VA TECH WABAG LTD: POISED TO BE A LEADER !!

Scrip Code: 533269 / WABAG

CMP:  Rs. 511.25; Market Cap: Rs. 2,784.15 Cr; 52 Week High/Low: Rs. 970.00 / Rs. 510.00

Total Shares: 5,44,57,891 shares; Promoters : 1,57,73,404 shares –28.96 %; Total Public holding : 3,86,84,487 shares – 71.03 %; Book Value: Rs. 125.92; Face Value: Rs. 2.00; EPS: Rs. 20.76; Dividend: 200 % ; P/E: 25.35 times; Ind. P/E: 24.79; EV/EBITDA: 12.68 times.

Total Debt: Rs. 180.64 Cr; Enterprise Value: Rs. 2,725.22 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. WABAG is one of the world’s leading companies in the water treatment field. WABAG’s key competences, which are based on over 90 years of plant building experience, lie in the design, completion and operation of drinking water and wastewater plants for both the municipal and industrial sectors. WABAG offers sustained solutions for special customer needs through a comprehensive range of services and innovative technologies. Their plants facilitate environmentally compatible wastewater disposal and secure access to clean drinking water for an increasing number of people. This allows them to make an important contribution to environmental protection and enhanced quality of life. 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. The company declared bonus on February 7, 2015 in the ratio of 1:1. 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. VA Tech WABAG is locally compared with Eco Recycling Limited and Ion Exchange, A2Z Maintainace, Thermax India, GE Water, Siemens Water, Voltas Ltd, Hindustan Dorr-Oliver Ltd, Wog Technologies, UEM India Pvt. Ltd, SFC Environmental Technologies 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 a multinational player in the water treatment industry with presence in India, the Middle East, North Africa, Central and Eastern Europe, China and South East Asia through principal offices in India, Austria, the Czech Republic, China, Switzerland, Algeria, Romania, Tunisia, UAE, Libya and Macau. It offers complete life cycle solutions including conceptualisation, design, engineering, procurement, supply, installation, construction and O&M services. The company provides a range of EPC and O&M solutions for sewage treatment, processed & drinking water treatment, effluents treatment, sludge treatment, desalination and reuse for institutional clients like municipal corporations and companies in the infrastructure sector such as power, steel and oil & gas companies. Till date, WABAG has executed 2,250 projects and is currently executing 72 projects. It is a technology‐focused player with R&D centres in Chennai, India, Vienna in Austria and Winterthur in Switzerland respectively. Wabag Austria and Wabag Wassertechnik own 157 patents, which include both process and product patents. WABAG has approximately 1,469 employees including 757 qualified engineers. In India, it has around 754 employees including 588 qualified engineers. The company benefits from association with the Wabag brand. In 2007, it acquired Wabag Austria, thereby taking over the Wabag Group. It has a project reference list of more than 2,250 over the past three decades. 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. Increasing population, economic development and urbanisation have led to higher demand for fast depleting fresh water. India has a robust investment opportunity of around Rs. 13.6 lakh crore alone in water sector, so there’s immense business opportunity in India for water solution companies like WABAG. This is coupled with strong international prospects across the water treatment space to bridge the demand-supply deficit, which is estimated to reach 39 % by 2020. WABAG operates on an asset light-EPC led model in water treatment projects across municipal & industrial segments. WABAG has a market share of 14 % in the Indian market. With growing concern on access to clean water and urgent measures to solve the issue of depleting water resources, the investment in water treatment is likely to increase manifold globally. Accordingly, WABAG is expected to benefit significantly by leveraging its Strong domestic presence and rising global footprint. The company’s strong book-to-bill ratio of 2.5 times provides revenue visibility for two years. This coupled with a strong execution track record is expected to lead to 17.1 % revenue CAGR in FY15-18E to around Rs. 3,898 crore while the margin is expected to expand by 0.80 % to 10.4 % over FY15-18E. The company garners a higher EBITDA margin of 13 % to 14 % across its India business, 8 % to 9 % across the India international business and 5 % to 6 % across the Europe segment taking overall EBITDA margin to 9.3 %. WABAG has the strongest portfolio of water treatment, waste water-desalination, etc., in India and unlike most EPC peers has in‐house technology, which is the key to its pole position. Its strong technological competence coupled with a large talent pool impart it the resources to successfully execute complex water projects. 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 trend in adoption of desalination process to secure clean water is on its spree & is likely to open up lots of new opportunities for the companies like WABAG.

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 in this sector 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. India has low per capita water supply of 146 litres per day versus 500 litres per day in developed nations, this hints huge potential. Also, with rising stringent norms for waste‐water treatment, the scope for WABAG becomes enormous; especially when only less than 30 % of industrial waste‐water is treated before release. The company has made significant inroads in China, Saudi Arabia, Egypt, Spain and Turkey which are important key emerging markets. Company has being clocking in high growth in water and waste‐water treatment. WABAG being an asset‐light business model, which imparts it’s capability to take on larger volume of projects and generate higher RoCE. The company has identified critical areas which are mostly retained in‐house, while non‐critical, low‐value add work is outsourced. WABAG reported flat revenues at Rs. 628.9 Cr on consolidated basis. While domestic revenues surged by 26.6 % to Rs. 371.3 Cr which reflects 59.0 % of total revenues, overseas revenues declined by 20.8 % to Rs. 257.6 Cr owing to - execution slowdown in Nepal project due to local conditions; 11 % depreciation in Euro, and many projects are at initial period of execution. WABAG’s key projects are now contributing significantly to its revenue in Q3FY16 which includes APGENCO’BOP water management project to about Rs. 98.9 Cr, Petronas RAPID ETP, Malaysia of about Rs. 42.1 Cr, PHED Habra, and West Bengal to about Rs. 40.2 Cr, Suplac, Romania about Rs. 34.2 Cr and Istanbul Turnkey O&M project contributed around Rs. 32.8 Cr. While rest of its key overseas project remains in engineering stage and are expected to start contributing from current quarter onwards. WABAG has also set up a separate team for project closure, which will lead to focused attention on closing projects. Wabag strengthened its positioning in Turkey market by bagging third order of Rs. 150.1 Cr from the Turkish Ministry of Environment and Urbanization in the last quarter. Resultantly total order inflow in 9MFY16 stood at Rs. 3360 Cr. Order backlog stands at INR 64.1 bn (book/ bill of 2.5x), which along with framework contracts worth INR 15.4 bn, provides strong revenue visibility. Wabag’s RoE and RoCE is expected to improve from 15.0 % and 17.4 % in FY15 to 18.4% and 21.2 %, respectively, in FY17E. The return on invested capital (RoIC) is expected to improve from 26.5 % in FY15 to 31.9 % in FY17E. Going ahead, Wabag’s growth to come from a revival in industrial capex across Indian and global markets. 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. 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. At its CMP of Rs. 511.25, the stock trades at 24.81 x FY16E EPS of Rs. 20.60 and 16.92 X FY17E EPS of Rs. 30.20. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	2,428.40	2,690.20	3,341.20	4,131.30
NET PROFIT (₹ Cr)	111.80	111.70	164.20	236.00
EPS (₹)	20.60	20.60	30.20	43.50
PE (x)	28.10	28.10	19.10	13.30
P/BV (x)	3.50	3.20	2.80	2.40
EV/EBITDA (x)	13.90	14.00	9.60	7.20
ROE (%)	12.80	11.80	15.50	19.30
ROCE (%)	19.20	17.00	23.80	29.50

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