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Tuesday, December 23, 2014

LUMAX AUTO TECHNOLOGIES LTD: SHIFTING ITS GEARS !!!


Scrip Code: 532796 LUMAXTECH
CMP:  Rs. 288.40; Market Cap: Rs. 392.32 Cr; 52 Week High/Low: Rs. 322.75 / Rs. 90.90.
Total Shares: 1,35,57,327 shares; Promoters : 75,89,146 shares – 55.67 %; Total Public holding : 59,68,181 shares – 44.02 %; Book Value: Rs. 75.83; Face Value: Rs. 10.00; EPS: Rs. 24.84; Dividend: 15.00 %; P/E: 11.61 times; Ind. P/E: 14.94; EV/EBITDA: 5.83.
Total Debt: Rs. 38.79 Cr; Enterprise Value: Rs. 417.95 Cr.

LUMAX AUTO TECHNOLOGIES LIMITED: Lumax Auto Technologies Limited was founded in 1981 and is based in Pune, India. The company was formerly known as Dhanesh Auto Electricals Limited and changed its name to Lumax Auto Technologies Limited in 2006. It manufactures and sells automotive parts for two wheeler and three wheeler industry in India. Lumax Auto Technologies Ltd came with an IPO in December 2006 offering 30.12 lakh equity shares of Rs. 10 each for Rs. 75 per share raising Rs. 22.60 Cr. The object of offer for sale was to part finance the project’s cost of Rs. 50.2 crore and for other general corporate purposes. The company primarily offers two wheeler chassis; exhaust systems and mufflers, and silencers; petrol tanks; sheet metal and tubular welded products, such as handle bar assemblies, side stands, main stands, footrest assemblies, fork assemblies, and number plates; gear shift levers; parking brakes; adjustor motors; and PCBs, as well as auto lightings. It is also involved in the trading of automotive parts. Lumax Auto Technologies Ltd has 6 manufacturing facilities in India, which are strategically located in the automotive industrial belt in Maharashtra. It has also has a setup in Himachal Pradesh. Lumax Auto’s other manufacturing units are located at Bhosai, Chinchawad, Chakan, Pantnagar in Uttaranchal and Waluj in Maharashtra. Company’s subsidiaries include Lumax DK Auto Industries Limited. LDK, The Gear Shifter division (including research and development facilities) of LDK has been demerged from the LDK and transferred to LMAT w.e.f. October 01, 2013. Recently the company has sold some stake of LMAT to Mannoh Industrial Co, Ltd, Japan. In order to strengthen its foothold in the seat frame business, the Company has entered into a Joint Venture Agreement with Gill-Austem LLC as new JV Company - Lumax Gill-Austem Auto Technologies Private Limited (LGAT) was incorporated during the year. Another JV, Lumax Cornagiia Auto Tech (LCAT) is supplying Air Intake System (AIS) to leading automobile manufactures in India viz. TATA, FIAT, VOLKSWAGEN, SKODA & General Motors. Lumax Auto Technologies Limited is locally compared with Amtek Auto Ltd, Balkrishna Industries, Bharat Forge LTd, Munjal Auto Ind Ltd, Suprajit Engineering Ltd, Motherson Sumi Systems, Swaraj Engines Ltd, Richo Auto and globally compared with Bosch Ltd of USA, Cub Elecparts Inc of Taiwan, Depo Auto Parts Industrial Co. Ltd of Taiwan, Toyota Industries Corporation of Japan, ARB Corp Ltd of Australia, Stanley Elecctric Co of Japan, Sumitomo Electric Ind Ltd from Japan, Sangsin Brake Co. ltd of South Korea, Denso Co of Japan, Metair Investments Ltd Johannesburg, AD Plastik d.d of Africa, DaNang Rubber JSC of Middle East, Phuoc Hoa Rubber JSC , Saph,  Hyundai Wai Corp of Korea, Hi-lex Corp of Japan.

Investment Rationale:
Lumax Auto Technologies Ltd is a part of the DK Jain Group of companies which has carved its strong position in automotive parts and is the market leader in Design, Testing and Manufacturing of Parking Brakes & Gear Shift with a strong presence in both passenger cars as well as in the commercial vehicle segments. In order to fully exploit the opportunity in exports market and to give speed to its Gear Shift lever business, Lumax Auto Technologies incorporated its 100 % wholly owned subsidiary, Lumax Mannoh Allied Technologies Limited (LMAT) on July 22, 2013. Lumax is the leader in automotive lighting systems and has a technical and financial collaboration with Stanley Electric Co (Stanley) of Japan. Lumax, primarily, was in the business of automotive lighting systems which now accounts only 30 % of its standalone revenues and 19 % of consolidated revenues. The company is market leader in Designing, Testing and Manufacturing of Parking Brakes & Gear Shift levers in India since past 10 years with an overall domestic market share of more than 60 % with a strong presence in both passenger cars & commercial vehicle segments. Also the company is a major supplier of chasis, exhaust systems and petrol tanks for two wheelers. Further, Lumax Auto has now diversified into non-automotive segments such as infrastructural lighting. The company has ten modern manufacturing plants in India. Lumax Auto has large and reputed customers which include Bajaj Auto, Honda Motorcycle & Scooters India (HMSI), Piaggio, Lumax Industries, Maruti Suzuki, Tata Motors, Eicher Motors, Force Motors, and Fiat etc. in the commuter segment. Company’s five plants are located in Pune, two plants in Aurangabad, in Maharashtra, one in Manesar Gurgaon, in Haryana, one plant in Ambala in Himachal Pradesh and one in Narsapura, Karnataka. All these facilities are strategically located in the automotive industrial belt. The manufacturing facility at Narsapur, Hubli, Karnataka has commenced supplying plastic moulded parts to Honda Motorcycle & Scooters India (HMSI) last year which helped them to post flat growth in FY14 despite weak automotive sales during the year. With HMSI growing rapidly and capturing significant market share the growth of Lumax is likely to remain intact in the coming years. Lumax has various tie-ups like for its exhaust systems the company has a tieup with Cornaglia group of Italy which is a major supplier to Fiat. For its parking brakes and gear shift levers business, LATL through its subsidiary Lumax DK Auto Industries has formed a JV with M/s Mannoh Industrial Co Ltd, Japan to manufacture complete gear shift lever systems for Manual, AMT & CVT transmissions in India. These tieups ensure best of the technologies for LATLs products. The domestic automobile industry has increased at a CAGR of 10.6 % from 2003-2008. The vast domestic market is attracting more number of foreign automobile manufacturers such as Ford, General Motors, Honda and Toyota as they look for alternative markets to counter the sluggish growth in US market and to counter the overcapacity in other global markets. Global manufacturers such as Suzuki and Hyundai have adopted India as their global production base for small cars. The Indian auto component industry has been growing at a CAGR 16 % p.a. for past seven years and is expected to have 3 % share in global market by 2015-16. Exports of auto components grew at the rate of 30 % during the last five years. As per estimates provided by Automobile Components Manufacturers Association of India (ACMA), auto component exports are expected to reach US$ 20-22 billion by 2015-16. The entry of foreign vehicle manufacturers in India & with the growing cost pressures in the global automotive market gives India a huge exports potential. India has low penetration of car per 1000 person; India has 7-8 cars per 1000 person and India will have a growing middle class from 5 Cr to 55 Cr by 2025 and so the prospects of the Auto Industry in India looks good and eventually with better infrastructure development which are planned out to be around $50,000 Cr in the next 5-6 years will also be the key growth drivers for the auto component industry in India.

Outlook and Valuation:

Lumax Auto Technologies (LATL) is a supplier of key components to the two wheeler and the passenger car industries. It has created its strong position in automotive parts like Sheet Metal parts, Fabricated Assemblies, Tubular Parts for two wheeler and three wheeler industry. Its key customers include Bajaj Auto, Piaggio, Honda Motorcycles and Scooters, Maruti Suzuki, Toyota and Tata Motors. Strong tie-ups with these OEMs will entail large business opportunities in the next few years. For Lumax Auto Technologies its Head lamp contributes 15 % to its standalone revenues; Tail Lamp contributes 3.69 % to its standalone revenues; Frame Chassis contributes 9.95 % to its standalone revenues; Adjustor Motor contributes 6.15 % to its standalone revenues; Gear Shift Assembly/Parking Brake/Nob contributes 32.65 % to its standalone revenues; Air Intake Systems (AIS) contributes 3.32 % to its standalone revenue. The company had shown poor growth in FY14 due to slowdown in Automotive Industry.  But it is expected that there could be a strong revival in automotive industry on the back of overall macro-economic recovery, cut in fuel prices and peak out in interest rates. The auto industry showed decent performance in YTD FY15 and expect it will continue in coming years on the back of revival in economy. Lumax Auto Technologies can have a top line increase by 13 % in FY15e and 15 % in FY16e on the back of strong volume growth driven by new launches and favourable economic conditions. With strong volume growth expectations in automotive industry the next couple of years, it can have a robust margin expansion. On performance side its Total sales for the H1FY15 rose by 13.18 % to Rs. 420 Cr from Rs. 370 Cr in H1FY14. During H1FY15, the consolidated net profit jumped to Rs. 32 Cr against Rs. 14.5 Cr in the corresponding quarter of previous year, an increase of 121 %. EBITDA for the H1FY15 was Rs. 34.54 Cr as against Rs. 27.8 Cr in H1FY14, growth of 24.24 %. EPS of the company stood at Rs. 23.49 a share during the period, registering at 120.8 % increase over previous year period. However, during H1FY15, there was an exceptional item of Rs. 21.36 Cr in Q1FY15 as profit on sale of shares in Lumax Mannoh Allied Technologies Limited (LMAT) to Mannoh Industrial Co, Ltd, Japan in terms of Joint Venture and Share Purchase and Shareholders' agreement. With comfortable D/E of 0.2x and robust RoCE of 17 %+, the stock has to catch up in terms of valuations of its auto ancillary peers which have seen strong rally in the recent past. It is expected that with the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also. 

KEY FINANCIALSFY13FY14FY15EFY16E
SALES ( Crs)766.30762.80861.90991.20
NET PROFIT (₹ Cr)41.1130.2034.8048.00
EPS ()30.1022.2025.5035.20
PE (x)9.3012.6010.907.90
P/BV (x)1.801.701.501.30
EV/EBITDA (x)4.004.205.904.30
ROE (%)19.4013.4013.8016.40
ROCE (%)23.9016.8017.4020.80

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.
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Saturday, December 13, 2014

CREDIT ANALYSIS AND RESEARCH LTD : HAS A GOOD POTENTIAL !!!

Scrip Code: 534804 CARERATING
CMP:  Rs. 1,389.35; Market Cap: Rs. 4,029.12 Cr; 52 Week High/Low: Rs. 1,590.00 / Rs. 666.00.
Total Shares: 2,89,99,122 shares; Promoters : Not Defined00.00 %; Total Public holding 5 % or more : 84,96,066 shares – 29.30 %; Total Public holding 1 % or more : 1,76,25,415 shares – 60.78 %; Public holding : 28,77,641 shares – 9.92 %; Book Value: Rs. 167.01; Face Value: Rs. 10.00; EPS: Rs. 45.16; Dividend: 280.00 % ; P/E: 30.76 times; Ind. P/E: 43.38; EV/EBITDA: 19.31.
Total Debt: ZERO; Enterprise Value: Rs. 4,005.70 Cr.

CREDIT ANALYSIS AND RESEARCH LTD: The Company was founded on 21st April, 1993 and is based in Mumbai, India. Credit Analysis and Research Limited is a credit rating agency, providing rating and grading services for various sectors in India. The company came with an IPO of 71,99,700 equity shares of Rs. 10 each at Rs. 750.00 to the general public in December, 2012. Its rating services include corporate rating services, such as corporate debt, bank loan, issuer, corporate governance, and recovery rating services; financial sector rating services, which cover banks, mutual funds, capital protection oriented schemes, insurance, NBFCs, securitization, and housing finance companies; and public finance ratings that cover ratings of state government entities and urban local bodies, as well as project finance, infrastructure sector, and small and medium enterprises rating services. The company also offers grading services for educational institutes, IPOs, construction companies, shipyard companies, maritime training institutes, renewable energy service companies and system integrators, micro finance institutions, and energy audit, as well as real estate star rating services. CARE has entered into collaboration with four credit rating agencies from emerging markets like in Brazil, Portugal, Malaysia, and South Africa each to provide ratings in those countries, set up ARC ratings in those countries. CARE also provides research services and it has been expanding its product portfolio to include newer services. The company is exploring opportunities to provide risk management solutions and acquired 75.1 % stake in Kalypto, a firm providing risk management software solutions in Nigeria in Nov 2011. Credit Analysis and Research Ltd is locally compared with CRISIL INDIA LTD, ICRA and Globally with Asukanet Company Ltd of Japan, Eprint Group Ltd of Hong Kong, ZWEI Co Ltd of Japan, McGraw Hill Financial Inc of USA, Standards & Poors of USA, Moody's of UK.

Investment Rationale:
Credit Analysis and Research Ltd (CARE) is a leading credit rating company in India offering rating and grading services. It also provides research services and risk management solutions through its subsidiaries. CARE is the second largest rating company in India and it enjoys a strong parentage of marquee banks and large financial institutions like SBI, Canara Bank, IDBI Bank and IL&FS. CARE has over 19 years of experience in this business and has a significant rating coverage of Indian banks and financial institutions. Its experience and knowledge has enabled it to rate a wide range of instruments and has created a strong customer base of 7,754 clients as on March 2014. CARE has rated debt instruments of entities in various sectors like manufacturing, services, banks and infrastructure. It also has provided debt and issuer ratings to corporates, banks, financial institutions, public sector undertakings, state government undertakings, sub-sovereign entities, NBFCs, SMEs and microfinance institutions. In FY14 CARE reported completed assignments of 7,865 nos as compared to 7439 no.s last year. CARE has also launched ARC Ratings in London on 16th January 2014 while it has commenced operations in Advisory Services through its subsidiary company CARE Kalypto Risk and Advisory Services Private Limited. Credit rating business is a niche segment in the financial services arena. In the post-reforms era, with increased activity in the Indian Financial sector both existing and new companies are opting for finance from the capital market. Presently, the India can claim to be one of the world's most vibrant capital markets. In spite of the challenges that are still there, the future of this sector's looks good. The market size of banking assets in India have reached US$ 1.8 trillion in FY 13 and is projected to touch US$ 28.5 trillion by FY 2025. According to the data provided by SEBI, during FY 14, Foreign Institutional Investors (FIIs) invested a net amount of about Rs. 80,000 Cr (US$ 13.31 billion) in Indian equity market. Association of Mutual Funds in India (AMFI) has reported that the mutual fund industry's assets under management (AUM) have gone past the Rs. 10 trillion (US$ 166.37 billion) mark in May, 2014. The AUM of the Indian mutual fund industry rose to Rs. 10.11 trillion (US$ 168.19 billion) in May from Rs. 9.45 trillion (US$ 157.21 billion) in April. A strong capex cycle in Indian economy, lower penetration of corporate bond market and regulatory push due to implementation of Basel II norms are likely to help credit rating agencies ahead. Also Credit Agencies are likely to benefit from increased penetration by pension funds and insurance companies and multiple initiatives taken by the Government of India to develop the bond market. In India, Rating is a more recent phenomenon, but the changing global perspectives on the subject do impact the financial system. India was perhaps the first amongst developing countries to set up a credit rating agency in 1988. The function of credit rating was to institutionalized when RBI made it mandatory for the issue of Commercial Paper (CP) and subsequently by SEBI, when it made credit rating compulsory for certain categories of debentures and debt instruments. In June 1994, RBI made it mandatory for Non- Banking Financial Companies (NBFCs) to be rated. Also earlier there was severe under-cutting in the BLR (Bank Loan Rating), which impacted the margins of credit rating business, however, over the past six months, SEBI has came out with its guidelines under which a credit rating agency (CRA) has to disclose its minimum rating fees on a new BLR assignment. Around 50 % to 60 % is surveillance income and 70 % to 80 % of the business comes from existing clients with the balance coming from new clients. Therefore, this provides a hedge against a downturn even if CARE does not get any new client. However, old clients are still enjoying discounted fees in the BLR segment. Consequently, the full impact of SEBI guidelines on minimum rating fees is also not visible. CARE is trying to gradually increase its fees going forward, which is expected to improve the margins of the BLR segment and partially negate the effect of lower margins in SME rating business. CARE has also started increasing its presence in the SME segment. For this, CARE has expanded its reach to 60-70 locations, the results of which will be visible in the coming years. This should surely benefit CARE.

Outlook and Valuation:
CARE is the second largest rating company in India in terms of rating turnover. CARE also enjoys a strong parentage of marquee banks and large financial institutions of India like SBI, Canara Bank, IDBI Bank and IL&FS. CARE has over 19 years of experience in this business and has a significant rating coverage of Indian banks and financial institutions and financial instruments. CARE is primarily engaged in rating services which accounts for around 98 % of the total revenue of the company as of FY13. CARE has achieved a steady growth in its ratings business having rating relationships with 7,754 clients and with number of assignments of 7,865 and it has cumulatively rated around Rs. 7.7 lakh Crs of debt in FY14. In the last few years, the company has begun expanding itself internationally and is now providing technical assistance services to countries like Maldives, Hong Kong, Nepal and Mauritius. Globally and in India also Credit Rating business will continue to be an niche business making existing players in India thrive on the upturn expected in the economy over the medium term. This is because credit rating agencies all across the globe are a business based on trust, long relationships and hence from the market point of view also there is unlikely to be any excess supply of paper in this space. Also one important and noteworthy aspect in the Indian Ratings space is that global rating players have shown strong interest in the Indian ratings players with S&P holding 75 % in CRISL and Moodys holding 50.8 % in ICRA which has resulted in a sharp rise in credit rating counters. After CRISL and ICRA, CARE is now the second largest player in the rating space which is now available going ahead. While any kind of strategic tie up cannot be ruled out, it is quite clear that in future such a development cannot be ruled out. Added to this CARE is atleast twice as large and more profitable to ICRA and enjoys better financials and return ratios but still trades at 20x FY15E as compared to 34x FY15E for ICRA. From performance side, CARE’s income from operations increased 14 % yoy to Rs. 74.3 Cr in Q2FY15 despite sluggish growth in bank credit. This higher income came mainly from surveillance cases. The sequential strong growth was seen mainly due to cyclical nature of rating business. Total operating expenditure increased to 28 % yoy to Rs. 22.70 Cr mainly due to 43 % yoy increase in the staff cost which was Rs. 16.70 Cr. Higher staff cost was due provision for ESOP cost and also increase in the staff count on account of continued focus on building the business team especially in the SME space. CARE’s EBITDA increased 8 % YoY to Rs. 51.5 Cr, and its EBITDA margin reduced to 69.4 % from 72.9 % in Q2FY15. However, it was much ahead than EBITDA margins of its listed peers ICRA which has EBITDA margin of 40.1 % in Q2FY15 and CRISIL with 33.3 % in Q2FY15. As CARE declared special dividend of Rs. 65.00 per share in the last quarter, the company had to sell its some of the investments and booked the gain on investments to P&L a/c. As a result, the company’s net profit increased 50 % YoY to Rs. 52.40 Cr and its Net Profit margin increased to 54.1 % from 49.6 % in Q2FY15. Modified credit ratio (MCR) has increased from 1.0 in Q1FY15 to 1.3 in Q2FY15 which is a good sign for the economy and it also suggests improvement in credit environment during the recent quarters. It was 1.1 in Q2FY14. MCR is the ratio of upgrades against downgrades in ratings of the companies. An increase in MCR means stable and improving financials of the rated companies. CARE continued with its liberal dividend pay-out policy and the company had announced a special dividend of 650 % in Q2FY15 with the purpose of sharing the cash surpluses with the shareholders. Combining this with the interim dividend announced in Q1 of 60 %, the total dividend paid so far is 710 % or Rs. 71. In Feburary 2014, the stake holders of CARE namely IDBI holding 16.62 %, Canara Bank holding 11.95 % & SBI holding 5.19 % invited bids for selling their 33.76 % or approx 97,88,041 Cr shares of their holding in CARE. However the bids did not went through at that time due to valuation issues. It is now heard that CARE is likely to revive the stake sale of its investors again, now it should be noted here that if at all this stake went through, will also trigger an open offer for an additional 26 % shares facilitating the new investor to corner over 70 % in CARE. So if this stake sale goes successful then there would be a very good upside for the stockCARE’s Q2FY15 performance was better and one can have a positive view on the huge long term opportunities for the credit rating sector on the back of development in debt market over next two to three years and CARE should be a good pick among the listed credit rating agencies. CARE is the best placed for cyclical recovery in corporate capex and bank credit growth. It is expected that with the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also. 

KEY FINANCIALSFY13FY14FY15EFY16E
SALES ( Crs)198.80229.50265.80319.00
NET PROFIT (₹ Cr)113.00128.70148.20179.10
EPS ()40.8044.0051.0062.00
PE (x)18.9030.7026.6022.00
P/BV (x)5.108.1012.109.80
EV/EBITDA (x)15.8026.7022.8018.60
ROE (%)28.3027.7036.5049.00
ROCE (%)167.30164.50101.50111.60

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-------------------------------------------------------------------------------------------Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.
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Wednesday, December 3, 2014

VA TECH WABAG LTD : ONE OF THE BEST IN INDUSTRY !!! UPDATES

Scrip Code: 533269 WABAG
CMP:  Rs. 1,582.15; 
Market Cap: Rs. 4,240.53 Cr; 52 Week High/Low: Rs. 1,748. / Rs. 485.00; Total Shares: 2,68,02,373 shares; Promoters : 78,86,702 shares –29.43 %; Total Public holding : 1,89,15,671 shares – 70.57 %; Book Value: Rs. 224.93; Face Value: Rs. 2.00; EPS: Rs. 34.21; Dividend: 400 % ; P/E: 46.97 times; Ind. P/E: 35.99; EV/EBITDA: 20.28.
Total Debt: Rs. 158.25 Cr; Enterprise Value: Rs. 4,068.40 Cr.

VA TECH WABAG LTD: VA Tech WABAG Limited was incorporated in 1995 and is headquartered in Chennai, India. The company was formerly known as Balcke Durr and Wabag Technologies Limited and changed its name to VA Tech Wabag Limited in April 2000. Va Tech Wabag Limited provides solutions in the water treatment industry. The company offers life cycle solutions, including conceptualization, design, engineering, procurement, supply, installation, construction, and operations and maintenance (O&M) services. The Company has four business units: Municipal Business Group, Industrial Water Business Group, International Business Group and Operation and Maintenance Business. It provides a range of engineering, procurement and construction, and operation & maintenance (O&M) solutions for sewage treatment; drinking and industrial process water treatment; effluents treatment; and sludge treatment, desalination, and reuse for institutional clients, including municipal corporations, and companies in the infrastructure sector. The company operates primarily in India, Middle East and North Africa, central and eastern Europe, China, and south East Asia. It has overseas subsidiaries in Austria, Switzerland, Germany, Czech Republic, Romania, Macao, Algeria, Tunisia, Egypt and Turkey.  It has a joint venture agreement with Zawawi Trading Company LLC in Oman. The company came with an Initial Public Offer in September 2010 with 9.5 lakhs shares at the issue price of Rs. 1,310 a share raising Rs. 475 Cr. On August 2011 the company declared the sub division of shares from the face value of Rs. 5 to Rs. 2.00. VA Tech WABAG is locally compared with Eco Recycling Limited and Ion Exchange, A2Z Maintainace and globally compared with Beijing Enterprises Water Group Ltd of China, HanKore Environment Tech Group Ltd, SIIC Environment Holding Ltd, Severn Trent PLC, Cia Saneamento Basico Do Estado SABESP,  Veolia Environment SA of France, Suez Environment of France, ITT Corporation of USA, United Utilities of UK, Severn Trent of UK, Thames Water of UK, American Water Works Company of USA, Nalco Company Water treatment of USA, GE Water of USA, Kurita Water Industries of Japan, Takeei Corporation of Japan, Daiseki Co. Ltd of Japan    

Investment Rationale:
VA Tech Wabag Ltd (WABAG) is an established EPC player in water management space. It offers complete life cycle solutions from project design to installation to operation & maintenance. WABAG is multinational player with presence in India, MENA region, Central & Eastern Europe, China and South East Asia. Majority of its revenues comes from various municipalities. The company owns more than 100 process and product patents and has research centres in Austria, Switzerland and India. India is the second most populated country with over 1.2 billion people and the Official estimates of the Ministry of Water Resources (MoWR) have put total utilisable water at 1,123 billion cubic metres as against the current use of 634 billion cubic metres, which reflects the surplus. However, there exists a considerable temporal and spatial variation within the country with respect to water availability. The Indian population is 16 % of the world with 4 % of its water and 2.4% of its land. The population is expected to increase from 1.2 billion in 2010 to 1.6 billion by 2030. The country’s urban component is expected to increase from 30 % in 2010 to 50 % by 2030 also the per capita income is expected to rise by US$468 to US$17,366 by 2050. The freshwater is crucial need for human wellbeing and sustainable socio-economic development. Global water demand in terms of water withdrawals is projected to increase by around 55 % by 2050, mainly because of growing demands from manufacturing, thermal electricity generation and domestic use. As a result, freshwater availability will be increasingly strained over this period, and more than 40 % of the global population is projected to be living in areas which will face severe water stress through 2050. Seawater and brackish water desalination for reuse represents good demand. The share of water derived from long-distance transfer, desalination and reuse is expected to rise from 1.8 % in 2011 to 5.7 % in 2030. Although the low-cost water resources will continue to remain the dominant source of supply, and the expenditure in developing new water resources could grow by 8.2 % over the period 2013-2018. Spending on water infrastructure by industrial users is expected to outpace the municipal water sector. While the natural resource industries are increasingly pursuing marginal resources, these involve significant wastewater treatment challenges. In other sectors, brand management and corporate social responsibility are driving investments in water-efficient technologies. The VA Tech Wabag has won several a new large framework contracts worth Euro 4.5 Cr in the Operating & Maintaining space in Turkey which reiterates the growing stature of WABAG in Turkey and company continues its focus on increasing O&M Revenues. Wabag expects stronger traction in its domestic order books over next few months. This may be due to the government’s increased focus on improving water infrastructure in urban and rural areas in India, including Rs. 51,000 Cr for Ganga cleaning program over the next 5 years and Rs. 19,500 Cr to be incurred by Delhi Jal board to improve the water infra. WABAG has its inherent skills and execution capabilities in this sector and is very well placed to capture a large pie from these upcoming opportunities. Increasing adoption of desalination process to secure clean water is on its spree & is likely to open up lots of new opportunities for the company. Over the next couple of quarters, Nemeli phase 2 desalination project & additional 2 more desalination plants of 400 mld in Tamil Nadu viz. Tuticorin & Ramantham are expected to open up for bidding and WABAG has good chances to win those. Also company has strong order books from Andhra Pradesh, Maharashtra, Bihar, Rajasthan, Odhisa and Delhi, with projects size being between Rs. 200 Cr to Rs. 500 Cr. Internationally, WABAG’s order book too remains healthy and growth is expected to come from Srilanka, Philippines, Turkey and Eastern European geographies and Middle East areas especially Qatar, Bahrain. Wabag has incorporated a new subsidiary in Thailand to target the Indo-China markets. Being one of the key players in Turkish market, Wabag is bullish on its Turkey MDU. Water recycling and sustainable solution for a wastewater treatment plant in Saudi Arabia made by WABAG for the Al Kharj industrial park are now operational. WABAG to build two new water treatments plants in Egypt with a value of around EUR 13 million and Clean drinking water from the Nile for the cities of Suez and Port side. The water and waste-water sector continues to be an attractive investment portfolio for VA Tech Wabag due to various factors such as urbanization, industrialization and population explosion. The growth of the water market in the Asia Pacific region is driven by growing population densities in these regions. In the Middle East, the driver is scarcity, while massive government spending will boost the Chinese market. Sea water desalination will attract investments to augment the installed capacity from 66 million cubic metres (m3) per day to 120 million m3 per day by 2016. The global water market is estimated to be around US$ 400 billion.

Outlook and Valuation:
WABAG is a global technological leader in the entire water treatment field managed by professionals and technocrats. The company has a unique business model with strong in-house research. The company has an excellent system for efficient equipment procurement and has expertise of better engineering & designs. The company also enjoys higher margin due to close monitoring and cost control. The company runs an asset-light business model by outsourcing the capital-intensive construction business and focusing on delivering the optimum water technology solution. Wabag entered into long term agreement for technology co-operation with Royal Haskoning DHV of Netherlands and intends to use it in India and Swiss markets. This innovative technology comprehends Wabag's superlative technology portfolio as it requires less power and is more cost effective in waste water management. Hence this new technology will be less expensive than the conventional technology both on capex and lifecycle cost fronts. The company recently inaugurated its BOOT Project in Ujams, Namibia, an Industrial Water Reclamation Plant. It is a technologically advanced project treating effluents from five different production plants which include brewery, slaughterhouse, beverage, chocolate and tannery. The plant will serve as a very good reference project for WABAG in terms of high end technology. The concession period is for this project is 21 years. VA Tech Wabag is attempting to expand into new geographies, including South East Asia, Sub-Sahara Africa, Latin America and Central Asia. In FY14, the company received initial orders from Nepal and Tanzania which also opens up interesting growth possibilities to ramp-up the business in these countries. Order intake in overseas subsidiaries has increased from Rs. 600 Cr to Rs. 700 Cr in FY12-13 to Rs. 1,640 Cr in FY14. O&M business contributed 20 % of FY14 revenues where margins are higher at 18 to 20 % vs 12 to 13 % in projects. WABAG intends to increase contribution from O&M segment and intents to move up in value curve in terms of Refurbishment, Spare Parts, Plant rehabilitation and automation. WABAG’s global operation makes it expose to multiple currencies & exchange rates volatility could significantly impact its earnings. Also Wabag’s presence in politically unstable countries likes Libya and Iran, where its peers have reported delays in project execution could also be a concern. However, these projects are backed by Dollar denominated LC’s, which results in limited impact on Wabag’s financials. On performance side WABAG’s consolidated Revenue for Q2FY15 stood at Rs. 500 Cr showing growth of 9 % YoY. Its EBITDA stood at Rs. 32.9 Cr grew 3 %. Company’s PAT stood at Rs. 15.60 Cr a drop of 14 % YoY due to lower execution coupled with reduced margins and increase in interest costs. WABAG’s Standalone sales stood at Rs. 233 Cr with an EBITDA of Rs. 23.6 Cr and its PAT stood at Rs. 11.6 Cr. Wabag’s gross cash stood at Rs. 340 Cr at the end of Q2FY15 which declined as compared to Rs. 470 Cr at the end of FY14. Its Gross debt stood at Rs. 250 Cr at the end of Q2FY15 vs Rs. 157 Cr at end of FY14. The increase in borrowings has been mainly led by higher working capital and investment in BOOT project. WABAG being the only listed Indian player with presence across the value chain of water spectrum is the best play on water scarcity theme. Rapid urbanisation, dwindling fresh water reserves, widening demand-supply gap, depleting groundwater level and increasing thrust of government on water & infra sectors, will keep the water treatment business thriving for a long time. Superior return ratios like its RoCE of +20 %, cash rich balance sheet, asset light business model and technological & locational advantage places it above its peers. Wabag’s book to bill ratio of 2.2x along with its superior execution track record, will place VA Tech Wabag on a sustainable growth path. Further upcoming opportunities of over Rs. 70,000 Cr from Ganga cleaning + Delhi Jal board project, alone would be more than double its order backlog, even if Wabag maintains a strike rate of mere 10 %. It is expected that the company’s surplus scenario is likely to continue for the next three years, & will keep its growth story in the coming quarters intact. It is expected that over 2013-2016E, the company can to post a CAGR of 23 % and 21 % in its top-line and bottom-line respectively.

KEY FINANCIALSFY13FY14FY15EFY16E
SALES ( Crs)1,618.852,238.602,647.503,055.40
NET PROFIT (₹ Cr)90.34113.35142.30168.90
EPS ()34.0342.6153.5763.35
PE (x)41.2432.9329.3224.70
P/BV (x)5.214.444.664.06
EV/EBITDA (x)22.7416.7516.6913.23
ROE (%)12.5313.5116.4317.56
ROCE (%)20.7922.4221.9924.58

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.
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