81% 26.81%
EBIT(1-t) INR 10.98 INR 12.30 INR 13.78 INR 15.43 INR 17.28 INR 19.35 INR 28.59 INR 39.17 INR 50.95 INR 63.72 INR 77.20
+DepreciationINR 5.82 INR 6.25 INR 6.72 INR 7.22 INR 7.75 INR 8.33 INR 8.92 INR 9.54 INR 10.16 INR 10.80 INR 11.45
- Capital Expenditures
INR 5.10 INR 5.48 INR 5.89 INR 6.32 INR 6.79 INR 7.30 INR 7.85 INR 8.39 INR 8.94 INR 9.49 INR 10.03
- Change in WIN
CR (16.08) INR 3.34 INR 3.74 INR 4.18 INR 4.69 INR 5.25 INR 5.29 INR 5.21 INR 5.00 INR 4.64 INR 4.15
=FCFF INR 27.78 INR 9.74 INR 10.87 INR 12.13 INR 13.55 INR 15.13 INR 24.38 INR 35.10 INR 47.18 INR 60.39 INR 74.46
Terminal Value(in '20) $ 652
COSTS OFEQUITYANDCAPITAL
INR 1.00 INR 2.00 INR 3.00 INR 4.00 INR 5.00 INR 6.00 INR 7.00 INR 8.00 INR 9.00 INR 10.00
Cost of Equity 12.01% 12.01% 12.01% 12.01% 12.01% 12.01% 12.01% 12.01% 12.01% 12.01%
Proportion of Equity 25.00% 25.00% 25.00% 25.00% 25.00% 24.00% 23.00% 22.00% 21.00% 20.00%
After-taxCost of Debt 25.62% 25.62% 25.62% 25.62% 25.62% 24.42% 23.22% 22.02% 20.82% 19.62%
Proportion of Debt 75.00% 75.00% 75.00% 75.00% 75.00% 76.00% 77.00% 78.00% 79.00% 80.00%
Cost of Capital 22.21% 22.21% 22.21% 22.21% 22.21% 21.44% 20.64% 19.82% 18.97% 18.10%
Cumulative WACC 22.21% 27.15% 33.18% 40.55% 49.56% 60.18% 72.61% 86.99% 103.50% 122.23%
Present Value INR 7.97 INR 7.28 INR 6.65 INR 6.07 INR 5.55 INR 7.60 INR 9.44 INR 11.11 INR 12.65 INR 137.70
FIRMVALUATION
Value of Firm INR 212.01
- Value of Debt INR 50.69
Value of Equity INR 1,613,186,527.98
Value of Equity per Share INR 126.76
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Value of Firmby year INR 212.01 INR 45.33 INR 53.42 INR 63.08 INR 74.63 INR 88.46 INR 102.85 INR 117.23 INR 130.80 INR 142.52
$Value of Debt INR 159.01 INR 34.00 INR 40.07 INR 47.31 INR 55.97 INR 67.23 INR 79.20 INR 91.44 INR 103.33 INR 114.02
Page 35
Conclusion:
For the valuation, I have used the growth rate which is basically the average of the Industry Growth rate
for the engineering, consumer product and the chemical the segments to which Ion Exchange
caters. The average rate comes to 12% which can be considered to be valid for the high growth
period.
Whole industry operates on very low margins also same thing is seen in the case of Ion Exchange. But
the capital expenditure that Ion Exchange has done on R&D is exceptional which may reap the
fruits in near future.
Also, beta of the stock as calculated by my method, it is low which shows low volatility of this
particular stock, which is very good sign for a stock in the Capital goods sector which always has
a buying row material price pressure from the steel, chemical, cement industry.
The value of the firm is well poised for the current valuation and growth in the Water Treatment
Industry.
About the risks associated with Ion Exchange, it has threats from local as well as International Water
Treatment comapanies. But, as stated eartlier the segment in which it operates is very niche and
specific, so being a one of the oldest players in this industry Ion Exchange has an upper
advantage over the other companies.
As per my valuation, an investor should hold this stock.
Page 36

Water Treatment Sector Outlook Parag Lavane

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Water Treatment Sector Outlook Parag Lavane

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A PROJECT REPORT ON

EQUITY RESEARCH ON WATER

TOWARDS FULFILLMENT OF THE REQUIREMENTS

MMS- ROLL NO: M0934

UNDER THE GUIDANCE OF

FR. C. RODRIGUES INSTITUTE OF MANAGEMENT STUDIES, VASHI

(Signature of the student)

I, Mr.V.Narayanan hereby certify that Mr.Madhu Rampelli a student

His work and output has been found to be satisfactory.

Place: (Signature of the

I wish to express my sincere thanks to Prof. V. Narayanan (FCRIMS), for

Why water is so important?

(Source: World Water Development Report)

(Source: World Water Development Report)

Global Water Market

(Source: Global Water Markets 2008)

(Source: Global Water Markets 2008)

(Source: Global Water Markets 2008)

(Source: Global Water Markets 2008)

7. Pharmaceutical companies employ state-of-the-art treatment equipment to produce high

(Source: Global Water Markets 2008)

(Source: Global Water Markets 2008)

Key Demand Drivers for the Industry

Increasing population & urbanization:

2. Tightening Environmental Regulations: Tightening of environmental regulations is

3. Private Sector Participation: Building water infra-structure is very capital intensive in

Global Markets Overview

Water Industry in India

Demand and Supply:

of the United Nations -http://www.fao.org/nr/water/aquastat/dbase/index.stm). The per capita

Class I cities Class II towns Total

Agriculture Organization of the United Nations -

(Source: The Eleventh Five Year Plan Documents, Planning Commission)

Est. Amt Amt.

Construction companies in India are typically civil engineering companies which

• Stricter disposal norms for industrial waste water.

• Increasing trend to outsource O&M services.

• Improvement in technology leading to lower costs and higher affordability.

Membrane-based methods to outpace other techniques

Ion Exchange Ltd Analysis and Valuation

IE has a sustained focus on:

• Technological advancement through R&D - innovation is hallmark as numerous patents

IE has businesses in the following segments, in the environment management field.

Group Businesses (SBUs)

Ion Exchange Singapore Asia Pacific Pte. Ltd. (Subsidiary)

Ion Exchange Services Ltd. (Subsidiary)

IE investment in building an all-India service

Ion Exchange Enviro Farms Ltd. (Subsidiary)

Ion Exchange Waterleau Ltd. (Joint Venture)

Orders bagged by Local Projects

 Desalination plant for Simapuri Energy Phase 2

 Madhucon Projects Limited, for Phase II power plant package

 From Ship Building Centre - Vishakapattinam for MB Polisher Unit

Net Profit Surged 359% Y-0-Y in FY10

Segmental Performance Of Ion Exchange

Segment wise Operational Performance

Engineering and Projects

Performance for the year ended March 2010

Risks, Threats , Concerns for Ion Exchange

Financials and Valuations

Projected Profit and Loss A/C

Interest 13.59 13.681 14.506

FCFF Valuation(More details in the Excel Sheet)