VA Tech Wabag IPO Analysis

Va Tech Wabag (VTWL) is a multinational player in the water treatment industry with strong presence in developing countries including India, China, Middle East, North Africa, South East Asia, Middle East as well as Central and Eastern Europe. The company provides EPC and operation & maintenance (O&M) services for sewage treatment, processed and drinking water treatment, effluents treatment, sludge treatment, desalination and reuse for institutional clients like municipal corporations and industrial players in power, steel, oil & gas. As on July 31, 2010, the company had executed 113 projects and is currently executing 81 projects.



Promoted by Deutsche Babcock Group (DB Group) as Balcke Durr Cooling Towers in 1995, the company provided cooling tower solutions. In 1996, it started offering water treatment solutions represented by another group company Wabag. In 1999, the company came into the fold of Austrian company VaTech when the latter acquired the Wabag business from DB Group. In July 2005, the company got a new owner, Siemens Aktiengesellschaft Oesterreich (SAO), as its parent VaTech, Austria, was acquired by SAO. In September 2005, Rajiv Mittal, Amit Sengupta, Shiv Narayan Saraf and S. Vardarajan, the promoters of the company, with the support of India Advantage Fund I and represented by investment manager ICICI Venture Funds Management Company, effected a management buy-out of VTWL from Siemens. In November 2007, VTWL, through its wholly owned subsidiary, Wabag Singapore, acquired the entire shareholding of Wabag Austria. Pursuant to this acquisition, Wabag Austria and its subsidiaries became its subsidiaries.

Currently it has R & D centres located in Chennai (India), Vienna (Austria) and Winterthur (Switzerland). Wabag Austria and Wabag Wassertechnik own 157 patents including both process and product patents. Wabag Austria has also applied for 51 patents that are pending.

The issue seems to be mainly to list the company as the cash and bank balance as of March 2010 was Rs 218.51 crore and debt of just Rs 39.12 crore against the stated fund requirements of Rs 110 crore (working capital, construction of corporate office and implementation of global IT systems).

Strengths

The company is an established player in the water and waste-water business both in India and international markets with its single minded focus on the water segment and complete presence in the value chain offering service from concept/design stage to implementation and O&M.

Has reference list of over 2,250 projects in last three decades. Moreover, the company can leverage on strong brand name of Wabag, which was in existence since 1924. Brand name, long reference list, option to leverage on the long patents of its erstwhile parent and now subsidiary along with strong EPC and O&M capability give an edge for pre-qualification. Further the business strategy of focusing on technology as well as high margin O&M business in-house and outsourcing of asset-heavy civil construction to third parties will allow the company to ramp up fast and capitalize on growing opportunities, backed by experienced and qualified management team.

Order book of Rs 2780 crore end June 2010 gives strong revenue visibility. The company was awarded 100 MLD Chennai desalination order worth Rs 1030 crore in 2009. This is the first-ever 1000-crore order for the company.

Increase in share of high margin O&M business in sales has resulted in margin expansion. The consolidated operating margin expanded from 2.9% in FY 2008 to 9.1% in FY 2010.

Globally the demand outlook for projects in water and waste treatment is strong. The water markets in some of the developing countries including India and China are expected to post a CAGR growth of over 10%. The company has presence in 19 countries including top 12 of the 15 fastest growth markets such as Saudi Arabia, Algeria, China, Egypt and India and is better positioned to capitalize on the opportunity in these markets on the strength of executed projects in the past in these markets.

Weaknesses

Competition is getting intensified for water projects both in domestic as well as overseas markets on strong demand. In India lot of new players have already entered / are entering this space, which might affect the profitability going forward. Because of focus on the water segment, any downside in demand will hurt it more than diversified engineering players.

About 88% of the order book as of June 30, 2010, contributed by municipal clients, posing risks of delays in order execution and payment.

The company is yet to prove its mettle in the BOOT space. Of late, it is moving towards greater integration of newer forms of contracts such BOOT & TOT projects. But its ability to succeed in this mission remains to be seen.

India Advantage Fund I and Dynamic India Fund I, among five of the selling shareholders, will have 728145 equity share and 812614 equity shares, respectively, and this is not subject to any lock-in as India Advantage Fund I is a Venture Capital Fund registered with SEBI and Dynamic India Fund I is an FVCI. Hence, post listing, if these shareholders decide to sell their stake, it will impact the stock prices.

Valuation

Sales for the fiscal ended March 2010 were higher by 8% to Rs 1223.74 crore and net profit (after minority interest) was higher by 28% to Rs 44.74 crore. PBT had jumped 97% to Rs 77.51 crore. The consolidated EPS for FY 2010 works out to Rs 44.1 and Rs 44.4, respectively, on lower and upper price band. The offer price discounts FY 2010 consolidated EPS by 27.9-29.5 times.

On the other hand, Hindustan Dorr is available at a PE of 17.3 times, Ion Exchange 70.6 times and Nagarjuna Construction 16.6 times of their FY 2010 consolidated earning. However, VTWL is a class of its own and will continue to command higher valuation multiple.

via CM