va tech ipo note

 

. VA TECH WABAG LIMITED

 

IPO NOTE tem m er epte

,

IPO NOTE

VA Tech Wabag Limited

IPO Details

VA Tech Wabag Limited (Wabag) was incorporated in 1995 as Balcke

Face Value Price Band (Rs.)

Rs. 5 Rs. 1,230 - 1,310

Issue Opens

22-Sep-10

Issue Closes

27-Sep-10 Enam Securities Pvt. Ltd., IDFC Capital Ltd. Karvy Computershare Pvt. Ltd. upto Rs. 4.7 bn

BRLM Registrar to issue Issue Size Pre issue shareholding pattern Shareholders

% Stake

Promoter and Promoter Group

34.3%

Non-Promoter Group

65.7%

Durr Cooling Towers Limited. The Company has a global presence in the water treatment industry with presence in emerging countries like India, the Middle East and China among others. It manages its business operations through its headquarter in Chennai, India and principal offices in various emerging countries. The Company offers complete life cycle solutions including conceptualisation, design, engineering, procurement, supply, installation, construction and O&M services. As of July 31, 2010, the Company had 1,469 employees. Meanwhile, the Company has executed 113 projects and is currently executing 81 projects. We see Wabag’s issue as a good investment opportunity as:   Wabag’s strong order book of Rs. 27.8 bn as of June 30, 2010, which is 2.3x times of FY10 total income, would provide a strong revenue outlook in short- to medium-term.   Wabag’s focused approach on technology helps it to gain on new clients and benefit it in terms of returns on investments. The Company’s global presence allows it to identify and evaluate   projects in new jurisdictions effectively, establish client relations, understand local markets, culture and requirements, procure raw materials locally, reduce currency risks and meet client expectations efficiently.   The Company’s brand recognition and technical competencies would allow it obtain new clients and repeat orders from existing clients. •

•

Post issue shareholding pattern Shareholders

Subscribe

Lower End

Upper End

Promoter and Promoter Group

31.0%

31.2%

Non-Promoter Group

69.0%

68.8%

Lo Lower wer En End d

Uppe Upperr End End

QIBs

1.83

1.80

Non-Institutional

0.55

0.54

Retail

1.28

1.26

Lower End

Upper End

Rs Rs.. 1,23 1,230 0

Rs. 1,310 ,310

Equity Shares prior to issue (mn)

9 .5

9.5

Fresh Issue of shares (mn)

1 .0

1.0

10.6

10.5

Rs. 52.8

Rs. 52.5

•

Allo Alloca cati tion on (i (in n mn; mn; no nott less less than than))

IPO Details Pr Pric ice e Ba Ban nd

•

Valuation and Recommendation We recommend the investors to subscribe to the issue on the basis of the following: We value Wabag’s stock at Rs. 1,419, by using the DCF method   (WACC of 15.4% and terminal growth of 5%), which offers an upside potential of 15% over the lower end of the price band and 8% over the upper end of the price band.  

•

Total Equity Shares (mn) Share Capital (mn) Implied market cap (mn)

Rs. 12,985.2 Rs. 13,748.5

Debt (mn) (31/03/10)

Rs. 391.2

Rs. 391.2

Cash (mn) (31/03/10)

Rs. 2,185.1

Rs. 2,185.1

Implied EV (mn)

Rs. 11,191.3 Rs. 11,954.6

FY09 FY10 Year to March (Figures in Rs. mn, except per share data) Total Income EBITDA Adj. Net Profit

  11,550   817   422

  12,338   1,213   494

FY11E   14,800   1,529   683

FY12E   17,461   1,891   866

FY13E CAGR (%) (FY10-13E)   20,420   2,314   1,083

Margins (%) EBITDA NPM

7.1% 3.7%

9.8% 4.0%

10.3% 4.6%

10.8% 5.0%

11.3% 5.3%

Per Share Data (Rs.) Adjusted EPS

44.4

52.3

68.1

82.3

102.9

PER (x) @ Rs. 1,230 PER (x) @ Rs. 1,310

27.7x 29.5x

23.5x 25.0x

18.1x 19.2x

14.9x 15.9x

Please see the end of the report for disclaimer and disclosures

12.0x 12.7x

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18.3% 24.0% 29.9%

25.3%

 

. VA TECH WABAG LIMITED

 

IPO NOTE epte tem m er  

•

,

We expect the Company to enjoy better margins over the average of its peer set (IVRCL Infrastructures & Projects Ltd., Nagarjuna Construction Co. Ltd. and Consolidated Construction Consortium Ltd.) with an EBITDA margin and a net margin of 10.3% and 4.6%, respectively, as compared to an EBITDA and a net profit margin of 9.6% and 4.2%, respectively, of its peer set for FY11E. This is primarily attributable to its focused approach on technology and diversified international presence.

 

•

Though the Company’s forward P/E of 18.1x at the lower end of the price band and and 19.2x at the upper band for FY11E looks slightly expensive, as compared to the peers’ average P/E of 15.3x for FY11E, investment in Wabag provides an international exposure and allows an investor to be more focused on the Water industry, which is a niche market in most of the emerging countries, unlike its peer set listed on the Indian stock exchange. Thus, we suggest to invest in the Company. Peer Analysis - FY11E Consolidated Construction Consortium Ltd IVRCL Infrastructures & Projects Limited Nagarjuna Construction Co. Ltd   Average   VA Tech Wabag Limited

EBITDA M argin Net Profit Margin 9.1% 4.6% 9.7% 3.9% 10.2% 4.3% 9.6% 4.2%   10.3% 4.6%  

P/E 13.5x 16.2x 16.4x 15.3x 18.1x

EV/EBITDA 7.7x 6.6x 11.6x 8.6x   7.3x

ROE 18.0% 12.4% 10.6% 13.7% 14.7%

2016 31,296 3,585 431 4,016 (848) (939) (353)

2017 35,981 4,301 496 4,797 (1,029) (1,079) (353)

Middle Terminal Period Period 2018 2019 2024 41,367 47,573 100,470 5,152 5,233 10,047 570 618 1,256 5,722 5,851 11,303 (1,245) (1,256) (3,014) (1,241) (1,427) (2,009) (353) (742) (1,256)

1,876

2,336

Source: Reuters and Indiabulls research 

DCF Model (in Rs. Mn) Period Turnover Operating profit (EBIT) Add back Depreciation EBITDA T a xe s W orking Capital Less Capex Free Cash flow for the Firm (FCFF)  

2011 14,800 1,325 204 1,529 (290) (2,220) (220)

2012 17,461 1,651 241 1,891 (368) (1,746) (260)

(1,201)

(483)

DCF Assumptions Beta

1.0

W ACC Risk Free Rate

15.4% 7.5%

Market Return

17.0%

Terminal Growth Rate

5.0%

Terminal Margin EV (as per DCF)

10.0% Rs. 13,145

Value per Share

Rs. 1,419

Explicit Forecasts 2013 2014 2015 20,420 23,678 27,222 2,033 2,475 2,982 281 326 375 2,314 2,802 3,357 (461) (570) (697) (1,021) (947) (817) (304) (353) (353) 528

   h    t   w   o   r    )   g    l    %   a   i   n   n   (    i   m   r   e    T

931

1,491

2,883

2,426

5,023

15.9

16.4

WACC (in %) 14.4

14.9

 

15.4

4.0 4.5

  1,547   1,591

  1,443   1,481

  1,350   1,383

  1,267   1,295

  1,190   1,215

5.0

  1,639

  1,523

  1,419

  1,326

  1,242

5.5

  1,694

  1,569

  1,459

  1,360

  1,272

6.0

  1,754

  1,621

  1,503

  1,398

  1,304

Please see the end of the report for disclaimer and disclosures

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. VA TECH WABAG LIMITED

 

IPO NOTE tem m er epte

,

IPO Issue details Wabag is entering in the capital markets with an initial public offering (IPO) of up to 3.7 mn equity shares of Rs. 5 each at a price band of Rs. 1,230–1,310 to raise up to Rs. 4.7 bn. The issues consisting of a fresh issue of up to 1.0 mn equity shares aggregating up to Rs. 1.25 bn by the company and an offer for sale of equity shares aggregating up to Rs. 3.5 bn by India Advantage Fund I, Dynamic India Fund I, Rainbow Fund Trust, GLG Emerging Markets Fund and Passport India Investments (Mauritius) Limited. The Issue opens on September 22, 2010 and closes on September 27, 2010.

Issue objectives • Funding working capital requirements: The Company intends to use Rs. 645.1 mn to fund its future working capital requirement. • Construction of a corporate office at Chennai: The Company has assigned Rs. 347.4 mn to construct a new office facility, to be named Wabag House, at Chennai measuring nearly 150,000 sq. ft. • Implementation of global IT systems: The Company has allotted Rs. 110.5 mn to develop and implement a global IT system to facilitate the integration of the business process with its subsidiaries. • General corporate purposes: The balance of its net proceedings would utilise for general corporate purposes, including strategic initiatives, brand building exercises and strengthening of marketing capabilities.

Investment Rationale More focused on technology The Company is primary involves in providing complete life cycle solutions including conceptualisation, design, engineering, procurement, supply, installation, construction and O&M services. The Company is more focused on its principal expertise in technology and sub-contracts the civil works. It concentrates on technology development and advancement through its R&D centres in Chennai, Vienna and Winterthur in India, Austria and Switzerland, respectively. Further, its two subsidiaries, Wabag Austria and Wabag Wassertechnik, own 157 patents which include both process and product patents. Wabag Austria has also applied for 51 patents that are pending. Moreover, its strategy of outsourcing civil work also benefits in terms of returns on investments in each project as fixed assets costs are low. We believe that the Company’s concentration on its core-competencies would help it to attract more clients and to take hold on the opportunities arises with the increase in government investments across the globe. Wide presence Wabag’s wide presence in the Middle East, North Africa, Central and Eastern Europe, China, India and the South East Asia provides it an upper hand compare to its local peers as it provides international exposure and allows the Company to capture the demand for Water and Waste Water treatment from emerging economies. Further, we believe that the Company’s presence in various countries allows it to identify and evaluate projects in new jurisdictions effectively, establish client

Please see the end of the report for disclaimer and disclosures

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. VA TECH WABAG LIMITED

 

IPO NOTE epte tem m er

,

relations, understand local markets, culture and requirements, procure raw materials locally, reduce currency risks and meet client expectations efficiently. Robust order book provides revenue visibility Wabag has a strong order book of Rs. 27.8 bn as of June 30, 2010, which is mainly attributable to municipal clients. The municipal clients contribute 88% of the total order book, while remaining 12% by industrial client. The company has added new order of Rs. 13.6 bn in FY10, which reflects a growth of 100% yoy. We expect the Company’s robust order book, which is 2.3x times of FY10 total income, would provide a strong outlook for its revenues in short- to medium-term. Brand recognition Wabag brand, established in 1924, allows Wabag to leverage its business. The Company has acquired the brand name with the acquisition of Wabag Austria in 2007. The brand provides the opportunity to penetrate new markets, pre-qualify for bids and expand its services in new business areas. In addition, the brand supports the Company to operate into competitive markets and to attract and retain skilled employees. We believe the Company’s brand recognition along with its technical competencies would allow it obtain new clients and repeat orders from existing clients.

Risks and concerns Dependence over government-sponsored projects Wabag owes 88% of its order book to projects of the government-controlled entities in India as well as abroad. Thus, the Company is susceptible to the risk of scaling back of Government policies, changes in governmental or external budgetary allocation or insufficiency of funds, delay, termination or cancellation of projects. In case of any such happening, the Company’s business would be significantly and adversely impacted. Relying over major clients can backfire The Company currently derives significant portion of its income from a limited number of large clients. The five largest clients of the Company accounted for 66% of revenue and 82% of its order book as of March 31, 2010. Thus, any loss of its significant clients or a significant decrease in the volume of work from these clients would adversely affect its future revenues.

Financial Analysis  

•

Wabag’s total income grew at a CAGR of 40.7% 40.7% over the period FY08-10. During FY10, the total income grew by 6.8% yoy to Rs. 12.3 bn.

 

•

The cost o off sales and services as percentage to total income declined 356 bps yoy to 68.6% in FY10. However, However, the administrative expenses as percentage to total income increased 82 bps yoy to 8.0%. Lastly, the staff cost as percentage to total income remained almost flat on a yoy basis at 13.6%. Consequently, the EBITDA margins improved 276 bps yoy to 9.8% in FY10.

Please see the end of the report for disclaimer and disclosures

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. VA TECH WABAG LIMITED

 

IPO NOTE epte tem m er  

•

,

Its net profit for FY10 increased increased 17.0% yoy to Rs. 493.9 mn, with its net margins improving from 3.4% in FY09 to 4.0% in FY10.

•

 

At the end of FY10, the company had a cash balance of Rs. 2.2 bn and a net worth of Rs. 4.0 bn.

Company Background VA Tech Wabag Limited was incorporated in 1995 as Balcke Durr Cooling Towers Limited, subsidiary of Balcke-Durr Aktiengesellschaft, a German company held by Deutsche Babcock. The company’s name was changed to Balcke Durr and Wabag Technologies Limited with the starting of water treatment division in 1996. In 1999, the Austrian group VA Tech acquired the water business of Deutsche Babcock operating under the brand name of Wabag. In 2000, VA Tech has demerged its water and non-water division and named its water division as VA Tech Wabag Limited. The Company has a world-wide presence in the water treatment industry with market presence in India, the Middle East, North Africa, Central & Eastern Europe, China and South East Asia. It manages its business operations through its headquarter in Chennai in India and principal offices in Austria, the Czech Republic, China, Switzerland, Algeria, Romania, Tunisia, UAE, Libya and Macao. Wabag offers complete life cycle solutions including conceptualisation, design, engineering, procurement, supply, installation, construction and O&M services. These services are provided for sewage treatment, processed and drinking water treatment, effluents treatment, sludge treatment, desalination and reuse for institutional clients like municipal corporations and companies present in the infrastructure sector such as power, steel and oil & gas companies. As on July 31, 2010, the Company has executed 113 projects and is currently executing 81 projects. Income Statement

2009

2010

2011E

2012E

2013E

2014E

2015E

2016E

2017E

2018E

Income 11,332.8

Income from operations Other Income Total Income

 

12,237.4

14,684.9

17,328.2

20,273.9

23,517.8

27,045.4

31,102.3

35,767.6

41,132.7

216.7

100.2

115.2

132.5

145.8

160.3

176.4

194.0

213.4

234.8

11,5 11,549 49.5 .5

1 12, 2,33 337. 7.6 6

14 14,8 ,800 00.1 .1

17, 17,46 460. 0.7 7

20 20,4 ,419 19.7 .7

2 23, 3,67 678. 8.1 1

27 27,2 ,221 21.8 .8

3 31, 1,29 296. 6.3 3

35 35,9 ,981 81.0 .0

4 41, 1,36 367. 7.5 5

Cost of sales and services

8,333.2

8,463.2

10,078.4

11,802.9

13,701.0

15,768.9

17,992.8

20,529.4

23,422.5

26,722.1

Staff cost

1,555.4

1,674.4

2,008.6

2,369.7

2,771.3

3,213.5

3,694.4

4,247.4

4,883.2

5,614.2

General, selling and administrative e  

EBITDA Margin

Depreciation/ Amortisation   EBIT Margin Int & Finance Charges Total Expenditure  

Profit before tax Margin Total Tax Profit after Tax

 

Share of profit/ (loss) from Associate Minority Interest Changes in accounting policies Other material adjustments   Adj Net Profit Margin

843.9

987.0

1,184.0

1,396.8

1,633.6

1,894.2

2,177.7

2,503.7

2,878.5

3,309.4

817.0

1 ,,2 213.0

1,529.1

1 ,,8 891.3

2 ,,3 313.9

2 ,,8 801.5

3 ,,3 356.9

4 ,,0 015.9

4,796.9

5 ,,7 721.8

7%

10%

10%

11%

11%

12%

12%

13%

13%

14%

84.4

170.0

203.9

240.6

281.4

326.3

375.1

431.2

495.8

570.0

732.6

1 1,,043.0

1 ,,3 325.2

1 ,6 ,650.7

2 2,,032.5

2 ,,4 475.3

2 2,,981.8

3 3,,584.6

4 ,,3 301.1

5 ,,1 151.8

6%

8%

9%

9%

10%

10%

11%

11%

12%

12%

353.7

299.0

358.7

423.2

494.9

573.8

659.7

758.5

872.0

1,002.5

11,170.6

11,593.6

13,833.6

16,233.1

18,882.0

21,776.7

24,899.7

28,470.1

32,551.9

37,218.2

378.9

744.0

966.5

1,227.5

1,537.7

1,901.4

2,322.1

2,826.2

3,429.1

4,149.3

3%

6%

7%

7%

8%

8%

9%

9%

10%

10%

40.1

303.5

289.9

368.3

461.3

570.4

696.6

847.8

1,028.7

1,244.8

440.5

676.5

859.3

1,076.4

1,331.0

1,625.5

1,978.3

2,400.4

2,904.5

338.8 10.6

 

6.9

6.9

6.9

6.9

6.9

6.9

6.9

6.9

6.9

0.7

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

2.8 70.7 422.2

0.0 46.5 493.9

0.0 0.0 683.4

0.0 0.0 866.2

0.0 0.0 1, 1,083.3

0.0 0.0 1 1,,337.9

0.0 0.0 1 1,,632.4

0.0 0.0 1 1,,985.2

0.0 0.0 2 2,,407.3

0.0 0.0 2 2,,911.4

4%

4%

5%

5%

5%

6%

6%

6%

7%

7%

Please see the end of the report for disclaimer and disclosures

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. VA TECH WABAG LIMITED

IPO NOTE epte tem m er

,

Disclaimer This report is not for public distribution and is only for private circulation and use. The Report should not be reproduced or redistributed to any other person or person(s) in any form. No action is solicited on the basis of the contents of this report. This material is for the general information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be considered as an offer to sell or the solicitation of an offer to buy any stock or derivative in any  jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Indiabulls Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. You are advised to independently evaluate the investments and strategies discussed herein and also seek the advice of your financial adviser. Past performance is not a guide for future performance. The value of, and income from investments may vary because of changes in the macro and micro economic conditions. Past performance is not necessarily a guide to future performance. This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Any opinions expressed here in reflect judgments at this date and are subject to change without notice. Indiabulls Securities Limited (ISL) and any/all of its group companies or directors or employees reserves its right to suspend the publication of this Report and are not under any obligation to tell you when opinions or information in this report change. In addition, ISL has no obligation to continue to publish reports on all the stocks currently under its coverage or to notify you in the event it terminates its coverage. Neither Indiabulls Securities Limited nor any of its affiliates, associates, directors or employees shall in any way be responsible for any loss or damage that may arise to any person from any error in the information contained in this report. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject stock and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Indiabulls Securities Limited prior written consent. The information given herein should be treated as only factor, while making investment decision. The report does not provide individually tailor-made investment advice. Indiabulls Securities Limited recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. Indiabulls Securities Limited shall not be responsible for any transaction conducted based on the information given in this report, which is in violation of rules and regulations of National Stock Exchange or Bombay Stock Exchange.

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