EDUCOMP SOLUTIONS LTD : A BEST BUDGET BUY !!!

Scrip Code: 532696 / EDUCOMP

CMP:  Rs. 200.70; Buy at Rs. 198 levels.
Medium to Long Term Target – Rs. 250; STOP LOSS – Rs. 182.16; Market Cap: Rs. 1,927.27 cr; 52 Week High/Low: Rs. 492.50 / Rs. 162.00; Total Shares: 9,60,27,630 shares; Promoters : 4,75,53,645 shares –49.52 %; Total Public holding : 4,84,73,985 shares – 50.47 %; Book Value: Rs. 167.26; Face Value: Rs. 2.00; EPS: Rs. 27.90; Div: 30 % ; P/E: 7.19 times; Ind. P/E: 11.18; EV/EBITDA: 4.86.

Total Debt: 671.37; Enterprise Value: Rs. 2,618.09 cr.

EDUCOMP SOLUTIONS LTD: The Company was founded in 1994 and is based in Gurgaon, India. Educomp Solutions Limited provides education solutions to schools, learners, and educators in India. The company’s products comprise SmartClass - an education content and technology solution; QuEST - Quality Education for Students and Teachers, which provides various services, including professional development programs for educators and students, whole school development programs, parents empowerment programs, mathematical lab kits, and parents empowerment programs; Mathguru - a math-help program; WiZiQ - a Web learning platform, which connects students and teachers worldwide; LearnHub - a social learning network; ETEN - a tele-education network; and MagiKeys - a software application that allows government school students to surf the Web, email, chat, and write documents in their mother tongue. Its products also include Educomp O3 - an one on one learning system; Pave - an alpha phonics and reading program; EduLearn - a learning management system; Wizlearn - an advanced learning platform; Singaporelearning.com - a learning portal for parents and students mainly from Singapore; Aha!Math - a Web-delivered supplemental math curriculum for grades K-5; EasyTech - a Web-delivered K-8 technology literacy curriculum; Aha!Science - a supplemental science curriculum for grades 3-5; and Millennium Learning System - a learning delivery system. In addition, the company operates Leap learning centers; Learning Hour tutoring centers; IndiaCan vocational training centers; EduSchools and higher education institutions under Raffles Millennium International, JRE Group of Institutions, and Millennium Academy of Professional Studies brand names. Further, it provides various services, such as professional development; education infrastructure implementation, teacher training, and content development projects; EduIgnite career guidance program; and TechLiteracy Assessment to measure and report technology literacy. As of 2011, the Educomp Solutions Ltd held portfolio of over 15 direct subsidiaries and approximately 25 indirect subsidiaries in India, Singapore, the United States and Canada. In February 2011, the company acquired majority stake in Gateforum Educational Services Pvt Ltd. EDUCOMP SOLUTION is locally compared with Everonn Education Ltd and with Ichishin Holdings Company Ltd and Riso Kyoiku Co. Ltd globally.

Investment Rationale:

Educomp Solutions has steadily moved up the value chain‐from an Instructional Communication Technologies (ICT) provider to one of the largest school chains in the country. The company has proved its execution skills and is well placed to take advantage of the new opportunities in the education sector. The ICT business gives it access to PPP (Public Private Partnership) projects envisaged for government schools. Smartclass has helped Educomp to develop a differentiated pedagogy (a study of being teacher or process of teaching) for its K‐12 (Kindergarten to Class 12) schools and have proved its execution skills in the K‐12  section. The base for the company’s future expansion into the vocational/ higher education space is this Smart Class. However, the past two quarters have seen a massive detoriation in the profitability of its core segment i.e. Smartclass. This is a key concern from the near to medium term perspective as the other businesses that can drive growth growing forward are still at nascent stages. Educomp’s business is capital intensive due to upfront investments required in the K‐12 segment or BOOT model for smartclass. The capex requirements are set to increase by threefold, particularly for its plans in K‐12 schools (Educomp provides facilities and technology to schools). The school business, as per regulations, cannot be a profit making enterprise So most companies have avoided this regulatory hassles by creating subsidiaries that charge schools for infrastructure and services provided, while the schools themselves operate at breakeven. Many state governments have set up regulatory bodies to regulate fees charged by schools; any increase in fees will require such a body’s prior approval. So, Educomp has a first mover advantage in smartclass and has been able to move quickly to establish itself in schools. Though margins are attractive in smartclass, with no strong barriers to entry in this sector - a competition is expected. However FITCH Rating a rating agency has affirmed its rating on Educomp to stable as they see the affirmative factors like Educomp's first mover advantage, its innovative business offering, market leadership in multimedia education and a diversified presence across all segments of the education sector covering pre schools, K-12 education, multimedia and online learning to higher education/vocational skills. Also Educomp is expected to benefit from the strong renewal rates in smart class business.The contracts in smart class are typically for 5 years and come up for renewal thereafter.  

Outlook and Valuation:

Union Budget is very close and I think Educomp Solutions will see a run up as government trends to increase spending on education sector as this sector is important for the core and sustainable development of the country. A growing economy, growing income, increasing urbanization, improving lifestyle and the determination of the young and educated couple to provide better and best quality higher education to their kids will result in higher penetration of ICT market in India. India enjoys good growth in Per capita income where more and more parents tries to provide best of the education to their kids. Further Government's Sarva Shiksha Abhiyan is the area to watch for as government tends to increase emphasis on PPP in education and ICT implementation in schools which would benefit firms like Educomp. Also due to FITCH Rating Educomp may see any private equity infusion or other initiatives such as disinvestment, if used for debt reduction or reduced off balance sheet corporate guarantees debt which leads to reduction in financial leverage to 2x or below its consistent basis. Educomp continued its good show in the SmartClass business with 6,818 classroom additions (up 28% YoY) in Q2FY12. Management has maintained its FY12 guidance of 40,000 ‐ 45,000 classroom additions (12,000 in H1FY12), which is aggressive. They have built in 34,000 additions in FY12, implying 45 % YoY growth in H2FY12. After incurring heavy capex in the past many quarters (and significantly higher than Street expectations), the capex have dipped during Q2FY12, as guided by management and no capex was incurred in higher learning versus the capex of Rs. 105 Cr which incurred in Q1FY12. Further, the K‐12 capex was Rs. 48 Cr versus Rs. 115 Cr in Q1FY12. Management has guided for even lower capex in H2FY12, which is a positive.  Educomp’s Q2FY12 PAT of Rs. 12.80 Cr (including MTM forex loss of Rs. 37.40 Cr) was significantly below expectation, on back of higher losses in online and higher learning segments. Though SmartClass performed well during the quarter, management’s FY12 guidance is aggressive, in the broader view. It is expected that it can report 8 % ‐ 13 % below consensus on FY12‐13 EPS estimates and expect the earnings downgrade cycle to continue. While a dip in capex in Q2FY12 is a key positive, sustaining it for a few more quarters is important for any re‐rating of the stock. Educomp stock prices fell substantially after the IT raids on its premises but the company clarified that it was the survey conducted by IT department and was not a raid, however due to this sort of negative news gives a good opportunity to enter & accumulate the stock at lower prices. At the current market price of Rs. 200.70, the stock is trading at a PE of 6.78 x FY12E and 4.98 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 29.60 in FY12E and Rs. 40.30 in FY13E. One can buy EDUCOMP SOLUTION with a target price of Rs. 250/share for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 210.00 from the day of budget.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
REVENUES (Rs. Crs)	1,039.50	1,350.90	1,514.00	1,917.60
NET PROFIT (Rs. Crs)	275.90	336.60	244.40	383.70
EPS (Rs.)	29.30	35.10	29.60	40.30
PE (x)	6.00	5.00	5.90	4.30
P/BV (x)	1.00	0.80	0.70	0.06
EV/EBITDA (x)	4.30	4.90	4.80	3.50
ROE (%)	27.40	17.80	12.60	15.10
ROCE (%)	17.60	13.90	13.10	16.70

I would buy EDUCOMP SOLUTIONS LTD with a price target of Rs. 250 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. 182.16 on every purchase.

PRAJ IND LTD : Passionate for Green Fuel !!!

Scrip Code: 522205 / PRAJIND

CMP:  Rs. 79.90; Buy at current levels.
Short term Target: Rs. 92, 6 month Target – Rs. 120; STOP LOSS – Rs. 75.44; Market Cap: Rs. 1,476.38 cr; 52 Week High/Low: Rs. 113 / Rs. 63.90

Total Shares: 18,47,78,723 shares; Promoters : 4,77,00,000 shares –25.81 %; Total Public holding : 13,70,78,723 shares – 74.18 %; Book Value: Rs. 30.25; Face Value: Rs. 2.00; EPS: Rs. 4.13; Div: 63 % ; P/E: 19.35 times; Ind. P/E: 12.68; EV/EBITDA: 20.79.

Total Debt: ZERO; Enterprise Value: Rs. 1,478.22 cr.

PRAJ INDUSTRIES LTD: The Company was founded in 1985 and is based in Pune, India. Praj Industries Limited engages in process and project engineering activities in India and internationally. The company offers turnkey alcohol and fuel ethanol plants, as well as a range of specialized services to alcohol and fuel ethanol plants, including license and technology for liquefaction, fermentation, and distillation; technology and engineering audits for bio-fuel plants;  contract research and pilot plant scale facility for fermentation & biotechnology applications; engineering services; project management; manufacture, procurement, and inspection services; engineering and supervision of civil and structural work; supervision of erection and installation; and after-sales services. It also provides brewery engineering/technology services consisting of mash kettles, lauter tans, mash filters, wort kettles, Whirlpools, and wort cooling and aeration products; engineering and design services; and project services. In addition, the company offers water and wastewater treatment solutions consisting of biological treatments; energy efficient evaporation plants; solvent recovery plants; membrane based solutions; and chemical treatments UV treatment, ozonation, and chlorination. Further, it provides EFFYTONE range of products for use as fermentation performance enhancers; and designs and manufactures various equipment, such as distillation columns pressure vessels, fermentors, reactors, tanks, heat exchangers, evaporators, condensers, re-boilers, skid mounted equipment, and customized fabrication / fabricated equipment; and offers agri energy consultancy services for bio-fuels. The Company's subsidiaries include Pacecon Engineering Projects Ltd. (PEPL), BioCnergy Europa B. V., Netherlands, Praj Jaragua Bioenergia S.A., Brazil, Praj Americas Inc., Texas, Houston and Praj Far East Co. Ltd., Thailand. In October 2011, it formed a new wholly owned step subsidiary, Praj Industries (Sierra Leone) Ltd. In January 2012, the Company acquired 50.2 % of Neela Systems Limited. The company is compared with Alfa-Laval (India) Limited, SML Isuzu Ltd. and Federal-Mogul Goetze (India) Limited.

Investment Rationale:

Praj Industries ltd is a global Indian company that offers innovative solutions to significantly add value in bio-ethanol, alcohol, brewery plants, process equipment and water and wastewater treatment systems for customers, worldwide. Praj is a knowledge based company with expertise and experience in Bioprocesses and engineering. It has one of the largest resource bases in the industry with over 450 references across all five continents. The company has filed 11 patents in the recent time and 3 patents are related to various technologies. In domestic market, Praj has a market share of 75 % share in distillery and 65 % in breweries. In SE Asia and South Central America, the company has a market share of 50 %. The company is enjoying overall 10 % global market share in ethanol/ alcohol segment. The company has capex plan of Rs 250-300 crore over next three years that would be invested into high value products, and in-house land and expansion of premises. Management expects 12 % - 13 % margins in FY13E and 15 % - 16 % of margins in next 2-3 years. Management indicated that lignocellulosic ethanol development activity is in advance stage and demo scale plant with total capacity of 35,000 - 45,000 liters per day will commence operation in next 1-2 quarters. Praj acquired 50.20% stake with Rs 64 crore in Neela Systems Ltd, having business interest in niche area like water treatment and modular process systems. The acquisition cost looks at higher end at 3.1x to book value that we expect is discounted in state of art technology and higher margins. Further, Neela has an annual turnover of Rs 80.5 crore in FY11. Praj’s board has recently approved a Buy-back of its outstanding equity shares (FV Rs 2.0) to an aggregating amount of Rs 55.9 crore. The buyback price would not be more than Rs 90. It is expected that this move is the right utilization of cash and will bring stability in the share price. The utilization of cash for buy back purpose will lead to fall in other income by Rs 5.00 crore and fall in equity by 3.4 % resulting into fall in EPS by 2.08 %. However, the return ratios like ROE and ROCE will see the growth by 37 bps and 93 bps for FY13E. Buyback has improved ROCE’s by 100 bps for FY13E that is positive for the company.

Outlook and Valuation:

Alcohol/Ethanol vertical contributed majority of revenue (73%) and order inflow (58%) at the end of Q3FY12. We expect revenue CAGR of 16% over the period of FY11-FY13E on account of substantial order backlog in this segment. Management indicated that geographies like US, Europe & Brazil are silent in current period and growth will be contributed regions like South & Central America, SE Asia and Africa. Customized engineering vertical has commenced 3,000 tons facility in Kandla and this facility will generate revenue of Rs 70-100 crore over the period of FY13E to FY15E. Further, Jejuri Plant, GMP compliant manufacturing facility, for range of biotech products also operationalised and expected to generate revenue of Rs 60-70 crore over the period FY13E to FY15E. PRAJ, in Q3FY12, received an order inflow of Rs 220 crore (58%, international orders) inspite of challenging global environment that builds more confidence in the business. The order backlog is Rs 900 crore (1.2x to FY12 Sales), 84% from ethanol/alcohol plants. PRAJ reported Q3FY12 standalone revenues of 219.3 crore (up 47.9%, YoY) that is above to our estimates, primarily led by higher execution in alcohol/ethanol segment. Excluding Forex losses, EBITDA up by Rs 24.2 crore (up 151.5%, YoY), primarily led by lower O&M expenses. EBITDAM has improved by 455 bps and O&M Expenses fell by 295 bps and employ cost fell by 228 bps. PAT grew by Rs 21.5 crore (up 57.4%, YoY) and forex losses has fallen from -5.3 crore to -3.6 crore in Q3FY12. Revenue grew by Rs 219.3 crore (up 47.9%, YoY) primarily led by strong execution in ethanol segment. Excluding Forex losses, EBITDA up by Rs 24.2 crore (up 151.5%, YoY), primarily led by lower O&M expenses. EBITDAM has improved by 455 bps and O&M Expenses fell by 295 bps and Employ cost fell by 228 bps. PAT grew by Rs 21.5 crore (up 57.4%, YoY) and forex losses has fallen from -5.3 crore to -3.6 crore in Q3FY12. I am positive on account of improvement in margins secondly due to moderate order flow thirdly increases in Return on Capital Employed on account of cash utilization for buyback of shares. The stock is currently trading at P/E of 17.00 x FY2012E and 13.31 x FY2013E. Valuing the stock which is of ZERO debt the fair price of PRAJIND comes at Rs. 140. In my view PRAJ IND could report EPS in FY12E & FY13E of Rs. 4.70 per share and Rs. 6.00 per share, respectively. 

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	734.40	664.90	759.30	898.30
NET PROFIT (Rs. Crs)	120.10	57.80	84.10	113.20
EPS (Rs.)	6.50	3.10	4.70	6.00
PE (x)	13.00	25.50	17.00	13.30
P/BV (x)	3.00	2.60	2.20	1.80
EV/EBITDA (x)	15.10	31.10	18.80	13.20
ROE (%)	22.80	10.30	12.80	14.10
ROCE (%)	15.70	6.50	10.10	12.80

I would buy PRAJ IND LTD with a price target of Rs. 120 for Medium to Long term and Rs. 92 for the Short term players. 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. 73.40 on every purchase.

Europe gives second round of funding of € 529.53 billion or Rs. 34,94,898 Cr !!!

European Central Bank gave second 3 year discounted loans to the banks under LTRO.

LTRO stands for ‘Long-Term Refinancing Operation’ and is a monetary tool used by the European Central Bank to help pump liquidity into the banking system. The ECB offers European banks long term loans at the prevailing ECB interest-rate. The recent “LTRO” and “LTRO 2″ are 3-year loans at 1% interest rate. However, these operations have been carried out in the past with other, shorter maturies, such as 3-month loans back during the 2008 crisis. ECB offers LTRO during emergencies such as the funding crisis that hit European banks at the end of 2011. Usually when a particular bank gets into trouble and is in short of money to finance its operations, it has to go to the private market like private sector banks or financial institutions for those funds and when it cannot, due to the price to borrow is too high, or funds have pulled back from a particular bank (because of exposure to Euro-zone periphery debt) it needs to rely on funding from national central banks or from the ECB. The part of the purpose of the LTRO is to give banks a chance to participate again in the “Carry Trade” of European sovereign bonds. By being able to borrow at 3-year maturities banks can use those funds for buying shorter term government debts with higher yields. Carry Trade means borrowing in Euro € (any currency) converting them into US$ (or any currency) and route those $ into India (or any country).

European Central Bank allotted € 529.53 billion (Rs. 34,94,898 Cr) for 1,092 days under the refinancing tender were 800 banks asked for the three year loans. Since the expected range was around € 200 billion (Rs. 13,20,000 Cr) - € 1 trillion (Rs. 66,00,000 Cr), and just above the median € 500 billion (Rs. 33,00,000 Cr), this is clearly within the expectation. What is certainly scary is that the number of banks demanding a hand out was a whopping 800, well above the 523 banks from the LTRO 1 were ECB allotted € 489 billion (Rs. 32,27,400), this clearly points that many banks are capital deprived. LTRO will help out the entire country. Spanish and Italian banks, the biggest buyers in the last operation, used their holdings of their own sovereign bonds as collateral for the LTROs. This helped reduce sovereign bond yields, which were threatening to stay at unsustainable levels that would make debt repayments impossible.

Now, the ECB will collect 1 % on combined total of € 1.018 trillion (Rs. 77,88,000 Cr). It’s wished that these banks will find its way to monetize this in Carry Trade opportunities. Usually, equity markets tend to rally whenever there is any easing of liquidity directly or indirectly by the central banks. It is partly due to sentiment, and partly due to money actually flowing into risk assets like equity. Liquidity easing by central banks leads to lowering of bond yields, and also assures investors that the crisis has been averted. Besides, banks may use a chunk of the funds for 'carry trade'- as said above. At the peak of the 2007 Bull Run, many investors would borrow in yen, convert those into dollars, and then deploy the dollars in risk assets like emerging markets equities.

But LTRO should not be looked as the only solution for Europe. It will only improve the liquidity in the system, and reduce some of the problems that otherwise may have been aggravated by a liquidity problem. But it will not address the fiscal problems in weaker Euro zone economies like Greece and Portugal, among others. Most economists are of the view that Europe is headed for recession, irrespective of LTRO. 


As for our India , many experts believe that this money will not leak into emerging market. They believe that these monies is primarily to make sure that Europe doesn't have a credit crunch and stays primarily in Europe. The money flow to India will depend on India ensuring that it has friendly investment climate to attract those funds, India has to free up its economy more from deficits. Since the beginning of the 2012 the FII's have infused a total of Rs. 24,225 cr  (US$ 4 billion) into Indian stocks. In the first 17 days of the February 2012 they have infused about Rs. 13,867 cr way higher than that of the entire month of January 2012 which stood at Rs. 10,358 Cr.


Hope this time too they bring in such kind of money - the trigger they would be watching would be Budget    

VEDANTA RESTRUCTURING: Sterlite & SesaGoa to merge !!!

As per the plan, the Sterlite Industries will merge into SESA GOA, which will be form as combined entity named to be SESA STERLITE. Sterlite shares holders will be given 3 Shares of SESA GOA for every 5 Shares of Sterlite held.

Vedenta Aluminium (VAL) and Madras Aluminium will be 100 % consolidated into SESA STERLITE. Vedanta’s direct holding of 38.8 % in Cairn India will be transferred to SESA GOA, together with the associated debt of $5.9 billion (Rs. 29,500 Cr) at cost. After the transfer, SESA STERLITE will have 58.9 % shareholding in Cairn India. The new entity SESA STERLITE will be seventh largest global diversified natural resources major by Earnings Before Interest , Tax and Depreciation. According to the chairman of VEDANTA Mr. Anil Aggarwal, SESA STERLITE will be the principle operating company in the group and with its high quality assets, growth projects and strong management; it is well placed to create value for all shareholders. This merger would be cost saving of around Rs. 1,000 Cr a year.

After consolidation, Vedanta will own 58.3 % in SESA STERLITE. The group’s 79.4 % shareholding in Konkola Copper Mines will continue to be directly held by Vedanta. Post consolidation VEDANTA will own 58.3 % stake in SESA STERLITE with VEDANTA PLC’s debt service liability will reduce by 61 % from $9.65 billion (Rs.48,250 Cr) to $3.8 billion (Rs.19,000 Cr). Post consolidation SESA STERLITE will have market capitalization of $20 billion (Rs. 1 lakhs crore) and will join the elite league of resources firms like BHP Billiton, Vale and Rio Tinto. Post consolidation the new entity SESA STERLITE will have net debt of $7.38 billion (Rs.36,936 Cr) with 8 % of interest cost.  

For SESA GOA – it will issue 3 Shares for every  5 shares of Sterlite; will issue 7.2 Crores shares to VEDANTA for its 70.5 % stake in Vedanta Aluminum; will issue 7.9 crores shares to Vedanta for its 94.8 % stake in MALCO

What VEDANTA will do – It will transfer its 38.8 % stake in Cairn India to Sesa Goa along with $5.9 billion debt. However, Hindustan Zinc and Bharat Aluminum Company in which government has stake will not be a part of merger.

SESA STERLITE will be listed in India and on New York Stock Exchange as American Depository Shares (ADS).        

SESA STERLITE STRUCTURE AFTER CONSOLIDATION

YEAR ENDED DEC 2011	Rs. Crore	$ Million
REVENUE	66,431	14.23
OPERATING PROFIT (EBITDA)	24,953	5.35
GROSS DEBT	66,717	13.55
OUTSTANDING SHARES	296 Crore	----

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.