4. VA Tech Wabag – Investment Snapshot
(as on July 31, 2013)
Recommendation :- BUY
Maximum Portfolio Allocation :- 5-6 %
Investment Phases & Buying Strategy
1st Phase (Now) of Accumulation :- 80%
Current Market Price – Rs. 400
Current Dividend Yield – 1.51%
Bloomberg / Reuters Code –VATW IN/
VATW.BO
Current Accumulation Range :- 350-400 Rs
BSE / NSE Code – 533269 / WABAG
VA Tech Wabag is one of the safe bets in the current Turbulent
market environment, where Midcaps are going through a severe
correction. Investors can make use of the current prices to build
a strong position in this Stock. Make sure that the majority of the
allocation to this stock is on front ended buying.
Core Investment Thesis :
VA Tech Wabag is one of those Big Bets on the structural growth
of Water Treatment companies. We believe that – VA Tech with a
Good Management, Clean Balance Sheet, Innovative
Technologies and Cost effectiveness is well positioned to
capitalize on the Huge opportunity which is looming.
Market Cap (INR BN / USD Mn) – 1040
/10.40 [1 USD – Rs. 61.0]
Total Equity Shares [Mn]– 2656.3
Face Value – Rs. 2
52 Week High / Low – Rs. 589 / Rs.403
Promoter’s Holding
FII
DII
Other Holdings
“ Specialists in discovering Multibagger stocks “
- 30.91%
-29.43%
- 20.60 %
-19.06%
5. Key Investment Highlights
1.) Presence in a scarce Resource Sector:- Company is in a space which is a scarce resource sector which requires
huge investments by the government thereby creating a huge opportunity for the company year after year.
2) Presence across the entire value chain: Company is present in the entire value chain in the water business
thereby providing a one stop solution unlike its peers who are mostly confined to a few segments in the value chain.
3.) Strong Capital Allocation :- The company has one of the best business models in the industry and has been at the
forefront of innovation in the industry thereby generating Returns on Invested capital of over 35%.
4.) Huge opportunity in desalination market :- The company has huge opportunity in the desalination space which
has not only been cost effective, but also takes care of the need for clean water which is a basic necessity.
5) Patents a key differentiator:- The company owns about 100 patents and this technological expertise differentiates
the company from its competitors and enables it to prequalify for high tech projects apart from being cost competitive
in bidding for projects.
6.) Strong & Healthy Balance sheet :- Company has a very strong balance sheet that helps the company to look for
acquisitions and also bid for Big projects without the problem of Capital availability.
7.) Tie up with sumitomo to help enhance bid for bigger projects :- Company has made JV with sumitomo
corporation which helps the company to bid for projects in the PPP mode which are bid on BOOT mode spanning 20-25
years. This is inline with the company’s model of being an Asset light operator.
8) Robust overseas subsidiaries performance:- The company’s overseas subsidiaries performance has been robust
with order book rising from Rs.10.6Bn in FY10 to about Rs.14 Bn in FY14 thereby diversifying their India business.
9.) Management/ Corporate Governance :- The company has a good management and adheres to strong
corporate governance norms. The company is run professionally by a team of professionals who have a strong
understanding of the business and have a strong vision about building the business.
10.) Compelling Valuations :- In spite of so many advantages, the company is quoting at very attractive Valuations.
The company is quoting at 11X its trailing FY13 Earnings which is very attractive for the Quality of this stock which has
strong free cash flows and order book providing good revenue visibility..
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6. Industry Opportunity & Potential
- An Overview
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7. Global Water Market overview
• As per global water resource
estimates the demand for
water is growing at 2%.
• In 2011, the global
commercial water market is
estimated to be around
USD360 Bn.
• The market has been growing
at the rate of 5% and this is
expected to go up considering
the demand supply
environment.
• By 2030 the demand supply
gap for water would be about
40%, necessitating investment
in water for augmenting the
supply going forward.
• The growing global economy,
improving life style and demand
for the scarce resource are
compelling governments to
invest more in providing water.
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8. Global Water Market Demand
• The global water market has huge demand, with about 783 million people globally have no access to clean
drinking water and about 2.6 Bn having no access to sanitation.
• There is manifold increase in fresh water demand across industries ranging from Agriculture,
Manufacturing to Domestic uses which is likely to further strain the availability of scarce resource.
• Not withstanding the global slowdown the global water market represents USD500 Bn growing at 7% well
above the global growth rates across various sectors.
• By 2020,the water industry could be worth USD one trillion marked by robust growth coming out of water
treatment, water management, water infrastructure and supply segments.
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9. Indian Water Market overview
• The Indian market for water is
estimated to be about USD
5.9Bn last year.
• According to global water
resource estimates, demand for
water in India is estimated to
be growing at 2.8% per annum.
• By 2030, demand for water is
expected to be 1498 Bn CU
cubic meter while supply would
account for about 744 Bn CU
cubic meter which leads to a
massive demand supply gap of
about 50%.
• Water being a prime necessity
would require expenditure
towards recycling of water and
its reuse, sewage and sludge
treatment and desalination.
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10. Indian Water Resource Market
• The Industrial sector accounts
for about 50% of water
treatment market and the rest
is accounted by the municipal
sector in India.
• Water market in India is
expected to grow by about 1012% per annum. The drinking
water and industrial segments
are expected to grow by 18%
per annum.
• The size of the Indian water
market is expected to be
around USD15 Bn over the
foreseeable future.
• A combination of scale and
growth makes this market
highly lucrative for water
management project
companies.
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11. Huge Opportunity in the desalination space
• VA Tech wabag has a strong presence in the desalination space and has won major orders in both the
domestic and International market.
• VA Tech wabag has won a 191 MLD desalination plant in Oman. Wabag along with Cadagua (Spain)and
Gulfar (Oman) have been awarded EPC and O&M of the project and it is to be executed in 24 months.
• VA Tech wabag has completed the Chennai desalination plant which takes care of the requirement of
Chennai to the extent of 10-12% of its overall needs.
• The desalination capacity at Chennai is expected to reach 5350 MLD in 2018 from the current 900 MLD
growing at a CAGR of 30%.
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12. Huge Government Spending provides Opportunity
• According to a recent high powered expert committee, CAPEX expenditure on water supply for the next 20
years is estimated at Rs.3,20,908 Cr translating into an opportunity of about Rs.16,000 Cr per annum.
• The operation and maintenance expenditure on water supply is pegged at Rs.5,46,095 Cr ( Rs.27,000 Cr per
annum) based on various Research projections.
• While implementing the projects is the key - it is believed that, if a suitable percentage of the cost of
infrastructure development is recouped through collecting water charges , then many of these projects will
remain viable and also Repair & Maintenance work would be taken care of.
.
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13. VA Tech Wabag – Business Overview
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14. VA Tech Wabag – A Snapshot
• VA Tech Wabag is a
leading multi national
player in the water
treatment industry with
strong operational
performance and
execution skills.
• The company provides a
range of EPC and O&M
solutions for processing
drinking water, treatment
of sewage, effluents,
sludge and also
desalination plants.
• VA Tech Wabag provides services to Institutional clients spanning across 3 continents. It also provides
solutions to corporate in water treatment in infrastructure sectors such as Steel, Power Oil & Gas etc.
• The company undertakes project orders under its two segments of EPC division and Operation &
Maintenance division.
• The company’s EPC division accounts for about 86% revenues while the operation and maintenance
division accounts for the remaining 14% revenues.
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15. Flexibility across variety of Contracts
• In standalone EPC contracts - the
company is responsible for design,
engineering, procurement and
construction of the plant.
• In the Design, Build and Operate
contracts(DBO) it is responsible for
design and construction of the plant as
well as O&M activities.
• In BOOT the company is responsible
for design and construction of the
plant. The company operates the plant
after the stipulated period in the
contract and then transfers it back to
the client.
• The O&M contracts of the company
fall in categories like DBO,BOOT and
TOT. The company refurbishes the
already operational plant and
undertakes its O&M activities under
TOT.(Transfer, Operate, Transfer
Contracts)
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16. Porters Five Forces Model
Bargaining Power of Buyers
(Moderate)
Few dominant buyers
Threat of backward integration is low
Switching cost are high
Bargaining Power of Suppliers
(Moderate)
Lower number of projects
Dilution in prequalification
norms
Industry Rivalry
(High)
Industry is fragmented
Project cancellation prospects low
Product differentiation is low
Exit Barriers are high
Threat of new entrants
(Low)
High capital requirement
Technical expertise
High prequalification norms
Threat of substitute products
(Low)
No substitutes available
Product differentiation is low
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17. Key Technologies of VA Tech Wabag
• An important highlight of its technical expertise is that - depending on the economical size of the
project it can offer customized solutions without compromising on quality owing to a wide array of
technological solution and patents which it possesses.
• The expertise enables the company to bid for big ticket size projects floated by multilateral institutions
which are often based on past experience of execution and financial strength.
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18. Presence in high growth markets
Major International Subsidiaries
- China
- Austria
- Switzerland
- Czech Republic
- Turkey
- Philippines
- Romania
- Saudi Arabia
- Oman
• The Company has operations in India, Austria, the Czech Republic, China, Switzerland, Algeria, Romania,
Tunisia, UAE, Libya and Macau providing it a market presence in the Middle East, North Africa, Central and
Eastern Europe, China, India and the South East Asia.
• Its presence in various countries helps it to identify and evaluate projects in new jurisdictions effectively,
establish client relations, understand local markets, culture and requirements, procure raw materials locally
reducing currency risks and meet client expectations efficiently .
• The company recruits labour in the local country which enables them to tap local talent who possess better
domain knowledge. Its presence in the International market has helped the company to diversify its revenue
base and insulate it from any slowdown in the domestic market.
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19. Strategic Business Units
• VA Tech Wabag strategic business units consist of 1) Municipal Business Group (MBG) & 2) Industrial
Business Group(IBG).
• MBG provides water and sewage waste water treatment solutions to municipalities and Government
organizations. These contracts typically have longer durations of 5-7 years thus providing steady revenue
streams for the company.
• Apart from focussing on the municipal segments in India, VA TECH WABAG has also begun to increase its
presence in the Industrial segment. The growth for IBG segment would be primarily from two sectors i.e.
Power sector, Refinery and petrochemicals.
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20. Domestic Vs Global Operations
• VA Tech’s domestic business is
generally skewed towards large
big ticket contracts that are
generally funded by multi-lateral
institutions like the World Bank
and the IMF.
• VA Tech wabag has presence in
Municipality, Industrials,
Operation and maintainece and
desalination.
• In the International business the
company focuses on projects
which are small to medium ticket
size and it has presence in some
of the fastest growing water
markets in the world.
• The company plans to reduce its
cost of its global operations by
shifting from centralized high cost
operation to decentralized low
cost operation.
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21. Corporate Structure
• VA Tech has a strong corporate structure which allows to it have flexibility to operate in different markets
and also to combine the strengths of the consolidated group as a whole.
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22. VA Tech Wabag – Investment Rationale
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23. Key Highlights
Huge Opportunity
Attractive Price
VA Tech Wabag is currently trading
at around 5X EV/ EBIDTA multiple
which is pretty cheap for a Business
which can grow at a healthy clip.
Water Treatment is a big structural
opportunity for the next several
decades and VA Tech Wabag is one of
the best poised companies which can
capitalize on this Big opportunity.
VA Tech
Wabag
Strong Moats
Company’s Brand, Patents, Project
track record, Management and
Focus allows it to out beat
competition in its space and bid
aggressively without
compromising on its Profitability.
Good Management
Clean Financials
VA Tech Wabag is one of the few
professionally managed Indian
MNC company. Management has
displayed Credibility as well as
aggressive entrepreneurialism.
Cash constitutes 30% of the
company’s current Equity Value. It
has an unleveraged balance sheet
giving it space to grow aggressively.
Margins also seems to be on an
expansion mode.
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24. Presence across the entire Value Chain written p
IC’s gross
• VA Tech Wabag offers a
complete range of
solutions in the water
treatment space with
presence in sewage water
treatment, drinking water
treatment, industrial
water treatment,
industrial waste water
treatment, desalination
and water recycling.
• The company’s presence
in all key major segments
across the entire value
chain with high
technological competence
is a moat to the company.
• VA Tech’s project
execution capabilities
across Complex projects
helps it bid for High
Margin businesses.
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25. Strong Order Book & Execution Track record
• VA Tech Wabag has an order book of Rs.42.8 Bn which provides revenue visibility for the company over the
next 2-3 years time frame.
• The company has Framework orders of about Rs10.9 Bn which will help the company to grow its order
book further.
• The company expects order in take to be about Rs.26 to 27 Bn which will result in a healthy growth of
about 20-25% YoY.
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26. Order in take in FY13
• VA Tech Wabag recorded an order in take of Rs.2154.9
Cr excluding frame work contracts. This augurs well for
the medium term prospects of the company.
• The share of municipal order in take in FY13 was at
Rs.906 Cr which constituted about 42%, while the
share of municipal order in take in FY13 was Rs.1248.9
Cr which constituted about 58%.
• The company’s EPC order in take continued to
dominate the order in take with 83% constituting
orders to the tune of Rs.1782 Cr while the remaining
order in take was at 17% for O&M segment constituting
about Rs.372.9 Cr.
• The Company has frame work order to the tune of
about Rs.333.9 Cr in FY13 which can help the company
to add on its Order book going forward.
• The Order Book is well spread and hence the Risk to a
single segment is not present.
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27. Innovative Technology reduces cost and induces Demand
•Desalination refers to the processes that remove salt and other minerals from saline water.
• The high cost of desalination had prevented adoption of this technology thus far. But with the introduction
of reverse osmosis technology, the cost of desalination has come down dramatically resulting in the
Technology being a viable cost alternative solution across the Globe.
• The process of desalination is expected to double by 2025 due to its cost effectiveness and this will help in
meeting the demand for safe water.
• VA Tech Wabag is likely to benefit due to its technological strength in this area and also the successful
execution of such Desalination projects.
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28. International Order Book Trend
Year
Domestic Order
Book
International
Order Book
Total
% Contribution from International
Order Book
FY09
1271
916
2187
41.88
FY10
1934
926
2860
32.38
FY11
2521
909
3430
26.50
FY12
2452
1279
3731
34.28
FY13
2880
1400
4280
32.71
• VA Tech Wabag’s International order book has been consistently around 30-40% of its total order book over
the past five years.
• The International order book was around Rs.916 Cr in FY09 and has grown to about Rs.1400 Cr in FY13
growing at a CAGR of about 11.19%.
• The company has secured good amount of overseas orders and has bagged a maiden order from the
Peoples Republic of China and this gives a good opening for future Orders.
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29. Asset Light Business Model
• Unlike its peers VA Tech Wabag, works on an asset light model wherein it outsources the entire civil and
plant manufacturing works.
• The focus of the company is on its core strength of design, technology and project management skills
which negates the need to necessarily invest on long cycle of working capital requirements.
• This outsourcing of non-technical areas helps the company to enhance its project execution skills apart
from ensuring cost competiveness there by improving its operating margins.
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30. Robust Patent & Process
• VA Tech wabag has over 100 patents and three major research centers in Austria, Switzerland and India.
Availability of a variety of Technologies helps the company to bid across a variety of projects across countries
according to the needs of that particular project.
• Important highlight of its technical expertise is that - depending on the economical size of the project ,it
can offer customized solution without having to compromise on quality, owing to wide array of technical
solutions and patents. The company is also consistently investing to boost its Innovating capability.
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31. Lower Working Capital Requirement
• VA Tech Wabag’s working capital
days decreased from 140 days in
FY12 to about 131 days in FY13.
• The net working capital days for
FY13 was at about 66 days
excluding cash & equivalents.
• VA Tech Wabag’s receivables and
payables are well under control
compared to last year.
• Company derives around 40-45%
of turnover during Q4 of every year
due to the nature of the business
where payments are realized only
during the last quarter.
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33. Clean Balance Sheet & Attractive Valuations
• VA Tech wabag’s working capital is around 30% of its revenues, which is marginal when compared to other
infrastructure companies which have about 50% of its revenues struck in the form of Working Capital.
• The company is available at a EV/EBIDTA of about 4.6x which is very cheap considering the long term
potential of the sector and the company.
• The company has grown its revenues at a CAGR of about 16% during the past 7 years, backed by strong
order book and excellent execution track record.
• The company generates cash from Operations of Rs.100 Cr which points to the strong business model to
throw cash and maintain an unleveraged balance sheet.
• The company is debt free due to its asset light business model and outsourcing of its non core activities will
help it to reduce cost and lower its working capital requirement.
• The company has ROIC of 30%+ and is available at attractive valuations of 1.5x Price to Book.
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35. Earnings Projection
Particulars (Rs Cr)
Net Revenue
% Growth
FY11
FY12
FY13
FY14E
FY15E
• VA Tech wabag’s revenues are
1,241.82 1,443.52 1,618.85 1877.87 2178.32 expected to grow by 16% in FY14
& FY15 driven by robust order
16.24
12.15
16.00
16.00 book and order book execution .
13.24 • VA Tech wabag has EBITDA
margins of about 9%. We
Total Income
1,291.09 1,433.64 1,622.42 1891.11 2191.56 conservatively estimate EBITDA
margins of about 10% in FY14
Operating Expenditure 1,176.23 1,313.52 1,463.90 1690.08 1960.49 and FY15.
Other Income
6.69
15.07
13.24
13.24
114.86
130.00
155.0
187.79
9.25
9.01
9.57
10.00
21.47
25.46
22
18.78
9.98
8.59
10.9
14.08
PBT
83.41
95.95
122.04
168.16
PAT
51.80
73.13
90.30
110.99
EPS
19.9
27.9
34.1
41.91
EBITDA
EBITDA Margins(%)
Interest
Depreciation
217.83 • VA Tech wabag is likely to report
PAT of Rs.110.99 Cr in FY14 and
10.00 127.35 Cr in FY15 with an EPS of
Rs.41.91 and Rs.48.09 in FY14
21.78 and FY15 respectively.
16.34
• VA Tech wabag EPS is likely to
192.95 record a growth of about 23%
and 15% in FY14 and FY15
127.35 respectively.
48.09
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36. Concerns & Reasoning
1.) VA Tech Wabag’s municipal clients contribute 66% of revenues :
Order Book as of Mar 31, 2013 (INR 42.8 bn) and relies substantially on municipal clients for its revenues.
Any delay, termination or cancellation could adversely affect its results of operations. Company relies heavily
on government business (centre, state, municipal bodies, PSU’s) and entities funded by multilateral aid
agencies. Many of the projects are government sponsored and are often subject to delay. Of the order book
at both the consolidated and parent levels 59%, is attributable to municipal clients and 31% to industrial
clients. This may also create a Working Capital problem for the company in the future.
2.) Client concentration Risk :
At present, VA Tech wabag derives a substantial portion of its income from a limited number of large
clients. Cancellations by any of these clients will have a significant impact on business. Events such as change
in management, mergers and acquisitions, change in government in the local and international market and
political scenario or lack of funding by the government may lead to order cancellations which exposes the
business to risks.
3.) VA Tech Wabag is subject to liquidated damages under its EPC and O&M contracts :
VA Tech Wabag provides performance guarantees to its customers, which require it to complete projects
within a specified timeframe. Failure to complete a project as scheduled, or in case of a performance
shortfall in the quality and quantity of water or waste water treated, it could be liable to pay penalties in the
form of agreed liquidated damages, which usually average about 10% of the project cost. Further, any
inability to complete these projects in a timely manner could adversely affect its reputation and hence its
growth prospects.
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37. Price Chart
Jun
Mar
Dec
Sep
• VA Tech Wabag had been volatile during the past 2 years
and had hit a high of Rs.722 before correcting strongly in
line with its Peers.
Share Holding %
2013
2013
2012
2012
Promoters
30.91 30.91
30.92
FII
29.43 30.82
30.37
30.93 • The Stock has exhibited volatility typical of any mid cap
stock considering the low liquidity in the stock.
31.72
DII
20.60 20.45
20.76
Others
19.06 17.82
17.95
• The promoter holding is stable and the significant FII
17.94 holding can put additional pressure on the stock in case of
a broad based FII pull out.
19.41
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39. Conclusion
When one thinks of a professionally managed Indian MNC in the Midcap space, VA Tech Wabag would be
one of the top names which comes to our mind. While the sector may currently be facing some strains, the
structural demand for Water Treatment looks great supported by, several data points across the globe. VA
Tech Wabag is not one of the regular contracting companies which is currently available cheap, it is a Market
Leader in its own right.
VA Tech Wabag’s combination of its In-House Technology prowess with contracting skills of a local
Operator, helps the company to bid for Indian Water Treatment projects at a cost which is far lower than its
peers who depend on Foreign Collaboration for technology. Company’s execution is also fast with its HandsOn approach, leading to better timelines and hence better margins, even on competitive bids helping the
company create a strong Competitive advantage.
The company is also using its Engineering ability in India to help it to bid for foreign location projects at a
lower cost. The standardization helps it to be competitive and with subsidiaries across the Globe, the
company is well positioned in most big Water Treatment markets. The company is current quoting at a
substantial discount to its IPO valuations in spite of performing strongly over the past few years. The
Business is available at a price lower than its Intrinsic value based on various valuation parameters.
VA Tech Wabag’s consistent focus on Water Treatment projects has helped it to build a strong
expertise in a Niche domain. Water Technology in itself is a Specialized business which uses Safe
Technology, considering the fact that it affects Human lives. This along with its Unique asset light model
makes the business, share holder friendly in terms of Returns on Capital. With the added advantage of the
buying the business at a cheap cost, we believe that a Long Term Investor has a good probability of
generating Multibagger returns from this Stock.
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