VA TECH WABAG – AN INTERESTING INVESTMENT INTO WATER STOCKS

VA TECH WABAG

Sector                                    Waste water treatment

CMP                                       INR 407.70

Market Capitalization        INR 2,237.28 (in crores)

Business description

This multi-national company underwent a management buy-out in 2005 from the Austrian management and SIEMENS. VA TECH WABAG is a waste water management and recycling company that operates over 100 plants in India and abroad. This company has a reputation of being ‘globally-local’. A strong background owing to its international outlook and a domestic management with a keen understanding of the on-ground business, the company is marching forward. The company is one of the biggest companies in its class in the world.

Key projects executed by the company

• The largest drinking water plant in Oman – Al Ghubrah SWRO
• India’s largest seawater RO plant, Chennai – Nemmeli WTP
• Majis, Sohar International Port, Oman – Seawater Desalination employing Microfiltration based inline RO system
• Delhi Games Village – Water treatment plant based on membrane filtration
• Duqm, Oman – Sea water desalination plant employing microfiltration and reverse osmosis
• Asia’s largest wastewater treatment plant at the Jamnagar Refinery
• India’s first wastewater recycling plant for IOCL Panipat
• India’s largest lamella wastewater treatment plant for the Brihan Mumbai Municipal Corp. (BMC)
• The world’s largest tannery wastewater treatment plant for the Calcutta leather complex
• India’s first ultra-filtration plant for treated wastewater for the Vizag Steel Plant
• India’s first wastewater treatment plant based on a BOOT model for Alandur

Opportunity

• United Nations estimates global population to touch 9.3 billion by 2050. This is likely to increase strain on the global fresh water availability and the world is predicted to face a 40% deficit in water.
• Nearly 80% of the wastewater is released into environment without treatment. The untreated water discharged into the seas and oceans has led to creation of 2,45,000 km2 of de-oxygenated dead zones that has direct impact on fisheries, livelihoods and food chains.
• A research by Global Water Leaders Group suggests that inadequate access to water and sanitation inflicts unnecessary costs to the global economy to the tune of US$ 325 bn which is on top of the US$ 485 bn of annual direct costs of water and wastewater utility services.

Threats

Competition risk

Rising competition from other global organized players in the bidding process may compel the Company to lower prices to win contracts and maintain market share. This may lead to substantial margin pressure.

Mitigation: However, the company still remains one of the top 10 players in the world in this industry.

Economic risk

Changes in economic and relevant regulatory policies, lower GDP growth, scaling back of government initiatives and termination of government contracts with little or no prior notice, insufficiency of funds and the reluctance of government departments to make quick decisions may adversely impact opportunities from a specific country or region.

Mitigation: The company has a strict procedure of evaluating projects and credit-worthiness of the client, thus making sure that the client is able to finance the project till the end and not have to abandon mid-way due to any financial reasons. However, when governments and companies fail to even allocate a budget to this, business opportunities remain subdued.

Vendor risk

WABAG depends on vendors for the construction of its various projects and supply of key equipment. Therefore, it is exposed to uncertainty in the quality of their services, equipment and supply including timely delivery. This can cause operational delays and increased costs.

Forex risk

Volatile global currencies may impact WABAG’s profitability adversely.

Strengths

• Strong brand name and long-term experience
• Skilled and talented intellectual capital
• Extensive R&D capabilities and technological prowess
• Robust track record and references
• Global presence and synergies among various units
• Wide portfolio of offerings
• Asset-light and strong financials

Weakness

The earnings have plateaued over the last 5 years with no significant upside. However, the strong order book bestows confidence in the growth story of the stock. The faster the executions, the better.

Moat Analysis

• Pricing power                                Medium
• Financial Strength                        Medium
• Competition                                   Low – Domestic | Medium – Overseas
• Special support                              Impetus from govt. projects like Namami Ganga
• Entry barrier                                  Low from an asset & capital perspective
• Intellectual property                    High moat backed by > 100 patents
• Nature of clientele’                       Strong clientele’ with high ratio of repeat orders

Overall Moat

Financials (Key Green indicates positivity,  Yellow indicates neutrality & red indicates discomfort/breach of our filters)

PEG ratio                                                                                              2.27

Book Value                                                                                           INR 208.44

Return on Invested Capital                                                               25.92% 

Cash Return on Invested Capital                                                     26.69 %

Return on Equity (7 years)                                                                11.79%

Intrinsic value (Assuming 6.8% discount rate)                             INR 693.15

Margin of Safety                                                                                   55.83%

Valuation

Fair Value by DCF calculation                                                             INR 451

Calculation by PE multiple          (Assuming 22x FY19E)               INR 616

The stock is almost fairly valued currently. We see upside in the medium & long term due to its niche domain, management efficacy, multi-national presence & tremendous opportunity going ahead. This can definitely be an investment for the future.

Disclaimer: All data has been presented as on 26th & 27th June,2018. The above document must not be construed as a research report, advice or recommendation to buy/sell the stock. These are simply our views on the same and we request you to consult us or your financial expert before taking a decision.