its water <-- water belonging to the cat it's water <-- It is water
Usually 's would mean it belongs to someone (e.g Emma's book)
but when 'it' belongs to someone we would say Its book / Its water
and It's means It is e.g It's a book, it is a book
Since this sentence is 'The cat drinks its water.' The cat is drinking water that belongs to him, the sentence cannot become 'The cat drinks, it is water'