VA Tech Wabag IPO Review

Headquartered in Chennai, VA Tech Wabag is coming out with an initial public offer (IPO) of 9.5 lakh shares to raise `125 crore. Besides, there is an offer on sale of 26.5 lakh shares by existing shareholders amounting to `350 crore. The issue will result in the promoter's holding slipping to 31.1% from 34.5 % currently. The company has hit the capital market to raise resources to fund its working capital requirements and enhance the existing infrastructure facilities.



BUSINESS: VA Tech is a global player in the water and wastewater treatment space. It provides solutions to government entities and industrial users. It offers end-to-end water treatment solutions, including conceptualisation, design, engineering, procurement, supply, installation, and construction and operations and management (O&M) services. The technologically-treated water can be used for drinking, reclaimed in industries or safe disposal. The company also offers drinking water, treatment of effluent, sewage and sludge, desalination and de-mineralisation solutions.

With a total of 13 subsidiaries, the company has a wide presence across geographies of India, the Middle-East, North America, central and eastern Europe, China and South-East Asia. In India, while over 60% of the business comes from the government entity, balance comes from the industrial business. Technical competencies in the business space have helped the company improve its orderbook over the years. Moreover, the company has been able to get repeat orders from its existing clients. The company is consistently trying to grow its footprint in India. This is evident from the fact that nearly 60% of the current orderbook size of `2,800 crore comprises the company’s Indian operations.

FINANCIALS: VA Tech has posted a robust growth over the past three years with almost a doubled topline and a nine-fold increase in the bottomline during the period. For the year ended March 2010, while net sales edged up 7% to `1,234 crore against a year ago, net profit rose 17% to `49.4 crore. Despite a small jump in the company’s topline, the operating margin for the year went up by 370 basis points to 9.1% against the year-ago period.

This was on account of less than proportionate increase in employee costs and selling, general and administrative expenses as a percentage of net sales.However, the negative cash flows from the operating activities continue to be a concern for the company from the past two years. This is mainly on account of a very high receivable period of 179 days. Moreover, high working capital requirements and direct taxes further reduce the cash flow from operating activities.

VALUATIONS: At the upper price band, the offer price works out around 27.8 times the company's earning per share for FY10 adjusted for IPO equity dilution. There is no strict peer for VA Tech. Average P/E for similar size engineering companies is over 22.

This makes VA Tech’s IPO richly valued. However, given the domain expertise and the growing demand for water treatment globally, VA Tech is well poised to fare well in coming quarters. The stock looks attractive for investors.

via ET