VA TECH WABAG Ltd Company Background VA Tech Wabag Limited (Wabag) is in the business of providing Rs. 1230 ‐ Rs. 1310 turnkey solutions for water and waste water treatment to 22rd Sept‐27th Sept 2010. municipal and industrial users. It is a multinational player in the SUBSCRIBE
water treatment industry with HQ in Chennai & market presence in India, Middle East, North Africa, Central and Eastern Europe, Sector Engineering China and South East Asia. It offer complete life cycle solutions Retail Application‐ Detail At Issue Price including conceptualization, design, engineering, procurement, 75 supply, installation, construction and O&M services. The contract Number of Shares 98250 could be standalone EPC, (engineering, procurement & Application Money Amount Payable 98250 construction), DBO (design, build & operate) or BOOT (build, own, Financials (Rs in Crs) FY09 FY 10 operate & trade).The Company currently has 13 subsidiaries, all of which are incorporated outside India. Revenue including other income 1155.0 1233.8 The company has research and development (R&D) centers located in Chennai (India), Vienna (Austria) and Winterthur EBIDTA 83.1 121.3 (Switzerland). At the end of July 31, 2010, on a consolidated basis, PAT 42.2 49.4 the company had a workforce of 1,469 persons including 757 Lead Manager
EPS Book Value
ENAM. IDFC
50.8 447.6
P/BV (U‐L) PE (U‐L)
52.7 428.2
2.6‐2.5 27.8‐27.1
No of Equity Shares Offered Post Issue Promoter Holding
0.36 crores 31%
Offer structure for different categories
QIB (Excluding Mutual Fund) Mutual Fund
45% 5%
Non‐Institutional
15%
Retail Lot Size
35% 5 5.15
Post issue Equity (Rs. in crore) Issue Size (Rs. in crore) Face Value (Rs.) Shareholding pattern (Post Issue)
qualified engineers. It holds around 157 patents and has lodged about 51 patents applications for registration. The operations of Wabag India have been divided into four strategic business units, namely municipal business, industrial water, O&M and international businesses. For FY2010, Wabag India contributed to 57.4% of the consolidated revenues and the balance came from Wabag Austria and its subsidiaries. On a stand‐alone basis, Wabag India’s revenues include 64% from the municipal business, 11% from the industrial business, 5% from the O&M business and 20% from the overseas business. Object of the Issue Particulars Rs. In Crs Working capital 66 requirement Construction of corporate 35 office at Chennai Implementation of global IT 11 system General Corporate exp. 14 Net Proceeds of the Issue
125
In addition to this there is an offer for for sale of 0.26 crores from from existing investors amounting to Rs 347.6 crores at upper band.
IPO Note
VA TECH WABAG Ltd
Investment Rationale:
Favorable demand outlook
Indian water and waste water treatment market size is estimated at USD 4 billion and is expected to grow at the rate of 10% to 12% pa. The domestic outlook would remain robust given the governments thrust on improvement and augmentation of water and waste water treatment infrastructure. The total planned expenditure for urban water supply and sanitation, under the 11th five year plan (2007‐2012) was estimated at Rs 1292 billion, which is more than 2 times of the planned expenditure of the 10th five year plan. Further, GOI is implementing the same through, various initiatives including Jawaharlal Nehru National Urban Renewal Mission (JNNURM) currently covering about 65 cities, and implementation in another 28 cities is under consideration. At global front, the water industry is estimated to be worth USD 463 billion in 2007, out of that USD 350 billion comprises from water utilities and industrial market. This segment is expected to grow to USD 530 bn by 2016. Wabag is expected to benefit from favorable demand outlook in these key growing markets, where it has established its presence over the period.
(Sources: DRHP)
Complete water solution provider with established position Wabag provides complete engineering solutions and offers a comprehensive range of services right beginning from conceptualization, construction and O&M support in the water industry for sewage treatment, processed and drinking water treatment, effluents treatment, sludge treatment, desalination. It also executes the projects under Design, Build, Operate (DBO), BOOT model. Wabag has executed more than 100 projects for clients, includes various Municipal corporations and Industrial units. In addition to this the company through its subsidiary own 155 patents which include both process and product patents. The previous experience and technology support from subsidiaries helps it to leverage in a highly dynamic business environment.
IPO Note
VA TECH WABAG Ltd
Wabag brand coupled with advanced technology Wabag brand is established since 1924 and over the years it has invested to build the brand. The brand accords it the opportunity to penetrate in new markets, pre‐qualify for bids and expand services in new
areas such as BOOT and TOT. Designing and engineering of projects in the water and wastewater treatment segment is technically complex, time consuming and resource intensive because of unique client requirements. It has executed the projects with state of the art technology based on bio reactor plant in Muscat & China. The company and its subsidiaries own several technologies for waste water treatment plants. Brand recognition coupled with technical competencies and ability to meet client requirements has provided to get repeat orders from clients. In addition to this the patent portfolio gives the company to bid individually, without entering technological tie up.
Lower investments and capital expenditure due to outsourcing model Wabag usually outsource the civil works, construction and erection works for projects to the third party contractors. This benefits the returns on investments in each project as fixed assets costs are low. It also helps the company to increase the scalability and have more focus towards engineering, design and technology to provide quality water engineering solutions.
Excellent execution track record and strong order book In past demonstrated excellent track record of executing large and complex water & waste Wabag has water treatment EPC projects of longer duration. It has been involved directly or indirectly in more than 2250 projects over the last 3 decades across 19 countries. The construction of water & waste water treatment projects requires a significant amount of technical expertise and skill in execution. The excellent management bandwidth, proven skills, propriety technology, rich expertise, gives a distinct advantage to the company for bidding new projects. The average execution cycle ranges from 18 to 24 months. It has robust order book of Rs 2779.6 crores on consolidated basis, which is 2.27 times of FY10 revenues, provides revenue visibility. From the total order book, 60% comprises from Indian operations and balance from international markets. On standalone basis the order backlog of the company for the last 4 years is more than 2 times of sales. The consistency in the order inflow indicates the company’s position on back of leadership, track record and technology portfolio it holds. 1885
4 3 2
2.6
3.5 1161
1271 2.2
663
2.7
2000 1500 1000
1
500
0
0 2007
2008
Stand alone Order Book
Sources: DRHP
2009
2010 Order Book to sales
IPO Note
VA TECH WABAG Ltd
Risk Concern Order book lopsided towards government entities. Wabag’s large portion ~88% of order book is from government entities. Many of the government projects are often subject to delay on account of insufficient funds, changes in policies, budgetary allocation. Delay in the projects affects business operations and financial condition of the company.
Large portion of projects are on a lump sum payment basis About the 38% of total income in FY 10 is derived from fixed price contracts. Any significant fluctuations in the prices of raw material (especially metals) will take a hit to the profitability of the company.
Timely execution of the orders is critical Timely execution of orders without having cost overrun is critical. Delay in project execution could lead to the liquidated damages. In past there had been instances of LD claims (about 3% of operating income) which had impacted the profitability of the company. Going ahead, timely execution of project remains critical to the company.
Retrospective change in 80IA could affect bottom line adversely Section 80‐IA of the Income Tax Act, 1961 has been amended with retrospective effect by the Finance Act, 2009, disallowing tax benefits to persons who are having mere work contracts with the government or statutory bodies. The tax benefit disallowed amounts to Rs24.20 crore and the interest thereon amounts to Rs10.81 crore. The company has filed a writ petition in the High Court of Madras challenging the constitutional validity of the retrospective amendment. However, if the order goes against the company, it would dent its bottom line. From FY 10 the company has started providing full tax.
Outlook & Valuation Water even though abundant on earth is scarce when it comes to its quality. Only 2.5% is available in the form of fresh water. The uneven spread of water and the increasing demand for fresh water due to the growing urbanization provide significant opportunity for players in the waste water treatment industry especially Vatech Wabag Ltd. With significant industry expertise, advance technology, strong execution track record and a growing order book, the company is well balanced to tap the growing water and waste water treatment market.
Further, the company is strengthening its base in India and is setting up local presence in the target markets that are Low‐cost and would help bring down the company’s dependence on Austria and Switzerland for servicing. The EBIDTA margin on the consolidated basis has improved to 9.83% in FY2010 from 4.8% in FY2008. At the lower and upper ends of the price band of the issue, the stock is offered at 27.15x and 27.8x FY2010 earnings respectively. We recommended Subscribe to the IPO due to, (1) Va tech is the only company which is fully focused on water and waste water treatment company in India (2) strong brand, (3)technological backing and (4)healthy execution track record (5) Attractive Industry Outlook.
IPO Note
VA TECH WABAG Ltd
Consolidated Financials Income Statement (Rs in Crores) Income from Operations Other Operating Income Total
FY08 610.9 12.3 623.2
FY09 1,133.3 21.7 1,155.0
FY10 1,223.7 10.0 1,233.8
Cost of Sale & Services Employee Cost General Administrative Exp Total Expenditure
491.5 61.8 40.0 593.3
833.3 155.5 83.0 1,071.8
846.3 167.4 98.7 1,112.5
EBIDTA Depreciation EBIT Interest Cost Other Adjustments Prior Period Exp
29.9 5.3 24.6 14.4 (3.4)
83.1 8.4 74.7 35.4 7.4 1.4
121.3 13.9 107.4 29.9 4.7 3.1
PBT Current Tax Deferred Tax FBT MAT Total Tax Adj PAT Share of Associate Minority Interest Adj Pat after Minority Interest
6.8 3.1 (1.2) 0.3 (1.2) 1.0 5.8 (0.0) (0.3) 5.5
45.2 11.1 (7.5) 0.5
79.1 35.8 (5.5)
‐
‐
‐ ‐
4.0 41.2 1.1 (0.1) 42.2
49.4
FY08
FY09
FY10
EBITDA
4.8%
7.2%
9.8%
EBT PAT
1.1%
3.9%
6.4%
0.9%
3.7%
4.0%
85.3%
6.8%
177.8%
46.0%
769.9%
117.0%
Key Ratios
30.4 48.7 0.7
‐
Margins
Growth Sales EBITDA PAT
IPO Note
VA TECH WABAG Ltd
Balance Sheet (Rs in Crores) Equity Share Capital Pref Share Capital Reserves & Surplus Networth Loans Minority Int Capital Employed Gross Block Less : Dep Net Block Intangible Assets Capital WIP Total Fixed Assets
Investments Deferred Tax Assets Inventories Sundry Debtors Cash & Bank Balance Other Current Assets Loans & Adv Total Current Assets Current Liabilities Provision Current Liabilities & Provns Net Current Assets Capital Deployed
Key Ratios ROCE RONW Book Value/Share Debt to Equity Adj EPS
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