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VA TECH WABAG LIMITE

IPO NOT

VA Tech Wabag Limited (Wabag) was incorporated in 1995 as Balc

Durr Cooling Towers Limited. The Company has a global presence in t

water treatment industry with presence in emerging countries like Ind

the Middle East and China among others. It manages its busine

operations through its headquarter in Chennai, India and principal offic

in various emerging countries. The Company offers complete life cyc

solutions including conceptualisation, design, engineering, procureme

supply, installation, construction and O&M services. As of July 31, 201

the Company had 1,469 employees. Meanwhile, the Company h

executed 113 projects and is currently executing 81 projects.

We see Wabags issue as a good investment opportunity as:

Wabags strong order book of Rs. 27.8 bn as of June 30, 201

which is 2.3x times of FY10 total income, would provide a stro

revenue outlook in short- to medium-term.

Wabags focused approach on technology helps it to gain on ne

clients and benefit it in terms of returns on investments.

The Companys global presence allows it to identify and evalua

projects in new jurisdictions effectively, establish client relation

understand local markets, culture and requirements, procure ra

materials locally, reduce currency risks and meet clie

expectations efficiently.

The Companys brand recognition and technical competenciwould allow it obtain new clients and repeat orders from existi

clients.

Valuation and Recommendation

We recommend the investors to subscribe to the issue on the basis

the following:

We value Wabags stock at Rs. 1,419, by using the DCF metho

(WACC of 15.4% and terminal growth of 5%), which offers

upside potential of 15% over the lower end of the price band a

8% over the upper end of the price band.

VA Tech Wabag Limited SubscribIPO NOTE

IPO Details

Face Value Rs. 5

Price Band (Rs.) Rs. 1,230 - 1,310

Issue Opens 22-Sep-10

Issue Closes 27-Sep-10

BRLM

Registrar to issue

Issue Size upto Rs. 4.7 bn

Pre issue shareholding pattern

Shareholders % Stake

Promoter and Promoter Group 34.3%

Non-Promoter Group 65.7%

Post issue shareholding pattern

Shareholders Lower End Upper End

Promoter and Promoter Group 31.0% 31.2%

Non-Promoter Group 69.0% 68.8%

Allocation (in mn; not less than) Lower End Upper End

QIBs 1.83 1.80

Non-Institutional 0.55 0.54

Retail 1.28 1.26

IPO Details Lower End Upper End

Price Band Rs. 1,230 Rs. 1,310

Equity Shares prior to issue (mn) 9.5 9.5

Fresh Issue of shares (mn) 1.0 1.0

Total Equity Shares (mn) 10.6 10.5

Share Capital (mn) Rs. 52.8 Rs. 52.5

Implied market cap (mn) Rs. 12,985.2 Rs. 13,748.5

Debt (mn) (31/03/10) Rs. 391.2 Rs. 391.2

Cash (mn) (31/03/10) Rs. 2,185.1 Rs. 2,185.1

Implied EV (mn) Rs. 11,191.3 Rs. 11,954.6

Enam Securities Pvt. Ltd.,

IDFC Capital Ltd.

Karvy Computershare Pvt.

Ltd.

Year to March FY09 FY10 FY11E FY12E FY13E CAGR

(Figures in Rs. mn, except per share data) (FY10-13

Total Income 11,550 12,338 14,800 17,461 20,420 18.

EBITDA 817 1,213 1,529 1,891 2,314 24.

Adj. Net Profit 422 494 683 866 1,083 29.

Margins (%)

EBITDA 7.1% 9.8% 10.3% 10.8% 11.3%

NPM 3.7% 4.0% 4.6% 5.0% 5.3%

Per Share Data (Rs.)

Adjusted EPS 44.4 52.3 68.1 82.3 102.9 25.

PER (x) @ Rs. 1,230 27.7x 23.5x 18.1x 14.9x 12.0x

PER (x) @ Rs. 1,310 29.5x 25.0x 19.2x 15.9x 12.7x


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We expect the Company to enjoy better margins over the average of its peer set (IVRCL Infrastructures & Projects Ltd

Nagarjuna Construction Co. Ltd. and Consolidated Construction Consortium Ltd.) with an EBITDA margin and a n

margin of 10.3% and 4.6%, respectively, as compared to an EBITDA and a net profit margin of 9.6% and 4.2%

respectively, of its peer set for FY11E. This is primarily attributable to its focused approach on technology and diversifie

international presence.

Though the Companys forward P/E of 18.1x at the lower end of the price band and 19.2x at the upper band for FY11

looks slightly expensive, as compared to the peers average P/E of 15.3x for FY11E, investment in Wabag provides

international exposure and allows an investor to be more focused on the Water industry, which is a niche market in mo

of the emerging countries, unlike its peer set listed on the Indian stock exchange. Thus, we suggest to invest in th

Company.

Peer Analysis - FY11E EBITDA Margin Net Profit Margin P/E EV/EBITDA ROE

Consolidated Construction Consortium Ltd 9.1% 4.6% 13.5x 7.7x 18.0%

IVRCL Infrastructures & Projects Limited 9.7% 3.9% 16.2x 6.6x 12.4%

Nagarjuna Construction Co. Ltd 10.2% 4.3% 16.4x 11.6x 10.6%

Average 9.6% 4.2% 15.3x 8.6x 13.7%

VA Tech Wabag Limited 10.3% 4.6% 18.1x 7.3x 14.7%

Source: Reuters and Indiabulls research

DCF Model (in Rs. Mn)

Middle

Period

Termin

Perio

Period 2011 2012 2013 2014 2015 2016 2017 2018 2019 2024

Turnover 14,800 17,461 20,420 23,678 27,222 31,296 35,981 41,367 47,573 100,4

Operating profit (EBIT) 1,325 1,651 2,033 2,475 2,982 3,585 4,301 5,152 5,233 10,0Add back Depreciation 204 241 281 326 375 431 496 570 618 1,2

EBITDA 1,529 1,891 2,314 2,802 3,357 4,016 4,797 5,722 5,851 11,3

Taxes (290) (368) (461) (570) (697) (848) (1,029) (1,245) (1,256) (3,0

Working Capital (2,220) (1,746) (1,021) (947) (817) (939) (1,079) (1,241) (1,427) (2,0

Less Capex (220) (260) (304) (353) (353) (353) (353) (353) (742) (1,2Free Cash flow for the

Firm (FCFF) (1,201) (483) 528 931 1,491 1,876 2,336 2,883 2,426 5,0

Explicit Forecasts

DCF Assumptions

Beta 1.0

WACC 15.4%Risk Free Rate 7.5%

Market Return 17.0%

Terminal Growth Rate 5.0%

Terminal Margin 10.0%

EV (as per DCF) Rs. 13,145

Value per Share Rs. 1,419

14.4 14.9 15.4 15.9 16

4.0 1,547 1,443 1,350 1,267 1,194.5 1,591 1,481 1,383 1,295 1,21

5.0 1,639 1,523 1,419 1,326 1,24

5.5 1,694 1,569 1,459 1,360 1,27

6.0 1,754 1,621 1,503 1,398 1,30Terminalgrowth

(in%)

WACC (in %)


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IPO

Issue details

Wabag is entering in the capital markets with an initial public offering (IPO) of up to 3.7 mn equity shares of Rs. 5 each at

price band of Rs. 1,2301,310 to raise up to Rs. 4.7 bn. The issues consisting of a fresh issue of up to 1.0 mn equity share

aggregating up to Rs. 1.25 bn by the company and an offer for sale of equity shares aggregating up to Rs. 3.5 bn by Ind

Advantage Fund I, Dynamic India Fund I, Rainbow Fund Trust, GLG Emerging Markets Fund and Passport Ind

Investments (Mauritius) Limited. The Issue opens on September 22, 2010 and closes on September 27, 2010.

Issue objectives

Funding working capital requirements: The Company intends to use Rs. 645.1 mn to fund its future working capit

requirement.

Construction of a corporate office at Chennai: The Company has assigned Rs. 347.4 mn to construct a new offic

facility, to be named Wabag House, at Chennai measuring nearly 150,000 sq. ft.

Implementation of global IT systems: The Company has allotted Rs. 110.5 mn to develop and implement a global

system to facilitate the integration of the business process with its subsidiaries.

General corporate purposes: The balance of its net proceedings would utilise for general corporate purpose

including strategic initiatives, brand building exercises and strengthening of marketing capabilities.

Investment Rationale

More focused on technology

The Company is primary involves in providing complete life cycle solutions including conceptualisation, design, engineerin

procurement, supply, installation, construction and O&M services. The Company is more focused on its principal expertise

technology and sub-contracts the civil works. It concentrates on technology development and advancement through its R&

centres in Chennai, Vienna and Winterthur in India, Austria and Switzerland, respectively. Further, its two subsidiarie

Wabag Austria and Wabag Wassertechnik, own 157 patents which include both process and product patents. Wabag Austr

has also applied for 51 patents that are pending. Moreover, its strategy of outsourcing civil work also benefits in terms

returns on investments in each project as fixed assets costs are low. We believe that the Companys concentration on

core-competencies would help it to attract more clients and to take hold on the opportunities arises with the increase

government investments across the globe.

Wide presence

Wabags wide presence in the Middle East, North Africa, Central and Eastern Europe, China, India and the South East As

provides it an upper hand compare to its local peers as it provides international exposure and allows the Company to captu

the demand for Water and Waste Water treatment from emerging economies. Further, we believe that the Company

presence in various countries allows it to identify and evaluate projects in new jurisdictions effectively, establish clie


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relations, understand local markets, culture and requirements, procure raw materials locally, reduce currency risks and me

client expectations efficiently.

Robust order book provides revenue visibility

Wabag has a strong order book of Rs. 27.8 bn as of June 30, 2010, which is mainly attributable to municipal clients. Th

municipal clients contribute 88% of the total order book, while remaining 12% by industrial client. The company has adde

new order of Rs. 13.6 bn in FY10, which reflects a growth of 100% yoy. We expect the Companys robust order book, whic

is 2.3x times of FY10 total income, would provide a strong outlook for its revenues in short- to medium-term.

Brand recognition

Wabag brand, established in 1924, allows Wabag to leverage its business. The Company has acquired the brand name wi

the acquisition of Wabag Austria in 2007. The brand provides the opportunity to penetrate new markets, pre-qualify for bidand expand its services in new business areas. In addition, the brand supports the Company to operate into competiti

markets and to attract and retain skilled employees. We believe the Companys brand recognition along with its technic

competencies would allow it obtain new clients and repeat orders from existing clients.

Risks and concerns

Dependence over government-sponsored projects

Wabag owes 88% of its order book to projects of the government-controlled entities in India as well as abroad. Thus, t

Company is susceptible to the risk of scaling back of Government policies, changes in governmental or external budgeta

allocation or insufficiency of funds, delay, termination or cancellation of projects. In case of any such happening, th

Companys business would be significantly and adversely impacted.

Relying over major clients can backfire

The Company currently derives significant portion of its income from a limited number of large clients. The five largest clien

of the Company accounted for 66% of revenue and 82% of its order book as of March 31, 2010. Thus, any loss of

significant clients or a significant decrease in the volume of work from these clients would adversely affect its futu

revenues.

Financial Analysis

Wabags total income grew at a CAGR of 40.7% over the period FY08-10. During FY10, the total income grew

6.8% yoy to Rs. 12.3 bn.

The cost of sales and services as percentage to total income declined 356 bps yoy to 68.6% in FY10. However, th

administrative expenses as percentage to total income increased 82 bps yoy to 8.0%. Lastly, the staff cost

percentage to total income remained almost flat on a yoy basis at 13.6%. Consequently, the EBITDA margi

improved 276 bps yoy to 9.8% in FY10.


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Its net profit for FY10 increased 17.0% yoy to Rs. 493.9 mn, with its net margins improving from 3.4% in FY09

4.0% in FY10.

At the end of FY10, the company had a cash balance of Rs. 2.2 bn and a net worth of Rs. 4.0 bn.

Company Background

VA Tech Wabag Limited was incorporated in 1995 as Balcke Durr Cooling Towers Limited, subsidiary of Balcke-Du

Aktiengesellschaft, a German company held by Deutsche Babcock. The companys name was changed to Balcke Durr an

Wabag Technologies Limited with the starting of water treatment division in 1996. In 1999, the Austrian group VA Te

acquired the water business of Deutsche Babcock operating under the brand name of Wabag. In 2000, VA Tech ha

demerged its water and non-water division and named its water division as VA Tech Wabag Limited. The Company has

world-wide presence in the water treatment industry with market presence in India, the Middle East, North Africa, Central

Eastern Europe, China and South East Asia. It manages its business operations through its headquarter in Chennai in Ind

and principal offices in Austria, the Czech Republic, China, Switzerland, Algeria, Romania, Tunisia, UAE, Libya and Maca

Wabag offers complete life cycle solutions including conceptualisation, design, engineering, procurement, supply, installatio

construction and O&M services. These services are provided for sewage treatment, processed and drinking water treatmen

effluents treatment, sludge treatment, desalination and reuse for institutional clients like municipal corporations an

companies present in the infrastructure sector such as power, steel and oil & gas companies. As on July 31, 2010, th

Company has executed 113 projects and is currently executing 81 projects.

Income Statement 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E

Income

Income from operations 11,332.8 12,237.4 14,684.9 17,328.2 20,273.9 23,517.8 27,045.4 31,102.3 35,767.6 41,132.7

Other Income 216.7 100.2 115.2 132.5 145.8 160.3 176.4 194.0 213.4 234.8

Total Income 11,549.5 12,337.6 14,800.1 17,460.7 20,419.7 23,678.1 27,221.8 31,296.3 35,981.0 41,367.5

Cost of sales and services 8,333.2 8,463.2 10,078.4 11,802.9 13,701.0 15,768.9 17,992.8 20,529.4 23,422.5 26,722.1

Staff cost 1,555.4 1,674.4 2,008.6 2,369.7 2,771.3 3,213.5 3,694.4 4,247.4 4,883.2 5,614.2

General, selling and administrative e 843.9 987.0 1,184.0 1,396.8 1,633.6 1,894.2 2,177.7 2,503.7 2,878.5 3,309.4

EBITDA 817.0 1,213.0 1,529.1 1,891.3 2,313.9 2,801.5 3,356.9 4,015.9 4,796.9 5,721.8

Margin 7% 10% 10% 11% 11% 12% 12% 13% 13% 14%

Depreciation/ Amortisation 84.4 170.0 203.9 240.6 281.4 326.3 375.1 431.2 495.8 570.0

EBIT 732.6 1,043.0 1,325.2 1,650.7 2,032.5 2,475.3 2,981.8 3,584.6 4,301.1 5,151.8

Margin 6% 8% 9% 9% 10% 10% 11% 11% 12% 12%

Int & Finance Charges 353.7 299.0 358.7 423.2 494.9 573.8 659.7 758.5 872.0 1,002.5

Total Expenditure 11,170.6 11,593.6 13,833.6 16,233.1 18,882.0 21,776.7 24,899.7 28,470.1 32,551.9 37,218.2

Profit before tax 378.9 744.0 966.5 1,227.5 1,537.7 1,901.4 2,322.1 2,826.2 3,429.1 4,149.3

Margin 3% 6% 7% 7% 8% 8% 9% 9% 10% 10%

Total Tax 40.1 303.5 289.9 368.3 461.3 570.4 696.6 847.8 1,028.7 1,244.8

Profit after Tax 338.8 440.5 676.5 859.3 1,076.4 1,331.0 1,625.5 1,978.3 2,400.4 2,904.5

Share of profit/ (loss) from Associate10.6

6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9

Minority Interest 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Changes in accounting policies 2.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other material adjustments 70.7 46.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Adj Net Profit 422.2 493.9 683.4 866.2 1,083.3 1,337.9 1,632.4 1,985.2 2,407.3 2,911.4

Margin 4% 4% 5% 5% 5% 6% 6% 6% 7% 7%


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Past performance is not a guide for future performance. The value of, and income from investments may vary because

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This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete,and it should not be relied upon as such. Any opinions expressed here in reflect judgments at this date and are subjectto change without notice. Indiabulls Securities Limited (ISL) and any/all of its group companies or directors or employeesreserves its right to suspend the publication of this Report and are not under any obligation to tell you when opinions orinformation in this report change. In addition, ISL has no obligation to continue to publish reports on all the stockscurrently under its coverage or to notify you in the event it terminates its coverage. Neither Indiabulls Securities Limitednor any of its affiliates, associates, directors or employees shall in any way be responsible for any loss or damage thatmay arise to any person from any error in the information contained in this report.

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