VA TECH WABAG LTD: BEST STOCK TO OWN !!!

Scrip Code: 533269 / WABAG

CMP:  Rs. 442.45; Buy at Rs. 435 - 440 levels.
Short term Target: Rs. 480, 6 month Target – Rs. 550; STOP LOSS – Rs. 407.05; Market Cap: Rs. 1,174.51 Cr; 52 Week High/Low: Rs. 588. / Rs. 370

Total Shares: 2,65,45,772 shares; Promoters : 82,04,360 shares –30.91 %; Total Public holding : 1,83,41,412 shares – 69.09 %; Book Value: Rs. 154.77; Face Value: Rs. 2.00; EPS: Rs. 33.95; Dividend: 300 % ; P/E: 13.03 times; Ind. P/E: 11.50; EV/EBITDA: 6.56.

Total Debt: 82.19 Cr; Enterprise Value: Rs. 1,015.18 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. VA Tech WABAG is locally compared with Eco Recycling Limited and Ion Exchange, A2Z Maintainace and globally compared with Veolia Environment of France, Suez Environment of France, ITT Corporation of USA, United Utilities of UK, Severn Trent of UK, Thames Water of UK, American Water Works Company of USA, Nalco Company Water treatment of USA, GE Water of USA, Kurita Water Industries of Japan, Takeei Corporation of Japan, Daiseki Co.Ltd of Japan 

   

Investment Rationale:

VA Tech Wabag Ltd (WABAG) is an established EPC player in water management space. It offers complete life cycle solutions from project design to installation to operation & maintenance. WABAG is multinational player with presence in India, MENA region, Central & Eastern Europe, China and South East Asia. Majority of its revenues comes from various municipalities. The company runs an asset-light business model by outsourcing the capital-intensive construction business and focusing on delivering the optimum water technology solution. The company owns more than 100 process and product patents and has research centres in Austria, Switzerland and India. The WABAG brand has been in existence since 1924 and has executed projects across 17 countries. The urban share of total population in India is 31% as against 45% for Indonesia and 78% for Mexico, thus highlighting the significant room for upside in these regions. With rising urbanisation from 5,161 cities in 2001 to 7,935 cities in 2011 and the decades of negligence in water supply - sanitation is creating urgent need for up-gradation of the water and sanitation sector. Recognizing the potential growth in urbanisation, the government had launched the JNNURM in 2006 (which ended in 2012) and followed by the new improved JNNURM for the period 2012-32, this will help the company as it’s a market leader. Recently, the JV of VA Tech Wabag Ltd won a Rs. 344 Cr order from the Manila Water Co in the Philippines for design and construction of 100 million litre a day sewage treatment plant, this JV is with a local civil construction company & will also operate the plant for two years, this project is funded by the World Bank and Va Tech holds major shares in the JV. The Tamil Nadu government has announced four more desalination projects, giving fillip to the desalination business, of which two projects are for Chennai city. Of the remaining two, one is an expansion project of 150 MLD of the Nemili Desalination plant in Chennai, set up and operated by WABAG. The Nemili project is to be tendered shortly. The land required is already acquired and in possession. The other Chennai project is for 200 MLD, expandable to 400 MLD, for which detailed project report work has been initiated. The tender may be called in fourth quarter of FY14. 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. The global water market is estimated to be around US$ 400 billion.

Outlook and Valuation:

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. VAW's order intake has increased from Rs. 680 Cr in FY09 to Rs. 2200 Cr in FY13. The company's improving credentials, expanding reference list and ability to take larger jobs is driving growth in the order intake. The company has teamed up with Sumitomo for taking Desalination projects in the MENA region. The company has already announced a major order win in consortium with Sumitomo. In the current fiscal, the company has guided for order intake of Rs. 2600 Cr – Rs. 2700 Cr. Company’s revenues are expected to grow at a CAGR of 16% over the period of FY13- FY15E, with the share of Operation & Maintenance is expected to increase in the overall revenue and expect it to account for nearly 18% of revenues in FY14 as against 14% in FY12. Margins in the international business are around 3% but there are scope for improvement on account of fixed cost leverage and strategic outsourcing of design work to low cost centres. ROE is expected to expand from 12.2% in FY12 to 15.4% in FY15, which should support valuations. At its CMP of Rs.442.45, the stock trades at 10.79x FY14E EPS of Rs. 41 and 9.61 X FY15E EPS of Rs. 46. One can buy VA TECH WABAG Ltd with a target price of Rs. 450.00 for Medium to Long term investment. 

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	1,443.50	1,618.90	1,867.50	2,091.07
NET PROFIT (₹ Cr)	73.70	89.70	108.60	122.24
EPS (₹)	27.80	33.80	41.00	46.00
PE (x)	16.80	13.80	11.40	10.10
P/BV (x)	1.90	1.70	1.60	1.40
EV/EBITDA (x)	7.40	6.10	5.10	5.10
ROE (%)	12.20	13.30	14.40	13.50
ROCE (%)	18.05	16.46	18.67	19.10

I would buy VA TECH WABAG LTD with a price target of ₹ 550 for Medium to Long term target. 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 ₹ 407.05 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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