VA Tech WABAG Ltd – BUY Order pipeline remains robust ::IIFL

We hosted VA Tech Wabag (VATW) at our investor conference
in Singapore and Hong Kong recently. The management
indicated strong traction in the overseas business and
improving visibility in the standalone business with some sign
of revival in policy action in India. The company expects FY13
PAT to grow 25-30% on the back of: 1) savings of €2m-3m on
overseas overheads; 2) higher proportion of the more lucrative
O&M revenue; and 3) no spillover of prior-period variable pay
(40bps impact). We increase our Eps estimates for FY13 and
FY14 by 2.5% each. Our new TP is Rs546. We retain BUY.

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Guidance carries significant upside to our estimates: The
management indicated that there were signs of policy inaction easing
and the company is confident of achieving its FY13 order inflow
guidance of Rs22bn-24bn. The management maintained its guidance
of 20% order book growth, 15-18% revenue growth and 25-30% PAT
growth for FY13. These numbers materially exceed our estimates.
Improving visibility in standalone business and strong traction
in overseas markets: VATW has set its sights on sewage treatment
plants at seven sites in Mumbai. It is in negotiations for orders with
municipalities in Delhi, Karnataka, Tamil Nadu and Orissa (each order
worth Rs2bn-5bn). The company recently won an industrial order
worth Rs2.7bn from RIL. VATW expects overseas order inflow of
€140m-150m in FY13 from across a number of markets. The €90m
Libya order, which is in the framework order book, and a possible order
win (>€200m) by the JV with Sumitomo, provide upside potential to the
guidance. We build in FY13 orders of Rs23.6bn of which overseas orders
would comprise 45%.
Multiple drivers for margin expansion: VATW, through its
decentralisation drive, has successfully reduced overseas overheads
by ~45% in the past two years and anticipates a further 20%
reduction in FY13. A higher proportion of domestic O&M revenue
would help expand margins, but expansion into new markets would be
a drag. We increase our estimates for Ebitda by 2% and for Eps by
2.5%, which results in our new TP of Rs546.


Key takeaways
Better visibility in standalone business: Some of the key orders
in VATW’s pipeline include: sewage treatment plants in seven sites
in Mumbai, municipal orders in Delhi, Karnataka, Tamil Nadu and
Orissa (each worth Rs2bn-5bn). The delay in financial closure of the
Rs1.27bn Aurangabad BOOT project is because the BOOT partner
SPML is trying to rope in another partner for the civil work. VATW
expects this order to move into the order book in 2QFY13.
Figure 1: Order book highlights
Description of the order Original order size (Rs bn) Yet to be executed (Rs bn)
Chennai desalination 10.3 6.0
Water treatment plant, Sri Lanka 3.6 2.5
APGENCO BoP plant 2.9 2.2
Delhi Jal Board 3.8 3.8
Ulhasnagar BOOT contract 3.3 3.3
Madinah STP, Saudi Arabia 1.1 1.1
Seiverek STP, Turkey 0.5 0.4
Source: Company, IIFL Research
Figure 2: Order pipeline remains strong
Orders won/expected to be won in FY13 Status
Aurangabad BOOT contract (Rs1.27bn) Financial closure expected in 2QFY13
Libya order (Rs6bn)
Currently in framework order book due to
political disturbance; likely in 2HFY13, but
not part of the guidance
RIL industrial order (Rs2.7bn) Already won
Overseas orders from Turkey, Saudi Arabia,
Philippines, Austria, Switzerland, Czech and
Romania (each around the Rs2bn mark)
In pipeline
BOOT order (Rs12bn+) for JV with Sumitomo In pipeline
STP in seven sites in Mumbai In pipeline
Municipal orders from Delhi, TN, Orissa In pipeline
Source: Company, IIFL Research
Overseas order inflow expected to grow 40%: VATW expects
order inflow worth €140m-150m in FY13 from across a number of
countries: Turkey, Saudi Arabia, the Philippines, Austria, Switzerland,
Czech Republic and Romania. It expects each country to contribute
€20m-30m worth orders. This excludes the €90m Libya order, which
is in the framework order book and a possible order win (€200m-1bn)
by the JV with Sumitomo.
Higher O&M revenue to support margin expansion: In FY13,
the company expects O&M revenue of Rs2.4bn-Rs2.5bn (20–25%
higher YoY). Note that O&M contracts carry 18% margin compared
with 10-12% for EPC contracts. Incremental O&M revenue would
come from the Chennai desalination project (Rs250m-300m in
2HFY13) and execution of standalone O&M contracts (Rs300m).
Cost rationalisation in overseas business continues: The
company continues with its decentralisation drive with local staff
manning its offices in the overseas subsidiaries (especially Eastern
Europe and EMEA), instead of using services of the more expensive
Austrian expats. As a result, overseas overhead costs have reduced
from €21m in FY10 to €12m in FY12. Cost saving of €2m-3m more is
expected in FY13. While this translates to 90bps of consolidated
revenue, it would be partly offset by expansion into new markets
such as China.
We expect 70bps Ebitda margin expansion in FY13 because: 1) of
the interplay of the above factors; 2) staff provisions suppressing
margins by 40bps in FY12; and 3) operating leverage.
RIL order win accounts for 12% order inflow guidance:
Recently, VATW won a Rs2.7bn order for industrial effluent
treatment from RIL. It needs to be noted that this order was
expected in 4QFY12 but it materialised only in 1Q. This order is for
the construction of a 32.4MLD effluent treatment plant (including
recycling) for RIL’s PTA and PET Dahej manufacturing plant and a
tertiary treatment plant at its Hazira complex. According to the
management, this is a high-tech project that uses sandwich type
mixed bed demineralization for the first time in India and the
margins on the order would be ~12.5%.


Raising Eps estimate by 2.5%
We build in order inflow of Rs23.6bn in FY13, in line with the
company’s guidance of Rs22bn-24bn. We expect 13.9% revenue
growth for FY13, which would result in 19.4% order book growth vs.
the guidance of 20%.
Figure 3: FY14 order inflow is marginally below FY13 owing to order slippage in FY13
from FY12; we estimate the Rs6bn Libya order to move into the order book in 4QFY13
and 1QFY14; FY15 order inflow does not include any deferred order intake
Projected overall order book movement (Rs m) FY12 FY13ii FY14ii