VA TECH WABAG LTD: A VALUE PICK ; Buy at dips !!!

Scrip Code: 533269 / WABAG

CMP:  Rs. 440.25; Buy at Rs. 410 - 425 levels.
Short term Target: Rs. 450, 6 month Target – Rs. 550; STOP LOSS – Rs. 391; Market Cap: Rs. 1,164.30 cr; 52 Week High/Low: Rs. 285. / Rs. 576

Total Shares: 2,64,46,460 shares; Promoters : 81,97,915 shares –31 %; Total Public holding : 1,82,48,545 shares – 69 %; Book Value: Rs. 154.77; Face Value: Rs. 2.00; EPS: Rs. 24.25; Div: 200 % ; P/E: 18.15 times; Ind. P/E: 11.76; EV/EBITDA: 6.80.

Total Debt: ZERO; Enterprise Value: Rs. 1,100.30 Cr.

VA TECH WABAG LTD: VA Tech Wabag Limited was incorporated in 1995 and is headquartered in Chennai, India. The company was formerly known as Balcke Durr and Wabag Technologies Limited and changed its name to VA Tech Wabag Limited in April 2000. Va Tech Wabag Limited provides solutions in the water treatment industry. The company offers life cycle solutions, including conceptualization, design, engineering, procurement, supply, installation, construction, and operations and maintenance (O&M) services. The Company has four business units: Municipal Business Group, Industrial Water Business Group, International Business Group and Operation and Maintenance Business. It provides a range of engineering, procurement and construction, and operation & maintenance (O&M) solutions for sewage treatment; drinking and industrial process water treatment; effluents treatment; and sludge treatment, desalination, and reuse for institutional clients, including municipal corporations, and companies in the infrastructure sector. The company operates primarily in India, Middle East and North Africa, central and eastern Europe, China, and south East Asia. It has overseas subsidiaries in Austria, Switzerland, Germany, Czech Republic, Romania, Macao, Algeria, Tunisia, Egypt and Turkey.  It has a joint venture agreement with Zawawi Trading Company LLC in Oman. The company came with an Initial Public Offer in September 2010 with 9.5 lakhs shares at the issue price of Rs. 1310/ share raising Rs. 475 Cr. On August 2011 the company declared the sub division of shares from the face value of Rs. 5 to the face value of Rs. 2.00   

Investment Rationale: 

The global water market is estimated to be around US$ 400 billion. The water and waste-water sector continues to be an attractive investment portfolio due to various factors such as urbanization, industrialization and population explosion. The growth of the water market in the Asia Pacific region is driven by growing population densities. In the Middle East, the driver is scarcity, while massive government spending will boost the Chinese market. Sea water desalination will attract investments to augment the installed capacity from 66 million cubic metres (m3) per day to 120 million m3 per day by 2016. WABAG is a global technological leader in the entire water treatment field managed by professionals and technocrats. The company has a unique business model with strong in-house research. The company has an excellent system for efficient equipment procurement, better engineering & designs. The company also enjoys higher margin due to close monitoring and cost control. In financial terms Wabag is a zero debt company with significant cash balance of Rs 324 Cr and is constantly evaluating various opportunities for inorganic growth. The company has a diversified revenue source and more focused on high margin segments. VA Tech WABAG Ltd has an Order book of Rs. 3,530 Cr and healthy order inflow worth Rs. 900 Cr for 9MFY12, VA Tech Wabag is expected to achieve financial closure of its three BOOT framework contracts worth Rs. 530 Cr by end of 4QFY12. For 9MFY12, VTW has reported consolidated revenues of Rs. 770 Cr and expects to book 40 % - 50 % of its annual revenue for FY12 in 4QFY12, mainly due to higher revenue booking from the Dambulla (Srilanka) project in which 15 % of the jobs are already completed, but no revenues have been booked as yet. Key projects which would be revenue contributors are Chennai Desalination project would contribute around Rs. 45.80 Cr to the revenue; A total water management project from IOCL Paradip will contribute around Rs. 35.79 Cr; Project from Delhi JAL Board to contribute Rs. 11.58 Cr; Projects from ESSAR Group will contribute around Rs. 11.41 Cr; A project from Majjis, Oman to give Rs. 9.6 Cr and Projects from Tehran and Shiraz to contribute Rs. 26 Cr and Rs. 25 Cr respectively.  

Outlook and Valuation:

With a strong Order book & an order inflow for Q3FY12, the management remains confident of achieving a closing order book of around Rs. 4,000 Cr for next year. 3 BOOT Orders worth Rs. 530 Cr from Aurangabad, Ulhasnagar & Namibia have already moved from framework to firm order book on its financial closure. Further, more repeated orders worth Rs. 300 Cr are expected from the oil, gas & steel sector & an international framework order worth Rs. 200 Cr is expected to get booked in Q4FY12.While order inflow in past 9M has remained subdued from the municipal sector, the new JNNURM scheme planned by the government and other state/central projects is expected to boost investments from the municipal segment. The company have seen revenue de-growth of around 7 % for Q3FY12, on account of of delays in revenue recognition from the Sri Lankan project and a high base yoy execution of Libya project in 3QFY11. The Chennai Desal project & the Srilankan project are expected to contribute majorly, which will help VTW to achieve its growth guidance of close to Rs. 1400 Cr- Rs. 1500 Cr. Company's Operating margins were at 7.14 % due to the impacted of rupee depreciation combined with lower pace of execution in a few projects. With normalcy expected in the Libyan continent & revival in execution as well as revenue bookings in Q4FY12, VTW is poised to show strong growth going ahead. At its CMP of Rs. 440.25, the stock trades at 12.57 x FY13E earnings. The company can post Earnings per share (EPS) of Rs. 35 in FY13E and Rs. 42.80 in FY14E. One can buy VA TECH EABAG Ltd with a target price of Rs. 450.00 for Medium to Long term investment.

KEY FINANCIALS	FY11	FY12E	FY13E	FY14E
SALES (Rs. Crs)	1,233.00	1,428.80	1,668.60	1,952.70
NET PROFIT (Rs. Crs)	51.80	68.00	92.40	113.10
EPS (Rs.)	19.60	25.80	35.00	42.80
PE (x)	21.30	16.20	11.90	9.80
P/BV (x)	1.93	1.76	1.55	1.37
EV/EBITDA (x)	6.80	6.00	4.60	3.50
ROE (%)	9.10	10.90	13.10	14.00
ROCE (%)	15.00	16.40	17.40	18.40

I would buy VA TECH WABAG Ltd with a price target of Rs. 450 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 391.00 on every purchase.