VA Tech Wabag - ...bringing water back to life - SKP Securities

Desalination is the key - Big opportunity for WABAG:

- Out of the total water reserves only 0.76% water is most easily accessible. Further, the water resources are unequally distributed. To make it worse, it is expected that number of people living in water scarce conditions would double in 20 years.

- Thus, Water desalination, can provide the cure to our water woes. Desalination, which was very expensive few years back, has now become viable because of continued falling cost with the development of technology.

- The market for seawater desalination can be divided between the mature markets of the Middle East and the Mediterranean, for whom desalination is well established as a important source of water, and the new markets opening up around the world in the US, Mexico, Chile, Australia, China and India.

- Keeping this in view WABAG is betting big on desalination water projects across globe and hence formed a separate vertical focusing on this line. WABAG is expected to bid for desalination projects, globally, considering it major opportunity segment in water industry.

Strong and diversified order backlog of Rs.40.3 bn:

- WABAG has a strong order backlog of Rs.40.3 bn (as on Nov, 2012) from its various business segment.

- Order book of the company is growing at the CAGR of 19.5% for past three years. Further, WABAG has received about Rs.8.6 bn worth order during H1FY13 from its various clients.

- With the strong order backlog, focus on desalination and healthy reputation with its clients in place, WABAG is well positioned to cater the burgeoning demand of the industry - domestic as well as international.

Unique outsourcing business model - results in low D/E:

- WABAG outsources the civil works, construction and erection works for the projects in hand to the third party contractors. This allows WABAG to expand in different geographies at a fast pace without expressive capital expenditure.

- Low investments in fixed assets brings down the D/E ratio of the company as the company do not have raise much longterm debt.

Outlook & Recommendation

- At CMP of Rs.556 the stock is trading at a P/E of 18.0x, and 15.1x for FY13E and FY14E respectively. We have valued WABAG using DCF model of valuation.

- We recommend BUY rating on the stock with a target price of Rs.710/- (28% upside) in 15 months.

Source : Equity Bulls

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