VA Tech Wabag - No speed breakers to growth - PhillipCapital

We visited the Nemmeli desalination plant and also met the top management (including the business heads of the desalination and O&M business groups) of VA Tech Wabag recently. Key takeaways are:

FY14 order book to grow 15-20% YoY. Given the opportunities in the domestic and overseas businesses, management is confident of continuing its growth in order book and revenues of ~15-20% in FY14. While some slow down is visible in the domestic markets, management is confident of compensating this via overseas orders. The company is on track to meet its FY13 guidance; however, overseas subsidiary orders, revenues and margins remain subdued.

Complete solutions provider - not a product company. VA Tech's competence lies in being a complete solution provider for a customer while also doing the O&M for the project. Their edge over competition is the ability to source products and execute projects on a timely and most cost efficient manner. This is possible on account of its vast domestic and overseas experience in executing water projects.

Desalination to be a key growth driver. To achieve its vision of achieving EUR1bn in revenues, VA Tech has identified desalination as one of the key contributors. It recently won the Al Gubrah desalination plant(190MLD) in Oman post the Nemeli desal plant(100MLD) in 2010 and aims to win at least one such big order each year with Sumitomo. The engineering work at the Al Gubrah project has been completed and FC has been achieved.

Opportunity in desalination in FY14 at Rs45bn; Tamil Nadu presents a key market. Tamil Nadu presents a huge opportunity in the municipal desalination market. Post Nemeli, another 150MLD plant is being planned at the same site (DPR is being prepared by a consultant) while another 4 plants (>100MLD) are being planned to also be set up. Apart from Tamil Nadu, the municipal market in India is very sluggish. On the industrial side, Reliance (240MLD) and IOC(50MLD)are also expected to bid out projects in FY14. In the overseas markets, Oman (another similar sized project as Al Gubrah), Kuwait and Saudi Arabia present sizeable opportunities over the next one year. However, larger desalination plants would have lower margins; competition has become quite aggressive in this space, especially from the Korean EPC players such as Doosan Heavy and GS Engineering.

Trend of municipalities outsourcing O&M to private contractors. There is a clear shift by municipalities to outsource their O&M as this entails significant cost savings and improves efficiencies. VA Tech currently manages 60 facilities primarily in India for municipal and industrial customers with revenues of ~Rs1.1bn. Another Rs0.7bn would be added post the start of the O&M contract from Nemeli plant. Typical O&M contracts from industries are for 2-5 years, municipalities for 10-15 years and 25 years for BOOT projects. The O&M contract for the Al Gubrah project could be worth ~Rs2bn and is yet to be awarded.

Framework orders see no material change in Q413 (ex Al Gubrah); overseas subs revival expected in FY14. VA Tech's framework orders stood at Rs12.6bn as of Q313 with key projects being Al Gubrah(Rs4bn), Libya(EUR90mn), Auranagabad BOOT project(Rs1.3bn - FC still awaited) and Matinaty order(Rs1.1bn). While the Al Gubrah project should be booked in Q413/Q114, the remaining projects have seen no material change to enable them to be taken into the order book. The performance of overseas subs remained subdued in FY13 with both revenues and orders expected to be below expectations. Debtor days remain at Rs11bn which is around the same levels as in FY12 and efforts are being made to ensure faster collection.

Source : Equity Bulls

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