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.
| KEY FINANCIALS | FY13 | FY14 | FY15E | FY16E |
|---|
| SALES (₹ Crs) | 1,618.85 | 2,238.60 | 2,647.50 | 3,055.40 |
| NET PROFIT (₹ Cr) | 90.34 | 113.35 | 142.30 | 168.90 |
| EPS (₹) | 34.03 | 42.61 | 53.57 | 63.35 |
| PE (x) | 41.24 | 32.93 | 29.32 | 24.70 |
| P/BV (x) | 5.21 | 4.44 | 4.66 | 4.06 |
| EV/EBITDA (x) | 22.74 | 16.75 | 16.69 | 13.23 |
| ROE (%) | 12.53 | 13.51 | 16.43 | 17.56 |
| ROCE (%) | 20.79 | 22.42 | 21.99 | 24.58 |
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