India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
GameChanger
FORUM TAKEAWAYS
Takeaways from KIE’s water forum: Deluge of Opportunity. GameChanger
Forum’s second conference (after the successful first on agri in October) put the
spotlight on a nascent but critical component of infrastructure in India--the water
sector. The forum featured companies from desalination to domestic supply and from
EPC to BOT projects, giving investors a wide perspective on the upcoming sector. The
forum provided investors rich insights into the nitty-gritty of the challenges faced and
the strategies employed by companies in converting the deluge of opportunity into cash
flows and profitability.
Keynote Speaker: Dr Leena Srivastava, ED, TERI
Dr Srivastava listed the key constrains in the state of India’s water resources as (1) increasing
demand, (2) overuse of groundwater, (3) declining access and (4) deteriorating quality. She also
noted the adverse health effects of polluted water – including disease and microbial resistance.
On this note, she mentioned that only 13.5% of sewage is actually treated in India. Her talk
focused on the increased need for PPPs in the water sector even as she emphasized the need to
differentiate between ‘privatization’ and ‘private participation’, the latter being far more palatable
idea. She outlined a bunch of opportunities in the sector, including water supply in cities,
wastewater treatment, rejuvenation of wetlands, desalination and irrigation.
Takeaways from our panel discussion: Befesa, SPML Infra, VA Tech Wabag
The panel discussed a range of issues (1) credit risk for municipal bodies, (2) the challenges in
collecting payments from consumers, (3) the institutional framework of model contracts and their
enforceability. The panelists were clear that while, prima facie, the credit of the urban local bodies
appears weak, there are mechanisms (guarantees, escrows) to work around the same, but this
does remain a challenge. SPML, with its experience in collection, (while responding a Q&A on
pricing) mentioned that they charge Rs150-200 per household per month in Latur for water
supply, and they are seeing healthy collection from retail consumers. All panelists, however,
bemoaned the lack of model contracts and enforceability of many of their contracts. They were all
excited about the opportunity provided by the nascent sector, which they see as the next big
infrastructure play in India.
TAKEAWAYS FROM KEYNOTE SPEAKER
Dr Leena Srivastava, TERI
In a packed session, Dr Srivastava focused on the main issues plaguing access to water in
India in view of an exponential growth in demand. The session stimulated a great deal of
interest and discussion in the audience, more than the schedule had planned for. She
highlighted the need to address the problems of quality, quantity and inequality of access.
Dr Srivastava listed the key constrains in the state of India’s water resources as (1) increasing
demand, (2) overuse of groundwater, (3) declining access and (4) deteriorating quality. In
elaborating, she highlighted the problems of inequitable access, unsustainable and
inefficient use and irrational tariffs that do not represent actual O&M or the totality of water
cost (which should include social and environmental costs). She also noted the adverse
health effects of polluted water – including disease and microbial resistance. On this note,
she mentioned that only 13.5% of sewage is actually treated in India. On the subject of zero
discharge of treated water for industry – a norm in many other countries, Dr Srivastava said
that many companies were working towards this despite the absence of regulation or
compulsion.
PPPs in the water sector. Private sector investment in water and sewage in is just 0.3%
of the total. The challenges in making PPPs attractive for investors are many, primarily, the
absence of a transparent, well articulated regulatory and policy framework. Execution by
state governments has been weak in the past on account of political or other factors of
volatility.
Opportunities. Dr Srivastava outlined a bunch of opportunities in the sector, illustrating
her point with examples in India and Europe. Key segments—water supply in cities,
wastewater treatment, rejuvenation of wetlands, conservation, desalination and irrigation.
Sensitivities. (1) Privatization: Dr Srivastava emphasized the differentiation between
‘privatization’ and ‘private participation’, the latter being far more palatable.
(2) Tariffs: Dr Srivastava underscored the high hidden cost paid by consumer without direct
access to water. She also quoted examples and studies that indicating that ‘full pipes’
actually decreased water consumption. In the final count, she said that the cost of 24X7
water would actually be lower than many are already paying. -------------
Dr Leena Srivastava is Executive Director,TERI and Senior Vice President of TERI-NA
(The Energy and Resources Institute, North America), Washington, DC, USA.
She held additional charge as Dean, Faculty of Policy and Planning, TERI University
from June 2000 – June 2008. From November 1992 to January 1994, she was the
Vice-President, TERI-NA. She has a number of publications to her credit and is on
the editorial boards of several international journals dealing with issues related to
energy and the environment.
She was a Co-ordinating Lead Author for Working Group III of the Third Assessment
Report of IPCC and an anchor for Sustainable Development for AR4. Currently, she
is a member of the Advisory Group on Energy and Climate of the UN Secretary
General; an Independent Director on Reliance Infrastructure Ltd. - the largest private
sector utility in India; Member, International Public Policy Advisory Board (IPPAB),
The Coca Cola Company; Member of the Foresight Advisory Council of Suez
Environment and various other Boards. She was also Member of the Expert
Committee to formulate Energy Policy, Planning Commission, Government of India
and Member, National Security Advisory Board, Government of India. She also
serves on the research advisory councils of various academic institutions.
-------------
TAKEAWAYS FROM CORPORATE PARTICIPANTS
Befesa (Unlisted)
Befesa, a Spanish company, specializes in the management of water supply and integrated
management of industrial wastes. Abengoa, the parent company of Befesa, is a technology
company with innovative solutions for sustainability in the infrastructure, environmental and
energy sectors. Befesa had a turnover of Euro722 mn with an EBITDA of Euro119 mn for the
year ending 2009.
Befesa has set up a 100 mld (million liters per day) desalination plant in Chennai along with
a local Indian partner, IVRCL. The company claims that the Chennai plant has the lowest
energy consumption plant in the world with energy consumption of 2.5 units of power as
compared to global average of 3.5 units of power per kilo-liter of water. With power being
a major cost in desalination, such technologies give Befesa a significant edge over its
competitors. The Chennai desalination plant was delayed by about nine months due to a
couple of cyclones hitting the coast, effectively stopping and delaying the work.
The capital cost of setting up a 1mld desal plant, according to the company, is Euro1 mn.
The total cost of water per kilo-liter comes to Rs50, which is around the rate that they have
contracted with the Municipality of Chennai. Befesa intends to focus on BOT projects in
India, and not on EPC projects. All their projects are expected to feature a local partner,
especially for civil construction. The company is clear that it will not get into the supply of
water as the management believes collection will be big issue in India as it will be very
difficult to bring non-revenue water (NRW) below 10% (from the current levels of more
than 30%).
Pratibha Industries (NC)
Pratibha Industries is a well established infrastructure company with backward integration
into the manufacturing of saw pipes. The company’s core expertise lies in water supply and
environmental engineering, urban infrastructure, buildings and road related projects. It has
an order book of nearly Rs40 bn with water segment forming nearly 60-65% and urban
infra contributing the remaining 35-40%. The company is lowest bidder in projects worth
Rs5.5 bn and expects order inflow to increase in the coming quarters. It also has three BOT
projects in its portfolio – two in roads while one in multilevel car parking. The company had
also raised funds worth Rs1.5 bn through QIP and compulsorily convertible participatory
preference share. These funds are likely to be utilized for the repayment of debt. TAKEAWAYS FROM CORPORATE PARTICIPANTS
Befesa (Unlisted)
Befesa, a Spanish company, specializes in the management of water supply and integrated
management of industrial wastes. Abengoa, the parent company of Befesa, is a technology
company with innovative solutions for sustainability in the infrastructure, environmental and
energy sectors. Befesa had a turnover of Euro722 mn with an EBITDA of Euro119 mn for the
year ending 2009.
Befesa has set up a 100 mld (million liters per day) desalination plant in Chennai along with
a local Indian partner, IVRCL. The company claims that the Chennai plant has the lowest
energy consumption plant in the world with energy consumption of 2.5 units of power as
compared to global average of 3.5 units of power per kilo-liter of water. With power being
a major cost in desalination, such technologies give Befesa a significant edge over its
competitors. The Chennai desalination plant was delayed by about nine months due to a
couple of cyclones hitting the coast, effectively stopping and delaying the work.
The capital cost of setting up a 1mld desal plant, according to the company, is Euro1 mn.
The total cost of water per kilo-liter comes to Rs50, which is around the rate that they have
contracted with the Municipality of Chennai. Befesa intends to focus on BOT projects in
India, and not on EPC projects. All their projects are expected to feature a local partner,
especially for civil construction. The company is clear that it will not get into the supply of
water as the management believes collection will be big issue in India as it will be very
difficult to bring non-revenue water (NRW) below 10% (from the current levels of more
than 30%).
Pratibha Industries (NC)
Pratibha Industries is a well established infrastructure company with backward integration
into the manufacturing of saw pipes. The company’s core expertise lies in water supply and
environmental engineering, urban infrastructure, buildings and road related projects. It has
an order book of nearly Rs40 bn with water segment forming nearly 60-65% and urban
infra contributing the remaining 35-40%. The company is lowest bidder in projects worth
Rs5.5 bn and expects order inflow to increase in the coming quarters. It also has three BOT
projects in its portfolio – two in roads while one in multilevel car parking. The company had
also raised funds worth Rs1.5 bn through QIP and compulsorily convertible participatory
preference share. These funds are likely to be utilized for the repayment of debt.
SPML Infra (NC)
SPML has grown over the last 32 years from being a player in the pumps business to a player
operating the complete cycle of water procurement, transportation and management. At
present, SPML Infra has a portfolio of two water projects and four waste management
projects. Apart from water and waste management, the company is also involved in sewer
pipeline rehabilitation, roads and power. The company has backlog of Rs37 bn comprising
of 65% in water, 25-30% in power (covering T&D and BOP) and rest in infrastructure. SPML
shareholders include CVC (15%) and Reliance Capital (9%) showcasing PE interest.
The water projects are operating out of Bhiwandi (Rs6.5 bn) and Latur (Rs520 mn). In
Bhiwandi, the company is supplying water at a total cost of supply of around Rs25 per kiloliter including water procurement and O&M expense. The deal is funded by SBI (70%). Latur
is a relatively smaller project where the company is essentially managing the water network
and collecting water charges directly from the end user (taking on collection risk). The waste
management projects are in Allahabad, Delhi, Madurai and Mumbai. The Delhi project is the
biggest, treating about 1,500 tons of waste. Roads represent a 11% stake in a multi-party
project in MP and a 51% stake in a road project in Rajasthan. BOP project is happening in
Ramgarh for setting up a 160 MW power plant.
Tata Chemicals (REDUCE, TP: Rs370)
Tata Swach is a portable water purifier which requires no electricity or running water to
operate. It was launched by Tata Chemicals (TCL) in December 2009. Swach has redefined
the water purifying business in India and the company claims to have only scratched the
surface of the huge potential this business presents. Swach is targeted at households where
there is no penetration of either filters or purifiers or households relying on boiling water.
According to TCL, of 207 mn households in India, 183 mn do not use filtering systems or
boil water.
Maharashtra, Karnataka based on (1) its superior product features versus peers and (2) its
low price point. Swach is set to clock sales of 1 mn units in FY2011E, ahead of company
expectations. TCL plans to drive future volumes through (1) expansion across the country (12
states covered now) (2) expansion into rural areas (urban India accounts for majority of sales)
(3) sales of Rs499/749 models launched recently (most of current sales are the Rs999 variant)
(4) tapping distribution channels of NGO’s Tata Kisan centers. However, the business is still
some time away from breaking even.
Besides Swach’s low price point, the company claims it has superior product features versus
peers. Swach has (1) higher storage capacity of upto 18 liters for Rs999 variant and 15 liters
of Rs749 variant (2) longer life of bulb used to filter water (3) In addition, the cost of
purifying 1 liter of water using Swach is Rs0.1 versus Rs0.22-0.25 using other purifiers such
as Pureit, Aquasure. The replaceable bulb lasts for 3,000 liters, much higher than immediate
peers, and the purifier has a lock feature ensuring that only genuine Swach bulbs are used
as replacements.
Triveni Engineering (NC)
The company has recently formed a JV with GE for the exclusive global supply of all steam
turbines in the 30 to 100 MW. The turbine business would be demerged with listing
expected in Q4FY11. Company will ramp up existing capacity of 60 MW to 100 MW in the
next two years. Triveni believes its technology to be better than GE and is only using GE for
branding. The company is also in the High Speed Gears business domestically and intends to
start global operations for low speed gears though another JV within a year. Its water
revenues were Rs1.6 bn in FY2010 with an order backlog of Rs5.2 bn with an average
execution cycle of 24 months. The company is focusing more on the industrial than the
consumer side of the business where margins are higher. The overall revenue mix in
industrial, municipal and product based segment is 40:40:20. In the sugar segment, Triveni
is not investing any capex and the company could divest the business in case it gets a good
price.
Triveni’s steam turbine business has a negative working capital and Rs500-600 mn debt. The
company believes that incremental capex is less due to productivity gains in the business.
Global market for 30-100 MW turbines is about US$2-2.5 bn with Siemens being the
biggest player. Triveni is confident of getting 25% share of the market easily (it believes that
its costing is at a 30% discount to Siemens). Triveni will not want to enter the boiler
business (and hence on EPC plans) since boiler operation involves onsite deployment and a
higher associated capex and competition is more there. The company also intends to get
into compression pumps for the oil and gas sector but says it doesn’t need a JV for the
same.
Unity Infra (NC)
Unity Infraprojects is one of the leading players in the infrastructure segment with its key
expertise in civil, urban infrastructure and water related projects. The company’s current
order book stands at Rs36 bn diversified across water and irrigation (50%), civil and urban
(43%) and the remaining from the transportation segment. It is also the lowest bidder in Rs5
bn worth of projects in the buildings segment. Going forward, the company expects to bag
significant order inflows from water meter projects, pumping stations as well as micro
tunneling. The company also expects to maintain operating margins in the range of 13-14%
due to its focus towards higher margin water and irrigation segment. As far as real estate
diversification is concerned, the company has invested nearly Rs1.9 bn in the real estate
division in the form of loans and advances to its real estate subsidiary for buying land parcels
in Bangalore and Kolkata. It plans to launch a residential project in Bangalore during
Q4FY11 and in Kolkata by end of Q1FY12. The key risks going forward could be lower than
expected order inflows as well as execution delays.
VA Tech Wabag (NC)
VA Tech is an India-based multinational player in water treatment. It provides a range of EPC
and O&M solutions for sewage treatment, processed and drinking water treatment,
effluents treatment, sludge treatment, desalination and re-use for institutional clients like
municipal corporations and companies in the infrastructure segment such as power, steel
and oil and gas. It has R&D centers located in Chennai and at Vienna and Winterthur in
Austria and Switzerland, respectively. The company owns 157 patents in the field of water
treatment.
The municipal and industrial water market is forecasted to grow at a CAGR of 5% till 2016.
The faster growing markets like Saudi Arabia, Romania and Algeria are expected to grow at
higher rates of 10-16%. VA Tech is present in the 12 of the top 15 fastest growing markets.
The company has employed an asset light model where only the high value added work is
done in house and the civil construction is outsourced to dedicated contractors.
Consequently the return on average capital employed is highest in the business (42% in
FY2010). Revenues of the company are likely to grow at a CAGR of 24% over FY2010-13E.
The order book of the company is Rs30 bn. The Chennai water desalination project was
bagged on an L1 basis where VA Tech had bid Rs10 bn (including O&M) whereas the
second highest bidder was at Rs12 bn. The company is confident of allaying concerns
regarding executing the project profitably.
No comments:
Post a Comment