VA TECH WABAG (VTWL) Sector: Construction /Mid Cap

Earnings Update – 3QFY16 February 12, 2016

Sensex Nifty Price: INR 570 Target Price: INR 676 BUY 23,540 7,146 Background: VA Tech Wabag is a leading company in the water treatment space. The company has vast experience in plant building, planning, execution and operation of drinking water plants and waste water plants for both municipal and industrial sectors. The company has a multinational pedigree and offers customer specific solutions. The company has about 157 patents which include both products and process patents and Wabag Austria has 51 patents that are awaiting approval. 52 Week High/Low INR 1940/551 Overseas business muted; domestic opportunities to drive growth Bloomberg / Reuters VATW IN/VATE.BO . In 3QFY16, revenues grew by 1.8% YoY to INR 6.3bn. Muted revenue growth was due to flat Equity shares in mn 54.4 Mkt. Cap in bn INR 31.0/ $0.46 International business at INR 4.1bn (65% of sales), while India business grew 17% YoY to INR Avg. Daily Vol. (‘000) 77.6 2.2bn. Muted overseas revenue was due to 11% Euro depreciation against INR, delay in Nepal Avg. Daily Vol. (mn) INR 44.2/$ 0.65 project due to local conditions and Oman project nearing completion.

. Gross margin expanded by 490bps YoY to 22.3% due to reduction in raw material prices. Shareholding Sep 14 Jun 15 Sep 15 r 14 D 13 Jun13 Mar12 EBITDA grew by 9.1% YoY to INR 462mn and EBITDA Margin improved by only 50bps YoY to Promoters(%) 29.43 28.99 28.96 330 0.31 30.1 30.91 30.95 7.3%, as employee cost as % of sales increased 90bps YoY to 8.4%, while other operating FII (%) 28.55 28.85 28.11 302 2927 30.8 29.43 31.04 DII (%) 21.39 21.24 22.45 20.5 expenses21.1 as % of sales increased20.60 350bps16.07 YoY to 6.6%. Others (%) 20.63 20.92 20.48 17.8. Adj.PAT18.8 grew by 29.017.2% YoY1 to9.06 INR 18221.94mn . Adj.PAT margin increased 60bps YoY to 2.9%. Pledge (% of . For 9MFY16, EPC segment (76% share in revenues) grew 8% YoY to INR 12.9bn, while O&M promoter 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 holding) segment (24% share in revenues) grew 18% YoY to INR 3.9bn. In india business, both

Valuation Summary (INR bn) municipal and industrial segment had similar contribution to revenues, while overseas

Y/E March 2016E 2017E 2018E business, Municipal segment had more contribution (63% share) compared to industrial Revenue 28.1 33.7 38.6 segment. Key projects that contributed to reve nue were APENCO – BOP with water EBITDA 2.4 3.1 3.7 management, PETRONAS RAPID – Malaysia and Istanbul – Turkey O&M. Adj PAT 1.3 1.7 2.0 . Order inflow for current quarter was around INR 2.7bn. Company received an order for waste Adj EPS 23.2 31.8 37.6 % growth 14.0 36.8 18.4 water treatment plant worth Euro 20.75mn from Turkey. Order backlog stood at INR 64bn. P/E 24.4 17.8 15.1 . Management indicated that orders for Namami Gange would be bid in 3-6 months providing P/ BV 3.1 2.6 2.4 opportunity of around INR 250bn over next 3 years. Smart city project and EV/EBITDA 13.3 10.3 8.7 desalination project are expected to provide strong opportunities domestically. While overseas, EV/Sales 1.1 0.9 0.8 order worth INR 6.7bn is expected from Sri Lanka which would get converted by Feb 2016. Div Yield (%) 0.8 1.3 1.1 ROE (%) 12.7 15.5 16.6 . Management maintained its guidance for FY16 as INR 28-30bn in revenues and order intake of

INR 35-37bn.

1M 3M 12M Performance% Valuation: Healthy order inflow and strong order book giving revenue visibility of 2.5 years are key VTWL -15.5 -12.7 -21.7 positives. At CMP the stock trades at 15.1X to FY18E. We assign a target multiple of 18X FY18E and Sensex -3.6 -6.7 -15.3 rate VTWL as BUY with a target price of INR 676. Risks: Cancellation of orders, slower order execution, 1,000 300 delayed/non receipt of payments. 900 Result Summary 3QFY16 (Consolidated) 800 250 700 200 600 Y/E March ( INR mn) 3QFY16 3QFY15 YoY Growth 2QFY16 QoQ Growth 500 150 400 Revenue 6,308 6,194 1.8% 6,025 4.7% 300 100 200 50 EBITDA 462 423 9.1% 440 5.0% 100

0 0 Depreciation 50 55 -8.4% 53 -5.8%

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14 Interest 101 61 66.5% 108 -6.7%

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Dec Dec Aug Aug Tax 115 130 -11.7% 149 -23.1% Va tech wabag Relative Sensex (RHS) PAT 182 141 29.0% 154 17.8% Adjusted PAT* 182 141 29.0% 154 17.8% Arun Kumar HS +91- 44-30007363 EBITDA Margin (%) 7.3 6.8 7.3 [email protected] Effective Tax Rate (%) 38.7 47.9 49.1

Adj PAT Margin (%) 2.9 2.3 2.6 * Adjusted for one-offs in the previous representing period

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