Va Tech Wabag (“Va Tech Wabag”, “Wabag” or the “Company”) provides turnkey solution in the following categories:
- Drinking water treatment
- Industrial waste water treatment
- Municipal waste water treatment
- Industrial and process water treatment
- Desalination (sea water and brackish water)
- Recycling (industrial and municipal waste water)
Va Tech Wabag divides its business into 4 strategic business units namely – Municipal Business Group, Industrial Water Group, Operations Business Group and Desalination Business Group.
- Municipal Business Group – Explained below
- Industrial Water Group – Offers water management solutions for steel, petrochemicals, fertilizers, oil and gas, and power industry.
- Operations Business Group – Operates and maintains more than 70 water and waste water treatment plants for the Company in India and has now ventured overseas.
- Desalination Business Group – Va Tech WABAG is one of the top 10 desalination companies globally according to Global Water Intelligence. WABAG has executed various desalination projects in countries worldwide.
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WHAT’S DRIVING THE STOCK
Leading Player in the Water Treatment Space
Wabag is a leading player in the water treatment space with a presence in more than 30 countries including India, Middle East, North Africa, Central & Eastern Europe, China and South East Asia with access to over 100 patents.
With growing concern on access to clean water and urgent measures to solve the issue of depleting water resources, investment in water treatment is likely to increase manifold globally. Va Tech Wabag is expected to benefit significantly by leveraging its strong domestic presence and rising global footprint. The Company’s order book is growing at a CAGR of 15.20% (FY 2011 to FY 2016). For FY 2016, we expect the order book to grow at ~60%. Order book consists of 62 % of municipal contracts and 38 % of industrial contracts. Domestic market contributes 52% of order book.
Significant Opportunity in Water Treatment Space
India faces acute water crisis and has sub-optimal water infrastructure in place. As against the requirement of 140 litres per capita per day, urban India receives only 105 litres of water (as per company’s annual report). Rural India fares even worse. One in four rural families across India draws water from untreated taps and uncovered wells.
Present wastewater infrastructure can treat only 30% of the household waste. Increasing population, economic development and urbanization also led to higher demand for fast depleting fresh water. With growing concern on access to clean water and urgent measures to solve the issue of depleting water resources, investment in water treatment is likely to increase substantially. Wabag will benefit significantly by leveraging its strong domestic presence and rising global footprint.
Asset Light Business Model
Wabag has adopted an asset-light business model wherein it provides engineering, design, technology (it owns more than 100 patents), O&M services to water and waste water treatment projects. But, the Company has stayed away from constructing water projects which require high capital and instead outsourced it. This has helped Va Tech Wabag to operate with negligible debt (0.08:1).
Boost from Indian Government’s Initiatives
The Municipal Business Group continues to be at the forefront, both in terms of order book and sales turnover. Wabag’s order book consists of 62 % of municipal contracts, more than 25% of the revenue is derived from domestic government contracts.
As for the Indian municipal market, Wabag is well poised to benefit from three major schemes – (i) Ganga Rejuvenation Plan (ii) Swachh Bharat Mission and (iii) 100 Smart Cities Project. This also envisages good business opportunities for sewage treatment plants and water treatment plants.
Delhi Jal Board Drafts Rs. 19,500 Cr. Sewage Master Plan
The Delhi government has drafted Rs.19, 500 Cr. master plan which aims to fix the failing wastewater management system and reduce pollution in Yamuna. The blueprint proposes a 10,000-km pipe network, 75 Waste Water Treatment Plants and integration of various ongoing sewerage projects.
The first phase of this involves construction of 15 new sewage treatment plants (STPs) and upgrading and rehabilitating existing sewerage lines.
Yamuna Revitalization project – Rs. 3659 Cr. for first 2 yrs
Construction of 15 new sewage treatment plants (STPs) and laying 130 km of trunk sewer lines
Rs. 1,666 Cr.
Interceptor sewage projects and allied projects
Rs. 1,390 Cr.
Repairing existing sewer line and STPs
Rs. 603 Cr.
WHAT’S DRAGGING THE STOCK
Highly Fragmented and Competitive Space
Water and waste water treatment industry is a highly fragmented industry. In water treatment, Wabag is the single listed player with pure focus in water treatment space. There are other large players like L&T and Thermax which have some focus in this segment. Small cap companies like Pratibha Industries and Ion Exchange also offer water treatment solutions.
The Company faces competition from Degremont India – a subsidiary of Suez Environment, L&T, Thermax, Pratibha Industries, ION Exchange, Hindustan Dorr Oliver, Voltas, Siemens Water, etc.
In FY 2015, Toshiba Corporation acquired 54 % stake in UEM India Private Limited (UEM), a highly respected player in the water treatment business with vast experience in delivering complex, turnkey projects around the world.
Risks Related to Execution of Projects
Wabag water treatmnet projects have long execution timelines. To successfully execute the project, the Company has to rely on multiple equipment and services providers and construction contractors across sites spread over a wide geographic area. Ensuring timely delivery of such services and equipment at the right cost, managing materials at remote sites, while simultaneously ensuring that all compliances are met can pose potential challenges.
Any delay in the commissioning of projects is a concern for the Company as it leads to delay in inflow of revenues. At the same time, company has to incur costs on the delayed projects, thus affecting margins and overall profitability which could have a negative impact on the share price.
About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities