VA Tech Wabag
Equity Valuation of VA Tech WABAG
Submitted by: DoMS, IIT Madras
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Rating Outperform (Target Price Rs 1766) Latest Price (BSE/NSE) Rs. 1591.90/ Rs. 1593.90 52 Week Range (Low/ High) Rs. 480/ Rs. 1748 BSE/ NSE ticker 533269/ WABAG ISIN Code INE956G01038 Face Value of Equity Share Rs. 2 Shares Outstanding 26.5 MN Market Capitalization Rs. 43.48 BN P/E Ratio (TTM) 35.61 Dividend Yield 0.50%
Introduction:
VA Tech WABAG is one of the leading companies in the world which is present in the water treatment Industry. Its key competency lies in design, completion and operation of drinking and waste water treatment for both industrial and municipal sector. It is a major player in a sector which has not seen much development and proceedings in the country. As a result with the advent of time VA Tech WABAG has established itself as the market leader in water treatment industry in India.
India which is the second most populous country in the world is home of more than 1.25 billion people. It is growing at a rate of 1.3% annually and is expected to become the most populous country in the world by overcoming China by 2025. After getting independence in 1947 India has witnessed colossal improvement in its economy and GDP but providing basic requirements to people to sustain life, i.e., clean water still remains a vision that is yet to be realized. Even now many states are suffering from various water quality issues. The scenario is pictorially depicted in Figure 1. Currently only 60% of industrial and 26% of domestic water is treated in India. This situation, if not improved, will inevitably create a scarcity of fresh water, whose demand is expect to rise by 50% in the next decade. All these factors have led India to be marked as a water stressed nation by 2025. However the country has witnessed some developments in the field of water treatment in recent times.
This surge in purification can be attributed to two reasons: i) Tax break for industries that save water ii) Environmental concerns
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Figure 1: States suffering from water quality issues (Source: Ministry of drinking water and sanitation)
No. of Suffered States
Nitrate 12
Iron 21 No. of Suffered States Salinity 15
Fluoride 19
Arsenic 8
0 5 10 15 20 25
Whatever be the reason various industries in the country have started taking water purification as a grave matter. Indian government is also encouraging private investment in wastewater treatment sector. The government has started supporting PPP model in the water sector and is lending a hand of assistance to state governments to improve the infrastructure of water treatment in their respective provinces.
The rapid development of medium and small sized cities in the country fabricates a huge demand for wastewater treatment industry in India. This industry is expected to grow at a rate of 18-20% annually till 2018. The rise in the demand of water with increase in urbanization is shown in Figure 2. The municipal corporations continue to be the major users of the water & sewage treatment plants. But recent developments have indicated an increase in the industrial users of water & sewage plants. Due to scarcity of water various industries across the country, including Power, Textiles, Petrochemical, Steel, Pharmaceutical, Fertilizers & Chemicals, have started recycling waste water to use it in their plants. Added to fact are the rapid urbanization in the country and the increase in disposable income in the hands of people due to economic growth trajectory followed by the country. All these facts are making the future prospect of the wastewater treatment industry more upbeat for the water treatment plants. However the current status of this industry does not give the market observers many
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reasons to cheer about. There are very few companies which are operating in India in this particular segment. Among those companies only a few are Indian companies. VA Tech WABAG, an Indian company operating in this particular industry, has managed to carve a niche for itself in it. VA Tech WABAG has not witnessed much competition in the field it operates in. Absence of other significant players leaves a huge opportunity for other players to enter into this market and capture market share.
Figure 2: Demand of water/day Vs. Population (Source: Bureau of Indian Standards)
Litres per day
180.00 170.00 160.00 140.00 130.00 120.00 100.00 90.00 80.00 60.00 Litres per day 40.00 20.00 0.00
Industry Analysis: Water Treatment Industry
To analyze the market competition in this particular segment we have developed the following Porter’s Five Forces Model.
Bargaining power of Suppliers
Industry Rivalry Threat of New Entrants Threat of Substitutes
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Bargaining power of Buyers
Threat to New Entrants: The major barrier to entry in the water treatment industry is that this industry is highly capital intensive. The high amount of capital required to set up the plant, carry on the daily operation of it before finally handing it over to the client is the main hindrance behind the lack of domestic players in this sector. On the other hand the lack of major players is enticing capital rich foreign players to come forward and fund such projects. So the entry barrier present in this segment is reducing with the advent of time. However apart from money this industry also calls for technical expertise which also acts as an entry barrier. After analyzing all the factors the entry barrier of this industry can be set at medium level.
Threat of Substitutes: With the expansion of urbanization of India, the demand for fresh water is also on the rise. This in turn calls for more wastewater treatment plants. Technologies adapted in these plants are also evolving on a continuous basis. These technologies appeal to the industrialists for quality purposes. However there aren’t alternate means of treating the wastewater apart from these latest technologies that are being adapted in the plants. So the threat of substitutes in this industry is very low if not absent.
Bargaining power of Buyers: The major consumers of these plants are government and municipalities. There is a constant pressure on these companies from its various stakeholders to reduce its profit margin. The constant pressure to upgrade its technology to the latest available technology also reduces the profit margin of these companies. Moreover, in these projects the consumers enjoy the liberty to choose from various bids from multiple companies. This also acts as an obstruction for these companies to higher its profit margin. After analyzing these factors, the threat to the companies in this segment can be put in the medium level.
Industry Rivalry: India with its high rate of growth, high population and high rate of modernization is posing as a lucrative market for investors in this segment both domestic and foreign alike. The number of players in this sector is also increasing gradually and many capital intensive foreign investors have started analyzing the future prospect of this sector. Also high capital cost borne by these companies makes switching very difficult. So the companies in this sector encounter a high degree of competition and rivalry among themselves to sustain in this sector.
Bargaining power of Suppliers: The major components for developing, running and maintaining of water treatment plants are equipments, infrastructure to treat water and infrastructure to supply water to end users. As the companies are in constant
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pressure from its competitors to upgrade to latest technologies on a continuous basis, the equipment suppliers enjoy a high degree of bargaining power. The human resources who also play a very critical role in this industry enjoy a high bargaining power. Competitive Analysis: Indian Market
VA tech Wabag faces a stiff competition both in India as well as abroad. Though in India it has monopoly by extensively operating in all major segments of water treatment industry, it is trying to make its presence visible in international arena by aggressive expansion.
Water treatment industry primarily consists of following segments:
1) Equipment Supply: Kirloskar is the Market Leader, Currently VA Tech is absent from this segment, it can expand its profile to a 360 degree by entering this segment. 2) Water supply and infrastructure: It includes construction of treatment plant, its maintenance and supply. VA tech has its presence in this segment but not much focus on this segment as construction is a much capital intensive and long wait to return project. Other big domestic players include Thermax. 3) Waste Water treatment: Various sub segments under this include treatment of drinking water, municipal waste water, sea and brackish water, industrial and process water, and industrial waste water. VA Tech operates in all these sub segments. Overall its primary focus is on this segment. Only few players like Triveni, Thermax, Ion Exchange operates under all these segments, but revenue wise (from these segments only) VA tech is much ahead. Here focus on Municipal contracts is the key to growth for domestic business. 4) Operation & Maintenance: Lot of potential in this segment, Most of the municipalities owned treatment plants are being outsourced for O &M. All major firms are tapping in this segment. 5) Desalination: Desalination plant is a new business to enter in water treatment industry. VA Tech also entered in this segment recently and currently constructing a plant in Chennai for water desalination. Major competition here is by IVRCL which is having Minjur desalination plant. Company Analysis: VA Tech Wabag
After analyzing the market forces and competitions, we tried to analyze the various threats and opportunities experienced by the company itself. For that we carried out a SWOT Analysis which is explained below.
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Strengths: VA Tech WABAG has been in existence for nine decades during which it has managed to create a very strong brand reputation for itself. The name VA Tech WABAG has almost become synonymous to water treatment in India. From this point of view it has gained a major advantage from its competitors who are also operating in this sector. It is also present in the entire value chain of the industry. Besides India, VA Tech WABAG has established its presence in Europe, Asia Pacific, Middle East and Africa. So its international segment has the ability to supplement domestic growth. The company has also distinguished itself from its competitors with its superior project management skills and relationship with its suppliers. Also on virtue of being a market leader it has access to latest technologies in the market. All these factors have rendered VA Tech WABAG an edge over its competitors.
Weaknesses: Company has encountered sluggishness in order booking in the last financial year. Any further sluggishness in order booking can pose a serious threat in the share price of the company which has performed extremely well till now. Even though VA Tech WABAG is known for its distinguished project management, it has faced some project execution issues in the recent past. Also the company has adopted an asset-light strategy which has amassed positive results for the company. However it might face difficulties in the future if any change in the market trend forces it to follow a more capital-extensive structure.
Threats: India growing economy and population have lured various investors in investing in various fields. Water treatment is no exception to it. It has also attracted
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many capital intensive investors to fund many projects in the wastewater treatment segment. Also recent development has seen many small players partnering with many foreign players to start a venture. With the presence of a medium level of entry barrier, the industry has seen many emerging players in the recent times. So VA Tech WABAG always have to be aware of the threats that are being posed by the new entrants and prepare itself from these players by updating and upgrading itself on a continuous basis. It has already been mentioned that the major consumers of these plants are government and municipalities. So the companies, including established players like VA Tech WABAG, always have to deal with the changing norms and regulations. Moreover, running of these plants always encompasses of environmental risks and risks of political interferences in countries like India & abroad.
Opportunities: The rapid urbanization of India has created and is continuing to create a huge demand for water treatment. So there is a huge opportunity for the company to expand its business in upcoming and developing cities. Government of India has recently undertaken ‘Clean-Ganga’ project to clean its water by improving its sewage system. This creates a huge opportunity for the water treatment plants to expand its business. Apart from government, various industries like Power, Steel and Petrochemical etc. are vastly dependent on water treatment plants to meet its water requirements. With the growth of Indian economy the volume of these industries are also expected to rise which in turn is expected to rise more business opportunities for these companies. Barring India, water treatment and sanitation present a huge opportunity globally as well. As per Frost & Sullivan this market was 180 Billion USD in 2010. It is also expected to have a high rise percentage between 2010 & 2020. So there is a huge opportunity lying for these companies to amplify its business and growth.
Some of the Key projects executed by VA Tech Wabag
India Municipal Nemmeli Desalination Plant Waste water Recycle & Reuse Plant at Vizag Steel plant India Industrial BHEL kosti Sudan RIL Hazira Overseas Tatalon STP, Philippines Baraki WWTP, Algeria
Environmental Analysis - Water Treatment Industry
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A number of environmental conditions are posing a good opportunity for the water treatment sector. Increasing populations and evolving consumption patterns are straining freshwater resources. A growing gap between supply and demand, exacerbated by climate disruptions and extreme weather events, will likely require substantial capital investments in water treatment technologies and distribution infrastructure. This opens potential investment opportunities in companies providing new ways to supply, distribute, conserve and treat water. The Gap between Water Supply and Demand Approximately 336 million cubic miles of water circulate through the hydrological cycle. The vast majority is salt water. Only 2.5% of water is considered fresh. Of that, less than 1%, or 0.025% of all water on earth is accessible surface water. While fresh water supplies are relatively static, the global population is expected to increase from around seven billion to an estimated nine billion by 2050. Secondly, there could be enough water to meet humanity’s needs if it was evenly distributed but unfortunately it is not. Under a “current business as usual scenario,” water demand will outstrip supply by 40% by 2030. This has the potential to put $3 trillion of global Gross Domestic Product (GDP), or approximately 22%, at risk by 2050. In developed countries, roughly half of all water consumed is for industrial use, whereas in developing countries, agriculture is usually the biggest consumer, at levels approaching 80%. Four key factors underpin a growing supply/demand imbalance: • Population Growth • Aging Water Infrastructure • Water Regulation • Extreme Weather Events and Climate Change Population Growth: Global population is increasing rapidly and is driving demand for water. United Nations predicts that by 2050, two thirds of world’s inhabitants will be “water stressed”. Urban areas are under strain as people migrate to cities seeking new employment opportunities and living standards. Aging Water Infrastructure: Existing water supply infrastructure was built for a time which had different resource availability and water use. Increased use and deterioration over time heightens the urge for improvement and replacement. Accelerating population growth and urbanization is increasing the demand for robust infrastructure. Water Regulation:
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National and local governments are seeking to raise awareness and develop long and short term initiatives to find a solution. For example China’s current 12th five year plan seeks to reduce water usage by 30% for every new dollar of industrial output. This would require building 1200 new water treatment plants by 2015. Such strong regional regulations are driving water investment. Extreme Weather Events and Climate Change: Climate change is affecting rainfall, runoff and evaporation patterns as well as the snow pack, lakes, wetlands, soil, groundwater and glaciers. In southern Europe rainfall has decreased in recent years. Summer rains are predicted to become scarcer. The volume of water stored in glaciers and snow pack will decline over the course of the next century. After an initial phase of increased discharge there will be less water available in regions supplied by melt-water run-off where more than one-sixth of the world’s population currently lives. Key Factors of Water Treatment Sector In this section, we examine key factors and the potential of water sector investing, such as: Water investments with strong growth potential have business models that are addressing supply-demand imbalances. A balanced portfolio of water investments can be constructed with exposure to early cycle, late cycle and defensive business models. To simplify how investors can categorize the investible water universe, consider the sector as three sub-sectors: water infrastructure, water treatment, and water utilities. We will further elaborate on the water treatment sector that is more applicable to the firm under concern. Water treatment • Chemical treatment – Chemicals used for the treatment of municipal/utility water sources (water and wastewater) as well as industrial water and wastewater have a growth profile of 1% to 2% above GDP growth. Water chemical companies tend to have clear earnings visibility due to the importance of their product in existing processes. • Filtration, membrane technology, desalination – As a rule these businesses are less cyclical than water infrastructure companies, but nevertheless are exposed to both industrial and utility applications. Filters wear out and need replacing hence all ‘membrane’ or filtration-based businesses offer investors above-average earnings visibility due to the high proportion of recurring ‘consumables’ revenues generated. Global growth rates are around 15% to 20%, • Physical water treatment – Companies in the treatment field tend to have high margins, specialized technologies, and strong pricing power. The global water treatment equipment market is predicted to grow at approximately 2% to 4%, while 13.5% and 15% to 20% annual growth are considered achievable in China and India, respectively. There are relatively few market participants.
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• Pollution monitoring and testing – Companies involved in the manufacture of machinery for water sample testing, as well as the laboratories involved in sample analysis, focus on fulfilling increasingly strict global water purity regulations. The sector has forecast global growth rates of 5% to 7%, with China and India offering growth rates of 11% and 15% to 20%, respectively.
Sector growth Over the next five years, we expect investment in water infrastructure, wastewater treatment, desalination, and water recycling to rise steadily. As climatic conditions and the global water industry change, businesses and utilities will need to invest more in water technologies and infrastructure. In developed markets, there is an ongoing struggle to maintain infrastructure within the framework of tightening water quality regulations. Growth tends to be steady, at around 3% to 4% a year. In developing nations, the initial development of systems and infrastructure is still under way. This is driving 8% to 10% growth rates that are expected to continue for several years. We also expect the desalination market to show robust growth, especially in coastal regions where energy is relatively cheap. Global market growth is currently 15% to 20%. As technologies have advanced the unit costs of desalination processes have decreased considerably over the last three decades, from approximately $2.50 per cubic meter in 1972 to around $0.65 per cubic meter in 2010.34 It is estimated that China will invest $3.7 to $4.4 billion in the sub-sector by 2015, making it one of the largest and most attractive future markets
M&A Activity Over the last decade, and particularly in the early 2000s, M&A has been a major sector driver. The general pattern of M&A in the water sector has been for companies to grow and diversify through targeted acquisitions. The focus has been on the more technologically advanced parts of the water value chain. Average acquisition multiples of 14.8x trailing Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA) 35 in the water sector have been stronger than the broader global industrial sector comparable multiple of 12.4.36 We believe that these water sector multiples reflect the high technological content of many of the companies involved, as well as their superior global and regional growth prospects. Low cost of capital enabled large conglomerates to buy small, high growth, niche- focused businesses. Many of the most technologically complex companies active in the sector were acquired in the 2004 to 2005 period on particularly high multiples of EBITDA; when excluded from the analysis shown in Figure 6, it is apparent that over the last decade, acquirers have still been prepared to pay between 10x and 15x EV/EBITDA for access to high quality businesses within the water sector. We believe that the recent scale and frequency of transactions underpin the investment case.
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Risks and challenges As with other infrastructure investments, water and sanitation projects tend to be affected by political and macroeconomic instability, inadequate and frequently changing legal and regulatory environments, and insufficient government commitment to contractual obligations. When investing in these companies, investors need to be mindful of the following risks:
Low perceived project returns – Returns across much of the water industry are seen to be insufficient to cover the perceived risks and secure the necessary financing for water infrastructure projects. Utilities tend to invest in infrastructure assets where 1) the relevant regulations have been stable; 2) the regulator is immune from direct political intervention; and 3) the investment appears likely to provide solid returns. Technical expertise – Lack of private sector involvement may hold back public sector investment due to the limited technical expertise of the latter. Budgetary constraints – Public sector investment is often limited by budgetary constraints, especially in times of austerity programs. Order Booking: Uncertainty in the Order is one of the key challenges which can be seen in the Q1FY15 Report orders has not upto the mark as expected. Project Execution issues – So far company was strong in its project execution strategy & implementation but there is always uncertainty involve with Regulatory requirements, Technical knowhow etc. Asset Light Model – Company was always able to maintain Asset Light Business Model which company was successful with but it was seen that in the FY14 Fixed Assets in the Company has increased significantly which can hamper the company’s performance in the future.
Some of the key trading details of the company are given below.
Company Performance
We have used the data provided in the annual reports of the company to evaluate the performance of the company. Figure 3 outlines the return given by WABAG shares as compared BSE indices.
Figure 3: Return of WABAG Stocks
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Company Overview
VA Tech WABAG a multinational player in the water treatment industry in India, Middle East, North Africa, Central and Eastern Europe, and China etc. With time it has established a strong presence in both municipal and industrial sector. It was incorporated in 1995 and has witnessed various changes in control since then. Some of the major changes are stated below.
The company was incorporated as Balcke Durr Cooling Towers Ltd. in 1995.
In 1996 it started a water treatment division and renamed to Balcke Durr and Wabag Technologies Ltd. Austrian group VA Tech acquired the water business of the compay in 1999.
Water and Non-water segments of the company merged in 200o and the combined entity was christened as VA Tech WABAG. ICICI Ventures and the current shareholding acquired shares of WABAG Austria in 2005. I-Ven Water Technologies merged to VA Tech WABAG in 2006.
In 2007 the WABAG acquired the mother company VA Tech Austria.
Organization Structure
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The company has two broad divisions, India Unit and Austria MDU. Here we are focusing on the India Unit. The India Unit can further be divided into four SBUs.
1) Municipal Business Group:
This provides variety of water treatment solutions to various municipal corporations across the country. The services offered by this SBU are: treating the water collected from various sources, monitoring and distributing it to various customers. It is the biggest among all the four SBUs.
2) Industrial Water Business Group:
This SBU provides water treatment solutions to industries like refineries, steel and power plants. The main objective of this SBU is to treat water to make it fit for use in various industries.
3) Operations Business Group:
This SBU provides O&M services to both municipal and industrial customers. The projects of this SBU range from 1-20 years with an average of 7 years. This SBU is relatively small and accounted for only 13% of the company’s India division’s revenues in FY 2014.
4) Desalination SBU:
This SBU is relatively new and is aimed to capture the emerging market in both India and the Middle East. Shareholding Pattern
The share holders of the company are divided into four types: Promoters, Mutual Funds, FIIs and Others. The breakup of the shareholdings of different shareholders is shown in Figure 4.
Figure 4: Shareholding Pattern
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450.00%
400.00%
350.00% Percentage of Shareholding Others 300.00% Percentage of 250.00% Shareholding FIIs Percentage of 200.00% Shareholding Mutual Funds 150.00% Percentage of Shareholding Promoter 100.00% 22.13% 18.03% 20.88% 31.04% 30.82% 28.12% Group 50.00% 15.88% 20.24% 20.70% 30.95% 30.91% 30.30% 0.00%
It can be easily observed that the shareholding pattern has not undergone many changes in the recent past and is expected to follow the same pattern in the near future. Rajiv Mittal CEO of the company hold the maximum percentage of shares, he holds 18% of the Shares individually.
Company Financials
1) Dividend The company has recently distributed dividend of Rs. 8 which is 400% of the face value. Based on its previous records the dividends to be announced in the future has been estimated and shown in the following figure. Figure 5: Estimated DPS
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DPS
30 28 25 24 20 20 16 15 14 DPS 10 11 7 8 5 0
2) EPS
The estimated EPS is shown in figure 6.
Figure 6: Estimated EPS
EPS
160 141.27 140 117.57 120 97.83 100 81.38 EPS 80 67.67 56.25 60 42.72 40 33.75 20 0
3) EBIDTA and PAT
EBIDTA and PAT of VA Tech WABAG are also estimated to grow and are shown in Figure 7 and 8 respectively.
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Figure 7: Estimated EBIDTA
EBIDTA
70,000 64273 60,000 53581 50,000 44672 37248 40,000 31062 25908 EBIDTA 30,000 20135 20,000 16724 10,000 0
Figure 8: Estimated PAT
PAT
40000 37565 35000 31265 30000 26015 25000 21641 20000 17996 PAT 14959 15000 11361 8959 10000 5000 0
4) Revenue Company’s revenue can be divided into different classifications:
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Company is mainly into two type of business in the Water Treatment Segment. Based on EPC and O&M. Currently EPC is the main source of Revenue for the company comprising of nearly 80% but Revenue from the O&M has also increased significantly from 15% to 20%. The revenue split is shown in Figure 9. Figure 9: Revenue Split
Revenue Split
120% 100% 15% 16% 20% 80% O&M EPC 60% 40% 85% 84% 80% 20% 0% FY12 FY13 FY14
Revenue Split based on different geographies like Domestic (India) & International Revenues. Off late company has seen significant increase in the revenue & it is mainly attributed to the growth in the International Business of the Company, Based on the order book same is expected to continue in the future.
Revenue Split
120% 100% 31% 35% International 80% 48% India 60% 40% 69% 65% 52% 20% 0% FY12 FY13 FY14
Revenue split based on Type of customer, as majority of the revenue of the company comes from the Municipal Corporations & the percentage component of the same is increasing in the continuous basis.
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Revenue Split
120% 100% 80% 41% 40% 35% Industrial Municipal 60% 40% 59% 60% 65% 20% 0% FY12 FY13 FY14
5.) Order Book Order book of the company has been increasing continuously on the Year on Year basis, Order book of the company has increased by nearly 25% based as compared of FY13 & stands at Rs 5354 Crores by the end of 31st March 2014. Split of the Order Book is shown below which mainly comprises of EPC contracts & percentage of it is increasing in the continuous basis. But there were some serious signs as in Q1 of FY15 Company has slight decline in the Order Book then they have expected. Company is expecting same to overcome in the future.
Order Book Split
120%
100% 30% 80% 35% 34% O&M EPC 60%
40% 65% 66% 70% 20%
0% FY12 FY13 FY14
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Valuation We carried out our valuation of VA Tech WABAG by DCF method. For that purpose we have considered the current share price (Rs. 1590) of the company as its fair value. The key assumptions for the valuation are given below.
Cost of Equity 12.77% Cost of Debt 10.50% Tax Rate 32.455% Cost of Debt (after tax) 7.09% WACC 11.22% Terminal Growth Rate 6% No. of shares outstanding 26.5 MN
We have also done a sensitivity analysis of the fair value of the company’s shares, results of which are listed below.
Terminal Growth Rate 5% 5.50% 6% 6.50% 7.00%
C 10.22 1249 1315 1392 1481 1585 C
A 10.72 1219 1284 1359 1445 1547
W 11.22 1191 1254 132 1411 1509 7 11.72 1163 1224 1295 1377 1473 12.22 1136 1196 1265 1344 1438
For the Sensitivity Analysis we have measured the sensitivity of the fair value of VA Tech WABAG shares with the changes of WACC and Terminal Growth Rate. The change in WACC is taken as 0.50% (from 10.22% to 12.22%) and the change in Terminal Growth Rate in also taken as 0.50% (from 5% to 7%). The movement of the fair value with these fluctuations is captured in the above table. To analyze the value of the company we have also analyzed the valuation multiples of Indian and International companies the results of which are shown below.
P/ E (x) P/BV(x) ROE Dividend Yield Peer Group Company FY 14 FY 14 FY14 FY 14 Indian players Ion Exchange 59.80x 1.70x 3.0% 0.0% Pratibha Ind 32.70x 1.60x 2.0% 0.4%
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Thermax Ltd 42.03x 5.18x 11.3% 0.7% Median 42.03x 1.70x 3.0% 0.4% Other Global Players Companies Waste Management 21.30x 3.70x 17.0% 3.1% Violia Envi. 31.40x 2.10x 3.0% 5.2% Suez Envi. 20.40x 1.90x 7.0% 5.0% Sound Global 24.00x 3.00x 15.0% 0.0% Kurita Water 31.30x 1.80x 4.0% 1.8% Median 24.00x 1.90x 0.07x 0.03x
Mean 33.88x 2.52x 7.25% 1.84% Overall Median 31.40x 3.00x
Overall Performance of the Company (Actual & Expected)
Particulars FY 13A FY14A FY15E FY16E FY17E Income Statement Revenues 163,209 225,146 269,881 323,572 388,008 EBITDA 16,724 20,135 25,908 31,062 37,248 EBIT 15,633 18,634 24,107 28,901 34,654 Net Interest 2,115 2,521 1,902 2,188 2,531 Net Income 13,518 16,113 22,204 26,712 32,123 Projected Fiscal Year Ending is on 31st March and the amounts are in lakhs
Key Financial Ratios
Key Financial Ratios FY 13 FY 14 FY 15 FY 16 FY 17 Profitability Ratios Revenue Growth 37.95% 19.87% 19.89% 19.91% EBITDA Margin 10.25% 8.94% 9.60% 9.60% 9.60% EBIT Margin 9.58% 8.28% 8.93% 8.93% 8.93% Net Income Margin 5.49% 5.05% 5.54% 5.56% 5.58% EBIT / Total Assets [pre- 8.27% 7.65% 9.37% 10.18% 11.02% tax ROA] EBIT (1-Tax) / Total Assets 5.59% 5.17% 6.33% 6.88% 7.44% [ROA]
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Net Inc / Book Value of 12.52% 13.51% 15.57% 16.29% 16.94% Equity [ROE] Liquidity Ratios Current Ratio 0.09x 0.09x 0.07x 0.06x 0.06x Financing EBITDA / Net Interest 7.9x 8.0x 13.6x 14.2x 14.7x Total Debt / EBITDA 0.7x 1.1x 0.9x 0.7x 0.6x EBIT / Net Interest 7.4x 7.4x 12.7x 13.2x 13.7x Total Debt / Total 0.06x 0.09x 0.09x 0.08x 0.07x Capitalization
Financial Performance of the Company:
Profit & Loss FY13A FY14A FY15E FY16E FY17E
Revenue : Revenue from operations 161,885 223,860 268,632 322,358 386,830 Other Income 1,324 1,286 1,249 1,213 1,178 Total Revenue 163,209 225,146 269,881 323,572 388,008 Expenses: Cost of Sales & Services 116,697 168,878 198,363 237,825 285,186 Decrease in Inventories 967 915 1,349 1,618 1,940 Employee benefit expenses 20,581 22,174 29,687 35,593 42,681 Other expenses 8,239 13,043 14,574 17,473 20,952 Total Expenses 146,485 205,011 243,973 292,510 350,761
EBITDA 16,724 20,135 25,908 31,062 37,248 EBITDA Margins 10.25% 8.94% 9.60% 9.60% 9.60% Depreciation 1,091 1,501 1,801 2,161 2,594 EBIT 15,633 18,634 24,107 28,901 34,654 EBIT Margins 9.58% 8.28% 8.93% 8.93% 8.93% Interest Expenses 2,115 2,521 1,902 2,188 2,531 EBT 13,518 16,113 22,204 26,712 32,123 EBT Margins 8.28% 7.16% 8.23% 8.26% 8.28% Exceptional Items 506.00 EBT After Exceptional 13518 16619 Items Tax 4,559 5,258 7,246 8,717 10,482 PAT 8,959 11,361 14,959 17,996 21,641 PAT Margins 5.49% 5.05% 5.54% 5.56% 5.58%
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Some Key Highlights:
Company has got Expertise in Timely Project Completion; Company has witnessed rising Revenue, PAT in the adverse economic condition & has the growth rate which is above the average industry growth rate, Company is Expanding its Market share geographically, Company has got Healthy order book for the coming year which is the Good for the company in the future.
Wabag Provide total water solution to its valued customers, Company is managed by experience professionals & promoters who have got the experience in the segment of more than 30 years, Leaders of Such high experience is behind the success of the VA Tech Wabag
Company has got more than 20 subsidiaries present in many countries across the globe which is catering to the Total Water Solution; Company always tries to go for taking over new subsidiary of Domestic country because most of the revenue of the company comes from the government bodies.
Wabag’s Strength lies in proven engineering capabilities & continuous technological innovation.
Challenges pertaining to regulatory issues & Dependence on the Political system of the country, Recession in Europe leads to lessening of demand, as most of the business of Wabag takes place through government bodies.
Some of the main reasons for company’s success are innovative strategies, differentiated Products offerings, effective cost management, technological edge, superior cash flow management etc, Company is Technology focused with more than 100 Patents.
First mover advantage in the developing countries & other developed countries through subsidiaries. Company has got robust business model with Asset light balance sheet & access to strong Indian engineering talents. Company mainly outsource its Civil Construction mainly to maintain its Asset Light Business Model.
Company has got past record of strong project execution across the geographies, and Company was successful in doing this with the help of there professional experience employee.
Company goal is to make higher revenues & maintain the Asset light in their Balance Sheet, Through Hub & Spoke model where Chennai will serve as the Hub. Company also wanted to decentralizing it decision making power & empowering the local bodies for
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decision making. Company has got rich past experience of more than 3 decades & completed more 2250 Projects.
Company has paid the dividend of 400% on the Equity; Dividend of Rs 8 was give to each shareholder in 2013-14.Company has experienced good increase in there EPS from Nearly Rs 34 to Rs 42 which is expected to increase further in the future.
Rajiv Mittal CEO of the Company holds the 18% Shares of the Company & the highest Individual Shareholder.
Provision for bad & doubtful debt has increased considerably which is not good for business & company has incurred foreign currency losses. Company has incurred higher percentage expense of Revenue in the year 2013-14as compared to earlier years & thus resulted in the reduction in the Profitability.
Trade receivables have increased considerably from nearly Rs 780 Crore to Rs 920 Crore which increases the default risk. Long term trade receivables have also increased considerably from 36.00 to 119.50 Crore in the year 2013-14.
Company’s Tangible assets have increased considerably from Rs 27 to Rs 92 Crore in the year 2013-14, which is against company’s policy of maintaining the Asset Light Model.
Contingent Liability has also increased considerably in the year 2013-14 as compared to 2012-13, which increases the inherent risk which is present.
Assumption for Target Price: We have given Outperform (Buy) Recommendation & Set up Target price of Rs 1766, based on P/E Multiple & Median P/E Multiple of the Peer & Competitors in the Same Business (Taking Domestic & International Players). The P/E Multiple was 31.2x & we used the Forecasted EPS of the FY15 to get the Target Price of Rs 1766. As currently the stock is trading at Rs 1594 as on 28th October, 2014 so we have given a Buy Recommendation of VA Tech WABAG stocks.
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