va tech ipo note
Transcript of va tech ipo note
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eptem er ,
VA TECH WABAG LIMITE
IPO NOT
VA Tech Wabag Limited (Wabag) was incorporated in 1995 as Balc
Durr Cooling Towers Limited. The Company has a global presence in t
water treatment industry with presence in emerging countries like Ind
the Middle East and China among others. It manages its busine
operations through its headquarter in Chennai, India and principal offic
in various emerging countries. The Company offers complete life cyc
solutions including conceptualisation, design, engineering, procureme
supply, installation, construction and O&M services. As of July 31, 201
the Company had 1,469 employees. Meanwhile, the Company h
executed 113 projects and is currently executing 81 projects.
We see Wabags issue as a good investment opportunity as:
Wabags strong order book of Rs. 27.8 bn as of June 30, 201
which is 2.3x times of FY10 total income, would provide a stro
revenue outlook in short- to medium-term.
Wabags focused approach on technology helps it to gain on ne
clients and benefit it in terms of returns on investments.
The Companys global presence allows it to identify and evalua
projects in new jurisdictions effectively, establish client relation
understand local markets, culture and requirements, procure ra
materials locally, reduce currency risks and meet clie
expectations efficiently.
The Companys brand recognition and technical competenciwould allow it obtain new clients and repeat orders from existi
clients.
Valuation and Recommendation
We recommend the investors to subscribe to the issue on the basis
the following:
We value Wabags stock at Rs. 1,419, by using the DCF metho
(WACC of 15.4% and terminal growth of 5%), which offers
upside potential of 15% over the lower end of the price band a
8% over the upper end of the price band.
VA Tech Wabag Limited SubscribIPO NOTE
IPO Details
Face Value Rs. 5
Price Band (Rs.) Rs. 1,230 - 1,310
Issue Opens 22-Sep-10
Issue Closes 27-Sep-10
BRLM
Registrar to issue
Issue Size upto Rs. 4.7 bn
Pre issue shareholding pattern
Shareholders % Stake
Promoter and Promoter Group 34.3%
Non-Promoter Group 65.7%
Post issue shareholding pattern
Shareholders Lower End Upper End
Promoter and Promoter Group 31.0% 31.2%
Non-Promoter Group 69.0% 68.8%
Allocation (in mn; not less than) Lower End Upper End
QIBs 1.83 1.80
Non-Institutional 0.55 0.54
Retail 1.28 1.26
IPO Details Lower End Upper End
Price Band Rs. 1,230 Rs. 1,310
Equity Shares prior to issue (mn) 9.5 9.5
Fresh Issue of shares (mn) 1.0 1.0
Total Equity Shares (mn) 10.6 10.5
Share Capital (mn) Rs. 52.8 Rs. 52.5
Implied market cap (mn) Rs. 12,985.2 Rs. 13,748.5
Debt (mn) (31/03/10) Rs. 391.2 Rs. 391.2
Cash (mn) (31/03/10) Rs. 2,185.1 Rs. 2,185.1
Implied EV (mn) Rs. 11,191.3 Rs. 11,954.6
Enam Securities Pvt. Ltd.,
IDFC Capital Ltd.
Karvy Computershare Pvt.
Ltd.
Year to March FY09 FY10 FY11E FY12E FY13E CAGR
(Figures in Rs. mn, except per share data) (FY10-13
Total Income 11,550 12,338 14,800 17,461 20,420 18.
EBITDA 817 1,213 1,529 1,891 2,314 24.
Adj. Net Profit 422 494 683 866 1,083 29.
Margins (%)
EBITDA 7.1% 9.8% 10.3% 10.8% 11.3%
NPM 3.7% 4.0% 4.6% 5.0% 5.3%
Per Share Data (Rs.)
Adjusted EPS 44.4 52.3 68.1 82.3 102.9 25.
PER (x) @ Rs. 1,230 27.7x 23.5x 18.1x 14.9x 12.0x
PER (x) @ Rs. 1,310 29.5x 25.0x 19.2x 15.9x 12.7x
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eptem er ,
VA TECH WABAG LIMITE
IPO NOT
We expect the Company to enjoy better margins over the average of its peer set (IVRCL Infrastructures & Projects Ltd
Nagarjuna Construction Co. Ltd. and Consolidated Construction Consortium Ltd.) with an EBITDA margin and a n
margin of 10.3% and 4.6%, respectively, as compared to an EBITDA and a net profit margin of 9.6% and 4.2%
respectively, of its peer set for FY11E. This is primarily attributable to its focused approach on technology and diversifie
international presence.
Though the Companys forward P/E of 18.1x at the lower end of the price band and 19.2x at the upper band for FY11
looks slightly expensive, as compared to the peers average P/E of 15.3x for FY11E, investment in Wabag provides
international exposure and allows an investor to be more focused on the Water industry, which is a niche market in mo
of the emerging countries, unlike its peer set listed on the Indian stock exchange. Thus, we suggest to invest in th
Company.
Peer Analysis - FY11E EBITDA Margin Net Profit Margin P/E EV/EBITDA ROE
Consolidated Construction Consortium Ltd 9.1% 4.6% 13.5x 7.7x 18.0%
IVRCL Infrastructures & Projects Limited 9.7% 3.9% 16.2x 6.6x 12.4%
Nagarjuna Construction Co. Ltd 10.2% 4.3% 16.4x 11.6x 10.6%
Average 9.6% 4.2% 15.3x 8.6x 13.7%
VA Tech Wabag Limited 10.3% 4.6% 18.1x 7.3x 14.7%
Source: Reuters and Indiabulls research
DCF Model (in Rs. Mn)
Middle
Period
Termin
Perio
Period 2011 2012 2013 2014 2015 2016 2017 2018 2019 2024
Turnover 14,800 17,461 20,420 23,678 27,222 31,296 35,981 41,367 47,573 100,4
Operating profit (EBIT) 1,325 1,651 2,033 2,475 2,982 3,585 4,301 5,152 5,233 10,0Add back Depreciation 204 241 281 326 375 431 496 570 618 1,2
EBITDA 1,529 1,891 2,314 2,802 3,357 4,016 4,797 5,722 5,851 11,3
Taxes (290) (368) (461) (570) (697) (848) (1,029) (1,245) (1,256) (3,0
Working Capital (2,220) (1,746) (1,021) (947) (817) (939) (1,079) (1,241) (1,427) (2,0
Less Capex (220) (260) (304) (353) (353) (353) (353) (353) (742) (1,2Free Cash flow for the
Firm (FCFF) (1,201) (483) 528 931 1,491 1,876 2,336 2,883 2,426 5,0
Explicit Forecasts
DCF Assumptions
Beta 1.0
WACC 15.4%Risk Free Rate 7.5%
Market Return 17.0%
Terminal Growth Rate 5.0%
Terminal Margin 10.0%
EV (as per DCF) Rs. 13,145
Value per Share Rs. 1,419
14.4 14.9 15.4 15.9 16
4.0 1,547 1,443 1,350 1,267 1,194.5 1,591 1,481 1,383 1,295 1,21
5.0 1,639 1,523 1,419 1,326 1,24
5.5 1,694 1,569 1,459 1,360 1,27
6.0 1,754 1,621 1,503 1,398 1,30Terminalgrowth
(in%)
WACC (in %)
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eptem er ,
VA TECH WABAG LIMITE
IPO NOT
IPO
Issue details
Wabag is entering in the capital markets with an initial public offering (IPO) of up to 3.7 mn equity shares of Rs. 5 each at
price band of Rs. 1,2301,310 to raise up to Rs. 4.7 bn. The issues consisting of a fresh issue of up to 1.0 mn equity share
aggregating up to Rs. 1.25 bn by the company and an offer for sale of equity shares aggregating up to Rs. 3.5 bn by Ind
Advantage Fund I, Dynamic India Fund I, Rainbow Fund Trust, GLG Emerging Markets Fund and Passport Ind
Investments (Mauritius) Limited. The Issue opens on September 22, 2010 and closes on September 27, 2010.
Issue objectives
Funding working capital requirements: The Company intends to use Rs. 645.1 mn to fund its future working capit
requirement.
Construction of a corporate office at Chennai: The Company has assigned Rs. 347.4 mn to construct a new offic
facility, to be named Wabag House, at Chennai measuring nearly 150,000 sq. ft.
Implementation of global IT systems: The Company has allotted Rs. 110.5 mn to develop and implement a global
system to facilitate the integration of the business process with its subsidiaries.
General corporate purposes: The balance of its net proceedings would utilise for general corporate purpose
including strategic initiatives, brand building exercises and strengthening of marketing capabilities.
Investment Rationale
More focused on technology
The Company is primary involves in providing complete life cycle solutions including conceptualisation, design, engineerin
procurement, supply, installation, construction and O&M services. The Company is more focused on its principal expertise
technology and sub-contracts the civil works. It concentrates on technology development and advancement through its R&
centres in Chennai, Vienna and Winterthur in India, Austria and Switzerland, respectively. Further, its two subsidiarie
Wabag Austria and Wabag Wassertechnik, own 157 patents which include both process and product patents. Wabag Austr
has also applied for 51 patents that are pending. Moreover, its strategy of outsourcing civil work also benefits in terms
returns on investments in each project as fixed assets costs are low. We believe that the Companys concentration on
core-competencies would help it to attract more clients and to take hold on the opportunities arises with the increase
government investments across the globe.
Wide presence
Wabags wide presence in the Middle East, North Africa, Central and Eastern Europe, China, India and the South East As
provides it an upper hand compare to its local peers as it provides international exposure and allows the Company to captu
the demand for Water and Waste Water treatment from emerging economies. Further, we believe that the Company
presence in various countries allows it to identify and evaluate projects in new jurisdictions effectively, establish clie
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eptem er ,
VA TECH WABAG LIMITE
IPO NOT
relations, understand local markets, culture and requirements, procure raw materials locally, reduce currency risks and me
client expectations efficiently.
Robust order book provides revenue visibility
Wabag has a strong order book of Rs. 27.8 bn as of June 30, 2010, which is mainly attributable to municipal clients. Th
municipal clients contribute 88% of the total order book, while remaining 12% by industrial client. The company has adde
new order of Rs. 13.6 bn in FY10, which reflects a growth of 100% yoy. We expect the Companys robust order book, whic
is 2.3x times of FY10 total income, would provide a strong outlook for its revenues in short- to medium-term.
Brand recognition
Wabag brand, established in 1924, allows Wabag to leverage its business. The Company has acquired the brand name wi
the acquisition of Wabag Austria in 2007. The brand provides the opportunity to penetrate new markets, pre-qualify for bidand expand its services in new business areas. In addition, the brand supports the Company to operate into competiti
markets and to attract and retain skilled employees. We believe the Companys brand recognition along with its technic
competencies would allow it obtain new clients and repeat orders from existing clients.
Risks and concerns
Dependence over government-sponsored projects
Wabag owes 88% of its order book to projects of the government-controlled entities in India as well as abroad. Thus, t
Company is susceptible to the risk of scaling back of Government policies, changes in governmental or external budgeta
allocation or insufficiency of funds, delay, termination or cancellation of projects. In case of any such happening, th
Companys business would be significantly and adversely impacted.
Relying over major clients can backfire
The Company currently derives significant portion of its income from a limited number of large clients. The five largest clien
of the Company accounted for 66% of revenue and 82% of its order book as of March 31, 2010. Thus, any loss of
significant clients or a significant decrease in the volume of work from these clients would adversely affect its futu
revenues.
Financial Analysis
Wabags total income grew at a CAGR of 40.7% over the period FY08-10. During FY10, the total income grew
6.8% yoy to Rs. 12.3 bn.
The cost of sales and services as percentage to total income declined 356 bps yoy to 68.6% in FY10. However, th
administrative expenses as percentage to total income increased 82 bps yoy to 8.0%. Lastly, the staff cost
percentage to total income remained almost flat on a yoy basis at 13.6%. Consequently, the EBITDA margi
improved 276 bps yoy to 9.8% in FY10.
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eptem er ,
VA TECH WABAG LIMITE
IPO NOT
Its net profit for FY10 increased 17.0% yoy to Rs. 493.9 mn, with its net margins improving from 3.4% in FY09
4.0% in FY10.
At the end of FY10, the company had a cash balance of Rs. 2.2 bn and a net worth of Rs. 4.0 bn.
Company Background
VA Tech Wabag Limited was incorporated in 1995 as Balcke Durr Cooling Towers Limited, subsidiary of Balcke-Du
Aktiengesellschaft, a German company held by Deutsche Babcock. The companys name was changed to Balcke Durr an
Wabag Technologies Limited with the starting of water treatment division in 1996. In 1999, the Austrian group VA Te
acquired the water business of Deutsche Babcock operating under the brand name of Wabag. In 2000, VA Tech ha
demerged its water and non-water division and named its water division as VA Tech Wabag Limited. The Company has
world-wide presence in the water treatment industry with market presence in India, the Middle East, North Africa, Central
Eastern Europe, China and South East Asia. It manages its business operations through its headquarter in Chennai in Ind
and principal offices in Austria, the Czech Republic, China, Switzerland, Algeria, Romania, Tunisia, UAE, Libya and Maca
Wabag offers complete life cycle solutions including conceptualisation, design, engineering, procurement, supply, installatio
construction and O&M services. These services are provided for sewage treatment, processed and drinking water treatmen
effluents treatment, sludge treatment, desalination and reuse for institutional clients like municipal corporations an
companies present in the infrastructure sector such as power, steel and oil & gas companies. As on July 31, 2010, th
Company has executed 113 projects and is currently executing 81 projects.
Income Statement 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Income
Income from operations 11,332.8 12,237.4 14,684.9 17,328.2 20,273.9 23,517.8 27,045.4 31,102.3 35,767.6 41,132.7
Other Income 216.7 100.2 115.2 132.5 145.8 160.3 176.4 194.0 213.4 234.8
Total Income 11,549.5 12,337.6 14,800.1 17,460.7 20,419.7 23,678.1 27,221.8 31,296.3 35,981.0 41,367.5
Cost of sales and services 8,333.2 8,463.2 10,078.4 11,802.9 13,701.0 15,768.9 17,992.8 20,529.4 23,422.5 26,722.1
Staff cost 1,555.4 1,674.4 2,008.6 2,369.7 2,771.3 3,213.5 3,694.4 4,247.4 4,883.2 5,614.2
General, selling and administrative e 843.9 987.0 1,184.0 1,396.8 1,633.6 1,894.2 2,177.7 2,503.7 2,878.5 3,309.4
EBITDA 817.0 1,213.0 1,529.1 1,891.3 2,313.9 2,801.5 3,356.9 4,015.9 4,796.9 5,721.8
Margin 7% 10% 10% 11% 11% 12% 12% 13% 13% 14%
Depreciation/ Amortisation 84.4 170.0 203.9 240.6 281.4 326.3 375.1 431.2 495.8 570.0
EBIT 732.6 1,043.0 1,325.2 1,650.7 2,032.5 2,475.3 2,981.8 3,584.6 4,301.1 5,151.8
Margin 6% 8% 9% 9% 10% 10% 11% 11% 12% 12%
Int & Finance Charges 353.7 299.0 358.7 423.2 494.9 573.8 659.7 758.5 872.0 1,002.5
Total Expenditure 11,170.6 11,593.6 13,833.6 16,233.1 18,882.0 21,776.7 24,899.7 28,470.1 32,551.9 37,218.2
Profit before tax 378.9 744.0 966.5 1,227.5 1,537.7 1,901.4 2,322.1 2,826.2 3,429.1 4,149.3
Margin 3% 6% 7% 7% 8% 8% 9% 9% 10% 10%
Total Tax 40.1 303.5 289.9 368.3 461.3 570.4 696.6 847.8 1,028.7 1,244.8
Profit after Tax 338.8 440.5 676.5 859.3 1,076.4 1,331.0 1,625.5 1,978.3 2,400.4 2,904.5
Share of profit/ (loss) from Associate10.6
6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9
Minority Interest 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Changes in accounting policies 2.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other material adjustments 70.7 46.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Adj Net Profit 422.2 493.9 683.4 866.2 1,083.3 1,337.9 1,632.4 1,985.2 2,407.3 2,911.4
Margin 4% 4% 5% 5% 5% 6% 6% 6% 7% 7%
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Indiabulls (H.O.), Plot No- 448-451, Udyog Vihar, Phase - V, Gurgaon - 122 001, Haryana. Ph: (0124) 3989555, 3989666 -6-
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eptem er ,
VA TECH WABAG LIMITE
IPO NOT
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