Va tech hbj capital (final)

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  • 1. VA Tech Wabag Ltd - High Growth + Quality Business + Cheap Valuations
  • 2. Content Index • VA Tech Wabag Limited – Investment Snapshot :- Slide #4 • Industry Opportunity & Potential – An Overview:- Slide #6 • VA Tech Wabag Limited – Business Overview :- Slide #13 • Investment Arguments :- Slide #23 • VA Tech Wabag Limited – Financials:- Slide #34 • Concerns & Reasoning :- Slide #36 • Conclusion :- Slide #39 “ Specialists in discovering Multibagger stocks “
  • 3. “ Specialists in discovering Multibagger stocks “
  • 4. VA Tech Wabag – Investment Snapshot (as on July 31, 2013) Recommendation :- BUY Maximum Portfolio Allocation :- 5-6 % Investment Phases & Buying Strategy 1st Phase (Now) of Accumulation :- 80% Current Market Price – Rs. 400 Current Dividend Yield – 1.51% Bloomberg / Reuters Code –VATW IN/ VATW.BO Current Accumulation Range :- 350-400 Rs BSE / NSE Code – 533269 / WABAG VA Tech Wabag is one of the safe bets in the current Turbulent market environment, where Midcaps are going through a severe correction. Investors can make use of the current prices to build a strong position in this Stock. Make sure that the majority of the allocation to this stock is on front ended buying. Core Investment Thesis : VA Tech Wabag is one of those Big Bets on the structural growth of Water Treatment companies. We believe that – VA Tech with a Good Management, Clean Balance Sheet, Innovative Technologies and Cost effectiveness is well positioned to capitalize on the Huge opportunity which is looming. Market Cap (INR BN / USD Mn) – 1040 /10.40 [1 USD – Rs. 61.0] Total Equity Shares [Mn]– 2656.3 Face Value – Rs. 2 52 Week High / Low – Rs. 589 / Rs.403 Promoter’s Holding FII DII Other Holdings “ Specialists in discovering Multibagger stocks “ - 30.91% -29.43% - 20.60 % -19.06%
  • 5. Key Investment Highlights 1.) Presence in a scarce Resource Sector:- Company is in a space which is a scarce resource sector which requires huge investments by the government thereby creating a huge opportunity for the company year after year. 2) Presence across the entire value chain: Company is present in the entire value chain in the water business thereby providing a one stop solution unlike its peers who are mostly confined to a few segments in the value chain. 3.) Strong Capital Allocation :- The company has one of the best business models in the industry and has been at the forefront of innovation in the industry thereby generating Returns on Invested capital of over 35%. 4.) Huge opportunity in desalination market :- The company has huge opportunity in the desalination space which has not only been cost effective, but also takes care of the need for clean water which is a basic necessity. 5) Patents a key differentiator:- The company owns about 100 patents and this technological expertise differentiates the company from its competitors and enables it to prequalify for high tech projects apart from being cost competitive in bidding for projects. 6.) Strong & Healthy Balance sheet :- Company has a very strong balance sheet that helps the company to look for acquisitions and also bid for Big projects without the problem of Capital availability. 7.) Tie up with sumitomo to help enhance bid for bigger projects :- Company has made JV with sumitomo corporation which helps the company to bid for projects in the PPP mode which are bid on BOOT mode spanning 20-25 years. This is inline with the company’s model of being an Asset light operator. 8) Robust overseas subsidiaries performance:- The company’s overseas subsidiaries performance has been robust with order book rising from Rs.10.6Bn in FY10 to about Rs.14 Bn in FY14 thereby diversifying their India business. 9.) Management/ Corporate Governance :- The company has a good management and adheres to strong corporate governance norms. The company is run professionally by a team of professionals who have a strong understanding of the business and have a strong vision about building the business. 10.) Compelling Valuations :- In spite of so many advantages, the company is quoting at very attractive Valuations. The company is quoting at 11X its trailing FY13 Earnings which is very attractive for the Quality of this stock which has strong free cash flows and order book providing good revenue visibility.. “ Specialists in discovering Multibagger stocks “
  • 6. Industry Opportunity & Potential - An Overview “ Specialists in discovering Multibagger stocks “
  • 7. Global Water Market overview • As per global water resource estimates the demand for water is growing at 2%. • In 2011, the global commercial water market is estimated to be around USD360 Bn. • The market has been growing at the rate of 5% and this is expected to go up considering the demand supply environment. • By 2030 the demand supply gap for water would be about 40%, necessitating investment in water for augmenting the supply going forward. • The growing global economy, improving life style and demand for the scarce resource are compelling governments to invest more in providing water. “ Specialists in discovering Multibagger stocks “
  • 8. Global Water Market Demand • The global water market has huge demand, with about 783 million people globally have no access to clean drinking water and about 2.6 Bn having no access to sanitation. • There is manifold increase in fresh water demand across industries ranging from Agriculture, Manufacturing to Domestic uses which is likely to further strain the availability of scarce resource. • Not withstanding the global slowdown the global water market represents USD500 Bn growing at 7% well above the global growth rates across various sectors. • By 2020,the water industry could be worth USD one trillion marked by robust growth coming out of water treatment, water management, water infrastructure and supply segments. “ Specialists in discovering Multibagger stocks “
  • 9. Indian Water Market overview • The Indian market for water is estimated to be about USD 5.9Bn last year. • According to global water resource estimates, demand for water in India is estimated to be growing at 2.8% per annum. • By 2030, demand for water is expected to be 1498 Bn CU cubic meter while supply would account for about 744 Bn CU cubic meter which leads to a massive demand supply gap of about 50%. • Water being a prime necessity would require expenditure towards recycling of water and its reuse, sewage and sludge treatment and desalination. “ Specialists in discovering Multibagger stocks “
  • 10. Indian Water Resource Market • The Industrial sector accounts for about 50% of water treatment market and the rest is accounted by the municipal sector in India. • Water market in India is expected to grow by about 1012% per annum. The drinking water and industrial segments are expected to grow by 18% per annum. • The size of the Indian water market is expected to be around USD15 Bn over the foreseeable future. • A combination of scale and growth makes this market highly lucrative for water management project companies. “ Specialists in discovering Multibagger stocks “
  • 11. Huge Opportunity in the desalination space • VA Tech wabag has a strong presence in the desalination space and has won major orders in both the domestic and International market. • VA Tech wabag has won a 191 MLD desalination plant in Oman. Wabag along with Cadagua (Spain)and Gulfar (Oman) have been awarded EPC and O&M of the project and it is to be executed in 24 months. • VA Tech wabag has completed the Chennai desalination plant which takes care of the requirement of Chennai to the extent of 10-12% of its overall needs. • The desalination capacity at Chennai is expected to reach 5350 MLD in 2018 from the current 900 MLD growing at a CAGR of 30%. “ Specialists in discovering Multibagger stocks “
  • 12. Huge Government Spending provides Opportunity • According to a recent high powered expert committee, CAPEX expenditure on water supply for the next 20 years is estimated at Rs.3,20,908 Cr translating into an opportunity of about Rs.16,000 Cr per annum. • The operation and maintenance expenditure on water supply is pegged at Rs.5,46,095 Cr ( Rs.27,000 Cr per annum) based on various Research projections. • While implementing the projects is the key - it is believed that, if a suitable percentage of the cost of infrastructure development is recouped through collecting water charges , then many of these projects will remain viable and also Repair & Maintenance work would be taken care of. . “ Specialists in discovering Multibagger stocks “
  • 13. VA Tech Wabag – Business Overview “ Specialists in discovering Multibagger stocks “
  • 14. VA Tech Wabag – A Snapshot • VA Tech Wabag is a leading multi national player in the water treatment industry with strong operational performance and execution skills. • The company provides a range of EPC and O&M solutions for processing drinking water, treatment of sewage, effluents, sludge and also desalination plants. • VA Tech Wabag provides services to Institutional clients spanning across 3 continents. It also provides solutions to corporate in water treatment in infrastructure sectors such as Steel, Power Oil & Gas etc. • The company undertakes project orders under its two segments of EPC division and Operation & Maintenance division. • The company’s EPC division accounts for about 86% revenues while the operation and maintenance division accounts for the remaining 14% revenues. “ Specialists in discovering Multibagger stocks “
  • 15. Flexibility across variety of Contracts • In standalone EPC contracts - the company is responsible for design, engineering, procurement and construction of the plant. • In the Design, Build and Operate contracts(DBO) it is responsible for design and construction of the plant as well as O&M activities. • In BOOT the company is responsible for design and construction of the plant. The company operates the plant after the stipulated period in the contract and then transfers it back to the client. • The O&M contracts of the company fall in categories like DBO,BOOT and TOT. The company refurbishes the already operational plant and undertakes its O&M activities under TOT.(Transfer, Operate, Transfer Contracts) “ Specialists in discovering Multibagger stocks “
  • 16. Porters Five Forces Model Bargaining Power of Buyers (Moderate)  Few dominant buyers Threat of backward integration is low Switching cost are high Bargaining Power of Suppliers (Moderate) Lower number of projects Dilution in prequalification norms Industry Rivalry (High) Industry is fragmented Project cancellation prospects low Product differentiation is low Exit Barriers are high Threat of new entrants (Low) High capital requirement Technical expertise High prequalification norms Threat of substitute products (Low)  No substitutes available  Product differentiation is low “ Specialists in discovering Multibagger stocks “
  • 17. Key Technologies of VA Tech Wabag • An important highlight of its technical expertise is that - depending on the economical size of the project it can offer customized solutions without compromising on quality owing to a wide array of technological solution and patents which it possesses. • The expertise enables the company to bid for big ticket size projects floated by multilateral institutions which are often based on past experience of execution and financial strength. “ Specialists in discovering Multibagger stocks “
  • 18. Presence in high growth markets Major International Subsidiaries - China - Austria - Switzerland - Czech Republic - Turkey - Philippines - Romania - Saudi Arabia - Oman • The Company has operations in India, Austria, the Czech Republic, China, Switzerland, Algeria, Romania, Tunisia, UAE, Libya and Macau providing it a market presence in the Middle East, North Africa, Central and Eastern Europe, China, India and the South East Asia. • Its presence in various countries helps it to identify and evaluate projects in new jurisdictions effectively, establish client relations, understand local markets, culture and requirements, procure raw materials locally reducing currency risks and meet client expectations efficiently . • The company recruits labour in the local country which enables them to tap local talent who possess better domain knowledge. Its presence in the International market has helped the company to diversify its revenue base and insulate it from any slowdown in the domestic market. “ Specialists in discovering Multibagger stocks “
  • 19. Strategic Business Units • VA Tech Wabag strategic business units consist of 1) Municipal Business Group (MBG) & 2) Industrial Business Group(IBG). • MBG provides water and sewage waste water treatment solutions to municipalities and Government organizations. These contracts typically have longer durations of 5-7 years thus providing steady revenue streams for the company. • Apart from focussing on the municipal segments in India, VA TECH WABAG has also begun to increase its presence in the Industrial segment. The growth for IBG segment would be primarily from two sectors i.e. Power sector, Refinery and petrochemicals. “ Specialists in discovering Multibagger stocks “
  • 20. Domestic Vs Global Operations • VA Tech’s domestic business is generally skewed towards large big ticket contracts that are generally funded by multi-lateral institutions like the World Bank and the IMF. • VA Tech wabag has presence in Municipality, Industrials, Operation and maintainece and desalination. • In the International business the company focuses on projects which are small to medium ticket size and it has presence in some of the fastest growing water markets in the world. • The company plans to reduce its cost of its global operations by shifting from centralized high cost operation to decentralized low cost operation. “ Specialists in discovering Multibagger stocks “
  • 21. Corporate Structure • VA Tech has a strong corporate structure which allows to it have flexibility to operate in different markets and also to combine the strengths of the consolidated group as a whole. “ Specialists in discovering Multibagger stocks “
  • 22. VA Tech Wabag – Investment Rationale “ Specialists in discovering Multibagger stocks “
  • 23. Key Highlights Huge Opportunity Attractive Price VA Tech Wabag is currently trading at around 5X EV/ EBIDTA multiple which is pretty cheap for a Business which can grow at a healthy clip. Water Treatment is a big structural opportunity for the next several decades and VA Tech Wabag is one of the best poised companies which can capitalize on this Big opportunity. VA Tech Wabag Strong Moats Company’s Brand, Patents, Project track record, Management and Focus allows it to out beat competition in its space and bid aggressively without compromising on its Profitability. Good Management Clean Financials VA Tech Wabag is one of the few professionally managed Indian MNC company. Management has displayed Credibility as well as aggressive entrepreneurialism. Cash constitutes 30% of the company’s current Equity Value. It has an unleveraged balance sheet giving it space to grow aggressively. Margins also seems to be on an expansion mode. “ Specialists in discovering Multibagger stocks “
  • 24. Presence across the entire Value Chain written p IC’s gross • VA Tech Wabag offers a complete range of solutions in the water treatment space with presence in sewage water treatment, drinking water treatment, industrial water treatment, industrial waste water treatment, desalination and water recycling. • The company’s presence in all key major segments across the entire value chain with high technological competence is a moat to the company. • VA Tech’s project execution capabilities across Complex projects helps it bid for High Margin businesses. “ Specialists in discovering Multibagger stocks “
  • 25. Strong Order Book & Execution Track record • VA Tech Wabag has an order book of Rs.42.8 Bn which provides revenue visibility for the company over the next 2-3 years time frame. • The company has Framework orders of about Rs10.9 Bn which will help the company to grow its order book further. • The company expects order in take to be about Rs.26 to 27 Bn which will result in a healthy growth of about 20-25% YoY. “ Specialists in discovering Multibagger stocks “
  • 26. Order in take in FY13 • VA Tech Wabag recorded an order in take of Rs.2154.9 Cr excluding frame work contracts. This augurs well for the medium term prospects of the company. • The share of municipal order in take in FY13 was at Rs.906 Cr which constituted about 42%, while the share of municipal order in take in FY13 was Rs.1248.9 Cr which constituted about 58%. • The company’s EPC order in take continued to dominate the order in take with 83% constituting orders to the tune of Rs.1782 Cr while the remaining order in take was at 17% for O&M segment constituting about Rs.372.9 Cr. • The Company has frame work order to the tune of about Rs.333.9 Cr in FY13 which can help the company to add on its Order book going forward. • The Order Book is well spread and hence the Risk to a single segment is not present. “ Specialists in discovering Multibagger stocks “
  • 27. Innovative Technology reduces cost and induces Demand •Desalination refers to the processes that remove salt and other minerals from saline water. • The high cost of desalination had prevented adoption of this technology thus far. But with the introduction of reverse osmosis technology, the cost of desalination has come down dramatically resulting in the Technology being a viable cost alternative solution across the Globe. • The process of desalination is expected to double by 2025 due to its cost effectiveness and this will help in meeting the demand for safe water. • VA Tech Wabag is likely to benefit due to its technological strength in this area and also the successful execution of such Desalination projects. “ Specialists in discovering Multibagger stocks “
  • 28. International Order Book Trend Year Domestic Order Book International Order Book Total % Contribution from International Order Book FY09 1271 916 2187 41.88 FY10 1934 926 2860 32.38 FY11 2521 909 3430 26.50 FY12 2452 1279 3731 34.28 FY13 2880 1400 4280 32.71 • VA Tech Wabag’s International order book has been consistently around 30-40% of its total order book over the past five years. • The International order book was around Rs.916 Cr in FY09 and has grown to about Rs.1400 Cr in FY13 growing at a CAGR of about 11.19%. • The company has secured good amount of overseas orders and has bagged a maiden order from the Peoples Republic of China and this gives a good opening for future Orders. “ Specialists in discovering Multibagger stocks “
  • 29. Asset Light Business Model • Unlike its peers VA Tech Wabag, works on an asset light model wherein it outsources the entire civil and plant manufacturing works. • The focus of the company is on its core strength of design, technology and project management skills which negates the need to necessarily invest on long cycle of working capital requirements. • This outsourcing of non-technical areas helps the company to enhance its project execution skills apart from ensuring cost competiveness there by improving its operating margins. “ Specialists in discovering Multibagger stocks “
  • 30. Robust Patent & Process • VA Tech wabag has over 100 patents and three major research centers in Austria, Switzerland and India. Availability of a variety of Technologies helps the company to bid across a variety of projects across countries according to the needs of that particular project. • Important highlight of its technical expertise is that - depending on the economical size of the project ,it can offer customized solution without having to compromise on quality, owing to wide array of technical solutions and patents. The company is also consistently investing to boost its Innovating capability. “ Specialists in discovering Multibagger stocks “
  • 31. Lower Working Capital Requirement • VA Tech Wabag’s working capital days decreased from 140 days in FY12 to about 131 days in FY13. • The net working capital days for FY13 was at about 66 days excluding cash & equivalents. • VA Tech Wabag’s receivables and payables are well under control compared to last year. • Company derives around 40-45% of turnover during Q4 of every year due to the nature of the business where payments are realized only during the last quarter. Specialists in discovering Multibagger stocks “
  • 32. High Quality Professional Management Specialists in discovering Multibagger stocks “
  • 33. Clean Balance Sheet & Attractive Valuations • VA Tech wabag’s working capital is around 30% of its revenues, which is marginal when compared to other infrastructure companies which have about 50% of its revenues struck in the form of Working Capital. • The company is available at a EV/EBIDTA of about 4.6x which is very cheap considering the long term potential of the sector and the company. • The company has grown its revenues at a CAGR of about 16% during the past 7 years, backed by strong order book and excellent execution track record. • The company generates cash from Operations of Rs.100 Cr which points to the strong business model to throw cash and maintain an unleveraged balance sheet. • The company is debt free due to its asset light business model and outsourcing of its non core activities will help it to reduce cost and lower its working capital requirement. • The company has ROIC of 30%+ and is available at attractive valuations of 1.5x Price to Book. Specialists in discovering Multibagger stocks “
  • 34. Financials “ Specialists in discovering Multibagger stocks “
  • 35. Earnings Projection Particulars (Rs Cr) Net Revenue % Growth FY11 FY12 FY13 FY14E FY15E • VA Tech wabag’s revenues are 1,241.82 1,443.52 1,618.85 1877.87 2178.32 expected to grow by 16% in FY14 & FY15 driven by robust order 16.24 12.15 16.00 16.00 book and order book execution . 13.24 • VA Tech wabag has EBITDA margins of about 9%. We Total Income 1,291.09 1,433.64 1,622.42 1891.11 2191.56 conservatively estimate EBITDA margins of about 10% in FY14 Operating Expenditure 1,176.23 1,313.52 1,463.90 1690.08 1960.49 and FY15. Other Income 6.69 15.07 13.24 13.24 114.86 130.00 155.0 187.79 9.25 9.01 9.57 10.00 21.47 25.46 22 18.78 9.98 8.59 10.9 14.08 PBT 83.41 95.95 122.04 168.16 PAT 51.80 73.13 90.30 110.99 EPS 19.9 27.9 34.1 41.91 EBITDA EBITDA Margins(%) Interest Depreciation 217.83 • VA Tech wabag is likely to report PAT of Rs.110.99 Cr in FY14 and 10.00 127.35 Cr in FY15 with an EPS of Rs.41.91 and Rs.48.09 in FY14 21.78 and FY15 respectively. 16.34 • VA Tech wabag EPS is likely to 192.95 record a growth of about 23% and 15% in FY14 and FY15 127.35 respectively. 48.09 Specialists in discovering Multibagger stocks “
  • 36. Concerns & Reasoning 1.) VA Tech Wabag’s municipal clients contribute 66% of revenues : Order Book as of Mar 31, 2013 (INR 42.8 bn) and relies substantially on municipal clients for its revenues. Any delay, termination or cancellation could adversely affect its results of operations. Company relies heavily on government business (centre, state, municipal bodies, PSU’s) and entities funded by multilateral aid agencies. Many of the projects are government sponsored and are often subject to delay. Of the order book at both the consolidated and parent levels 59%, is attributable to municipal clients and 31% to industrial clients. This may also create a Working Capital problem for the company in the future. 2.) Client concentration Risk : At present, VA Tech wabag derives a substantial portion of its income from a limited number of large clients. Cancellations by any of these clients will have a significant impact on business. Events such as change in management, mergers and acquisitions, change in government in the local and international market and political scenario or lack of funding by the government may lead to order cancellations which exposes the business to risks. 3.) VA Tech Wabag is subject to liquidated damages under its EPC and O&M contracts : VA Tech Wabag provides performance guarantees to its customers, which require it to complete projects within a specified timeframe. Failure to complete a project as scheduled, or in case of a performance shortfall in the quality and quantity of water or waste water treated, it could be liable to pay penalties in the form of agreed liquidated damages, which usually average about 10% of the project cost. Further, any inability to complete these projects in a timely manner could adversely affect its reputation and hence its growth prospects. “ Specialists in discovering Multibagger stocks “
  • 37. Price Chart Jun Mar Dec Sep • VA Tech Wabag had been volatile during the past 2 years and had hit a high of Rs.722 before correcting strongly in line with its Peers. Share Holding % 2013 2013 2012 2012 Promoters 30.91 30.91 30.92 FII 29.43 30.82 30.37 30.93 • The Stock has exhibited volatility typical of any mid cap stock considering the low liquidity in the stock. 31.72 DII 20.60 20.45 20.76 Others 19.06 17.82 17.95 • The promoter holding is stable and the significant FII 17.94 holding can put additional pressure on the stock in case of a broad based FII pull out. 19.41 “ Specialists in discovering Multibagger stocks “
  • 38. Conclusion “ Specialists in discovering Multibagger stocks “
  • 39. Conclusion When one thinks of a professionally managed Indian MNC in the Midcap space, VA Tech Wabag would be one of the top names which comes to our mind. While the sector may currently be facing some strains, the structural demand for Water Treatment looks great supported by, several data points across the globe. VA Tech Wabag is not one of the regular contracting companies which is currently available cheap, it is a Market Leader in its own right. VA Tech Wabag’s combination of its In-House Technology prowess with contracting skills of a local Operator, helps the company to bid for Indian Water Treatment projects at a cost which is far lower than its peers who depend on Foreign Collaboration for technology. Company’s execution is also fast with its HandsOn approach, leading to better timelines and hence better margins, even on competitive bids helping the company create a strong Competitive advantage. The company is also using its Engineering ability in India to help it to bid for foreign location projects at a lower cost. The standardization helps it to be competitive and with subsidiaries across the Globe, the company is well positioned in most big Water Treatment markets. The company is current quoting at a substantial discount to its IPO valuations in spite of performing strongly over the past few years. The Business is available at a price lower than its Intrinsic value based on various valuation parameters. VA Tech Wabag’s consistent focus on Water Treatment projects has helped it to build a strong expertise in a Niche domain. Water Technology in itself is a Specialized business which uses Safe Technology, considering the fact that it affects Human lives. This along with its Unique asset light model makes the business, share holder friendly in terms of Returns on Capital. With the added advantage of the buying the business at a cheap cost, we believe that a Long Term Investor has a good probability of generating Multibagger returns from this Stock. “ Specialists in discovering Multibagger stocks “
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