VA Tech Wabag: BUY

Think the world is running short of potable water? This makes >VA Tech Wabag , which provides a broad range of EPC (Engineering, Procurement, Construction) and O&M (Operations and Maintenance) works across areas such as desalination, drinking water, industrial water/waste water and sewage water treatment, a good long-term bet for your portfolio.

Well-established presence in the water treatment solutions space, a strong foothold in the international markets and healthy order inflows make the VA Tech Wabag stock an attractive business for investors.

Companies such as Thermax do offer industrial water treatment, but VA Tech provides turnkey solutions that set it apart.

The company derives more than half its orders and revenues from the municipal segment, partly shielding it from a slowdown in the industrial capex cycle. At the current market price of Rs 522, the stock trades at 14 times its estimated FY13 consolidated earnings. While this may seem to be at a premium to regular EPC contractors, its distinctive business model and strong technology base justify the premium.

Strong track record

VA Tech’s buyout of its Austrian parent, Wabag, has provided the company with access to key water markets across the world along with access to technology.

Through its subsidiaries/group companies, VA Tech has a presence in West Asia, North Africa and parts of Europe, China and South East Asia. Given that most of the water treatment projects are initiated by local bodies, about 76 per cent of the company’s order book of Rs 4,270 crore is from the municipal segment.

Besides, with areas such as West Asia and northern Africa being some of the most water-scarce regions in the world, they have been forced to adopt sea water desalination programmes.

Shortage of water, population growth and increasing industrialisation are expected to trigger the need for desalination in other developing countries as well.

Considering the opportunities in this space, the company has set-up a dedicated business unit for desalination programmes. Under this, its Rs 1,100-crore (EPC and O&M) Nemmeli Desalination project in Chennai has been commissioned recently.

VA Tech's sound track record of completed projects across the world gives it the pre-qualification for future projects both in India and abroad.

Healthy order inflows

Despite the economic challenges, the company has witnessed healthy order inflows this year.

The order intake during the first nine months of 2012-13 stands at Rs 1,463 crore, as against Rs 910 crore in the same period last year.

About 55 per cent of these have come from the municipal segment and the rest from industry. About one-third of the inflows have been from the international markets. The order book, as at the end of December 2012 (Rs 4,270 crore), shows a 20 per cent increase over the same period last year.

The order pipeline is robust, both on the domestic and international front. It has recently secured a desalination project order as part of an international consortium in Oman for about Rs 1,900 crore. With Japan’s Sumitomo Corporation being part of the consortium, this project is also the first after Wabag’s tie-up with Sumitomo last year. About Rs 350 crore for the EPC part of this project will be booked in VA Tech’s books.

Back home, it expects the tenders for the next desalination plant in Chennai to come up in the next few months. Tenders for the sewage treatment plants at Mumbai are also expected shortly. The company is pre-qualified for at least three projects — Colaba, Bhandup and Ghatkopar — on this front.

Financials

For the nine months ended December 2012, consolidated sales moved up by 21 per cent to Rs 926 crore while profits jumped from Rs 134 crore to Rs 300 crore.

The major contributions to revenue have come from the Dambulla Municipality Project in Sri Lanka, RIL-Dahej, APGENCO Rayalaseema Project and the Nemmeli Desalination Project in Chennai. Consolidated EBITDA margins came in at 7 per cent vis-à-vis 5 per cent last year. But there is scope for expansion in these margins.

For one, with projects such as the Chennai desalination plant commissioned, the company’s revenue from the higher margin yielding O&M space is set to increase in the coming quarters. The company has also won O&M orders from Surat Municipal Corporation and Sterlite Copper this year.

Two, the company expects margins in desalination projects abroad, such as the recently-won Oman project, to be in double-digits and better than margins in Indian projects. Three, the ongoing decentralisation /right-sizing drive in its overseas markets will also support margins.

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