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VA Tech Wabag (VATW) offers solutions for treatment of sewage,
process/drinking water, effluents and sludge as well as desalination and recycling
of water for both municipal and industrial use. The company was listed in Oct’ 10
and has underperformed by ~10% since listing.
Indian water sector a large opportunity, but there have been underspends:
10th Plan expenditure on water sanitation was ~$12B (6.5% of total infra),
followed by $29B target in the 11th Plan which has been revised down to $23B
(5% of total infra). According to L&T there will be ~35-40% underspending in
11th Plan. ~60% of spending is State driven; and an impending crisis would
give a push for activity to pick up. While desalination might take time to
penetrate given that water in India is practically free, effluent/sewage treatment
are more mature sectors. Key players estimate a market size of $27-30B in the
12th Plan. But the market is fragmented and there are several competitors
including domestic (L&T, IVRCL, ION exchange, Driplex, Ramky Group) as
well as international (Suez, Veolia).
Expecting a pickup in orders in 2H: VATW’s Jun-11 OB of Rs33B has a
72:28 mix between municipal and industrial and a 73:27 mix between domestic
and overseas. While the company is very optimistic on the domestic business,
albeit with a slowdown in the power sector orders, the international order
inflows particularly in the MENA region are expected to be subdued. VATW
has guided to Rs22B of orders in FY12 (up 22% yoy) but only Rs2.2B orders
being booked YTD. Management is expecting orders from domestic
municipalities and the Southeast Asian region to pickup in 2H. YTD L&T too
has not won any orders in the water sector, expecting some tenders to be bid out
in 2H. While L&T is optimistic about the size of the opportunity, it thinks the
pace of order flows has been relatively slow.
Visit to the Chennai desalination plant indicates its largest project is well
underway: VATW won the Rs5.3B EPC order in Dec ‘09 and the plant is
expected to be commissioned on time in Jun ‘12. Most of the equipment was on
site with 56% of the EPC work and 75-80% of the civil construction complete.
VATW also has an Rs5B O&M contract spanning 7 years.
Valuation: VATW is currently trading at 13x/10x FY12/13 consensus earnings
as compared to IVRCL at 12x/8x and international peers Veolia at 8.5x and
Suez at 12.5x/10.7x.
NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A
RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION,
OBTAINED BY THE ANALYST DURING MEETINGS WITH MANAGEMENT. J.P. MORGAN
DOES NOT COVER THIS COMPANY AND HAS NO RATING ON THE STOCK.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
VA Tech Wabag (VATW) offers solutions for treatment of sewage,
process/drinking water, effluents and sludge as well as desalination and recycling
of water for both municipal and industrial use. The company was listed in Oct’ 10
and has underperformed by ~10% since listing.
Indian water sector a large opportunity, but there have been underspends:
10th Plan expenditure on water sanitation was ~$12B (6.5% of total infra),
followed by $29B target in the 11th Plan which has been revised down to $23B
(5% of total infra). According to L&T there will be ~35-40% underspending in
11th Plan. ~60% of spending is State driven; and an impending crisis would
give a push for activity to pick up. While desalination might take time to
penetrate given that water in India is practically free, effluent/sewage treatment
are more mature sectors. Key players estimate a market size of $27-30B in the
12th Plan. But the market is fragmented and there are several competitors
including domestic (L&T, IVRCL, ION exchange, Driplex, Ramky Group) as
well as international (Suez, Veolia).
Expecting a pickup in orders in 2H: VATW’s Jun-11 OB of Rs33B has a
72:28 mix between municipal and industrial and a 73:27 mix between domestic
and overseas. While the company is very optimistic on the domestic business,
albeit with a slowdown in the power sector orders, the international order
inflows particularly in the MENA region are expected to be subdued. VATW
has guided to Rs22B of orders in FY12 (up 22% yoy) but only Rs2.2B orders
being booked YTD. Management is expecting orders from domestic
municipalities and the Southeast Asian region to pickup in 2H. YTD L&T too
has not won any orders in the water sector, expecting some tenders to be bid out
in 2H. While L&T is optimistic about the size of the opportunity, it thinks the
pace of order flows has been relatively slow.
Visit to the Chennai desalination plant indicates its largest project is well
underway: VATW won the Rs5.3B EPC order in Dec ‘09 and the plant is
expected to be commissioned on time in Jun ‘12. Most of the equipment was on
site with 56% of the EPC work and 75-80% of the civil construction complete.
VATW also has an Rs5B O&M contract spanning 7 years.
Valuation: VATW is currently trading at 13x/10x FY12/13 consensus earnings
as compared to IVRCL at 12x/8x and international peers Veolia at 8.5x and
Suez at 12.5x/10.7x.
NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A
RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION,
OBTAINED BY THE ANALYST DURING MEETINGS WITH MANAGEMENT. J.P. MORGAN
DOES NOT COVER THIS COMPANY AND HAS NO RATING ON THE STOCK.
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