How Jose struck gold from solid waste

On the pleasant morning of January1, 2021, when Jose Jacob Kallarakal rang the ceremonial gong at the BSE to mark the listing of his company, there was excitement on the floor. Though most primary market veterans had predicted a premium at the listing, the air of uncertainty was inescapable. Jose, as he is popularly known, looked at the charts in disbelief as the stock raced ahead. The mechanical engineer from Mumbai, who heads the newly-listed Antony Waste Handling Cell Ltd (AWHCL), knew he had struck gold from what many thought was only an environmental hazard—solid waste.

The stock steadily spiralled up to an intra-day high of nearly ₹493 before settling at ₹407, up 29% from the IPO price of ₹313-₹315 apiece. By any standard, it has been a spectacular market debut for a company that made a failed attempt to list shares a few months ago, in June 2020. In its first attempt, the shares were priced at ₹294-₹300, but failed miserably in a market wrecked by the pandemic. Only half of the shares were subscribed then.

Jose got the timing right in his second attempt, in the New Year. The stock markets have seen an upward swing ever since the early success of the Covid-19 vaccines. A few other IPOs had already set the primary market on fire. “My investor, Elliott Management, a large hedge fund from the U.S. who had invested in 2007, wanted to exit partially. And they could do it comfortably,” Jose, who is chairman and managing director of AWHCL, tells Fortune India.

Elliott, which had 49% stake in the company, has retained 19%.

“My investors are making excellent returns,” says an elated Jose.

Efforts to reach Karthikeyan S. Muthuswamy, managing director of Trident Advisors Pvt Ltd, which represents Elliott in India, were unsuccessful. Muthuswamy is on several boards of Antony Group companies, including AWHCL.

AWHCL, which operates one of the largest single-location waste processing plants in Asia with a capacity to handle up to 6,000 tonnes of solid waste per day, has developed in-house technologies to tackle municipal waste.

“The municipalities are reworking their bidding models with viability gap funding (VGF) to ensure participation by serious bidders. In a waste-to-energy project we recently won at the Pimpri-Chinchwad Municipal Corporation (PCMC), they have offered ₹50 crore in VGF, which is around 20% of the total capex of ₹240 crore. We are requesting the government and municipalities to increase the VGF contribution in all projects across the country so that the huge amount of waste generated daily can be professionally handled,” he says. VGF is a one-time grant provided to support infrastructure projects that are economically justified but may not be financially viable.

At Pimpri-Chinchwad, it is a compelling model at work. AWHCL handles around 1,000 tonnes daily and gets revenue through tipping fees (₹504 per tonne) and power tariff of ₹5 per every unit produced from the waste.

Tipping fee, or gate fee, is the charge levied by the company at a waste processing facility or a landfill. This fee helps to pay for the maintenance and other operating expenses of processing facilities and landfills.

“We generate around 12 MW of electricity and sell it to the cash-plus municipality. We get our payment without any delay,” says Jose.

Earlier, there was no VGF nor any tipping fee. Power generated from the waste was sold to the fund-deficit distribution companies owned by the state, and their payments were miserably slow. “It was difficult to operate in such an environment. Luckily, municipalities across the country have now realised the importance of making their waste management projects viable for bidding companies.”

What was the trigger for Jose to enter the waste management business? “After my engineering, I was fascinated by hydraulic technologies. Our family is into the business of automobile body building. We had built and sold ‘garbage compactors’ to several municipalities to help them manage waste. The ‘garbage compactors’ were much better than the usual dumpers, because you could manage it with just two labourers, and could handle three-four times the capacity. But municipalities kept demanding for services. I figured that waste management services were an excellent opportunity waiting to be explored. With more stringent rules related to groundwater and atmosphere pollution coming into play, municipalities are finding it increasingly difficult to manage the growing menace of solid waste,” says the 47-year-old Jose.

AWHCL came into existence in 2001. “Though we were doing small projects earlier, our first project under the AWHCL banner was in Greater Noida. Then there was no looking back. We kept winning order after order. At present, we are operating in 10 municipalities including five in Maharashtra—Mumbai, Thane, PCMC, Navi Mumbai, and Nagpur. We just won a seven-year contract in Varanasi, for collection and transportation of waste,” he says.

The company’s daily routine involves door-to-door collection of waste from households, slums, commercial establishments, and other bulk waste generators such as community bins. The processing of waste involves sorting and segregating waste received, followed by composting, recycling, shredding, and compressing into refuse-derived fuel, as required.

While AWHCL’s initial focus was on collection and transportation of waste, it forayed into waste processing in less than a decade since its inception. “In 2010, we started waste processing with our Kanjur (Mumbai) project. It has a capacity to handle 6,000 tonnes of waste daily. We tied up with a leading Brazilian company, Lara. It had extensive experience in the management of household and industrial solid waste and was handling over 4,000 tonnes of waste in São Paulo. The alliance was important because the BMC [Brihanmumbai Municipal Corporation] tender demanded prior experience in waste processing, and we had none. We soon set up a joint venture company—Antony Lara Enviro Solutions—with Lara holding 27%.”

The project at Kanjur, a Mumbai suburb, employs two technologies: bio-reactor landfill technology (where the company excavates and vacates the waste heaps after five years) and aerobic composting technology (which separates the organic part of the waste, which can then be made into compost). “Of the total waste collected at Kanjur, around 4,000 tonnes go to the landfill and over 1,000 tonnes, to compost making. The gas generated from the landfill is used to produce 1 MW of power at Kanjur,” says Jose.

AWHCL, one of the largest players in the Indian municipal solid waste management industry and the second listed company after Eco Recycling Ltd, employs over 7,000 people, mostly drivers, labourers, and managerial staff. Whenever it wins a municipal contract, all the workers associated with the project come to its payroll. AWHCL finds it easier to hire the same bunch of people for their experience. As of November 15, 2020, the company had 7,391 full-time employees and a fleet of 1,147 vehicles, a majority of which are equipped with GPS technology. It is among the key players in the landfill construction and management sector in India with in-house expertise for landfill construction and operations.

Vinay Mantri, a Mumbai-based waste management consultant, says AWHCL is founded on a sound business model, with its primary business being collection and transportation of municipal waste. “For the company, waste-to-energy projects provide additional revenue. Independent waste-to-energy projects are not financially viable yet and some companies are on the verge of closure,” says Mantri, adding that a foray into electronic and hazardous waste will give the company scope for expansion.

“Since most contracts are from government agencies, political connections are extremely important for growth,” adds Mantri.

For 2019-20, the company reported a 79% increase in profit after tax at ₹62.1 crore. Total revenues for the year jumped 55.6% to ₹464.6 crore. The rise in revenues was primarily due to new projects in Pimpri-Chinchwad and Nagpur becoming operational. Apart from these projects, two others at Noida and Dahisar-Borivali that began operations in January 2019 and November 2018, respectively, also contribute to the total kitty.

Jose foresees a new opportunity in bio-mining of legacy landfills. “In some cities like Mumbai, such landfills are situated in prime areas, and the land, once cleared of the waste, can be taken up for commercial development. Municipalities are increasingly ready to pay a higher tipping fee to vacate the old waste bases.” Typically, such projects are EPC contracts with two-three years’ tenure.

AWHCL’s ₹300-crore IPO comprised a fresh issue of ₹85 crore and an offer for sale of more than 6.8 million equity shares by existing shareholders. Elliott’s all four investment arms that invested in AWHCL—Leeds (Mauritius), Tonbridge (Mauritius), Cambridge (Mauritius) and Guildford (Mauritius)—participated in the offer for sale.

Shiju Jacob Kallarakal, Jose’s brother and CFO of the company, says the company has proposed to utilise the proceeds towards part-financing the waste-to-energy project at Pimpri-Chinchwad by investing in its subsidiaries. “Around half of the ₹85 crore will go to the PCMC project,” he says.

AWHCL is also looking to reduce consolidated borrowings of the company and its subsidiaries by infusing debt into its subsidiary, AG Enviro, for repayment or prepayment of a portion of their outstanding debt. It also intends to utilise a part of the proceeds towards general corporate purposes. “Our total debt is around ₹160 crore, with a debt-to-equity ratio of 0.6. With half of the IPO proceeds, we will bring it down to ₹120 crore,” says Jose.

The market capitalisation of AWHCL stands at ₹1,152 crore as on January 1 at the end of market hours. The Kallarakal family holds nearly half of the company (46% in AWHCL), with Jose holding 20.4%. His brother Shiju Jacob Kallarakal holds 5.82% while a cousin, Tito Kallarakal, holds 5.65%.

Jose believes that raising ₹90 crore from anchor investors ahead of the IPO, at the upper end of its price band, was crucial to the IPO’s success. The investors included Massachusetts Institute of Technology (MIT) and SBI Mutual Fund, among others.

What raised a stink for many has turned a gold mine for Jose.