CFA Institute Research Challenge Hosted by Indian Association of Investment Professionals (IAIP) Indian Institute of Management (IIM), Tiruchirappalli

Date: 29-10-2014

Sector: Water and Waste water Treatment Exchange: NSE | Ticker: WABAG Industry: Water Industry 1 USD = 61.91 INR; 1 EUR=70.27 INR SELL Current Price Target Price: (27th Oct 2014):INR 1594 INR 1353 Downside: 15%

GOOD COMPANY BUT TIME TO LEAVE THE PARTY We initiate coverage on VA Tech Wabag Ltd. with a SELL recommendation with year-end (31st Market Profile Volume Weighted Avg. March 2015) target price of INR 1353, which implies a downside of 15% from the current 1593 market price as on October 27th, 2014. Price (INR) 52 week Price Range Healthy growth in both topline and bottom line 485-1748 In the last four years, the Company’s revenues and net income grew at a CAGR of 16% and (INR) 26% respectively. The Company’s improved performance comes from 1) its strategy of Average Daily Volume 68619 pursuing opportunities in high growth emerging markets and 2) improving operating margins Current Shares through labor arbitrage i.e. moving labor away from high cost European countries to low cost Outstanding (Mn) 26.8 destinations. (2014-10-28) Company strategies paying off Market Cap 42666.7 Wabag has built its strategy around five pillars-1) Asset light business model through which (2014-10-28,Mn INR) Free Float the company is present in the design, technology and O&M (Operations & Maintenance) 30,558.6 (2014-10-28,Mn INR) activities of the value chain but has outsourced the construction work. The low Cap-ex helps in pursuing more growth opportunities 2)Higher exposure to municipal segment (64%) which Lower Price Band (INR) 1,310.6 is less affected by economic cycles, 3)Investment in technology. The company owns more Upper Price Band (INR) 1,965.9 than 100 patents, 4) offering end-to-end water solutions for its clients and 5) reducing costs Dividend Yield 0.49% by moving labor from higher cost to lower cost countries. P/E (Current) 39.7 Growth to continue The Company is in a sweet spot due to 1) presence in a high-growth industry and 2) a low P/B (Current) 5.4 debt/equity relative to peers and 3) rich technical know-how enabling it to grow faster. EV/EBITDA (Current) 20.6 But time to leave the party Source: National Stock Exchange (NSE) We have arrived at the target price of INR 1353 using a combination of 3 stage Dividend Discount Model, Discounted Cash Flow model and Residual Income model. The stock price of Risk Profile the company has run up significantly over the past year with YTD returns being 211%. Though Qty. Traded 68,619 the fundamentals of the company are strong and it has good growth prospects going forward, Deliverable Qty. 61,999 we believe that the current stock price more than factors in all these positives. Hence the % Delivery Qty. to 90.35% trailing PE multiple of 37.4 is not justified and going forward, we expect the stock price to Traded Qty correct. VaR Margin 43.3 Investment Risks The major upside risks to our target price are-1) increased tie-ups with construction firms Applicable Margin Rate 48.3 having access to low cost credit enabling the company to aggressively pursue growth Extreme Loss Rate 5.0 opportunities, 2) successful foray into the Latin American market which holds significant market potential, 3) Reallocation of capital at group level and 4) Reduction in raw material Source: Bloomberg and NSE costs as a percentage of revenue. Indexed Prices : Nifty vs Wabag 400 WABAG 350 NIFTY Key Ratios 2012 2013 2014 2015E 2016E 2017E 2018E 300 Net Profit Margin 5.7% 5.3% 4.6% 4.9% 5.2% 5.5% 5.7% 250 Return on Equity 12.9% 12.0% 12.3% 14.0% 15.9% 17.5% 19.0% 200 Current ratio 1.53 1.55 1.49 1.44 1.41 1.39 1.37 150 Quick ratio 1.51 1.47 1.29 1.40 1.37 1.35 1.33 100 Asset turnover 0.81 0.86 0.92 0.96 1.00 1.03 1.06

Equity turnover 2.24 2.26 2.65 2.87 3.06 3.21 3.32

Jun-14

Sep-14

Aug-13 Nov-13 Debt to equity 0.06% 0.36% 5.33% 4.20% 3.21% 2.37% 1.67% Mar-14

Source: Bloomberg, Student Research Source: NSE

2 Investment Summary

Strong fundamentals in a growing industry: VA Tech Wabag has become a formidable player in the global water treatment industry after acquiring its Austrian parent in 2007. In this market which is expected to grow at a CAGR of 30% between 2013 and 20181. VA Tech Wabag has created a unique competitive advantage for itself, combining the 90-year old Wabag brand with rich technical expertise (over 100 patents) and the lower costs of operating from India. The strategy of entering emerging markets along with cost rationalization has helped the company grow its revenues from 12,237 Mn INR in FY’10 to 22,386 Mn INR in FY’14 at a CAGR of 16% and net profits from 414 Mn INR to 1040 Mn INR in the corresponding period at a CAGR of 26%. Performance: We expect the company to outperform the industry going forward given its strong balance sheet (asset light business model with debt-to-equity ratio of 5.33% as of FY’14), robust order book position (book-to-bill ratio of 2.39 at the end of FY’14) and rich technical knowhow combined with lower costs. We expect the company to post topline growth of 22% in the year’s up to FY’19, resulting in net profit margin expanding from the current 4.6% to 6% and RoE expanding from 12.3% to 20.4% Expensive Valuation: However the valuations have run up in the past 1 year with YTD returns being 211.2%. At the current Market Price (CMP) of INR 1594, the stock trades at a multiple of 31.79 times to the estimated FY’15 EPS. This we believe, more than prices in all the positives and ignore potential risks. According to our calculations, we have arrived at an end of the year (31 March 2015) fair price of 1353 INR, implying a downside of 15% from the current levels. Major upside risk: The major upside risks to our target price comes from the following factors: 1) Increasing tie-ups with partners who have access to low cost credit, 2) Successful Foray into Latin American market, 3) Reallocation of capital at group level and 4) Reduction in raw material costs.

VA Tech Wabag EPS VA Tech Wabag DPS (In INR)

(In INR) 25

21

107.08 120

20 17

83.42

100

13

15

80 65.08

10

50.14

8

60 42.67 7

10

33.64 5 40 27.90 5 20 8.49

0 0

2012 2011 2012 2013 2014 2013 2014

2015E 2016E 2017E 2018E 2015E 2016E 2017E 2018E

VA Tech bags Dividend of INR 8 2.5 Bn INR per share project in Tanzania VA Tech VA Tech posts 164 reports Mn INR 19.7% profit jump in net profit

1 GlobalSource: Water Money Intelligence control, Bloomberg, Student Research

3 Business Description (See Appendix 3,8&9)

Fig 1.Shareholding Pattern (30-06-2014) VA Tech Wabag Ltd., headquartered in Chennai, is an end-to-end water treatment solutions provider. With 18 subsidiaries and presence in 20 countries, the Wabag group’s offerings include Promoters municipal Drinking water, municipal sewage, industrial water, industrial effluents, desalination and 20.64% recycling. The company commands roughly 14% market share in India where it is the market leader 29.43% FII and about 1% globally where the industry is highly fragmented. 21.33% DII 28.55% The firm is organized into three groups -1) Municipal Water Group (MWG) which takes orders from Others government bodies, 2) Industrial Water Group (IWG) which provides water management solutions to demineralization plants, reverse osmosis plants and CPU plants used in industries like steel, petrochemicals, fertilizers, power et al. and 3) Operations Business Group (OBG) which is Source: Money Control responsible for operating and maintaining of plants

Company Strategies Fig 2.Geography- Revenue Break up (2013-14) 1. Global brand with a local connect: Water is a highly localized business and knowledge of local conditions gives a significant competitive advantage. This is one of the reasons for the industry to be highly fragmented at the global level. As the technology is becoming complex, India global companies can gain an advantage by using best practices across geographies. VA Tech Wabag 49% 51% Overseas is pursuing this strategy by building local sales teams and hiring engineers from India. 2. Asset light business: The value chain in the business of water treatment involves design, technology, construction and operation & maintenance (O&M). In order to keep the business asset light, the company outsources construction activity to third parties. In order to Source: Annual Report participate in BOOT projects, WABAG is going for alliances with companies that have access to cheap capital. It is a unique strategy, as its competitors have construction subsidiaries that Fig 3.Project- Revenue Breakup undertake the civil construction. While the competitors made losses due to economic downturn (2013-14) and project delays, WABAG is in a better financial position to bid for new projects. 3. Focus on the Municipality Segment: Majority of Wabag’s revenue (64%) comes 20% EPC from the municipal segment. These projects are more predictable than the industrial segment, which is affected by the state of the economy. As municipal projects are backed by developmental O&M banks, this decision helps it to reduce risk. Also, the water sustainability initiative taken by a 80% number of governments is set to increase the demand from this segment. 4. Focus on Increasing O&M share in the business mix: The operating margin of the operation & maintenance (O&M) segment is double than that of Engineering, Procurement & Source: Annual Report Construction (EPC) projects (16.2% vs 8.1%, Source: Student Research). Going forward, the management aims to increase the share of O&M in the overall revenues to 25-30%, from the Fig 4.Segment- Revenue Breakup present levels of around 20%. Towards this end, the company intends to take up O&M contracts for (2013-14) plants built by other companies in addition to the ones built by the firm. 5. Expansion in Emerging markets: The Water treatment industry is growing at a Municipal higher rate in the emerging markets and this offers a huge potential for the players. The similarity 36% Segment between the Indian and other emerging markets helps WABAG to better assess the projects. Labor Cost Arbitrage: 64% Industrial 6. Ever since the company started integrating with Wabag segment Austria, it has moved jobs from Austria to India where labor costs are lower. This labor arbitrage is reflected in the employee costs as a percentage of total expenses which reduced from 14.67% in FY’10 to 10.6% in FY’14. Arthur Andersen value dynamics framework for VA Tech Wabag Fig 5 Revenue (INR Mn) 60000 Order Book (INR Mn) Physical Customer 53540  High growth Municipal  Presence in emerging markets 50000  Order book worth 53540 Mn INR Business Group (Chennai 42840 metro, Odisha) 37310  100+ patents, 40000 34020 Customized solutions Organization  Desalination projects which is the future in-house  Total solution provider 30000 22390  Asset-light model Customized solutions in-house  “Water Company of Supplier 20000 14380 16190 12330 Financial the year”  Collaborative relationships 10000  At 3800 Mn INR, cash is 11% with suppliers. of the total assets.  Alliance with Sumitomo 0  Investments in technology. Corporation, Japan and 2011 2012 2013 2014  Debt to equity ratio of 5.33%. Zawawi Group of Oman

 Source: Annual Report Source: Annual Report, Student Research

4

Industry Overview and Competitive Positioning (See Appendix 2)

Fig 6.Water and wastewater World water and waste water treatment treatment: The industrial and The Global water and waste water treatment industry reached 10.9 Tn INR in 2013. At 3.9 Tn INR, municipal market (2013) the Municipal segment accounted for 35% of the revenues. The growth rates of various regions are given in the figure 7. The Asia Pacific region has the highest market attractiveness with a large market size coupled with high growth. China and India are leading the growth with high demand for clean water. 20% 13% Municipal Segment 18% The demand from municipal segment is relatively predictable with the projected Capital expenditure for the key regions given in figure 8. 35% Desalination Segment Water Scarcity has become a major factor contributing to the desalination industry in the world. According to TechNavio, the Global desalination market is projected to grow at a CAGR of 8.9% Municipal drinking water plants over the period 2013-18.

Municipal wastewater treatment Geographies: Asia Pacific Region plants Municipal sludge management The Asia Pacific region has the highest market attractiveness with a large market size coupled with high growth. Industrial process water Indian Market Ultrapure water treatment systems India is the second largest water consuming country in the world and is currently witnessing Industrial wastewater treatment serious shortage of water resources. The industry currently stands at 365 Bn INR and is estimated systems to reach 664 Bn INR by 2018 with a CAGR of 12.7%2. The major segments in the industry are (1) Municipal water and waste water Municipal Waste Water Treatment (2) Industrial Waste Water Treatment and (3) Drinking Water treatment operations Treatment. The industry is witnessing growing presence of many MNCs and ramping up of Source: Global Water Intelligence technologies such as Membrane Bioreactors (MBRs) for water reuse and recycling, up flow Fig 7. Wastewater Treatment Market: anaerobic sludge blanket (UASB) for biogas generation from industrial wastewater treatment and Attractiveness by Region (2012-2019) decentralized water treatment system (DEWATS) with aerobic treatment. The market for water and waste water treatment in India is a fragmented with 15 - large players accounting for around Middle East & Africa Asia Pacific 30% of the share.

Americas Europe Growth Drivers 15% 1. Reduced availability of water and growing public concern is driving many industrial companies

to reuse and recycle waste water. 19) - 10% 2. Growth in the number of private households in increasingly urbanized India. 3. General industrial and economic growth, particularly in chemical, pharmaceutical, power plants, food and textile industries.

5% 4. Government initiatives through formation of PPPs and regulatory reforms CAGR(2012 0% China Market 0% 20% 40% The WWT market turnover was over 1.5 Tn INR in 2012.The capacity growth rate was at a CAGR 3 Market Share of 14% during 2005-12 . The speeding up of investments of the local governments and the proposed progressive tariff plans for all the cities by 2015, which will increase the ROI from the projects, is set to boost the sector. Beijing Enterprises Water is the largest player in the market Source: Frost & Sullivan followed by Beijing Capital, SIIC and Sound Global.

4000 Fig 8: Municipal Cap-ex in Bn Growth Drivers: INR(2011-2018) China 1. The expected announcement of 20.4 Tn INR water pollution plan by State Council in Q4’14. 3500 th USA 2. The speeding up of investments from the 12 five year plan as the December 2015 deadline 3000 is approaching. Japan 2500 3. Potential use of desalination output by households through privatization of operations. France 4. Huge potential for growth in Rural WWT, where the current penetration is only 30%. 2000 Brazil 5. The government’s encouragement for FDI in WWTP’s construction and operation. 1500 India Europe and Africa 1000 Germany The size of the water and waste water treatment equipment market in Romania is projected to 500 reach 24.5 Bn INR in 20154. In Turkey, 460 WWTP will be approved by 2017 which are likely to be Australia 0 tendered as Public-Private Partnerships (PPP) structures under the responsibility of the

municipalities5.The water treatment industry in Africa is at a nascent stage and the governments

2012 2013 2014 2015 2016 2017 2018 2011 are waking up to the realities of clean water requirements.

Source: Global Water Intelligence

2 WABAG Annual Report 2013-14, Ken Research 3 Waste water treatment Industry Report China 2013, Research and Markets. 4 Business Opportunities in the Romanian Water and Waste Water sector, Romanian Water Association, April 2011. 5 Water management in Turkey, Switzerland Global Enterprise, 2013.

5 Industry Overview and Competitive Positioning

Barriers to entry: Moderate Threat of substitutes: Low Porter analysis of Industry Huge capital requirement: Design, No substantial substitute for waste water engineering and construction require large treatment or desalination. Fig. 9: Market attractiveness score capital. Technology substitutes: Many competing

Barriers to Incumbency advantage: Industry is technology technologies. entry intensive. Replication of patents and process Disruptive innovation: Low probability of 5 knowledge is difficult. occurrence.

4 3 Pre-qualification barriers: To qualify for Existing 2 Power of certain projects, strategic alliance is needed. Rivalry 1 suppliers Existing Rivalry: High 0 Numerous small players: Compete at Less differentiation: For a given technology, different levels of the value chain. the product offered by vendors is similar. High exit barriers: Especially for companies High growth market: Eases the rivalry as the Threat of Power of

substitutes buyers playing all along the value chain. pie is growing. Power of suppliers: Low Power of buyers: Moderate Non-differentiated supply products. Large players wield some power through Legend Lack of projects and companies to which sophistication and level of service. 5-less attractive; 0-highly attractive suppliers can switch. Backward integration is not possible Source : Student Research High switching costs

Key Success Factors

Bidding Capacity – Credentials, experience and capabilities for specific project size and complexity Presence across value chain – Focus on O&M is becoming an important factor for upcoming tenders in India. Global footprint through strategic alliance – Ability to draw on specialist support to capture high growth regions Project management capabilities– To manage procurement from multiple suppliers and monitor contractors R&D capabilities – To stay ahead in a technology intensive industry Cost Competitive Advantage - Through efficient operations and technology innovations as municipal segment competes mainly on price Risk management capabilities – To handle contract management risks and safety issues

Competitior Analysis (See Appendix 4)

Ratios 2010 2011 2012 2013 2014 Global Competitors Suez Environment VATW 11.58 10.81 12.16 13.31 14.56 Profitability The French company is the second largest water player in Europe. It SE 11.18 13.37 6.64 5.13 7.17 (ROCE) operates in the EPC, storage and distribution and sludge recovery BEW 13.65 15.73 10.03 9.07 9.96 serving individual, municipal and industrial customers. It is planning to VATW 1.47 1.63 1.53 1.55 1.49 boost its operations in the industrial segment which gives higher Liquidity margins. In the current year, it secured three new contracts in India to SE 0.91 0.89 0.87 0.91 0.84 (Current Ratio) provide WWT solutions to the municipal corporations in Mumbai, Pune BEW 0.84 1.02 1.75 1.48 1.31 and Bangalore. The parent company plans to expand its operations in Activity VATW 1.09 0.99 0.91 0.88 1.03 Australia through acquisitions to tap the growth in the Australian Oil (Total Asset SE 0.58 0.57 0.56 0.56 0.55 and Gas Industry6. It competes with Veolia in the municipal segment in 7 Turnover) BEW 0.44 0.52 0.13 0.13 0.17 France and in large treatment installations on a global level .

VATW 25.23 26.69 11.09 19.83 28.49 Leverage (Int. Beijing Enterprises Water SE 2.80 2.54 2.50 2.54 2.74 Covergae) Beijing Enterprises Water Group is a top player in the Chinese water BEW 3.17 3.90 2.10 2.25 2.19 market with presence in 21 provinces across Mainland China. It offers Shareholder VATW - - 0.25 0.24 0.19 project design, environmental protection facilities and consulting (Dividend Pay- SE - 0.57 0.98 - 0.94 services. As of December 2013, it was operating 152 plants in China and 36 plants in the overseas market that includes Malaysia and out) BEW 0.35 0.39 0.39 0.34 0.34 8 Portugal . It is planning to increase its daily capacity by 3 million metric VA Tech Wabag-VATW; Suez Environment-SE; Beijing Enterprises Water tons in 2014 by adding new distribution, sewage-treatment and Group Ltd.-BEW reclaimed water. The company continues to expand through inorganic Source: Bloomberg route by forming strategic alliances and acquiring water plants and is looking at UK, France, Germany and Singapore9. Veolia Water Technologies Veolia Water Technologies, a French company is one of the three branches of Veolia Environment, the largest water company in Europe. It has over 350 proprietary technologies through which it focuses on the high end segment of the market. Out of the total revenue of 162 Bn INR in 2013,

6 Suez Plans Oil and Gas Sector Water Treatment, envirojobs, 28 April, 2014 7 Suez Environment Eyes Purchases as Macau Sale Doubles Profit, Bloomberg, July 30, 2014 8 Beijing Water Enterprise Group Website 9 Beijing Enterprises Water Plans to Increase New Capacity, Bloomberg, June 24, 2014

6 60% came from the industrial segment10. It plans to further increase its revenues share from the industrial segment by targeting high growth markets such as India and China. It entered into a JV with Doshion Limited to form Doshion Veolia Water solutions to offer WWT solutions across the industrial, municipal and infrastructure segments in India. Domestic Competitors Ion Exchange Ion Exchange offers total environmental solutions for municipal, industrial and household segments. Its main focus is on industrial segment through their patented resin technology. The company is planning to take up large size municipal infrastructure and sanitation projects in India and overseas.11 It has recently been selected by the Sri Lanka water board for the execution of a water supply project worth 12 Bn INR12. It is planning to increase its share of revenues from exports to 50% in the next five years. They are focusing on Zero discharge technology that minimizes power consumption and completed the construction of 3 such plants in India.

Ratios 2010 2011 2012 2013 2014 Thermax Thermax provides engineering solutions to the energy and environment VATW 11.58 10.81 12.16 13.31 14.56 Profitability sectors. 75% of its revenues come from energy and 25% from the Thermax 13.95 31.89 27.41 18.30 12.59 (ROCE) environment segment. The company has been finding it difficult to IE 3.47 6.63 7.17 9.83 3.01 expand order book due to the economic slowdown and its growth is decelerating as a result. The sales in the second quarter of 2014 VATW 1.47 1.63 1.53 1.55 1.49 Liquidity dropped 2% YoY. The margins of the company reduced by 4-5% (Current Thermax 1.25 1.20 1.24 1.30 1.37 compared to last year13. Ratio) IE 1.25 1.01 1.01 1.02 1.05 Hindustan Dorr Oliver Limited The company is a major player in the industrial EPC market. Their main VATW 1.09 0.99 0.91 0.88 1.03 Activity focus is on the Mining and minerals industry and they undertake water (Total Asset Thermax 1.13 1.42 1.39 1.14 0.93 management and effluent treatment for major refineries in India. Due to the economic slowdown, most of the projects in this sector got Turnover) IE 1.15 1.17 1.25 1.30 1.19 delayed and the company has been making losses from two VATW 25.23 26.69 11.09 19.83 28.49 Financial consecutive years. It did not secure any major orders this year due to Leverage Thermax 136.25 112.25 46.16 45.09 14.85 the slowdown of investments in this sector. In the smaller water (ICR) projects, the company is facing intense competition due to competitive IE 2.25 -2.51 2.70 2.74 1.88 bidding. 14 VATW 0.25 0.24 0.19 Shareholder

(Dividend Thermax 0.41 0.28 0.21 0.26 0.29

Pay-out) IE 0.45 0.31 0.2 0.62 VA Tech Wabag-VATW; Ion Exchange India Ltd.-IE

Source: Bloomberg

Wabag overall industry position: In terms of profitability, VA Tech Wabag outperformed its peers in 2013 and 2014. VA Tech Wabag also has the highest current ratio among its peers indicating its higher ability to pay short term obligations. It is also utilizing its assets effectively in order to generate revenue. The interest coverage ratio that shows borrower ability to pay the interest is highest for Wabag. Wabag pays fewer dividends to its shareholder as compared to its peers. The less dividend payment shows that it has projects in pipeline that will require investment. Corporate Governance (See Appendix 7)

Fig. 10: Board Independence: VA Tech Wabag board comprises of five directors out of Corporate Independent which four are independent, with Rajiv Mittal being the lone promoter on the board. Governance Board Chairman Independent Board Chairman: The board is headed by Bhagwan Dass Narang, who is an independent director.

Other aspects: The Company has other aspects of good corporate governance like Board having a single class of shares with one vote each & presence of whistleblower policy. One share Independence Independent one vote Committes 80% Presence of promoter on committee: The only area of concern is the presence of Rajiv Mittal, the promoter-director on the Remuneration Committee which decides the emoluments for senior executives including the MD, Rajiv Mittal. However the compensation of the other board members has been approved by the shareholders in the AGM. Whistle- blower Policy Social Responsibility The firm is a laggard when it comes to social responsibility. The firm constituted a Corporate Social Responsibility (CSR) committee only on February 8, 2014 in response Source: Student Research to the new companies Act 2013, which mandates CSR spending.

10 Veolia website 11 PPP model for water industry is not viable: Rajesh Sharma, Rakesh Rao, Business Standard, August 25, 2014 12 Moneycontrol 13 Thermax: Sell, The Hindu Business Line, August 10, 2014 14 Hindustan-Dorr-Oliver, 39th Annual Report

7 Financial Analysis

60000 Fig 11 FY 2014 was an exceptionally strong year for VA Tech Wabag, with the topline In Mn INR growing by 38% to 22.4 Bn INR. Although India business remained stagnant, the business witnessed significant increase in the Austrian and Romanian revenues. 50000 Sales Operating Profit Going forward, we expect the company to increase revenues at a CAGR of 22% for the next 5 years to reach 60.5 Bn INR in FY’19 driven by higher spending on the 40000 CAGR water sector in the emerging countries and countries like Romania and Turkey 21.4% where the spending is going to be higher as they have to comply with strict 30000 European Union (EU) regulations if they are to join the Union. Margins and Returns to Improve Going Forward 20000 In the past 4 years, all the three margin measures as well as RoE had peaked in FY’12 as that was a year in which the cost of sales as a percentage of revenue was on the lower side at 70.45%. In an industry where the cost of sales account for 70- 10000 CAGR 31.2% 75% of sales, a small change in this measure can have a huge impact on the margins. Going forward, we expect the margins and RoE to improve on account of 0 two factors: FY FY FY FY FY FY FY FY 1) we believe the share of the higher margin O&M segment (operating margin of 2011 2012 2013 2014 2015 2016 2017 2018 16.2% as against 8.1% for EPC) (Source: Student Research) in the total revenue mix Source: Bloomberg, Student ResearchEst Est Est Est will go up from the current 20% to 25% by the end of FY’19 as guided by the company management and 2) Increasing proportion of business from emerging countries where the margins 35.0% Fig 12 Gross Profit Margin are higher. We anticipate the operating margin to improve from the current 8.2% Operating Profit Margin to 9.6% by FY’18 and RoE to improve from 12.3% to 19% in the same period. 30.0% Net Profit Margin Higher proportion of short term borrowings as opposed to long term ROE 25.0% borrowings The company follows asset light model and hence the D/E ratio is very low (at 5.33% in 2014). Within overall debt, short term debt predominates over long term 20.0% borrowings as the firm uses the former to fund the working capital. Short term and long term borrowings stood at 1133 Mn INR and 450 Mn INR respectively at the 15.0% end of FY’14. The sudden spurt in long term borrowings in FY’14 resulted from the company taking debt to fund the construction of its headquarters and also for the 10.0% BOT project in Namibia. However we expect the long term borrowings to decline going forward to reach 250 Mn INR the end of FY’18. At the same time, short term 5.0% borrowings are expected to reach 2489 Mn INR.

0.0% FY FY FY FY FY FY FY FY Quarterly cyclicality of Sales 2011 2012 2013 2014 2015 2016 2017 2018 The sales in this industry are cyclical with Q4 recording the highest revenues in a Est Est Est Est year. In India due to monsoon, no major orders are booked in Q1. The activity picks up during Q2 and Q3 with maximum shipments from vendors coming in Q4. This results in both current assets and current liabilities on balance sheet date being higher. More details on the working capital cycle are provided in the appendix. Source: Bloomberg, Student Research

3000 Fig 14 :Quarterly Sales (INR million) Fig 13

2500 10000 Long-Term 9000 Borrowings 2000 8000 Short-Term 7000 Borrowings 6000 1500 5000 4000 1000 3000 2000 1000 500 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 FY'13 FY'13 FY'13 FY'13 FY'14 FY'14 FY'14 FY'14 FY FY FY FY FY FY FY FY 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bloomberg, Student Research Source: Bloomberg, Student ResearchEst Est Est Est

8 Valuation (See Appendix 5 & 6)

For valuing WABAG we chose three methods- Discounted Free Cash Flow to Equity (DCE), Fig 15:Revenue Projections Dividend Discount Model (3 Stage H-model) and Residual Valuation method.

25% Revenue projections 22% The five year growth forecast is estimated to be 22%. The five year growth forecast is estimated to be 22%. The forecast for the ten year period after that is 15% and it will taper 20% down to 3% over the subsequent ten years. The perpetual growth will continue at 3%. This 15% pattern is illustrated in the figure 15. Our optimism with such a high growth trajectory is 15% supported by the following factors. 1. Desalination market growth: a. India desalination to grow at 30%1 CAGR from 2013-2018 10% b. Company is set to reach 24.8 Bn INR in desalination revenues by 20171. 3% c. Creation of Spanish subsidiary to cater to high potential Latin American market. 5% d. Large projects experience in desalination, such as Chennai Metro project (100 Mn liters daily) will help in clinching deals and converting bids.

0% 2. Indian water sector growth: Low penetration, industrial (60%) and domestic (26%) wastewater treated in India. India requires investment of around 8 Tn INR between 2011

1

2015 2039 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2017 and 2030 . Company has good reputation and leads on the technology front.

Source: Student Research 3. European market: Romanian market is expected to grow at CAGR of 14.8 percent from 1 Cost of Equity 2009 to 2015 . This growth trend is expected to continue and company’s growth will be around 25%. Similar growth in Czech Republic is expected. Turkey and Switzerland growth is Beta 0.5629 estimated to be around 10 to 15%.

Risk-free rate 8.48% 4. Middle East market: Acute water shortage is increasing demand for industry and huge projects are being planned. Qatar is inviting bids for sewerage network assessment which Historical ERP 8.13% will lead to major project announcements. Upcoming SEZ areas and industrial parks also spur demand. Cost of Equity 13.0% 5. Other markets: Some high growth markets such as China has not been tapped by the

company yet. Company focus is on such emerging markets. With right focus, entry and Source: Student Research expansion in these markets is achievable and will boost the overall growth rate. Other assumptions: Like employee expense, margins etc. used in financial modeling is given Fig 16: Weightage to different Models in the appendix 5. DDM Residual FCFE Discounted Cash Flow Model Here the firm is valued with the Free Cash Flow to Equity (FCFE) method. FCFE indicates the amount of money that the firm has at its disposal for disbursement to the shareholders after 25% meeting all operating expenses, required capital expenditures and transactions with the creditors. 40% FCFE = CFO – Capex + Proceeds from Sale of assets + Increase/ (Decrease) in borrowings t Value of the company equity = Σ FCFE t/ (1+re) Using this method, the value per share has been obtained as 1466 INR as of March 31, 2015. Dividend Discount 3-Stage H-Model 35% Under this method, the investor values an equity share as the present value of all future dividends. Here during the initial 5 year high growth period, a dividend payout ratio (DPR) of 20% is assumed (as indicated by the management during the conference call), followed by

Source: Student Research DPR at 25% in the next 10 years and then DPR gradually increasing to 40% in the next 10 years and at 80% thereafter. t Value of the company equity = Σ Dividend t/ (1+re) Using this method, the value per share has been obtained as 1246 INR as of March 31, 2015. Residual Valuation This method starts with the book value at time 0. Then for each time period starting from next period, required return on the book value equity is subtracted from net income to arrive at the residual income. The present value of all future residual incomes is added to the present book value of equity to arrive at the intrinsic value of equity. t Value at time 0 = Book Value of equity at 0 + Σ (Net Income t – Required Return t)/ (1+re) Using this method, the value per share has been obtained as 1300 INR as of March 31, 2015. Final Valuation: We have given different weightages to different valuation models depending as given in figure 16. The weighted average final target price as of 31st March, 2015 is 1353 INR/share. The current Market price as of 27th Oct, 2014 is 1595 INR/share. This implied a downside risk of 15%. Relative Valuation Though there are a number of global players in the water sector, there are no comparable listed players in India. The infrastructure companies such as L&T operate in a wide range of sectors and due to conglomerate discount; their multiples can’t be used to value WABAG. We considered the listed companies Ion Exchange and Thermax which offer total environmental solutions as Indian peers. Both the companies are experiencing a decline of revenues and PAT in the past 3-4 years where as WABAG has been continuously growing. Due to these issues, we did not choose relative multiples for valuing WABAG.

9 Business Risk Analysis

1. Risk due to project delays: It can result in realization of lower revenues per year. Delays Fig 17: Risk Likelihood-Impact Matrix also lead to wastage of resources and escalation of costs. It can also harm the reputation which will again have adverse effect. 2. Receivables risks: During an economic downturn, the contracted parties may be unable to pay by completion of project stages. Though WABAG opts for projects funded by bilateral agencies, there have been instances of delay in the year 2013 which resulted in lower cash flows. 3. Risks due to outsourcing: Wabag outsources the construction activities. Company has to invest efforts on project monitoring and has less control. Outsourcing the construction activity can also result in quality that is beneath the in-house standards. 4. Technology Risks: The number of patents being filed in water technology has been on a rise in the recent years. To obtain and defend a large share of the emerging markets, it is important to have a strong portfolio of patents. Patents will also give a better bargaining power in negotiating contracts and forming alliances with other companies. WABAG should be able to successfully come up with new processes and products to survive in the competitive water market. 5. Cost competition can erode margins: For the Municipal segment, the projects are Source: Student Research obtained through a tendering process, where the competition is mostly on price. WABAG should be able to continuously keep the costs down to compete for these projects. In the emerging markets, low-cost plays a key role in increasing the order book. 6. Foreign Currency Risk: Though the company is geographically diversified, it mainly earns its revenues in dollars. Currently, it does not hedge its currency risk as there is a natural operational hedge through the procurement of supplies from the US vendors. Any changes in the procurement policy or adverse movements in the currency market can result in foreign transaction losses. 7. High Competition in the Chinese market: The Company is yet to gain a significant market share in the high potential Chinese market. Due to intense price competition from thousands of local players backed by the government, WABAG is unable to attain a strong hold in the country15. Investment Risk

Upside Risks to Valuation 1. Increasing tie-ups with partners who have access to low cost credit: VA Tech Wabag already has tie-up with Sumitomo Corporation of Japan wherein the former’s technology combined with the latter’s access to low cost credit helps the company bid for BOT/BOOT projects. In the recent times, the company has kept it book-to-bill ratio in the region of 2.5-2.7 due to selectively bidding for EPC projects and also to reduce the risk of project delays. However increasing tie-ups with players like Sumitomo can help the company in bidding for more BOT projects, thereby increasing the topline as well as the bottom line. 2. Successful Foray into Latin American market: VA Tech Wabag, through its Spanish subsidiary VA Tech Wabag (Spain) S.L is looking to enter the Spanish-speaking markets in Latin America. As of date, the company has not made any inroads into these markets and hence we have not factored in this aspect into our calculations. This market holds huge potential and successful inroads by the company into this market can accelerate topline and bottom line growth. 3. Reallocation of capital at group level: At the end of FY’14, VA Tech Wabag GmbH, the Austrian subsidiary (the erstwhile parent of the Wabag Group) holds 1958.5 Mn INR in reserves (Source: Annual Report) (1692.1 Mn INR in FY’13) while its net profit was a mere 4.0 Mn INR implying an RoE of just 0.21%. The situation had not been too different in the three years before as well. Reallocation of capital from Wabag GmbH to the other attractive markets can improve the fortunes of the company at the group level. 4. Reduction in raw material costs as a percentage of revenue: Cost of sales and services comprise the majority of the expenses. In the last 4 years, this cost as a percentage of sales has varied between 70.47% and 75.44%. Even small changes in this figure can materially affect the bottom line. Scenario Analysis DDM Scenario Discount Rate Revenue Target 1245.59 11% 12% 13% 14% 15% Scenarios Projection Price (31st (FY15-19) Mar 2015) 1% 1613.0499 1360.3845 1152.9878 982.17078 840.9974

Base Case 22% 1353 Growth

2% 1677.6971 1412.5122 1195.101 1016.2575 868.6383 Bear Case 15% 1034 Rate 3% 1755.2018 1475.0074 1245.59 1057.1236 901.7767 Bull Case 30% 1818

4% 1849.8233 1551.3046 1307.2294 1107.0149 942.2336 Our base case assume 22% growth rate for

Perpetual 5% 1967.9356 1646.5435 1384.1716 1169.2923 992.7345 FY15-FY19 leading to the final target price of INR 1353. We have considered two more In scenario analysis on the target price from DDM model, the two variables are the perpetual cases: Bull & Bear case. In Bull case, we have growth and discount rate. In the base case, perpetual growth rate is 3% after 25 years & assumed 30% growth rate for FY15-FY19 discount rate is 13%. This led to target price of INR 1245. We can see that change in discount leading to final target price of INR 1818.In Bear rate has more impact on the target price as compared to change in perpetual growth rate. case, we have assumed 15% growth rate for leading to final target price of INR 1034. 15 China: Waste Water Treatment Industry, PR Newswire, November 18, 2013.

10 Model Risk Growth Rate Assumption: The revenue growth rate has been estimated at 22% for first five years. To model the uncertainty around the growth rate, we have simulated the first five year growth rate within a range of 15-30%. We have used Monte-Carlo simulation for DCF method with these growth figures. The mean target price of the simulation is INR 1467.08 which is close to our calculated target price of INR 1465.96.

Statistics of Monte Carlo Simulation 120 Fig 18 0.009 results 0.008 100 Mean 1467.08

0.007 Standard Error 1.61

80 0.006 Median 1466.36 0.005 60 Standard Deviation 50.97 0.004

Sample Variance 2597.46 Frequency 40 0.003 Probability Kurtosis 0.04 0.002 Skew ness 0.12 20 0.001 Range 341.06 0 0 Minimum 1309.08

Maximum 1650.14

1309 1331 1353 1375 1397 1419 1441 1463 1485 1507 1529 1551 1573 1595 1617 1639 Target Price Count 1000.00 Source: Student Research Confidence Level (95.0%) 3.16

COGS Projection: The COGS has fluctuated in between 69% to 75% of sales in last 5 years. However in last two years it has been 72% and 75% respectively. We have used 73.4% after 5 years. So to simulate the COGS, it has been varied from 72% to 75%. The mean target price using DCF comes out to be INR 1440 with a range of INR 970 to INR 1761. Hence we can see that, if company manages to lower its COGS, there is substantial upside potential. However, with increase in prices of raw materials this seems unlikely. Statistics of Monte Carlo Simulation 120 Fig 19 0.004 results 0.0035 100 Mean 1440.16 10% cumulative 90% cumulative 0.003 probability

Standard Error 3.52 80 probability 0.0025 Atleast Median 1441.79 60 value Atmax 0.002 Standard Deviation 111.33 Rs.1297 value

Rs.1582 0.0015 Sample Variance 12393.62 Frequency 40 Probability 0.001 Kurtosis 0.30 20 Skewness -0.10 0.0005 Range 790.38 0 0 Minimum 970.82

971 Maximum 1761.20

1379 1022 1073 1124 1175 1226 1277 1328 1430 1481 1532 1583 1634 1685 1736 Target Price Count 1000.00 Source: Student Research Confidence Level (95.0%) 6.91

Credit Rating

ICRA has upgraded the rating assigned for the 405 Mn INR fund based bank limits of VA Tech Wabag Limited from [ICRA] A to [ICRA] A+. The outlook on the rating is Stable. ICRA has also revised the short term rating from [ICRA] A1 to [ICRA] A1+ rating for the 19730 Mn INR non-fund based facilities of the company. Bloomberg has rated this company in investment grade with IG7 rating. The default spread of the company has been calculated as 0.0571% and the 5 year model CDS has been calculated as 99.83 basis points. The graph of both (1 year default spread and 5 year CDS) is shown: VA Tech Wabag Limited Instrument Amount Rating Action In Mn INR Sep-13 Long term: Fund [ICRA] A+ (Stable); based facilities 405 upgraded Short term: Non-Fund 11520 (enhanced [ICRA] A+ Based Facilities from 9730) upgraded Short term: Non-Fund 8210 (enhanced [ICRA] Based Facilities from nil) A+;Assigned

Source: ICRA website Source: Bloomberg

11 Appendices

Appendix 1: Macroeconomic Scenario

Global The global economic growth was 2.9% in the year 2013. The International Monetary Fund expects the growth to jump to 3.7% in 201416. As the unemployment figures improve in the US, Fed is carrying on the phased withdrawal of bond asset purchase program. Low interest rates and excess liquidity are pushing up asset prices in the advanced economies whereas emerging markets such as India and Indonesia are experiencing high inflation.

India The Indian economy registered a growth rate of 4.7% in the fiscal year 2013-14. The growth in second quarter of 2014 was 4.8% compared to 4.4% in the first quarter. The Current Account Deficit dropped to 1.2% of the GDP in Q2 2014 due to reduction in trade deficit. The World Bank projected a growth rate of 5.7% for India in 2014-15. Excess capacity expansion made during the boom period and structural impediments are still affecting the corporate performance in India17.

The newly formed majority government is expected to speed up the investments in infrastructure and get India back on its high growth track. It is attracting investments through Public-Private Partnership models (PPP), revival of SEZs and Infrastructural Investment Trusts. The Prime Minister Modi’s Clean India campaign aims to provide sanitation and sewerage facilities to 36 million households in the first phase18. The emphasis on clean drinking water and sewage facilities will increase investments in the water sector both in rural and urban areas.

Appendix 2: Industry Overview The global water equipment market capital expenditure is expected to grow to 40.6 Tn INR in the period 2013-18. The largest expenditure is projected to be in pipes followed by pumps.

Global water equipment capex forecast in INR billion (2013-18) Pipes Pumps Automation and Control 6499.5 86.66 8170.8 Valves/fittings 680.9 Aeration 235.22 Agitation/Mixing/Setting Screening/grit removal 1980.8 Disinfection 866.6 Non-membrane filtration 4394.9 928.5 Meters 1052.3 Testing 1052.3 Chemical feed system 1114.2 Sludge 1176.1 3899.7 ION Exchange/EDI/adsorption 1733.2 Membrane elements 2042.7 3466.4 Thermal process equipment Other equipment

Source: Global Water Intelligence

16 IMF World Economic Outlook 17 RBI Publications 18 Narendra Modi plans multi-million dollar sanitation project to clean up 1,000 Indian towns, The Economic Times, May 24, 2014

12 Global Desalination market

Top 20 Desalination Markets, 2010-13 1(2) Saudi Arabia INR 319.39 bn 2(7) USA INR 273.58 bn 3(3) Australia INR 200.4 bn 4(16) Israel INR 154.96 bn 5(13) Kuwait INR 153.54 bn 6(15) Libya INR 151.25 bn 7(1) UAE INR 136.08 bn 8(5) China INR 93.92 bn 9(9) India INR 80.05 bn 10(21) Chile INR 74.29 bn 11(17) Caribbean INR 66.18 bn 12(29) Morocco INR 57.33 bn 13(4) Spain INR 53.3 bn 14(11) Oman INR 48.6 bn 15(20) Iran INR 43.89 bn Source: Desaldata.com 16(14) Egypt INR 40.86 bn Though the capital expenditure in North America and Europe saw a decline after the financial crisis, the investments have picked up after 2010. The capital expenditure in 17(12) Bahrain INR 39.99 bn China has been growing at a higher rate compared to West Europe and North America 18(10) Turkey INR 33.74 bn and is set to exceed that of west Europe in 2015. 19(6) Algeria INR 32.75 bn 20(31) Jordan INR 30.71 bn The numbers in brackets represent coountry's market during 2006-09

Source: Global Water Intelligence

13 The total operating expenditure of the industrial segment in 2013 was 13062 Bn INR. The largest segment was integrated water with an operating expenditure of 10772 Bn INR.

Total Market Size INR 13062 bn (2013)

Source: Global Water Intelligence

Industry-wise forecasts

Source: Global Water Intelligence

Source: Frost and Sullivan

14

Water players in the China market

India water Industry

India is the second largest water consuming country in the world and is currently witnessing serious shortage of water resources. Development in desalination and wastewater treatment technologies is playing a big role to mitigate this water crisis problem and as a result the water treatment industry is booming in India. The industry currently stands at 365.3 Bn INR and is estimated to reach 663.7 Bn INR by 2018 with a phenomenal CAGR of 12.7%19. The major segments in the industry are (1) Municipal Waste Water Treatment (2) Industrial Waste Water Treatment and (3) Drinking Water Treatment

The industry is witnessing growing presence of many MNCs and also ramping up of technologies such as Membrane Bioreactors (MBRs) for water reuse and recycling and up flow anaerobic sludge blanket (UASB) for biogas generation from industrial wastewater treatment. Decentralized water treatment system (DEWATS) with aerobic treatment is an example of another technology that is being actively adopted in India.

The market for water and waste water treatment in India is fragmented with about 15 large players accounting for approximately 30% share.

Source: Avalon Analysis

Growth Drivers

 Reduced availability of water and growing public concern is forcing many industrial companies to reuse and recycle waste water.  The demand of drinking water is going up due to increase in the number of private households in increasingly urbanized India.  The growth in chemical, pharmaceutical, power plants, food and textile industries.  Government initiatives through formation of PPPs and regulatory reforms.

19 Ken Research, WABAG Annual Report

15

Europe water Industry:

Romania

The size of the water and waste water treatment equipment market in Romania is projected to reach 24.5 Bn INR in 201520.Technology and service availability are very poor for the Waste water treatment in Romania. As part of the Pre accession programs, significant investments are being made in water supply. There is an increasing demand for updated water technologies, equipment and consultancy services. In the municipal market, the legislation is helping both the effluent and drinking water segments. In the case of industrial market, the legislation is only driving the waste water treatment whereas the demand for process water is left to the market.

Turkey

As part of the “Strategic Plan 2013-17” set by the Ministry of Environment and Urbanization (MoEU), 460 waste water treatment projects will be approved by 2017, 50% of which will be paid by the state. These projects are likely to be tendered as Public-Private Partnerships (PPP) structures under the responsibility of the municipalities21. This provides an immense opportunity for water companies operating in the region.

Sub-Saharan and North Africa

The water treatment industry is at a nascent stage and the governments are waking up to the realities of clean water requirements.

Iran: According to government in 2011, the total investment required stands at 9.3 Tn INR in next 20 years, 20% of which will be financed by private sector1. The annual level of Industrial waste water is 1.5 billion cubic meters out of which only 30% have efficient WWTP’s2.

Algeria: As a part of five year plan during 2010-2014, The Algerian Government has planned 1.2 Tn INR investment1. From 2000 to 2011, the number of plants has increased from 18 to 1131. Namibia: 3% of Namibia GDP goes as operational expenditures of water utilities. This country is said to be in “Sanitation crisis” as per UN. 298 schools do not have toilet facilities. Tunisia: As part of a five year plan (2007-2011), 2887.9 MTD public investments have been made.1

Porter 5 Forces

Barriers to entry: Moderate 1. Huge capital requirement: In this industry, major activities are design, engineering and construction. Large capital expenditure is required for these activities as heavy equipment needs to be installed. In an asset-light model, though civil construction is outsourced, engineering remains highly capital intensive. To put the requirement in numbers, below is a chart which shows capital expenditure to long term asset.

4,500.0 26% 30% 4,000.0 25% 3,500.0 21% 3,000.0 17% 20% 15% 2,500.0 14% 15% 2,000.0 1,500.0 10% 1,000.0 5% 500.0 0.0 0% 2010 2011 2012 2013 2014 Long Term Asset Capex Capex/LTA %

Source: Bloomberg (VA Tech Wabag company data), Student Research 2. Incumbency advantage: Being a highly technology intensive industry, the existing players have developed wide range of patents and gained process knowledge. This makes it difficult for a new player to enter and replicate.

Power of suppliers: Low  The suppliers mainly supply components with very less differentiation.  Not many projects and companies to which suppliers can switch.

Power of buyers: Moderate  Municipal and Industrial buyers are large participants and can wield some power by offering sophistication and level of service.  Bidding system and pre-qualification norms provide some discretionary power to buyers.  However, the buyers are not equipped to perform the services and do not integrate backwards.

20 Business Opportunities in the Romanian Water and Waste Water sector, Romanian Water Association, April 2011. 21 Water management in Turkey, Switzerland Global Enterprise, 2013.

16  Also the switching costs are high as the operations require certain technological know-how which differs from one provider to another.

Threat of substitutes: Low  There is no substitute for waste water treatment or desalination.  Substitutes are available only in the form of technologies being used. VA Tech Wabag has a host of technologies and can cater to different needs.  A new disruptive innovation in technology can be a threat. However, the probability of such occurrence is quiet low. Meanwhile, the company is also working towards new technologies and will be capable of fighting such a threat.

Existing Rivalry: High  The industry has many small players which compete at different levels of the value chain.  For companies playing all along the value chain, exit barriers are very high.  For a given technology, there is very less differentiation provided by vendors.

Appendix 3: Company Analysis Evolution of the company VA Tech WABAG

Source: Investor Presentation August 2014

17 Source: Investor Presentation August 2014

WABAG Business Description

Source: Investor Presentation August 2014

Company presence in the world

Source: Student Research

18

Innovative Technology of VA Tech Wabag reduces cost and induces demand

Desalination is considered as highly expensive but the innovative technologies which VA Tech Wabag has in this domain will reduce the cost for desalination. The process of desalination is expected to double by 2025 and cost effectiveness of Wabag can propel its growth in this segment.

The company is continuously focusing itself to decentralize its operation from high cost economies to low cost emerging economies which is enabling it to lower the cost. The company is leveraging its presence in the low cost economies by using people and processes from these markets and utilizing them in the international geography. The company’s technological strength backed by its competitive cost is helping the company to emerge as a preferred global player in water technology industry. It established R&D centers in Switzerland, Vienna (Austria) and Chennai which is providing it with state-of-the-art innovative technologies enabling it to reduce cost and improve turnaround time. Moreover, in Europe the company has successfully turned couple of their projects from high cost processes to cost effective versions.

On the downside, it is estimated that total demand of water in the world by 2030 would rise to 1,562 km3, but not all of this water will come from cheap and conveniently available resources. The share of water derived from long-distance transfer, desalination and reuse is expected to rise from 1.8% in 2011 to 5.7% in 203022. This is going to increase the cost of processing for Wabag. However, all the players in the industry are going to be affected so it would not reduce the competitive advantage of Wabag.

Technologies Used By Wabag23

1. BIODEN® - The BIODEN® process is an environment compatible process targeted at removing the nitrate content of drinking water. It is based on standard filtration process, does not need any special equipment and highly cost effective compared to other nitrate removal process.

2. REHABITILATION and FILTRATION – The extensive use of rehabilitation in the filtration process permits the optimisation of conventional backwash principles based on continuous flow and sludge water withdrawal channels.

22 Annual Report 23 Source: Company Website

19

3. FLUOPUR® – Fluopur® is a moving bed process designed by Wabag for biological wastewater treatment. It requires high technological standard and is a result of Wabag’s decades of innovation. The FLUOPUR® system employs a proprietary material which consists of a thermally compact PE/PP fleece material with high chemical and mechanical stability.

Moving Bed

4. MICROPUR® - Micropur® is a compact, advanced fine sieving technology with superior solids and organic substance removal and the integrated dewatering of screenings.

20

Awards and Accolades Bagged by the Company

1. A Distinction award for the water company of the year 2014 by Global Water Intelligence. 2. The Environmental Risk Management Company - 2013 title given by ICICI Lombard in association with the Times Group for building power- neutral plants. 3. The Export Excellence Award from EEPC (Engineering Export Promotion Council) India for Its contribution to engineering exports for the year 2009-10 4. Wabag has been rated as the leader in the Indian wastewater treatment segment2425.

Management Experience of Wabag and its competitors

VA Tech Wabag All top members of the managerial group have work experience exceeding 20 years, most of which is the water and related industries. Rajiv Mittal, the Managing Director (who is also a promoter) has over 30 years of work experience in the water industry. He had previously worked with Wabag Water Engineering Ltd, UK as a Deputy Director for International sales. Shiv Narayan Saraf, Head of Operations has 42 years of experience in the water industry. He had previously worked with ion Exchange India Ltd. Amit Sengupta, Head of Corporate Strategy and Marketing and S Varadarajan, CFO have 37 and 28 years of work experience respectively.

VA Tech Wabag’s subsidiaries are headed by professionals with considerable experience in the industry. Wabag Austria is headed by Erik P. Gothlin, who has 22 years of experience in the industry. Gerhard Rhyiner, CEO of Wabag Switzerland has 23 years of experience and Lubomir Nemec, CEO of Wabag Czech has 25 years of experience in the Energy and Industry sector.

Ion Exchange (India) Ltd Mr. D.G. Rao, Chairman of Ion Exchange Services Ltd.is a veteran with over 66 years of work experience. Mr. Dinesh Srinivasan, the ED and CEO of Ion Exchange Services Ltd. has over 18 years of experience in general management and has been with the company since 1993. Mr. Rajesh Sharma, the Chairman and Managing Director of Ion Exchange (India) Ltd., had joined the company in 1974. He has deep knowledge about the company’s technologies and products, and possesses outstanding marketing expertise and leadership ability.

Thermax Ltd. Mr. M S Unnikrishnan is the CEO and MD of Thermax Ltd. He joined Thermax as a management trainee in 1982. He left the company in 1987 and in 1997, he rejoined the company as General Manager and has since been with Thermax. Commensurate with the number of businesses of the company, Thermax has 8 Executive Vice Presidents in charge of various functions whose work experience ranges from 20 to 32 years.

Veolia Environnement VE SA Mr. Antoinne Ferrot is the Chairman of the Board, Chief Executive Officer and Chairman of the Executive Committee of Veolia since December 12, 2010. Having a rich work experience of over 33 years, he was appointed as the CEO of Veolia water division in January 2003. Mr. Francois Bertreau, the COO and member of the Executive Committee since December 1, 2012 has an illustrious career of 33 years spanning various industries. Mr. Philippe Capron is the CFO since January 2014 and has work experience of more than 30 years. The company also has various other persons in leadership roles who possess rich and varied experience.

Appendix 4: Competitors Domestic 1. Degremont India – Suez Environment is present in India through its subsidiary Degremont India for three decades. It has created around 153 plants all over India out of which 18 are operational. Degremont is currently focusing on expanding operations across municipal segments, particularly projects that are awarded through DBO basis. It is now primarily focusing in Tier 1 cities of India. It targets in entering contractual agreement with its municipal customers. The major payments are milestone linked and the solutions which they provide are of international

24 TechSci Research 25 Techsci Research

21 standards. It wants to leverage the huge expertise it has in design and execution of desalination plants to enter into desalination markets which is a key focus of the company.

Global 1. Kharafi National – Kharafi National is the leading integrated infrastructure company in the Middle East. The Infrastructure Project Development (IPD) activities are divided into several market sectors including waste water treatment. The company undertakes a complete package of financing, design, construction and operation/maintenance of major projects on a BOOT, BOO, BOT or PPP basis. These activities have been vertically integrated and it has changed the role of the company from that of a contractor to one of an operational investor by taking full responsibility of infrastructure projects. Kharafi National was recently awarded a contract by the Abu Dhabi Sewage Services Company for the O&M of the Mafraq and Zakher waste water treatment plants in Abu Dhabi and Al Ain. The scope of the work is similar to the on-going O&M work that the company is carrying out in Al Wathba and Al-Saad. The new plant in Al-Saad is reducing the cost of waste water treatment by making it. Kharafi National started the ISTP1 Waste water plant, the first privatized project in the UAE with 80000 cu m total wastewater treatment capacity.

2. Hyflux – Hyflux is a global environmental solutions company with projects in Singapore, China, Southeast Asia, the Middle East, and Algeria. It possesses a wide range of proprietary filtration membrane product patents. It enjoys in-house product development and manufacturing which allows better control of raw materials, manufacturing costs, and product quality and project turnaround time. The company is trying to expand rapidly in the international domain and targeting the China market which can help to augment its growth. Last year, its revenues and profits took a hit due to the time-lag between the completion of large scale projects during the year and the commencement of construction work of the projects in the pipeline. In India, they were responsible for building the country’s largest membrane based water recycling plant in Surat. The operational capacity of the plant is 40,000 m3 per day.

3. IDE Technologies - Founded in 1965, IDE is a pioneer and world leader in water desalination and related technologies. It was started in Israel but is now present in 40+ countries worldwide. It implements the ‘low cost leadership’ form of competitive advantage and uses alternative materials to reduce raw material costs and proprietary system design to lower commodity costs. Their patent base for membrane technology is very strong and it was the first company to introduce “green” RO system for desalination without usage of any chemicals. IDE has developed itself into a highly capable multidimensional optimizer and it has a good record of completing large scale thermal and membrane projects in time. IDE has mastered various desalination technologies and complex customised solutions. This has helped them to broaden their targeted markets to go for opportunities beyond large-scale desalination like Small Scale RO solutions and IDE PROGREEN. The current strategy of the company is to venture into industrial water segment26.

35 ROCE 1.5 Asset Turnover VA Tech 30 Wabag 25 VA Tech Wabag 1.25 20 Thermax 15 Ltd

10 Thermax Ltd 1 5 Ion 0 0.75 Exchange 2010 2011 2012 2013 2014 20102011201220132014 India Ltd Interest Coverage Ratio 1.75 Current Ratio 150 VA Tech 130 Wabag 1.5 VA Tech 110 Wabag 90 1.25 Thermax 70 Ltd 50 1 Thermax Ltd 30 Ion 10 0.75 Exchange -10 2010 2011 2012 2013 2014 India Ltd

Relative Valuation ROE PE Thermax LTD 19.66% 41.76356589 Ion Exchange (INDIA) LTD 11.04% 64.33436627 VA Tech WABAG 11.02% 39.48651456 Source: Student Research, Bloomberg

26 Company website

22

PE vs ROE 70 60 Ion Exchange 50 40 Thermax 30 Wabag 20 10 0 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Source: Student Research, Bloomberg

Appendix 5: Financial Modeling Historical and Projected Income Statement VA Tech Wabag Ltd (VATW IN) - Standardized

In Millions of INR except Per Share FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 E FY 2016 E FY 2017 E FY 2018E FY 2019 E Sales 12,237.4 12,418.2 14,435.2 16,188.5 22,386.0 27,310.9 33,319.3 40,649.6 49,592.5 60,502.8 - Cost of Revenue 8,536.7 9,245.6 10,172.7 11,670.0 16,887.8 20,483.2 24,856.2 30,162.0 36,599.2 44,409.1 Gross Profit 3,700.7 3,172.6 4,262.5 4,518.5 5,498.2 6,827.7 8,463.1 10,487.6 12,993.2 16,093.8 + Other Operating Revenue 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Salaries Wages and Employee Benefits 1,690.2 1,715.5 1,882.9 2,058.0 2,217.4 2,731.1 3,331.9 4,065.0 4,959.2 6,050.3 - Depreciation and Amortization 139.0 100.0 86.0 109.0 150.0 199.7 239.2 287.9 347.8 421.3 - Other operating expenses 897.0 673.0 830.0 824.0 1,304.0 1,606.2 1,959.6 2,390.7 2,916.7 3,558.4 Operating Expenses 2,726.2 2,488.5 2,798.9 2,991.0 3,671.4 4,537.0 5,530.8 6,743.6 8,223.8 10,029.9

Operating profit (loss) 974.5 684.1 1,463.6 1,527.5 1,826.8 2,290.7 2,932.4 3,744.0 4,769.5 6,063.8 - Finance Cost 257.0 -67.0 254.6 211.5 252.1 332.2 390.2 485.3 586.4 718.9 Pre-tax Income 717.5 751.1 1,209.0 1,316.0 1,574.7 1,958.5 2,542.1 3,258.7 4,183.0 5,344.9 - Tax Provision 303.5 316.1 379.2 455.9 525.8 626.7 813.5 1,042.8 1,338.6 1,710.4 Income Before XO Items 414.1 435.0 829.8 860.1 1,048.9 1,331.8 1,728.6 2,215.9 2,844.5 3,634.6 - Extraordinary Loss Net of Tax 0.0 0.0 0.0 0.0 0.0 - Minority Interests 0.0 0.0 3.1 0.2 9.0 Net profit (loss) 414.1 435.0 826.7 859.9 1,039.9 1,331.8 1,728.6 2,215.9 2,844.5 3,634.6 - Total Cash Preferred Dividends 0.0 0.0 0.0 0.0 0.0 Net Inc Avail to Common Shareholders 414.1 435.0 826.7 859.9 1,039.9 1,331.8 1,728.6 2,215.9 2,844.5 3,634.6

Abnormal Losses (Gains) 0.0 -128.6 0.0 0.0 -50.6 Tax Effect on Abnormal Items 0.0 0.0 0.0 0.0 16.0 Normalized Income 414.1 563.6 826.7 859.9 1,074.5 1,331.8 1,728.6 2,215.9 2,844.5 3,634.6

Basic EPS Before Abnormal Items 19.14 10.57 27.90 33.64 41.37 50.14 65.08 83.42 107.08 136.83 Basic EPS Before XO Items 19.14 8.49 27.90 33.64 42.67 50.14 65.08 83.42 107.08 136.83 Basic EPS 19.14 8.49 27.90 33.64 42.67 50.14 65.08 83.42 107.08 136.83 Basic Weighted Avg Shares 23.4 61.9 26.4 26.5 26.6 26.56 26.56 26.56 26.56 26.56 Source: Bloomberg, Student Research

23 Historical and Projected Balance Sheet

VA Tech Wabag Ltd (VATW IN) - Standardized

In Millions of INR except Per Share FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 E FY 2016 E FY 2017 E FY 2018 E FY 2019 E Assets + Cash & Near Cash Items 950.4 1,584.3 2,379.8 1,965.9 2,667.5 2,461.8 2,227.4 1,942.9 1,616.3 1,248.1 + Short-Term Investments 1,234.7 1,690.5 1,001.5 900.4 1,151.7 1606.3 1959.7 2390.8 2916.8 3558.5 + Accounts & Notes Receivable 6,353.0 7,043.6 10,926.1 11,094.8 13,874.8 16835.5 20539.3 25058.0 30570.7 37296.3 + Inventories 351.2 736.1 498.9 405.3 350.2 713.6 865.9 1050.7 1275.0 1547.1 + Other Current Assets 1,284.9 1,652.0 1,266.0 2,034.3 2,308.6 2731.1 3331.9 4065.0 4959.2 6050.3 Total Current Assets 10,174.2 12,706.5 16,072.3 16,400.7 20,352.8 24,348.3 28,924.3 34,507.4 41,338.0 49,700.2 + LT Investments & LT Receivables 1.5 105.4 1.6 1.6 1.7 1.7 1.7 1.7 1.7 1.7 + Net Fixed Assets 377.3 403.2 541.9 690.7 1,088.0 1325.3 1619.2 1981.6 2427.3 2974.0 + Gross Fixed Assets 566.7 639.2 787.0 958.0 1,394.4 1670.7 2011.3 2429.9 2943.3 3572.2 - Accumulated Depreciation 189.4 236.0 245.1 267.3 306.4 345.4 392.1 448.2 516.1 598.2 + Other Long-Term Assets 393.5 815.0 1,124.6 1,813.0 2,914.8 2,914.8 2,914.8 2,914.8 2,914.8 2,914.8 Total Long-Term Assets 772.3 1,323.6 1,668.1 2,505.3 4,004.5 4,241.8 4,535.7 4,898.1 5,343.8 5,890.5 Total Assets 10,946.5 14,030.1 17,740.4 18,906.0 24,357.3 28,590.1 33,460.0 39,405.5 46,681.8 55,590.7

Liabilities & Shareholders' Equity + Accounts Payable 3,653.4 4,919.0 6,576.2 6,890.2 8,619.5 10381.89 12598.36 15287.58 18550.30 22508.71 + Short-Term Borrowings 386.1 423.9 1,244.1 795.8 1,132.9 1392.86 1690.22 2051.01 2488.75 3019.82 + Other Short-Term Liabilities 2,885.7 2,438.7 2,709.9 2,900.4 3,891.0 5088.89 6175.34 7493.52 9092.81 11033.10 Total Current Liabilities 6,925.2 7,781.6 10,530.2 10,586.4 13,643.4 16,863.6 20,463.9 24,832.1 30,131.9 36,561.6 + Long-Term Borrowings 5.1 2.7 3.8 26.1 449.6 399.6 349.6 299.6 249.6 199.6 + Other Long-Term Liabilities -- 536.2 776.4 1,120.2 1,824.4 1,824.4 1,824.4 1,824.4 1,824.4 1,824.4 Total Long-Term Liabilities 5.1 538.9 780.2 1,146.3 2,274.0 2,224.0 2,174.0 2,124.0 2,074.0 2,024.0 Total Liabilities 6,930.3 8,320.5 11,310.4 11,732.7 15,917.4 19,087.6 22,637.9 26,956.1 32,205.9 38,585.6 + Total Preferred Equity 0.0 0.0 0.0 0.0 0.0 + Minority Interest 0.0 0.0 9.8 19.4 28.2 + Share Capital & APIC 1,313.9 2,562.1 2,568.0 2,587.4 2,602.7 + Retained Earnings & Other Equity 2,702.4 3,147.5 3,852.2 4,566.5 5,809.0 Total Equity 4,016.2 5,709.6 6,430.0 7,173.3 8,439.9 9,505.3 10,888.2 12,661.0 14,936.6 17,844.2

Total Liabilities & Equity 10,946.5 14,030.1 17,740.4 18,906.0 24,357.3 28,593.0 33,526.2 39,617.1 47,142.4 56,429.8 Source: Bloomberg, Student Research

24 Historical and Projected Cash Flows

VA Tech Wabag Ltd (VATW IN) - Standardized

In Millions of INR except Per Share FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 E FY 2016 E FY 2017 E FY 2018 E FY 2019 E Cash From Operating Activities + Net Income 447.6 525.7 737.5 903.4 1,133.5 1,331.8 1,728.6 2,215.9 2,844.5 3,634.6 + Depreciation & Amortization 148.2 99.8 85.9 109.1 150.1 199.7 239.2 287.9 347.8 421.3 + Other Non-Cash Adjustments 196.4 324.5 302.3 948.6 638.3 203.7 249.5 305.4 373.9 457.7 + Changes in Non-Cash Working Capital -1,351.6 -653.9 -2,017.1 -1,151.7 -838.2 -1,613.1 -1,959.7 -2,418.3 -2,983.8 -3,681.2 Cash From Operations -559.3 296.1 -891.4 809.4 1,083.7 122.1 257.6 391.0 582.4 832.4

Cash From Investing Activities + Disposal of Fixed Assets 5.8 1.8 8.8 5.8 6.9 10.0 12.0 14.5 17.5 21.2 - + Capital Expenditures -159.8 -196.4 -225.9 -419.1 1,032.6 -437.0 -533.1 -650.4 -793.5 -968.0 + Increase in Investments -130.1 -300.0 -0.1 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 + Decrease in Investments 131.5 -- 396.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 + Other Investing Activities 462.0 -546.9 383.7 -53.9 13.0 -94.6 -122.8 -157.4 -202.0 -258.2 - Cash From Investing Activities 309.4 -1,041.5 563.3 -467.2 1,012.8 -521.5 -643.9 -793.3 -978.0 -1,205.0

Cash from Financing Activities + Dividends Paid 0.0 -- -122.9 -184.6 -217.3 -266.4 -345.7 -443.2 -568.9 -726.9 + Change in Short-Term Borrowings -13.1 40.5 1,053.1 609.2 2,913.3 260.0 297.4 360.8 437.7 531.1 + Increase in Long-Term Borrowings -- -- 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - + Decrease In Long-Term Borrowings -3.3 -5.1 -231.8 -1,035.1 2,152.6 -50.0 -50.0 -50.0 -50.0 -50.0 + Increase in Capital Stocks 4.8 1,224.1 3.0 19.6 14.7 14.7 14.7 14.7 14.7 14.7 + Decrease in Capital Stocks 0.0 -- 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 + Other Financing Activities 0.0 -1.3 148.3 36.5 235.5 235.5 235.5 235.5 235.5 235.5 Cash from Financing Activities -11.6 1,258.2 849.7 -554.4 793.6 193.8 151.8 117.8 69.0 4.4

Net Changes in Cash -261.5 512.8 521.6 -212.2 864.5 -205.7 -234.4 -284.5 -326.6 -368.2 Source: Bloomberg, Student Research

Ratio FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 E FY 2016 E FY 2017 E FY 2018E FY 2019 E

Solvency Ratios Current ratio 1.47 1.63 1.53 1.55 1.49 1.44 1.41 1.39 1.37 1.36 Quick ratio 1.42 1.54 1.48 1.51 1.47 1.40 1.37 1.35 1.33 1.32 Cash ratio 0.14 0.20 0.23 0.19 0.20 0.15 0.11 0.08 0.05 0.03 Operating Efficiency Total asset turnover 1.12 0.89 0.81 0.86 0.92 0.96 1.00 1.03 1.06 1.09 Equity turnover 3.05 2.17 2.24 2.26 2.65 2.87 3.06 3.21 3.32 3.39 Operating Profitability Operating Profit Margin 8.0% 5.5% 10.1% 9.4% 8.2% 8.4% 8.8% 9.2% 9.6% 10.0% Net Profit Margin 3.4% 3.5% 5.7% 5.3% 4.6% 4.9% 5.2% 5.5% 5.7% 6.0% ROE (Net Income / Common Equity) 10.3% 7.6% 12.9% 12.0% 12.3% 14.0% 15.9% 17.5% 19.0% 20.4% Financial Risk Ratios Debt to equity ratio 0.13% 0.05% 0.06% 0.36% 5.33% 4.20% 3.21% 2.37% 1.67% 1.12% Source: Bloomberg, Student Research

25 Historical & Projected Cost Sheet

FY FY FY FY FY FY FY FY FY FY (In INR Million) 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Revenue 12,237 12,418 14,435 16,189 22,386 27,311 33,319 40,650 49,592 60,503

Cost of Sales and Services Material, engineering and civil costs 6,298 7,576 8,273 8,789 12,816 Service costs and other project expenses 2,239 1,669 1,900 2,881 4,071

8,537 9,246 10,173 11,670 16,888 20,483 24,856 30,162 36,599 44,409 69.76% 74.45% 70.47% 72.09% 75.44% 75.00% 74.60% 74.20% 73.80% 73.40% Effect of increasing share of O&M from 20% to 25%. Employee benefits expense O&M has double margins compared to EPC. Salaries and wages 1,347 1,421 1,659 1,669 1,829 Contribution to defined benefit plans 46 6 55 78 42 Contribution to provident and other defined contribution funds 9 35 65 83 97 Expense on Employee Stock Option Plan (ESOP) 0 0 0 0 13 Staff welfare expenses 288 253 105 229 238

1,690 1,716 1,883 2,058 2,217 2,731 3,332 4,065 4,959 6,050 13.81% 13.81% 13.04% 12.71% 9.91% 10.00% 10.00% 10.00% 10.00% 10.00% Other expenses Moving employees to low wage countries will reduce the employee cost

Rent 134 107 126 134 145 Insurance 29 26 20 29 30 Power and fuel 17 15 18 21 22 Rates and taxes 34 28 18 14 15 Repairs and maintenance 95 91 89 78 79 Professional charges 99 128 145 156 185 Communication expenses 47 53 45 38 40 Traveling and Conveyance 102 132 122 110 110 9.80% 9.88% 9.96% 10.04% 10.13% Foreign exchange losses, net 49 0 18 0 205 Bad debts and provision for bad debts 193 -27 67 90 248 74.32% 74.24% 74.16% 74.07% 73.99% Advertisement 22 15 34 24 26 Loss on sale of assets 0 0 3 0 6 Other selling expenses 0 7 4 6 11 Research and development expenses 0 0 0 6 21 Miscellaneous expenses 75 100 121 119 163

897 673 830 824 1,304 1,606 1,960 2,391 2,917 3,558 7.33% 5.42% 5.75% 5.09% 5.83% 5.88% 5.88% 5.88% 5.88% 5.88% Finance costs 0 Interest expenses 42 42 111 73 68 Bank charges 257 173 143 139 184 Less: Interest and dividend received from banks and others 257 0 0 0 0

257 -67 255 212 252 332 390 485 586 719 2.10% -0.54% 1.76% 1.31% 1.13% 1.22% 1.17% 1.19% 1.18% 1.19% Source: Corporate Report, Student Research

26

Historical & Projected Depreciation Schedule

(In INR Million) FY FY FY FY FY FY FY FY FY FY 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Revenue 12,237 12,418 14,435 16,189 22,386 27,311 33,319 40,650 49,592 60,503 Capital Expenditures 166.0 125.9 224.7 257.8 547.3 437.0 533.1 650.4 793.5 968.0 Capital Expenditures as % of Net Sales 1.4% 1.0% 1.6% 1.6% 2.4% 1.6% 1.6% 1.6% 1.6% 1.6%

Beginning Gross PP&E 504 566.7 639.2 787.0 958.0 1394.4 1670.4 2010.6 2428.9 2942.0 Beginning Net PP&E 350.3 377.3 403.2 541.9 690.7 1088.0 1325.3 1619.2 1981.6 2427.3 Capital Expenditures 166.0 125.9 224.7 257.8 547.3 437.0 533.1 650.4 793.5 968.0

(Depreciation Expense) 139.0 (Asset Sales ) 103.3 53.4 76.9 86.8 110.9 161.0 192.9 232.1 280.4 339.7 Ending Gross PP&E 566.7 639.2 787.0 958.0 1394.4 1670.4 2010.6 2428.9 2942.0 3570.3 Ending Net PP&E 377.3 403.2 541.9 690.7 1088.0 1325.3 1619.2 1981.6 2427.3 2974.0

Depreciation as % of Gross PP&E 27.58% 17.64% 13.45% 13.85% 15.66% 14.32% 14.32% 14.32% 14.32% 14.32% Asset sales as % of Gross PP&E 20.49% 9.43% 12.03% 11.03% 11.58% 11.55% 11.55% 11.55% 11.55% 11.55% Source: Bloomberg, Student Research

Projected Shareholder Equity Schedule

(In INR Million) FY FY FY FY FY FY FY 2016E FY 2017E FY 2018E FY 2019E 2010 2011 2012 2013 2014 2015E

Beginning Equity Balance 8439.9 9505.34 10888.25 12660.98 14936.55 Net Income 1,331.80 1,728.63 2,215.92 2,844.46 3,634.57 Issuance/ (Repurchase) of Equity Dividends Paid 217.3 266.36 345.73 443.18 568.89 726.91 Ending Equity Balance 8439.9 9,505.34 10,888.25 12,660.98 14,936.55 17,844.20

Dividend Assumptions

Total Dividends Paid Net Income 826.7 859.9 1039.9 1331.80 1728.63 2215.92 2844.46 3634.57 Dividend Payout Ratio 14.9% 21.5% 20.9% 20% 20% 20% 20% 20% Source: Bloomberg, Student Research

27 Project Debt Schedule

(In INR Million) FY FY FY FY FY FY FY FY FY FY 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Cash Flow Available for Financing Activities 193.8 151.8 117.8 69.0 4.4 Proceeds from/ (Repurchase of) Equity Dividends -266.4 -345.7 -443.2 -568.9 -726.9 + Beginning Cash Balance 2,667.50 2,461.83 2,227.44 1,942.90 1,616.29 - Minimum Cash Balance -1500 -1500 -1500 -1500 -1500 Cash Available for Debt Repayment 1094.9 767.9 402.1 -57.0 -606.3 Long Term Debt Issuance

Long Term Debt (Repayments) Cash Available for Long Term Debt 1044.9 717.9 352.1 -107.0 -656.3

Long Term Debt Beginning Balance 449.6 399.6 349.6 299.6 249.6 Issuance (Repayment/ Amortization) -50 -50 -50 -50 -50 Ending Balance 449.6 399.6 349.6 299.6 249.6 199.6

Long Term Debt 424.6 374.6 324.6 274.6 224.6 10.0% 10.0% 10.0% 10.0% 10.0%

42.5 37.5 32.5 27.5 22.5

Cash Balances 2564.66 2344.63 2085.17 1779.59 1432.18 2.50% 2.50% 2.50% 2.50% 2.50% 64.12 58.62 52.13 44.49 35.80 Source: Bloomberg, Student Research

Appendix 6: Valuation Valuation methods

Dividend Discount Model and DCF Approach:

풏 Value = ∑풕=ퟏ 푪푭풕/(ퟏ + 풓)^풕

CFt is the cash flow in period t

R is the discount rate for the riskiness of the cash flow

Proposition 1: For an asset to have value, the expected cash flows have to be positive sometime over the life of the asset. Proposition 2: Assets that generate cash flows early in their life will be worth more than assets that generate cash flows later; the latter may however have greater growth and higher cash flows to compensate27.

풏 Value of Equity = ∑풕=ퟏ 푪푭 풕풐 풆풒풖풊풕풚/(ퟏ + 푲풆)^풕

CF to equity= Expected Cash flow to Equity in period t

Ke= Cost of Equity

27 Ashwath Damodaran

28

The Dividend Discount model is a special case of equity valuation where the value of the stock is calculated as the present value of the expected dividends in the future. By estimating the future earnings and cash flows on the asset i.e., the cash flow to equity and timing of the stable earnings, we can estimate the discounted cash flow value.

풏 푫ퟏ Value of Equity = ∑ 풕=ퟎ ퟏ+푹풆

Residual Valuation

Residual income is defined as the income generated by a firm after accounting for the cost of capital. This model adjusts the firm’s future earnings to compensate for the cost of equity and arrive at an accurate estimate of the firm value. The equity charge is calculated as the product of equity capital and cost of equity using the Capital Asset Pricing Model (CAPM). Hence even though a firm is making profits, it might not be making economic profits.

The residual income is calculated as the sum of book value of equity and the present value of future residual income. The discount rate is the cost of equity. The advantage of using this method is that it accounts for economic profitability of the firm rather than the accounting profitability. The drawback is that it involves a number of assumptions regarding the forward looking estimates of the firm. When used along with other valuation models, it can give a better estimate of a firm’s value28.

Value of Equity= BVo+{ RI1/(1+r)^1 +RI2/(1+r)^2 +……}

Snapshot: Dividend Discount Valuation

FY FY FY FY FY FY FY FY FY FY (In INR Million) 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Total Dividends Paid 122.9 184.6 217.3 266.36 345.73 443.18 568.89 726.91 Net Income 826.7 859.9 1039.9 1331.80 1728.63 2215.92 2844.46 3634.57 Dividend Payout Ratio 14.9% 21.5% 20.9% 20.0% 20.0% 20.0% 20.0% 20.0% PV of Terminal value of Dividend 262058.43 Sustainable growth Rate 3.0% Discount Rate 13%

Present value factor for July 1, 2015 (Dividends have been paid out in first half of July in recent years) 1 0.88496 0.78315 0.69305 0.61332

Present value of Dividends 34162.70 Present value of Dividends per share as on July 1, 2015 1286.25 Present value of Dividends per share as on March 31, 2015 1245.59 Source: Bloomberg, Student Research

Snapshot: Residual Valuation

FY FY FY FY FY FY FY FY FY FY

(In INR Million) 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Net Income 826.7 859.9 1039.9 1331.80 1728.63 2215.92 2844.46 3634.57 Required Return (13% of Equity) 1097.19 1235.69 1415.47 1645.93 1941.75 Residual Income 234.61 492.94 800.45 1198.53 1692.81 Terminal Value of residual income 86569.32 Present Value of Residual Income as on March 31, 2015 25024.53 PV of residual income per share 942.19 Book value per share on March 31, 2015 357.88 Total value per share as on March 31, 2015 1300.07 Source: Bloomberg, Student Research

28 Investopedia

29 Snapshot: FCFE Valuation

FY FY FY FY FY FY FY FY FY FY 2014 (In INR Million) 2010 2011 2012 2013 2015E 2016E 2017E 2018E 2019E - CFO 296.10 891.40 809.40 1083.70 122.06 257.64 390.95 582.38 832.44 Net Capex 124.09 215.90 252.00 540.40 521.53 643.86 793.31 978.02 1205.01 - Change in Borrowings 35.42 821.30 426.00 760.60 209.96 247.37 310.79 387.73 481.07 - FCFE 207.43 286.00 131.40 1303.90 -189.51 -138.86 -91.56 -7.91 108.50 Terminal Value 288946.92 Present Value of FCFE 38935.87 Value per share (31st March 2015) 1465.96 Source: Bloomberg, Student Research

Appendix 7: Corporate Board of WABAG

Name (Age) Designation Remunerations - In The company Executive / Non- Independent / Non- Qualifications Unit INR since Executive Independent Bhagwan Dass Chairman 1,000,000.00 2007 Non-Executive Independent Masters in Agricultural Narang (57) Economics Rajiv Mittal (53)* Managing 20,230,000.00 2000 Executive - Graduate in Chemical Engg Director Sumit Chandwani Director 750,000.00 - Non-Executive Independent BE PGD in Business Management Jaithirth Rao (62) Director 750,000.00 2007 Non-Executive Independent Degree in Chemistry Masters in Management

Rajiv Balakrishnan Company - - - - - Secretary Revathi Kasturi Director 750,000.00 - Non-Executive Independent BE(Electrical)

*Promoter

Source: Capitaline, Reuters

Appendix 8: Financial Details of Subsidiary Companies FY11-14

Financial Details of Subsidiary Companies for the Year Ended on 31 March 2011 (INR millions)

Reserves Investm Turnov Provisi Name of the Company Capita TA TL PBT PAT Total ent er on l VA TECH Wabag(Gulf) Contracting (L.L.C) 3.6 0.0 4.0 4.0 0.0 2.0 0.0 0.0 0.0 VA TECH Wabag (Singapore) Pte. Ltd 80.2 35.7 236.0 236.0 0.0 10.8 1.3 0.0 1.3 VA TECH Wabag (Hongkong) Ltd. 48.0 3.8 49.4 49.4 0.0 0.0 3.0 0.0 3.0 Beijing VA TECH Wabag Water treatment technology 48.0 32.5 25.2 25.2 0.0 0.0 34.0 4.6 29.4 co.ltd VA TECH Wabag GmbH, Vienna 63.2 1479.5 3900.9 3900.9 135.5 3052.8 68.6 4.2 72.8 VA TECH WABAG Deutschland GmbH 14.6 1.8 299.1 299.1 0.0 41.4 0.2 0.0 0.2 VA TECH Wabag Algerie SARL 0.7 29.4 443.9 443.9 0.0 280.4 38.0 0.0 38.0 WABAG Wassertechnik AG 43.3 101.7 1003.9 1003.9 0.0 975.0 85.6 18.5 67.1 VA TECH WABAG BRNO spol. S.r.o. 4.7 42.9 432.2 432.2 0.0 487.8 40.0 0.3 39.7 VA TECH WABAG Tunisie S.A.R.L. 0.3 19.5 135.6 135.6 0.0 109.5 0.2 0.1 0.1 Engenharia Hidraulica de Macao Ltd. 12.7 41.5 121.8 121.8 0.0 255.0 27.4 3.1 24.3 Wabag water services (Macao)ltd 1. 3.3 6.1 16.2 16.2 0.0 40.6 2.3 0.1 2.2

30 WABAG Water Services S.R.L. 0.6 78.9 199.6 199.6 0.0 583.0 55.5 9.1 46.4 VA TECH Wabag Tecknolojisi Ve Ticaret Limited 1.4 9.6 3.3 3.3 0.0 0.0 9.2 0.0 9.2 VA TECH Wabag Egypt Ltd 2.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Financial Details of Subsidiary Companies for the Year Ended on 31 March 2012 (INR millions) Reser Investm provis Name of the Company Capital ves TA TL Turnover PBT PAT ent ion Total VA TECH Wabag (Singapore) Pte. Ltd. 141.4 50.6 319.6 127.6 0 2 89 0 89 VA TECH Wabag (Hongkong) Ltd. 1288 149 1202 62 0 0 99 0 99 Beijing VA TECH Wabag Water Treatment Technology Co. 895 885 201 191 0 4 456 3 458 Ltd. VA TECH Wabag GmbH 683 16633 36481 19164 187 19267 560 4 556 VA TECH Wabag Deutschland, GmbH 157 36 1823 1630 0 37 15 0 15 VA TECH Wabag Algeria SARL 7 662 1158 1813 0 1459 301 0 301 WABAG Wassertechnik AG 467 1026 9448 7955 0 12214 648 77 571 VA TECH WABAG BRNO spol. S.r.o. 51 707 5836 5078 0 5704 258 16 242 VA TECH WABAG Tunisia S.A.R.L. 4 208 1365 1154 0 833 2 0 2 Engenharia Hidraulica de Macao Ltd. 137 59 239 43 0 1393 22 22 44 Wabag water services (Macao) Ltd. 1 74 355 279 0 655 76 7 69 WABAG Water Services S.R.L. 7 1200 2377 1170 0 5071 477 77 400 VA TECH Wabag Techknolojisi ve Ticaret Limited 16 419 260 663 0 101 324 2 322 VA Tech Wabag Muscat LLC 202 111 368 55 0 414 113 9 104 VA Tech Wabag (Philippines) Inc. 104 220 2229 1906 0 2915 293 89 204 VA TECH Wabag Egypt Ltd. 36 0 0 0 0 0 0 0 0 Ujams Wastewater Treatment Company(Pty) Limited 0 0 0 0 0 0 0 0 0 VA TECH Wabag(Gulf) Contracting (L.L.C) ** 0 0 0 0 0 0 0 0 0 ** VA TECH Wabag(Gulf) Contracting (L.L.C) is under Process of

Liquidation.

Financial Details of Subsidiary Companies for the Year Ended on 31 March 2013 (INR millions)

Reserves Invest Turnov provi Name of the Company Capit TA TL PBT PAT Total ment er sion al VA TECH Wabag (Singapore) Pte. Ltd 150.3 57.6 338.6 130.7 - 73 38 - 38 VA TECH Wabag (Hongkong) Ltd. 1351 -195 1210 53 - -13 -39 - -39 Beijing VA TECH Wabag Water Treatment Technology Co. 1159 -1173 166 180 - 191 -236 - -237 Ltd. VA TECH Wabag GmbH, Vienna 699 16921 37743 20123 191 23513 28 5 33 VA TECH Wabag Deutschland, GmbH 161 -584 1256 1679 - 94 -622 - -622 VA TECH Wabag Algerie SARL 706 -918 1238 1451 - 1045 -266 - -266 WABAG Wassertechnik AG 478 882 7804 6443 - 15906 741 -158 582 VA TECH WABAG BRNO spol. S.r.o. 52 1122 6803 5629 - 9119 475 -37 438 VA TECH WABAG Tunisie S.A.R.L. 4 210 1428 1214 - 922 1 2 3 Wabag water services (Macao)ltd 1 144 283 137 - 1016 76 -12 65 WABAG Water Services S.R.L. 7 1780 5461 3674 - 5091 657 -99 558 VA TECH Wabag Techknolojisi ve Ticaret Limited 16 -824 1624 2433 - 3230 -388 - -388 VA Tech Wabag Muscat LLC, Oman 212 36 335 87 - 639 10 - 10 VA Tech Wabag (Philippines) Inc. 114 270 1874 1490 - 2202 38 11 27 VA TECH Wabag Egypt Ltd 36.44 ------Ujams Wastewater Treatment Company (Pty) Limited, 0 661 2409 1747 - 1656 -7 - -7

31 Namibia VA TECH WABAG (SPAIN) S.L. 2 -33 33 64 - - -33 - -33 Engenharia Hidraulica de Macao Ltd. ** - - - - - 4 -210 0 -210 VA TECH Wabag(Gulf) Contracting (L.L.C) ** ------** VA TECH Wabag(Gulf) Contracting (L.L.C), Dubai and Engenharia Hidraulica de Macao Ltd, Macao have been liquidated during this year.

Financial Details of Subsidiary Companies for the Year Ended on 31 March 2014 (INR millions) Reserves Turno provi PA Name of the Company Capital TA TL Investment PBT Total ver sion T 45. VA TECH Wabag (Singapore) Pte. Ltd 191.9 107.2 395.2 96.2 - 4.7 45.3 - 3 - VA TECH Wabag (Hongkong) Ltd 190.8 -22.6 168.6 0.3 - 0.5 -1.2 - 1.2 - Beijing VA TECH Wabag Water Treatment - 167.7 -176.3 20.2 28.9 - 2.6 6.6 45. Technology Co. Ltd 39.2 8 VA TECH Wabag GmbH 82.3 1958.5 4998.0 2957.2 22.5 4203.2 4.2 0.1 4.0 - VA TECH Wabag Deutschland GmbH 18.9 -73.4 147.6 202.0 - 19.6 -4.6 - 4.6 - - VA TECH Wabag Algerie SARL 103.7 -181.0 41.0 118.3 - 86.7 - 73. 73.5 5 43. WABAG Wassertechnik AG 56.3 209.0 849.3 584.0 - 1498.5 56.5 13.1 4 44. VA TECH WABAG BRNO spol. S.r.o 6.1 167.6 605.0 431.3 - 861.6 55.7 10.7 9 - - VA TECH WABAG Tunisie S.A.R.L 0.4 9.4 153.5 143.6 - 86.0 0.0 13. 13.7 7 12. Wabag water services (Macao)ltd 0.2 28.5 65.2 36.5 - 131.4 14.2 1.3 9 116. 97. WABAG Water Services S.R.L 0.8 306.3 785.9 478.7 - 1713.6 18.6 2 6 VA TECH Wabag Techknolojisi ve Ticaret Limited 125.3 -101.3 140.4 116.4 - 436.2 2.5 - 2.5 15. VA Tech Wabag Muscat LLC 23.3 19.0 61.9 19.6 - 103.3 16.6 1.4 2 51. VA Tech Wabag (Philippines) Inc 11.4 76.4 620.3 532.5 - 756.9 73.3 22.0 3 VA TECH Wabag Egypt Ltd 3.6 ------Ujams Wastewater Treatment Company (Pty) 24. 78.6 7.8 779.0 692.7 - 568.2 24.7 - Limited 7 - - VA TECH WABAG (SPAIN) S.L 0.2 -27.9 16.8 44.4 - 7.1 1.0 23. 22.6 6 VA Tech Wabag Limited Pratibha Industries - 0.0 444.6 444.6 - 626.7 0.0 - 0.0 Limited JV* * The Company entered into a Joint Venture with Pratibha Industries Limited in Nepal to execute a project. Considering the fact that the group has control over the governing body and over the operating and financial decisions of the JV entity, the same has been treated as a subsidiary.

32 Appendix 9: Project List of Wabag Year 2013:

Project Type Country Client

Cudrefin Water Treatment Plant Switzerland Water supply association of the communities of Broye and Vully

Höfe Wastewater Treatment Switzerland Municipality of Freienbach

Nemmeli Desalination (RO) India Chennai Metropolitan Water Supply and Sewerage Board (CMWSSB)

Sohar International Port Desalination (RO) Oman Majis Industrial Services (MIS)

Source: Company Annual Report (2011-14)

33

Disclosures:

Ownership and material conflicts of interest: The author (s) or a member of their household, of this report does not hold a financial interest in the securities of this company. The author (s) or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with IAIP, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge

34