Wealth Out Of Water - VA Tech Wabag

Chennai-based VA Tech Wabag (Wabag) is coming out with an IPO in the price band of `1,230-1,310 per share. But this IPO from Wabag is a combination of a fresh issue amounting to `125 crore and an offer for sale of `26.53 lakh shares from selling investors, which includes India Advantage Fund I, Dynamic India Fund I, Rainbow Fund Trust, GLG Emerging Market Fund, and Passport India Investment (Mauritius). Thus, on a whole the Wabag IPO would raise `451.31- 472.54 crore of which `326.31- 347.54 crore would go to exiting investors while `125 crore would come to Wabag to fund the working capital requirement, construction of a corporate office at Chennai, implementation of global IT systems, and balance, if any, towards general corporate expenses.

As far as the fresh issue is concerned, on an issue size of `125 crore and price band of `1,230-1,310, the fresh issue of shares could be approximately 10.16 - 9.54 lakh shares taking the post-issue capital to 1.06 - 1.05 crore equity shares. VA Tech Wabag (Wabag) is a unique multinational company and is indeed a one-stop solution when it comes to the water and waste water-related treatment. Wabag provides complete life-cycle solutions for water and waste water, including conceptualization, design, engineering, procurement, supply, installation, construction, and O&M services.

The company provides a range of EPC and operation and maintenance solutions for sewage treatment, processed and drinking water treatment, effluents treatment, sludge treatment, desalination, and reuse for clients such as municipal corporations and companies in the infrastructure space. As on June 2010 the company’s total order book was at `2,779.60 crore, while as on July 31 2010 the company has executed 113 projects with 81 projects under implementation. Its domestic business generates 55-65 per cent of the total revenues, while the balance is from exports. There is a huge opportunity in the water-related projects and with the government globally taking active initiatives towards the same, this space is going to grow quite briskly in the coming years so that companies such as VA Tech Wabag, which has a presence in 12 of the 15 largest growth markets in the world, is poised to take advantage of this rising opportunity. Secondly, the company has a strong execution track record with an experience of executing 2,250 projects in the last three decades in more than 19 countries. This is quite commendable and makes it a preferred choice for such complex projects.

That apart, VA Tech Wabag is almost debt-free with debts totalling only `40 crore as on FY10. Coming to the financial performance, for FY10 Wabag’s revenues increased by 8 per cent to `1,233.76 crore (`1,154.95 crore) while its profits increased by 17 per cent to `49.39 crore (`42.22 crore). On fully diluted capital Wabag is available at a PE of 26-26.5x and EV/EBDITA of 9.4-10x. [PAGE BREAK]

Though this might sound steep, looking at the execution capability, extensive experience across major global markets, strong order book of `2,800 crore, its status as a one-stop solution for water-related projects, and the rising opportunities in the water segment, we believe that this is a good bet from a long-term perspective. Investors would do well to subscribe to the issue.