Va Tech Wabag Ltd. 11 th March, 2014 BUY

Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY Va Tech Wabag Ltd. 11 th March, 2014 BUY CMP Target Price Rs.691.30 Rs.870.00 VA Tech Wabag is Indian multinational player technology focused company which provides a complete range of water and waste water treatment solutions. BSE Code 533269 NSE Code WABAG Market Cap (Rs Cr.) 1838.86 52 Week High/Low 744.25/380.65 Industry Capital Goods Face Value Rs.2.00 Shares O/S 2.66 Cr. The company has registered robust results for the quarter ending December 2013. The consolidated revenue has increased by about 66% at Rs 589.30 crore for quarter under review as compared to Rs.354 crore for the quarter ended December 31, 2012. The company s business managed and operated out of India has contributed to the stellar performance. Operating profit climbed sharply by ~84% at about Rs.40.99 crores as against Rs.22.30 crores in the previous year quarter. The net profit of the company skyrocketed by about 116% at Rs. 21.71 crores as compared to Rs 10.04 crore for the same quarter in the previous year. The company s Multi Domestic Unit strategy is paying off well. EPS(TTM) 38.48 Book Value 300.40 P/E 17.97 P/B 2.30 Shareholding Pattern Revenue from international business for the quarter is at Rs. 358.96 crore against Rs. 177.29 crore, a rise of 102.47% y-o-y. Domestic revenue for the quarter stood at Rs. 239.02 crore against Rs.176.35 crore, a jump of 35.54% y-o-y. Order inflow for 9MFY14 stood at Rs.3047.5 crores comprising domestic orders worth Rs.1844 cr and Rs.1203.5 cr overseas. The inflow includes EPC orders worth Rs. 2621.3 cr comprising 86% of the order inflow while O&M orders stood at Rs.426.2 cr representing the remaining 14%. Municipal order inflow was at Rs.2233 cr while Industrial orders were at Rs. 814.50 cr. Valuation Research Analyst: Vineeta Mahnot vineeta@hemonline.com With asset light model, robust order pipeline, strong balance sheet, leadership position in Indian market and increasing geographical presence with strong brand image; Va Tech Wabag Ltd. revenue visibility looks strong. We believe the company is trading at an attractive valuation at 16.86x and 14.24x of FY14EPS of Rs.41.01 and FY15EPS of Rs.48.53. We initiate a BUY on the stock with a target price of Rs.870 (appreciation of about 26%) with the medium to long term investment horizon. For Private Circulation Only 1 Hem Research

Business Details WABAG is one of the world s leading companies in the water treatment field. The company is a multinational player in the water treatment industry with market presence in India, the Middle East, North Africa, Central and Eastern Europe, China and South East Asia through principal offices in India, Austria, the Czech Republic, China, Switzerland, Algeria, Romania, Tunisia, UAE, Libya and Macao. The company is headquartered in Chennai and conducts global operations through its 17 Subsidiaries and branch and representative offices. They share strategic and technical expertise across the Subsidiaries that believe, allow research, operational and marketing synergies. VA Tech offers complete life cycle solutions including conceptualization, design, engineering, procurement, supply, installation, construction and O&M services. They provide a range of EPC and O&M solutions for sewage treatment, processed and drinking water treatment, effluents treatment, sludge treatment, desalination and reuse for institutional clients like municipal corporations and companies in the infrastructure sector such as power, steel and oil and gas companies. The company has turnkey contracts which involve design, engineering, procurement, construction, erection, commissioning, operation and maintenance of the following: Drinking water treatment Industrial waste water treatment Municipal waste water treatment Industrial and process water treatment Desalination (sea water and brackish water) Recycling (industrial and municipal waste water) WABAG offers sustained solutions for special customer needs through a comprehensive range of services and innovative technologies. Its plants facilitate environmentally compatible wastewater disposal and secure access to clean drinking water for an increasing number of people. This allows it to make an important contribution to environmental protection and enhanced quality of life. For Private Circulation Only 2 Hem Research

Robust Order Book The Company has registered strong order inflow for the quarter ended December 2013 which stood at Rs.1013.80 crores and for the nine months ended December 2013 stood at Rs.3047.50 crores with major order inflow from overseas business even in turbulent times. This nine-month order intake in FY14 has surpassed full year order intake for last three financial years despite of global economic slowdown and policy paralysis in India. Order book stood at Rs.6000 crores as on Dec 2013. This firm order book has strong visibility and sustainability. The company has strong execution track record of more than 2250 projects in last 3 decades. The company has Rs.398 crores inflow of framework contracts in nine months ended December 2014; out of which Rs.244 crores moved to firm order book in January 2014. There has been a tremendous increase of in average order size from Rs.136 crores in FY13 to Rs.183 crores in 9MFY14. The company expects healthy order inflows to continue in FY15 on back of orders in pipeline. For Private Circulation Only 3 Hem Research

Increasing geographical presence The Company has plans to diversify in high potential growing economies with utilization of low cost Indian resources. The company is leveraging Indian resources for gaining momentum in international geographies. Well diversified geographical presence has reduced dependence on single country. Decentralized operations have helped improving client satisfaction and EBIDTA margins. Cost of operations also has improved in international business on account of such decentralization. The company has educes expenses in high cost geographies and invested in high potential water markets by establishing local presence (MDUs). For Private Circulation Only 4 Hem Research

Upped Guidance The Company has given a guidance to achieve revenue between Rs.1600-1700 crores in financial year ending March 2013; which it has achieved already. Similarly the order intake for FY13 was projected between Rs.2,000-Rs.2,100 crores which was clocked and met the guidance during the respective year. VA Tech has upped its revenue guidance for FY14 from Rs.1850-1950 crores to Rs.2000 crores. The order intake guidance for FY14 was previously projected at Rs.2600-2700 crores which has been easily surpassed in nine months ended December 2013. Therefore, the company has upped its order inflow guidance at Rs.3500 crores for FY14. Going forward, the company aims at improving its margins in International Business. With the backlog of robust order book backed by funded projects along with its strong inherent execution capability; the company expects to have strong FY14. For Private Circulation Only 5 Hem Research

Consolidated Profit & Loss Account Rs. Crore Particulars FY11 FY12 FY13 FY14E FY15E Net sales 1241.82 1443.52 1618.85 1991.19 2319.73 Growth 16.24% 12.15% 23.00% 16.50% Expenditure 1120.79 1313.49 1463.98 1798.04 2092.40 EBITDA 121.03 130.03 154.87 193.14 227.33 Growth 7.44% 19.10% 24.71% 17.70% EBITDA margin 9.75% 9.01% 9.57% 9.70% 9.80% Other income 0.00 15.07 13.24 11.95 13.92 Depreciation & Amortisation 9.98 8.59 10.91 14.93 18.04 EBIT 111.05 136.51 157.20 190.16 223.21 EBIT margin 8.94% 9.46% 9.71% 9.55% 9.62% Interest 14.78 25.46 22.00 24.89 27.62 PBT 96.27 111.05 135.20 165.27 195.59 Tax 31.61 37.92 45.59 56.19 66.50 PAT 64.66 73.13 89.61 109.08 129.09 Minority interest 0.00 0.31 0.02 0.00 0.00 Share of profits in Associates 0.77 0.93 0.76 0.00 0.00 Adjusted PAT 65.43 73.75 90.35 109.08 129.09 Growth 12.72 22.51 20.73 18.35 Net Profit margins 5.27 5.11 5.58 5.48 5.56 Exceptional item 12.86 0.00 0.00 0.00 0.00 Reported PAT 52.57 73.75 90.35 109.08 129.09 Equity Capital 5.28 5.30 5.31 5.31 5.31 Equity Shares 2.64 2.65 2.66 2.66 2.66 Adjusted EPS 24.78 27.83 33.97 41.01 48.53 Ratios Particulars FY11 FY12 FY13 FY14E FY15E Return on Equity 11.46 11.49 12.63 13.57 14.19 Return on Capital employed 18.10 17.80 19.71 21.05 21.89 Debt/Equity 0.07 0.19 0.11 0.12 0.12 Asset turnover 0.89 0.81 0.86 0.96 1.02 Current Ratio 1.62 1.68 1.63 1.65 1.68 For Private Circulation Only 6 Hem Research

Balance Sheet Rs. Crore Particulars FY11 FY12 FY13 FY14E FY15E Share Capital 5.28 5.30 5.31 5.31 5.31 Reserves & Surplus 565.68 636.72 710.08 798.38 904.11 Shareholders funds 570.96 642.02 715.39 803.69 909.42 Borrowings 42.66 124.79 82.19 99.56 110.46 Deferred tax liability 0.00 0.02 0.23 0.23 0.23 Minority Interest 0.00 0.98 1.94 1.94 1.94 Sources of funds 613.62 767.81 799.75 905.42 1022.05 Gross block 99.39 106.82 114.28 146.41 171.83 Accumulated Depreciation 50.99 56.10 63.21 78.14 96.18 Net block 48.40 50.72 51.07 68.27 75.65 Capital work in progress 7.70 18.03 47.76 60.10 74.30 Investments 43.70 3.63 3.30 4.25 5.15 Deferred tax assets 21.60 10.42 11.47 11.47 11.47 Goodwill on consolidation 0.00 0.00 0.00 0.00 0.00 Inventories 73.61 49.89 40.53 57.98 63.41 Sundry debtors 704.36 1,092.61 1,109.48 1,159.57 1,268.12 Cash and bank balance 324.48 338.26 286.65 328.55 359.30 Other current assets 75.92 123.35 224.78 251.24 274.76 Loans and advances 103.24 87.13 115.56 135.28 147.95 Total current assets 1,281.61 1,691.24 1,777.00 1,932.62 2,113.53 Current liabilities and provisions 789.39 1,006.23 1,090.85 1,171.29 1,258.06 Net current assets 492.22 685.01 686.15 761.34 855.48 Misc exp 0.00 0.00 0.00 0.00 0.00 Uses of funds 613.62 767.81 799.75 905.42 1,022.05 For Private Circulation Only 7 Hem Research

Quarterly Financial Highlights Rs. Crore Particulars Q3FY14 Q3FY13 Q2FY14 YoY% QoQ% Revenues 589.30 354.00 465.54 66.47 26.58 Expenditures 548.31 331.70 433.70 65.30 26.43 Operating Profit 40.99 22.30 31.84 83.81 28.74 Adjusted Net Profit 21.71 10.04 17.42 116.24 24.63 OPM% 6.96 6.30 6.84 66bps 12bps NPM % 3.68 2.84 3.74 85bps (6bps) Adjusted EPS 8.18 3.79 6.56 115.83 24.70 Past Price movement of the stock 770 VA TECH WABAG (680.0000, 744.2500, 672.0000, 708.7500, +22.0000) 760 750 740 730 720 710 700 690 680 670 660 650 640 630 620 610 600 590 580 570 560 550 540 530 520 510 500 490 480 470 460 450 440 430 420 410 400 390 380 370 360 350 rch April May June July August September October November December 2014 February March 770 760 750 740 730 720 710 700 690 680 670 660 650 640 630 620 610 600 590 580 570 560 550 540 530 520 510 500 490 480 470 460 450 440 430 420 410 400 390 380 370 360 350 For Private Circulation Only 8 Hem Research

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