On track for a strong H2FY16 November 09, 2015 Nishna Biyani nishnabiyani@plindia.com +91 22 66322239 Keyur Pandya keyurpandya@plindia.com +91 22 +91 22 66322247 Rating BUY Price Rs668 Target Price Rs1,000 Implied Upside 49.7% Sensex 26,121 Nifty 7,915 (Prices as on November 09, 2015) Trading data Market Cap. (Rs bn) 36.2 Shares o/s (m) 54.3 3M Avg. Daily value (Rs m) 59.1 Major shareholders Promoters 28.96% Foreign 28.11% Domestic Inst. 22.45% Public & Other 20.48% Stock Performance (%) 1M 6M 12M Absolute 2.4 (5.0) (17.4) Relative 6.0 (1.4) (11.1) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2016 23.3 26.7 13.0 2017 32.2 35.6 9.7 Price Performance (RIC:VATE.BO, BB:VATW IN) (Rs) 1,000 800 600 400 200 0 Nov 14 Jan 15 Source: Bloomberg Mar 15 May 15 Jul 15 Sep 15 Nov 15 Strong show in Standalone Performance: VATW reported revenues of Rs 3.2bn (up 39% YoY), EBIDTA of Rs 375m (150bps margin improvement) and PAT of Rs 239m (up 105%). Tight control of overheads has led to reduction in employee and other expenses by ~22%. Other concall Highlights: (1) Euro depreciation of 12%, delay in Nepal project due to local conditions & many overseas Projects being under engineering completion stage contributed to drop in overseas revenues for Q2 (2) Increase in Net Finance cost is due to Interest charges on account of Ujams BOOT Project in Namibia and reduction in interest income (3) Provided for site expenses of Oman desalination project to the tune of Rs 50m for the quarter. The project is now operating at 100% utilization. No LD s provided in this quarter based on the feedback from local advisor (4) Order intake of Rs 19bn for the quarter, order backlog now stands ~ Rs71bn Funding for Nemmeli 150MLD Desalination Project principally agreed by KfW: German KfW visited Chennai last month to finalize funding of Nemmeli 2 150 MLD Desalination plant at Chennai. The project worth ~Rs 12 14bn may get awarded soon and needs to be implemented over a period of 30 months. Guidance Maintained: Rs 28 30bn turnover, order intake of Rs 35 37bn for FY16, with chances of upward revision in order intake next quarter Valuation and View: VATW trades at 21x FY17E earnings and 11.2x EV/EBITDA FY17E, which are at a premium to its average valuations, post listing in 2010. However, a 26% earnings growth over FY15 FY17E period, continuous flow of new orders from both domestic and international businesses, excellent project execution track record, marquee client reference list, asset light business model, cash rich balance sheet and limited options available in water space makes VATW a long term portfolio stock. Maintain BUY Key financials (Y/e March) 2014 2015 2016E 2017E Revenues (Rs m) 22,301 24,284 27,312 30,733 Growth (%) 39.2 8.9 12.5 12.5 EBITDA (Rs m) 2,005 2,044 2,520 3,056 PAT (Rs m) 1,133 1,101 1,263 1,747 EPS (Rs) 21.3 20.3 23.3 32.2 Growth (%) 27.8 (4.8) 14.7 38.3 Net DPS (Rs) 4.0 4.0 4.5 5.5 Profitability & Valuation 2014 2015 2016E 2017E EBITDA margin (%) 9.0 8.4 9.2 9.9 RoE (%) 14.6 12.6 13.3 16.3 RoCE (%) 12.5 11.0 11.7 12.5 EV / sales (x) 1.5 1.4 1.3 1.1 EV / EBITDA (x) 16.7 17.1 13.6 11.1 PE (x) 31.3 32.9 28.7 20.7 P / BV (x) 4.2 4.0 3.6 3.2 Net dividend yield (%) 0.6 0.6 0.7 0.8 Source: Company Data; PL Research Q2FY16 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q2FY16 Result Overview Consolidated (Rs m) Y/e March Q2FY16 Q2FY15 YoY gr (%) Q1FY16 H1FY16 H1FY15 YoY gr (%) Net Sales 6,025 5,070 18.8 4,565 10,590 9,080 16.6 Expenditure Raw Materials 4,890 3,843 27.2 3,170 8,060 6,752 19.4 % of Net sales 81.2 75.8 69.4 76.1 74.4 Personnel 502 642 (21.8) 880 1,382 1,201 15.1 % of Net sales 8.3 12.7 19.3 13.1 13.2 Selling, dist & Other Exp 193 257 (24.8) 392 585 593 (1.4) % of Net sales 3.2 5.1 8.6 5.5 6.5 Total Expenditure 5,585 4,741 17.8 4,442 10,027 8,547 17.3 EBITDA 440 329 33.9 123 563 534 5.5 Margin (%) 7.3 6.5 2.7 5.3 5.9 Depreciation 53 55 (4.0) 51 104 89 17.6 Other Income 17 60 EBIT 387 291 33.1 72 459 505 (9.3) Net Interest 109 62 76.2 72 180 120 50.2 Foreign Exchange Fluctuation (Gain)/Loss 25 (2) 23 NA PBT 303 229 32.5 (2) 301 385 (21.8) Tax 149 87 71.8 97 246 135 83.0 Tax Rate (%) 49.2 37.9 81.7 34.9 Adjusted PAT before minority 154 142 8.5 (99) 55 251 (78.0) Share of profit/(loss) in associates 4 14 4 8 10 (20.4) Minority Interest (12) NA 4 (15) (3) NA Adjusted PAT 146 156 (6.3) (99) 48 258 (81.6) Adjusted EPS (Rs) 2.7 2.9 (6.3) (1.8) 0.9 4.7 (81.6) Exhibit 2: Business is seasonal with execution picking up from Q3 Revenues EBIDTA Margin (RHS) (Rs m) 10000 8000 6000 4000 2000 0 8.1% 7.5% 12.0% 5.1% 6.5% 6.8% 12.7% 2.7% 7.3% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 (%) November 09, 2015 2
Exhibit 3: H2 contributes ~77% of Full year earnings PAT % share of profit in H2 (Rs m) 800 600 400 200 0 96.3% 77.9% 82.1% 76.6% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 200 0.0% Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Exhibit 4: Order Intake and Order backlogs on a rise providing strong visibility Order Intake Order backlogs 75,000 60,000 45,000 30,000 15,000 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 (Rs m) Exhibit 5: Revising PAT estimates to factor in Oman desalination cost over runs Revised estimates Earlier estimates % revision FY16E FY17E FY16E FY17E FY16E FY17E Net sales (Rs m) 27,312 30,733 27,312 30,733 0.00% 0.00% Adj. PAT (Rs m) 1,263 1,747 1,414 1,747 10.68% 0.00% EPS (Rs) 23.3 32.2 26 32.2 10.54% 0.00% Source: PL Research November 09, 2015 3
Exhibit 6: Current order Book split EPC O&M Municipal Industrial Municipal Industrial Total Wabag India 15,312 15,324 10,996 269 41,901 Wabag overseas 15,333 10,516 2,074 933 28,856 Framework contracts 15,420 Total 30,645 25,840 13,070 1,202 86,177 Exhibit 7: Key Contracts in order book (Rs m) Petronas RAPID ETP, Malaysia 13,450 AMAS, Bahrain 40 MLD STP 5,877 APGENCO BOP with Water Management 4,670 Nemmeli, Chennai 100 MLD Desalination O&M 4,071 OWSSB, Orissa 100 MLD STP with O&M 2,170 Istanbul, Turkey O&M 2,146 Dangote, Nigeria 60 MLD RWTP 1,969 UP Jal Nigam 140 MLD STP with O&M 2,163 Habra, West Bengal 147 MLD WTP 1,745 Valenzuela, Philippines 60 MLD STP 1,633 Exhibit 8: Order book Split tilting towards high margin O&M Segment O&M 20% Exhibit 9: Municipal Business forms a significant chunk of order book Industrial 38% Municipal 62% EPC 80% November 09, 2015 4
Income Statement (Rs m) Net Revenue 22,301 24,284 27,312 30,733 Raw Material Expenses 16,979 18,328 20,452 23,000 Gross Profit 5,322 5,956 6,861 7,734 Employee Cost 2,217 2,777 3,012 3,268 Other Expenses 1,099 1,136 1,329 1,410 EBITDA 2,005 2,044 2,520 3,056 Depr. & Amortization 150 109 157 169 Net Interest 252 392 570 379 Other Income 59 129 130 160 Profit before Tax 1,662 1,671 1,922 2,667 Total Tax 526 566 654 907 Profit after Tax 1,136 1,104 1,269 1,760 Ex Od items / Min. Int. 15 35 39 49 Adj. PAT 1,133 1,101 1,263 1,747 Avg. Shares O/S (m) 53.2 54.3 54.3 54.3 EPS (Rs.) 21.3 20.3 23.3 32.2 Cash Flow Abstract (Rs m) C/F from Operations 1,129 55 951 549 C/F from Investing (972) (676) (600) (200) C/F from Financing 477 21 314 (83) Inc. / Dec. in Cash 634 (599) 665 266 Opening Cash 2,439 3,304 2,395 3,060 Closing Cash 3,304 2,395 3,060 3,326 FCFF (291) (1,304) 872 699 FCFE 469 (1,081) 1,513 1,017 Key Financial Metrics Growth Revenue (%) 39.2 8.9 12.5 12.5 EBITDA (%) 46.3 1.9 23.3 21.3 PAT (%) 28.1 (2.9) 14.7 38.3 EPS (%) 27.8 (4.8) 14.7 38.3 Profitability EBITDA Margin (%) 9.0 8.4 9.2 9.9 PAT Margin (%) 5.1 4.5 4.6 5.7 RoCE (%) 12.5 11.0 11.7 12.5 RoE (%) 14.6 12.6 13.3 16.3 Balance Sheet Net Debt : Equity (0.3) (0.1) (0.2) (0.2) Net Wrkng Cap. (days) 49 60 53 58 Valuation PER (x) 31.3 32.9 28.7 20.7 P / B (x) 4.2 4.0 3.6 3.2 EV / EBITDA (x) 16.7 17.1 13.6 11.1 EV / Sales (x) 1.5 1.4 1.3 1.1 Earnings Quality Eff. Tax Rate 31.6 33.9 34.0 34.0 Other Inc / PBT 0.5 7.7 6.8 6.0 Eff. Depr. Rate (%) 8.6 4.3 5.8 5.8 FCFE / PAT 41.4 (98.2) 119.8 58.2. Balance Sheet Abstract (Rs m) Shareholder's Funds 8,412 9,028 10,005 11,402 Total Debt 1,583 1,806 2,448 2,766 Other Liabilities 1,853 2,471 2,864 3,119 Total Liabilities 11,847 13,305 15,317 17,287 Net Fixed Assets 1,199 1,919 1,956 1,987 Goodwill 685 Investments 232 377 780 1,030 Net Current Assets 9,625 10,780 12,330 13,990 Cash & Equivalents 3,702 3,112 4,314 4,956 Other Current Assets 18,433 20,041 22,195 24,616 Current Liabilities 12,511 12,372 14,178 15,582 Other Assets 107 229 250 280 Total Assets 11,847 13,305 15,317 17,287 Quarterly Financials (Rs m) Y/e March Q3FY15 Q4FY15 Q1FY16 Q2FY16 Net Revenue 6,194 9,077 4,565 6,025 EBITDA 423 1,155 123 440 % of revenue 6.8 12.7 2.7 7.3 Depr. & Amortization 55 (34) 51 53 Net Interest 61 134 72 109 Other Income (37) (40) (2) 25 Profit before Tax 271 1,015 (2) 303 Total Tax 130 302 97 149 Profit after Tax 138 705 (99) 146 Adj. PAT 138 705 (99) 146. November 09, 2015 5
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