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Wednesday, December 3, 2014


Scrip Code: 533269 WABAG
CMP:  Rs. 1,582.15; 
Market Cap: Rs. 4,240.53 Cr; 52 Week High/Low: Rs. 1,748. / Rs. 485.00; Total Shares: 2,68,02,373 shares; Promoters : 78,86,702 shares –29.43 %; Total Public holding : 1,89,15,671 shares – 70.57 %; Book Value: Rs. 224.93; Face Value: Rs. 2.00; EPS: Rs. 34.21; Dividend: 400 % ; P/E: 46.97 times; Ind. P/E: 35.99; EV/EBITDA: 20.28.
Total Debt: Rs. 158.25 Cr; Enterprise Value: Rs. 4,068.40 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. 1,310 a share raising Rs. 475 Cr. On August 2011 the company declared the sub division of shares from the face value of Rs. 5 to Rs. 2.00. VA Tech WABAG is locally compared with Eco Recycling Limited and Ion Exchange, A2Z Maintainace and globally compared with Beijing Enterprises Water Group Ltd of China, HanKore Environment Tech Group Ltd, SIIC Environment Holding Ltd, Severn Trent PLC, Cia Saneamento Basico Do Estado SABESP,  Veolia Environment SA 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 owns more than 100 process and product patents and has research centres in Austria, Switzerland and India. India is the second most populated country with over 1.2 billion people and the Official estimates of the Ministry of Water Resources (MoWR) have put total utilisable water at 1,123 billion cubic metres as against the current use of 634 billion cubic metres, which reflects the surplus. However, there exists a considerable temporal and spatial variation within the country with respect to water availability. The Indian population is 16 % of the world with 4 % of its water and 2.4% of its land. The population is expected to increase from 1.2 billion in 2010 to 1.6 billion by 2030. The country’s urban component is expected to increase from 30 % in 2010 to 50 % by 2030 also the per capita income is expected to rise by US$468 to US$17,366 by 2050. The freshwater is crucial need for human wellbeing and sustainable socio-economic development. Global water demand in terms of water withdrawals is projected to increase by around 55 % by 2050, mainly because of growing demands from manufacturing, thermal electricity generation and domestic use. As a result, freshwater availability will be increasingly strained over this period, and more than 40 % of the global population is projected to be living in areas which will face severe water stress through 2050. Seawater and brackish water desalination for reuse represents good demand. The share of water derived from long-distance transfer, desalination and reuse is expected to rise from 1.8 % in 2011 to 5.7 % in 2030. Although the low-cost water resources will continue to remain the dominant source of supply, and the expenditure in developing new water resources could grow by 8.2 % over the period 2013-2018. Spending on water infrastructure by industrial users is expected to outpace the municipal water sector. While the natural resource industries are increasingly pursuing marginal resources, these involve significant wastewater treatment challenges. In other sectors, brand management and corporate social responsibility are driving investments in water-efficient technologies. The VA Tech Wabag has won several a new large framework contracts worth Euro 4.5 Cr in the Operating & Maintaining space in Turkey which reiterates the growing stature of WABAG in Turkey and company continues its focus on increasing O&M Revenues. Wabag expects stronger traction in its domestic order books over next few months. This may be due to the government’s increased focus on improving water infrastructure in urban and rural areas in India, including Rs. 51,000 Cr for Ganga cleaning program over the next 5 years and Rs. 19,500 Cr to be incurred by Delhi Jal board to improve the water infra. WABAG has its inherent skills and execution capabilities in this sector and is very well placed to capture a large pie from these upcoming opportunities. Increasing adoption of desalination process to secure clean water is on its spree & is likely to open up lots of new opportunities for the company. Over the next couple of quarters, Nemeli phase 2 desalination project & additional 2 more desalination plants of 400 mld in Tamil Nadu viz. Tuticorin & Ramantham are expected to open up for bidding and WABAG has good chances to win those. Also company has strong order books from Andhra Pradesh, Maharashtra, Bihar, Rajasthan, Odhisa and Delhi, with projects size being between Rs. 200 Cr to Rs. 500 Cr. Internationally, WABAG’s order book too remains healthy and growth is expected to come from Srilanka, Philippines, Turkey and Eastern European geographies and Middle East areas especially Qatar, Bahrain. Wabag has incorporated a new subsidiary in Thailand to target the Indo-China markets. Being one of the key players in Turkish market, Wabag is bullish on its Turkey MDU. Water recycling and sustainable solution for a wastewater treatment plant in Saudi Arabia made by WABAG for the Al Kharj industrial park are now operational. WABAG to build two new water treatments plants in Egypt with a value of around EUR 13 million and Clean drinking water from the Nile for the cities of Suez and Port side. The water and waste-water sector continues to be an attractive investment portfolio for VA Tech Wabag 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 these regions. 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 and has expertise of better engineering & designs. The company also enjoys higher margin due to close monitoring and cost control. The company runs an asset-light business model by outsourcing the capital-intensive construction business and focusing on delivering the optimum water technology solution. Wabag entered into long term agreement for technology co-operation with Royal Haskoning DHV of Netherlands and intends to use it in India and Swiss markets. This innovative technology comprehends Wabag's superlative technology portfolio as it requires less power and is more cost effective in waste water management. Hence this new technology will be less expensive than the conventional technology both on capex and lifecycle cost fronts. The company recently inaugurated its BOOT Project in Ujams, Namibia, an Industrial Water Reclamation Plant. It is a technologically advanced project treating effluents from five different production plants which include brewery, slaughterhouse, beverage, chocolate and tannery. The plant will serve as a very good reference project for WABAG in terms of high end technology. The concession period is for this project is 21 years. VA Tech Wabag is attempting to expand into new geographies, including South East Asia, Sub-Sahara Africa, Latin America and Central Asia. In FY14, the company received initial orders from Nepal and Tanzania which also opens up interesting growth possibilities to ramp-up the business in these countries. Order intake in overseas subsidiaries has increased from Rs. 600 Cr to Rs. 700 Cr in FY12-13 to Rs. 1,640 Cr in FY14. O&M business contributed 20 % of FY14 revenues where margins are higher at 18 to 20 % vs 12 to 13 % in projects. WABAG intends to increase contribution from O&M segment and intents to move up in value curve in terms of Refurbishment, Spare Parts, Plant rehabilitation and automation. WABAG’s global operation makes it expose to multiple currencies & exchange rates volatility could significantly impact its earnings. Also Wabag’s presence in politically unstable countries likes Libya and Iran, where its peers have reported delays in project execution could also be a concern. However, these projects are backed by Dollar denominated LC’s, which results in limited impact on Wabag’s financials. On performance side WABAG’s consolidated Revenue for Q2FY15 stood at Rs. 500 Cr showing growth of 9 % YoY. Its EBITDA stood at Rs. 32.9 Cr grew 3 %. Company’s PAT stood at Rs. 15.60 Cr a drop of 14 % YoY due to lower execution coupled with reduced margins and increase in interest costs. WABAG’s Standalone sales stood at Rs. 233 Cr with an EBITDA of Rs. 23.6 Cr and its PAT stood at Rs. 11.6 Cr. Wabag’s gross cash stood at Rs. 340 Cr at the end of Q2FY15 which declined as compared to Rs. 470 Cr at the end of FY14. Its Gross debt stood at Rs. 250 Cr at the end of Q2FY15 vs Rs. 157 Cr at end of FY14. The increase in borrowings has been mainly led by higher working capital and investment in BOOT project. WABAG being the only listed Indian player with presence across the value chain of water spectrum is the best play on water scarcity theme. Rapid urbanisation, dwindling fresh water reserves, widening demand-supply gap, depleting groundwater level and increasing thrust of government on water & infra sectors, will keep the water treatment business thriving for a long time. Superior return ratios like its RoCE of +20 %, cash rich balance sheet, asset light business model and technological & locational advantage places it above its peers. Wabag’s book to bill ratio of 2.2x along with its superior execution track record, will place VA Tech Wabag on a sustainable growth path. Further upcoming opportunities of over Rs. 70,000 Cr from Ganga cleaning + Delhi Jal board project, alone would be more than double its order backlog, even if Wabag maintains a strike rate of mere 10 %. It is expected that the company’s surplus scenario is likely to continue for the next three years, & will keep its growth story in the coming quarters intact. It is expected that over 2013-2016E, the company can to post a CAGR of 23 % and 21 % in its top-line and bottom-line respectively.

SALES ( Crs)1,618.852,238.602,647.503,055.40
NET PROFIT (₹ Cr)90.34113.35142.30168.90
EPS ()34.0342.6153.5763.35
PE (x)41.2432.9329.3224.70
P/BV (x)5.214.444.664.06
EV/EBITDA (x)22.7416.7516.6913.23
ROE (%)12.5313.5116.4317.56
ROCE (%)20.7922.4221.9924.58

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