Water Industry - IndiaNivesh

Sector Report | Water Industry

Contents Global Water Industry

03‐04

How big is the Global Water Market?

04‐06

Which geographies would see high spending?

06‐09

India ‐ Huge Opportunity ahead…

09‐15

How the listed companies fare…?

15‐16

Companies

ION Exchange (India) Ltd.

17‐29

Moving to the next Orbit next Orbit

VA Tech Wabag Ltd.

30‐43

Leader with the technology edge technology edge

IndiaNivesh Securities Ltd

04 Dec 2017

2 of 43


Contents Global Water Industry

03‐04

How big is the Global Water Market?

04‐06

Which geographies would see high spending?

06‐09

India ‐ Huge Opportunity ahead…

09‐15

How the listed companies fare…?

15‐16

Companies

ION Exchange (India) Ltd.

17‐29

Moving to the next Orbit next Orbit

VA Tech Wabag Ltd.

30‐43

Leader with the technology edge technology edge


04 Dec 2017

2 of 43


Global Water Industry

INSTITUTIONAL EQUITIES

Water ‐ Stay Invested, Invested, Stay Afloat Afloat ‐ Stay Water already a scarce Commodity Water is an essential commodity, with wide usage across all spheres of our life. Right from growing food, producing any type of of goods goods required for our existence, water has a key role to play. Even though water covers 70% of of Earth’s Earth’s surface, only 1.5% of of it it is fresh water. We are more dependent on annual precipitation for water supplies, which is not evenly distributed across geographies. ~65% of the annual precipitation evaporates into atmosphere, 20‐25% of it flows into waterways, not fit for human consumption. Only 10% of the rainfall is available for Personal, Agricultural and Industrial usage.

Population boom to drive demand We expect the global population to continue growing for next 2‐3 decades, mainly driven by African and some areas of the Asian sub‐continent. This population growth is likely to drive urbanization from 54% in 2015 to 60% in 2030. ~12% of available water globally flows into domestic use, 69% into Agriculture and 19% into Industrial production. Half the water consumed in developed world is towards Industries, whereas 70‐80% of it in developing world is towards the Agriculture. Rising population and rapid urbanization would drive the Food and Energy demand in developing world. This in‐turn should drive demand for water. Also surge in the Industrial activity would drive demand for water. As per United Nations Food and Agriculture Organization (UNFAO) report ~1.2 bn people are living in regions with extreme water scarcity. This is expected to increase to ~1.8 bn people by 2020 (owing to rise in water pollution, decline in waterbed levels, which makes the water undrinkable and unsafe for usage).

ANALYST Yellapu Santosh Tel: +91 22 6240 6456 [email protected] Sabyasachi Mukerji Tel: +91 22 6240 6458 [email protected]

Fig. 1:

Asia, the most stressed Water market If one were to look at continent‐wise details then, Asia is expected to face severe water shortage. ~60% of the global population is based in Asia with only 36% of global water supply. Within Asia, China and India are the two most populous economies, who could face water shortage going forward, as they are majorly exploiting available water resources. On other hand, North America has access to 15% of of global global fresh water with with just just 8% of of global global population.

~1.5% of the of the Global Water sources are Fresh Water

Fig. 2:

Water Vol. (cu. kms)

% of fresh of fresh water

% of total of total water

100%

1,338,000,000

‐

96.5

80%

Ice Caps, Glaciers, Permanent Snow

24,064,000

68.7

1.7

Groundwater

23,400,000

‐

1.7

Soil Moisture

16,500

0.1

0.0

Ground Ice & Permafrost

300,000

0.9

0.0

Lakes

176,400

‐

0.0

Water Source

Oceans, Seas & Bays

Atmosphere

12,900

0.0

0.0

Swamp Water

11,470

0.0

0.0

3,240

0.0

0.0

1,386,000,000

‐

100.0

Rivers & Biological Water Total

Source: Igor Shiklomanov's Igor Shiklomanov's Chapter "World Chapter "World fresh fresh water resources" water resources" in in Peter H. Peter H. Gleick,

69% of water of water globally flows towards Agriculture 25%

60%

48% 69%

71%

81%

64% 81% 54%

40% 37% 20% 0%

19% 12% d l r o W

4% 15% a c i r f A

M un un ic icip al al

16%

12% 14% a c i r e m A

17%

10% 9%

A S

a i s A

I nd nd us ust ri rial

21%

20%

e p o r u E

a i n a e c O

Agricul tu tu ra ra l

Source: Industry Report, Industry Report, IndiaNivesh Institutional Research Institutional Research

1993, IndiaNivesh Institutional Research Institutional Research


04 Dec 2017

3 of 43


Fig. 3: Asia, Europe & Africa are most stressed continents 70%

60%

Fig. 4:

Africa to see strong population growth….

100%

1% 5% 9%

80%

10%

60% 50% 36%

40%

10%

13% 11%

N or orth & Central America

South America

% of global of global p op op ul ulat io ion

20%

Asia

Aust. & Oceana

40%

Europe

17%

20%

2017

2030

26%

0%

Afri Africca

% of Global of Global Avg. Freshwater Res.


Asi Asia

Euro urope

2050

LatA LatAm m & Carib Caribbe bean an

2100

North North Ameri America ca

Ocea Oceania nia


Globally % of Urban of Urban population to increase…

Fig. 6: Asia has maximum no. of cities of cities with > 1 mn inhabitants 400

100%

80%

46%

48%

53% 60%

58%

8%

5%

0%

Fig. 5:

43% 54%

40%

13% 6% 1%

Af ri rica

1% 4% 6% 6%

60% 60%

15% 8%

1% 4% 8% 7%

9%

26%

30% 20%

1% 5% 5% 8%

40%

320 240

71%

160 40%

20%

54%

52%

47%

60%

29%

0

0% FY 1950

80

FY 2000

FY 2010

Urban

FY 2015 Rural


FY 2030

North America

Latam & Carribean 1950

Europe

2000

Africa

2010

Oceania

2015

Asia

2030


How big is the Global Water Market? Industry experts expect the 2017 Global Water market size to be ~$652 bn (76% of it from Municipal and the remaining from Industrial segment).

Within Municipality, APAC is the biggest market Given the high water stress, inadequate infrastructure and continued increase in demand, APAC emerges as the largest spender within Municipality segment. India, China, Malaysia, Thailand, Sri Lanka, Japan, Philippines, Vietnam, Bangladesh are few markets currently pursuing capacity augmentation within the Municipal segment. In the domestic markets, we expect awarding traction to be seen from Namami Gange, AMRUT and Smart City projects. Opening up of Japanese Water market to private sector, higher spending in Chinese, Vietnam, Philippines market and strong bid pipeline in Sri Lanka market (under Water Supply & Sanitation Improvement scheme), comfort us about the awarding momentum outlook, going forward.


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Project upgrades to drive European Municipal markets Higher spend is expected towards the up gradation of existing plants with new technologies, in order to make the Asset management smarter. Fig. 7:

Within Municipality segment, APAC is the biggest market… Latin America 6%

Fig. 8:

O&M accounts for over half of the Municipality Spending…

Design, Engineering & Construction 18%

North America 26%

Chemicals 3% Process Control & Management 16%

APAC 35%

Water & Wastewater Technology 11% Operation & Maintenance 52%

Europe 23%

Middle East & Africa 10%

Source: Industry Reports, IndiaNivesh Institutional Research


Fig. 9:

Fig. 10: O&M accounts for 46% of Industrial Spending…

APAC & Europe are 2 largest markets within Industrial segment Latin America 10%

APAC 30%

North America 19%

Design, Engineer. & Construction 10%

Chemicals 9%

Process Control & Management 17%

Operation & Maintenance 46%

Middle East & Africa 14% Europe 27%


Water & Wastewater Technology 18%


Key trends in Industrial Water Space Government initiatives, favorable policy (like Zero Liquid Discharge) announcements, fuelled by water scarcity and stress has propelled growth of Industrial Water and Waste Water treatment in the APAC region (especially in India and China). Oil and Gas and Mining sectors are likely to contribute majorly towards Middle East Industrial Water treatment industry. Strong awarding outlook is expected from Saudi Arabia, Oman and UAE markets. Food and Beverage industry in Europe is likely to contribute towards the growth of Industrial Water and Waste Water treatment, as demand for efficient treatment technology continues to increase. With Mining boom, stricter enforcement of regulations, adoption of BOOT model in Industrial Water treatment industry could lead to increase in awarding from the Latin American markets, going forward. Again if one were to look at the ~$652 bn of Global Water market size, then 50.5% is the share of Utilities and the remaining is held by Solutions & Services companies.


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Fig. 11: Utilities account for 50.5% of the Global Water market

Fig. 12: Solutions account for majority of Solutions & Services market

Build/ Construct 16%

Solutions & Services 50%

Utilities 50%

Operation Services 19%

Design/ Consulting 9%

Solutions 50%

Maintenance & Monitoring Services 6% Source: Industry Reports, IndiaNivesh Institutional Research


Within Solutions, Process Control & Management (PCM) accounts for a major 47.4% of total spends. Treatment technologies & Chemicals account for 36.3% and 16.3% of the total $161 bn being spent towards Global Water Solutions. Fig. 13: PCM accounts for 47.4% of Global Water Solutions market

Fig. 14: Coagulants & Flocculants account for majority of Chemicals market spending Antifoam Chemicals 5%

Chemicals 16% Process Control & Management 48% Treatement Technologies 36%


pH Conditioners Other 8% Chemicals 10%

Scale & Corrosion Inhibitors 19%

Coagulants & Flocculants 42%

Disinfectants and General Biocidal Products 16%


Within the $26.3 bn Global Water Chemicals market size, Coagulants & Flocculants account for a major $11 bn of the opportunity.

Which geographies would see high spending? We see strong awarding pipeline of Water/ Wastewater Treatment projects from Asia, Middle East and other African sub‐continents. We expect spending on the Desalination projects in Middle East markets to grow on the back of strong oil prices, which has been the backbone for many of these economies. With oil prices in recent months being on an uptrend, we see the long pending pipeline of large value projects to get awarded in Saudi Arabia and UAE. We also expect few Desalination orders to be awarded from the Yemen and Iran markets over a period the next 2‐3 years.


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In addition to investments made towards Desalination, Water Treatment Projects and Sewage Treatment Projects, Saudi Arabia, UAE, Qatar, Oman, and Bahrain are also simultaneously investing on expanding their water connectivity networks and enhance Storage capacities. Fig. 15:

Middle East Countries

Country

Emerging Trends/ Comments Reforms in Water sector (Split Water and Electricity Ministry in to 2 separate Ministries, reduction of Water subsidies, 

sign MoU’s with private players, privatization of existing government plants). Saudi Arabia



Focus shifts towards Waste Water Treatment projects (through PPP route). 3 Large Wastewater Treatment plants to be awarded under BOT/ BOO scheme.



Announced UAE Water Security Strategy 2036 (reduce demand for water resources by 21%, increase water productivity 3

0

index to $110/ m , reduce water scarcity index by 3 , increase the reuse of treated water to 95% levels) 

UAE spends ~Dh12 bn/ year on Desalination to meet its drinking water requirement. In 2016, UAE had ~70 Seawater Desalination plants accounting for 14% of world’s total output of Desalinated water.

UAE 

Pipeline of Desalination projects looks strong. Some of them include Salalah IV IWP, Ajman, and Hassyan projects.



(1) Water Security Strategy, (2) STEP and (3) MoU between DEWA and ADWEA for connectivity of water network, indicates awarding and execution of Water storage, connectivity and lay‐down of Pipelines during FY18‐19.

 

Pipeline of Sewerage Treatment Plants, Industrial Waste Management, Desalination projects looks strong. 6 Industrial Sewerage Treatment Plants (STPs) are planned. 2 Industrial Water Treatment Plants (IWP’s; Salalah, Sharqiya) on BOO basis to be awarded first. Duqm and Khasab IWP’s would be awarded thereafter.

Oman

Qatar



Darsait, Al Athaiba STPs projects to be awarded soon.



In addition to the on‐going $1bn worth of projects, Haya Water plans to spend another $4.3 bn on networks and Treatment Plants. Majority of it would be spent in 2017‐18.



Plans being drawn to integrate Renewable Energy sources with upcoming Seawater Desalination projects.



One of the few Middle East countries self ‐sufficient in its Water requirements.



Focus is more on Strategic Water Reservoirs (first phase to be operational in 2017).



Next set of opportunities to be driven by the proposed law on Industrial Zones, which in the long‐run could create opportunities for Industrial Waste Water treatment also.

Source: IndiaNivesh Institutional Research

India and China are the 2 largest Water/ Wastewater Treatment markets in Asia. Within Asia, countries like Sri Lanka and Bangladesh are spending to build basic Infrastructure to supply drinking water. World Bank in Aug‐2017 approved $47.5 mn loan to Bangladesh for Water supply projects (total loan sanctioned is $218.5 mn). Simultaneously, Philippines, Malaysia, Thailand, Vietnam, Cambodia, and Taiwan are increasing their allocations and spending towards the Water/ Wastewater Treatment plants. Fig. 16: Country

Thailand

Asian Countries Emerging Trends/ Comments A $3 bn Water Treatment (includes all sub‐segments) market. Agriculture accounts for >75% of Water Treatment market.  2015 and 2016 droughts in northern Thailand, forced government to increase allocation towards Water sector. Laws insist that (1) new Commercial properties should install Wastewater Treatment Systems (2) wastewater from 

livestock before discharging to public must be treated. 

GWI expects Waste Water treatment market to grow ~10% yearly. 90% of Equipment’s used for Water treatments are imported from USA, China, Japan and Korea. See good demand for Chemicals & Resins from this market.



In addition to the existing 46 Sewerage Treatment plants, Malaysian government has announced 77 new Sewerage Treatment plants by 2040 at estimated cost of RM52 bn (Singapore$16.8 bn).

Malaysia



As part of Water Services Industry Act (WSIA) Act, 2006, Indah Water Konsortium (IWK), government owned entity will be split separately in to state‐level entities and there‐after merged with state water supply companies in long ‐run.



In Mar‐2017, Johor became the first state in Malaysia to have a Waste Water recycling plant.



As part of Water Supply & Sanitation Improvement project, Sri Lankan government is spending on building the basic



Infrastructure. This project is being funded by JICA, ADB and other multi‐lateral funding agencies. Awarding pipeline looks stronger (includes awarding of Desalination projects).

Sri Lanka


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

One of the few Asian economies to successfully implement PPP model in Water sector (recently awarded projects‐ Metro Agoo Waterworks Inc. bagged Ilocos Village Water Supply project; Manila Water Company got Bulacan project; Apo Agua Infrastructura Inc. got the first Water Treatment project for Davao City; JFE Engineering got the upgrade works for Water purification project).

Philippines 

One of the few Asian economies with a very strong and robust awarding pipeline which should last for next few years.



Maynilad Water Services plans to spend P30.6 bn towards Wastewater management program, during 2018‐22 (invested P42 bn in last 5 years).



Japan

Opened the Water Treatment industry for wider private sector participation. 1 of the ~10 projects is recently awarded to Veolia Japan along with consortium partners.


We see lot of opportunity in Latin American Water Treatment market. Despite the evolving regulatory framework, funding continues to be a major concern in some of these countries. Peru is one of the few countries where we see a lot of awarding related to the Potable Water treatment projects. This is in addition to strong bid pipeline seen at Brazil, Argentina and Columbia. Fig. 17: Country

Latin American Countries Emerging Trends/ Comments 

……………………………………………….…………………………………………….………….………

Investment towards sanitization was below $3 bn in 2016 (half the requirement to fulfill sanitization goals, established by Brazilian National Plan for Basic Sanitation). In mid‐to‐long term, sector should benefit from Investment Partnerships Program as 18 of state‐owned companies would be privatized.

Brazil 

Brazilian National Water Agency (AWA) estimates $47.3 bn of investments till 2035 to attain universal Sewerage services.



Strong pipeline of Desalination & Wastewater treatment projects.



As part of Argentina National Water plan, in next 15 years investments are planned to the tune of $ 44 bn. Already tenders worth $ 2.4 bn have been announced and few of them have been awarded.

Argentina



Santa Fe province to spend 1.1 bn peso ($ 66 mn) to increase potable water production by 75%.



Northern provinces in Argentina would award $ 494 mn of Water and Sanitation projects in 2017.



Idesa estimates that PPP’s could quadruple Argentine Infra (including Water investments) to $ 97 bn during 2018‐20.



Columbian Housing Ministry in 2016 announced that it plans to award 100 Wastewater Treatment projects. Some of the key projects to be awarded include, Bogotá's El Salitre plant (waiting for WB financing approval),Canoas wastewater treatment plant (as part of Water and Sewerage Utility EAAB's plans to clean up contaminated Bogotá river, already

Columbia

raised 4.5 bn pesos), build Wastewater treatment plant to serve Pereira and Dosquebradas on PPP basis. 

Regulator Superservicios estimates the total installed capacity for Water Treatment to be at 33.1m3/s via 562 primary and secondary facilities. This is just 30% of the Country’s Waste Water getting treated.



SEDAPAL (Regulatory body for managing Lima’s Water Systems) is sitting on a cash of $ 5 mn (expected to reach $ 30 mn by 2020). With the new Optimized Master plan likely to be launched, we expect awarding of Water Treatment projects to gain momentum (in addition to rebuilding of Canal Systems, Build dams, Filtration Systems, amongst others).

Peru



National Water Regulator SUNASS, plans to award at least 3 potable Water Treatment plants (La Atarjea 3, Huachipa 2 and Lurín) in 2017.



SEDAPAL has plans to invest $ 6 bn towards ~200 Potable Water and Sewerage projects over the next 5 years (2017‐22).



Plans to award the up gradation of La Pastora Drinking Water Treatment Plant in 2017.


Fig. 18: African Countries Country

Emerging Trends/ Comments 

ONAS (Office Nationale de L’Assainissement) plans to double the integration of treated waste water until 2020.



Strong pipeline of 38 (9 to be industry oriented) new Sewerage Treatment plants to be awarded in next 2‐3 years’ worth

Tunisia

rd

~Euro 1 bn. Of a total 113 Sewage Treatment Plants, only few are equipped with 3 cleaning stage. This indicates scope for upgrades in long‐run. 

As per Holding Company for Water and Wastewater (HCWW) Master plan, capex of $2 bn and $3.5 bn would be spent towards Water Supply & Wastewater Treatment during 2015‐20.

Egypt

 

New Water & Sanitation Bill approved to encourage private sector participation in the sector. Funding agencies, like, AFESD, OFID, USAID, Swiss and German Development Bank, Islamic Development Bank have come forward to fund various Water Supply, Treatment projects.



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We see increased investment activity in Water sector from North African countries like Tunisia, Ethiopia, Egypt. Most of these projects are funded by Multi‐lateral Agencies. Increasing water scarcity, more of natural calamities is driving the Water spend across the African countries. Given that Europe has one of the best Water Infrastructure, focus for most of these countries is now shifted towards Smart Asset management. Accordingly, we expect Operation and Maintenance projects to see deployment of the next generation technologies like Smart Management, IOT, amongst other areas.

Fig. 19:

European Countries

Country

Emerging Trends/ Comments 

Austria

Announced to spend Euro 46 mn towards drinking Water projects, expansion of Wastewater Treatment plants and flood protection in Jul‐17. Of this Euro 26.6 mn would be used towards drinking Water and Wastewater Treatment.


India‐ Huge Opportunity ahead… Water Resources at a glance India accounts for 2.45% of the world’s land area, 4% of water resources, but 17% of the world’s population. Of the total 4,000 BCM of annual precipitation of water (including snowfall) seen in India, 48% ends up in rivers (average annual potential flow estimated at 1,869 BCM). Of this only 60% (1,123 BCM) is utilizable. Of the total potential of these river basins 59.4% (accounting for 1,110 BCM) comes from Ganga‐Brahmaputra ‐ Meghna basin alone. Fig. 20: Water Resources at Glance Water Source

Fig. 21: Qty. (in BCM)

Water Resource potential and Utilisable levels Water Reserves Potential (in BCM)

Utilizable Surface Water (in BCM)

1,110.2

273.9

Indus (up to border)

72.9

46.2

River Basin

Average annual Precipitation

4,000

Avg. precipitation during Monsoon (Jun‐Sept)

3,000

Water loss due to Evaporation & Soil Water

2,131

Average annual potential to flow in to Rivers

1,869

Godavari

110.3

76.6

Natural Run‐off

1,987

Krishna

78.5

58.0

Mahanadi

67.3

49.7

Narmada

44.9

34.5

Others

385.0

151.1

Estimated utilizable surface Water Resources

690

Total Utilizable ground Water Resources

433

Total Annual Utilizable Water Resources

1,123

Per capita Water availability (2003‐07 average)

1,720


Ganga‐ Brahmaputra ‐ Meghna


The ‘Water’ Challenge India faces water issue owing to (1) excessive and inefficient use of water used for Agriculture, (2) Depleting ground water levels, (3) increase in river pollution, (4) extremity in the monsoon season. Water Resource Group (WRG) 2030 Report, expects burgeoning population, urbanization and rapid economic growth to lead to 50% gap (754 BCM) in water supplies and projected demand. Barring East India and J&K, entire country would be facing moderate to severe water stress. The same report highlights 37 measures to bridge the water availability gap. The cheapest measure would entail investments of $5.9 bn by 2030 whereas the total government annual expenditure towards water sector has been


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to the tune of $2.3 bn in 2009. If one were to explore cheaper alternatives to lower this deficit then 80% of it is to be addressed by improving the efficiency and productivity in Agriculture sector (accounts for 80% of water demand till 2030). We expect the “triple play effect”, (1) River clean‐up programs, (2) High government spending, and (3) Change in the regulators perspective, to create favourable long‐term outlook towards the Water Treatment sector.

River clean‐up gets government attention Environment and Forest Ministry is focusing on cleaning ‐up of rivers across the country. As per a 2015 Central Pollution Control Board (CPCB) report, Sewerage generated from 650 urban cities along 302 river stretches has increased from ~38,000 MLD in 2009 to 62,000 MLD in 2015, reflecting 63% increase. Against this, 816 STPs have installed capacity of 23,277 MLD, indicating that only 37.5% of the need is addressed. Fig. 22:

Details of pollution across river stretches

Range

Count of rivers

BoD > 30mg/ I

34

Fig. 23:

Polluted river stretches ‐ State‐wise Mix (%)

Length (in kms)

West Bengal, 6%

A.P., 6% Assam, 5%

2,726 U.P., 18%

BoD 20‐ 30mg/ I

17

1,145

BoD 10‐ 20mg/ I

36

1,834

BoD 6‐ 10mg/ I

57

2,492

Others, 20% Telangana, 6% Orissa, 5%

BoD 3‐ 6mg/ I Totals

158 302

Gujarat, 5%

4,166 Maharashtra, 17%

12,363

Note: BoD‐ Biological Oxygen Demand; Source: CPCB, IndiaNivesh Institutional Research

M.P., 7%

Karnataka, 5%

Source: CPCB, IndiaNivesh Institutional Research

Under the National River Conservation Plan (NRCP) a total of Rs 45.1 bn is sanctioned towards 30+ rivers flowing across 14 states. This sanctioned amount is likely to create 3,155 MLD of STP capacities. As of Aug‐17, only 78% (i.e. 2,455 MLD) of the targeted capacity is created. Notably, 2 rivers which have seen wide interest from various stakeholders and large scale funding allocations are Ganga and Yamuna. Since 1993, ~Rs 15.1 bn has been spent under the Phase I and II of Yamuna Action Plan. Phase III (under new policy named as ‘Maily Se Nirmal Yamuna Revitalization Plan’) is expected to see Rs 16.5 bn of awarding activity towards STPs and Trunk Sewers, over next 7 years. Already Rs 3.4 bn has been sanctioned by Water Ministry, where 30% of the cost burden is to be shared by the respective state government. Another focus area for government is to clean river Ganga. Namami Gange Action Plan (NGAP) has been rolled‐out separately under the Ministry of Water Resources. As per a CPCB 2017 report, ~10,705 MLD of water is discharged every year in to river Ganga. Installed water treatment capacities in 2012 were at 1,231 MLD. In last 3 years only 7 STPs (<250 MLD) got commissioned, indicating that not much has changed in recent past. We estimate deficit levels to be >80%, that needs to be addressed. Of all the operational plants monitored, current utilization stands at ~55% levels. We expect ~75% of Rs 200 bn planned expenditure during FY18‐20 would be towards STP & Effluent Treatment Plant (ETP).


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Fig. 24: Ganga River‐ Water discharged versus Water Treated 12,000

100%

10,705

10,000

75%

84%

80%

Fig. 25: Ganga river: Utilization at 55% of the Operational STPs 1,200 1,000

100% 79%

82%

996 80%

800

8,000

55%

56%

6,000

600

4,974 40%

4,000

2,723

2,638

1,686

1,231

0

20%

2012

Sewage Gen. (MLD)

40%

336

400

2015


89

109

22%

Bihar

WB

20%

0% UP

2017

STP Capacity (MLD)

200 0

0% 2009

462 20%

1,209

1,174

2,000

60%

55%

60%

Uttarakhand

Capacity (MLD)

Gap (%)

Total

Utilization (%)


Of the Rs 150 bn worth of EPC and HAM projects anticipated to be awarded towards ETP/ STP construction/ up gradation during FY18‐20, already ~Rs 65 bn of projects have been approved in recent months (Rs 4.3 bn of it is awarded and Rs 45 bn of it should get awarded in next 12‐18 months), thereby indicating us that awarding momentum should gain further momentum. Fig. 26: Amount Sanctioned towards river Ganga to grow... 250,000

75

Fig. 27: Namami Gange‐ Mix of sources of funding… 80 JICA 5%

200,679

200,000

56

60 WB 30%

150,000 34 96,300

100,000

50,000

Budget Allocation 30%

40

20

35,810

0

0 2008‐14

2014‐17 Sanctioned (Rs mn)


2018‐ 20

Other Sources 35%

Projects Source: Industry Reports, IndiaNivesh Institutional Research

Even though the amount sanctioned under Namami Gange during FY14‐17 stood at ~Rs 96 bn, only 7 STPs got commissioned. Another 27 STPs are under construction stage (as of Jul‐17). We expect World Bank and budget allocations to account for ~60% of the planned spending, thereby allaying funding concerns up to certain extent.


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Inadequate Infrastructure to drive higher government spending Table highlights that across Urban India, there is a huge mismatch for the Sewage generated and treated. Fig. 28: State‐wise details (Urban) ‐ Sewage Generation versus the Operational Capacities State/UT

A. P.

Sewage generation in Urban areas (MLD) 2,871

Capacity of Municipal STPs (MLD)

No. of Municipa l STPs

Operational Capacity (MLD)

247

12

156

Under Construction Capacity (MLD)

Proposed Capacity (MLD)

91

Assam

703

0

1

0

Bihar*

1,879

125

6

100

421

Delhi*

4,155

2,694

35

2,671

94

Goa

145

75

7

35

40

Gujarat

4,119

3,063

51

2,112

360

94

Haryana

45

70

1,413

853

41

805

H. P.

110

115

66

80

J&K

547

265

19

146

117

Jharkhand*

1,270

117

15

117

Karnataka

3,777

1,304

57

1,112

192

Kerala

2,552

153

10

113

37

Maharashtra

8,143

5,160

76

4,684

132

M. P.

3,214

482

17

475

0

Odisha

1,121

386

13

158

228

Punjab

1,664

1,245

86

921

277

32

Rajasthan

2,736

866

63

385

149

332

Tamil Nadu

5,599

1,800

73

1,141

521

133

Telangana

1,671

686

18

635

51

7,124

2,647

73

2,372

170

494

39

155

Uttar Pradesh* Uttarakhand* West Bengal* Total

495

153

24

91

4,667

417

28

235

59,975

22,851

791

18,543

16

184 2,448

2,024

Source: CPCB, *Namami Gange project documents, IndiaNivesh Institutional Research

Of the 59,975 MLD of Sewage generated by Urban India, 791 Urban STPs treat ~18,543 MLD of Sewage, indicating the urgent need to add more STP capacities. Even the pipeline of ~4,400 MLD of STP capacities would not address this problem. Assuming benchmark cost of setting‐up Sewage plant (as per current technologies in use), it is estimated to cost ~Rs 50‐65 mn/ MLD (interception and diversion costs‐ Rs 40‐50 mn/ MLD and the plant cost is Rs 10‐15 mn/ MLD). In order to address this deficit, we expect the required installed capacities to be ~47,000 MLD. At Rs 50‐65 mn/ MLD range, this translates to an opportunity of Rs 2.3‐3.0 tn. Acknowledging the deficit, Government has rolled‐out Atal Mission for Rejuvenation and Urban Transformation (AMRUT) Scheme to ensure Water Supply and sewage networks for urban India. This program has been rolled out in convergence with the 100 Smart Cities Program. Table below highlights that during FY17‐20, Rs 191.5 bn would be spent towards setting ‐up the STPs.


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Fig. 29: AMRUT Scheme details: Total Sewage Project Cost

State (Rs mn)

Time Period

Jharkhand

FY2017 ‐20

5,556

5,556

1

1,969

Tamil Nadu

FY2017 ‐20

41,111

41,111

13

32,873

AP

FY2016 ‐20

22,273

13,503

28

5,291

Bihar

FY2015 ‐20

24,698

10,304

1

377

Chhattisgarh

FY2015 ‐20

21,928

8,790

12

4,474

Karnataka

FY2015 ‐20

49,529

20,696

21

10,615

Gujarat

FY2016 ‐20

36,800

22,790

36

10,895

J&K

FY2015 ‐20

5,931

MP

FY2016 ‐18

45,449

20,509

24,940

24

15,788

Maharashtra

FY2016 ‐18

58,079

24,899

33,180

19

25,290

Mizoram

FY2015 ‐18

1,226

872

353

Odisha

FY2016 ‐18

11,377

5,304

6,073

Rajasthan

FY2017 ‐20

32,239

UP

FY2015 ‐20

114,217

38,952

42,392

Goa

FY2015 ‐20

3,964

696

2,673

2,220

HP

FY2017 ‐18

1,150

1,150

271

Uttarakhand

FY2015 ‐19

6,891

2,472

2,118

WB

FY2017 ‐18

15,537

15,537

0

0

Chandigarh

FY2017 ‐20

620

620

1

600

Meghalaya

FY2017 ‐20

1,418

1,418

3

775

Manipur

FY2016 ‐20

1,289

689

0

0

Tripura

FY2017 ‐20

639

639

25

Nagaland

FY2017 ‐20

452

452

55

Punjab

FY2015 ‐20

27,727

12,758

16,809

Sikkim

FY2015 ‐18

401

Telangana

FY2017 ‐20

7,313

Arunachal Pradesh

FY2015 ‐20

1,403

Assam

FY2017 ‐20

Delhi Haryana Total

Total Cost

Approved for 2016 ‐17

8,771

7,404

14,010

Approved for 2017 ‐20

No. of Sewage Projects

2,247

384

40 4

32,239

600

21,078 47

21,495

133

0

0

7,313

2

1,260

526

1

180

2,922

2,922

0

0

FY2017 ‐18

3,386

3,386

3

1,771

FY2017 ‐20

28,223

28,223

573,744

133

844

467

122,616

345,084

14,057 216

191,555

Source: GoI Websites

Change in Regulators perspective The years leading up to 2020, when Paris Climate Agreement enters in to force, 127 member countries have ratified their commitments, which include water as one of the key priorities. India being member nation could see changes in the way water is managed and utilized. We could see (1) increased adoption of free water getting rationed in future, (2) water for all uses could get priced, (3) no more unrestricted rights over groundwater below the land one owes, and (4) mandatory for industries to use only treated water. We already see policy level changes happening, (1) MoEF has tweaked standards for water discharged from STPs, (2) Central Pollution Control Board (CPCB) made it mandatory to install STPs/ ETPs for all Textiles companies.


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In Oct‐2017, Ministry of Environment and Forest (MOEF) tweaked standards that govern the quality of water to be discharged from the STPs. Fig. 30:

Standards governing water quality discharged by STPs Old Standards (in mg/ l)

Parameter

Details

Ph

Captures level of acidity for aquatic life to thrive

Bio‐Chemical Oxygen demand (BoD)

Total Suspended Solids (TSS) Fecal Coliform (FC)

Amount of Oxygen needed per litre, permitted in the treated water

Indicate Turbidity; Dry weight of particles trapped by a filter at any water body

New Standards (in mg/ l)

Scope

5.5 ‐9

6.5 ‐9

<100

<20

Metro areas and all state capitals barring HP, Uttarakhand, J&K and UT of Andaman and Nicobar Islands, Dadar and Nagar Haveli, Daman and Diu and Lakshadweep

<30

Other Areas

<50

Metro areas and all state capitals barring HP, Uttarakhand, J&K and UT of Andaman and Nicobar Islands, Dadar and Nagar Haveli, Daman and Diu and Lakshadweep

<100

Other Areas

<100

Presence of Bacteria

Nil

<1,000

Everywhere in the country

Everywhere in the country

Note: *Metro Cities are Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Ahmedabad and Pune; Source: MoEF, IndiaNivesh Institutional Research

New Faecal Coliforms (FC standards) don’t apply if the treated effluent is used for Industrial purposes. Also, the total nitrogen and Ammonia levels were supposed to be NIL earlier. Now the criterion is updated to “not specified” levels. The new rules would apply to all plants getting commissioned after Jun‐2019 and all existing plants are required to comply with new standards within the next 5 years. Industry experts are of view that Sewage treatment capacity in India is inadequate and ~40% of the existing facilities don't meet the new standards. We expect deployment of new technologies in order to meet the new norms. As a result, prices of STPs would increase to ~Rs 60‐80 mn/ MLD (interception and diversion costs‐ Rs 40‐50 mn/ MLD and the plant cost is Rs 20‐30 mn/ MLD). On a whole, If one were to look at installed capacity of 23,277 MLD from 920 STPs (under the Municipal segment as of 2015), only 18,883 MLD is the utilization (from 615 STPs). Again of those operational, if one goes by above figure of 40% of them not meeting the new standards, then opportunity is for ~7,550 MLD of upgrades. At cost of Rs 60‐80 mn/ MLD, it translates to an opportunity of Rs 453‐604 bn, spread over the next 5 years. In Oct‐2017, CPCB amended rules to ensure that all types of effluents get treated (including suspended solids, biochemical oxygen, oil and grease) and are within the new prescribed limits and comply with new ammoniacal standards. Fig. 31: Water discharge norms for Textiles companies Parameter

New Standards (in mg/ l)

Ph

6.5 ‐8.5

Suspended Solids

100

Colour, P.C.U (Platinum Cobalt Units)

150

Bio‐Chemical Oxygen Demand (BOD3)

30

Oil and Grease

10

Chemical Oxygen Demand (COD)

250

Total Chromium as (Cr)

2.0

Sulphide (as S)

2.0

Phenolic Compounds (as C6H5OH)

1.0

Total Dissolved Solids, Inorganic (TDS)

2100

Sodium Absorption Ratio (SAR)

26

Ammonical Nitrogen (as N)

50



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Fig. 32:

Details of new laws being rolled‐out

Enforcement Agency

New Law

Scope

Supreme Court Ruling/ State Pollution Control Boards (SPCBs)

SC has mandated all SPCBs to make rules to have a primary functional ETP for running Industrial plants, within 3 months from 22‐02‐2017. SPCB’s are directed to set‐ up a on‐line continuous monitoring systems.

Across all Industrial Units

Bangalore Water Supply and Sewerage Board (BWSSB) and Karnataka State Pollution Control Board (KSPCB)

Apartment Complexes with over 50 Flats are required to Install STPs

Apartments (both, old and new)

Healthcare Establishments with 100+ beds need to maintain STPs in their premises Install STPs mandatorily at structures over 10,000 sq.mt. across Hyderabad

Andhra Pradesh Pollution Control Board (APPCB) Telangana Govt. Delhi Government (plans to make a law)

Mandatory to install Micro water and STPs for all new Building Complexes

Thane Municipal Corp. (plans to make a law)

Install STPs for all upcoming Housing projects with built ‐up area of 20,000 sq.ft. / 2,000 sq.m. (Current rule is applicable on Housing projects with built‐ up area of 40,000 sq.ft.)

Mid‐to‐Large Hospitals Apartments, Commercial and Industrial Buildings (new) Hospitals, Schools, Residential, Commercial, Government Buildings, amongst Others. New Housing Projects


In recent months, few of the State Pollution Control Boards/ Municipalities have turned active in order to implement stricter Water pollution norms. With more and more state bodies likely to join this trend, going forward, we expect demand outlook for STPs to improve in the domestic market.

How the listed companies fare… Industry experts predict that the yearly Indian Water/ Wastewater treatment market is Rs 110‐120 bn market opportunity. Higher water distress levels in domestic market, fast changing regulatory landscape tell us about the potential opportunity ahead. Over 2 dozen players have entered the domestic market in last decade. Currently there are too many mid‐to‐small sized players present with limited capabilities (most of them lack technology depth, product portfolio) and very few companies with scale having wide range of offerings. Fig. 33:

Wabag reported the fastest revenue growth during FY14‐17

Fig. 34: Yearly Revenues of larger players 20,000

13‐20%

8‐12%

1

Wabag

Numbers reflect exports done from India

16,000

2

SFC Environ., IEL

12,000

8,000 0‐7%

Veoli

1

Follows an Asset ‐heavy model

4,000

‐10‐0%

1

UEM India

Lost business to peers

8 8 5 8 0 3 1 9 0 , 8 9 9 1

1


2

5 4 4 5 8 0 2 0 6 , 8 , 6 , 7 , 2 1 1 1

Veolia

UEM

2 4 4 2 2 3 3 8 5 , 3 , 1 , 9 , 1 2 5 7 1 1 1 1

0 8 7 2 2 1 1 7 1 , 3 , 0 , 3 , 7 7 8 9

0 SFC

0

8 9 3 1 1 2 0 1 3 , 4 , 3 , 5 , 1 1 2 1

3

FY14

FY15

FY16

Wabag

IEL

FY17


Wabag, L&T and IEL are the 3 largest listed players in Indian Water Treatment space. L&T’s Water division is not comparable as it offers wide range of Water supply, distribution, conservation and other comprehensive Infra solutions. Despite the presence of too many smaller players, unlisted players like, Veolia, UEM, SFC, UEM have gained scale in domestic Water treatment market. These companies are subsidiaries of large global players with easy access to a wide range of technologies.


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Of the ~Rs 110‐120 bn market size, larger players enjoy ~30% of the market share (Wabag enjoys ~11‐13% market share), followed by Veolia, Suez, who are distant second and third. The remaining 70% of the market share is highly fragmented with many small‐to‐mid sized players in this space. We are of view that (1) wider presence across sub‐verticals with a bouquet of technology offerings, and (2) wide geographical diversity helped Wabag report 12.7% revenue CAGR during FY14‐17 versus single digit CAGR reported by domestic peers. Most of the domestic players are focused on 1‐2 sub‐verticals, thereby restricting their growth prospects, whereas, large MNC players are ahead on the curve with their presence across sub‐verticals, as they enjoy easy access to technologies from their parent entity. Fig. 35: Areas of water treatment, where the peers operate VA Tech Wabag

Ion Exchange

Concorde Enviro

Aqua Design India

Doshion Veolia

Suez

SFC

UEM India

Sludge Disintegration

















Desalination

















Nitrate Removal

















Water Reuse / Membrane

















Zero Liquid Discharge

















Technology


WTE GmBH is a German company with presence in slow‐growing European market; Hydrotek is just focused on the Thailand markets. Hyflux is present across many countries in Asia, thereby helping it report 22.1% revenue CAGR during FY14‐17. Fig. 36: Financials Snapshot

Companies incorporated in India

Global Peers

Wabag (Standalone)

IEL

SFC Environ.

Veolia India

UEM India

WTE GmBH

Hydrotek

Hyflux

Revenue CAGR during FY14‐17 (%)

12.5

8.9

6.3

4.7

(14.1)

(20.4)

(16.2)

22.1

Avg. EBITDA Margin during FY14‐17 (%)

12.0

7.0

17.0

5.7

(15.0)

(5.8)

(21.8)

9.0

Avg. PAT Margin during FY14‐17 (%)

6.7

2.4

8.4

(4.5)

(30.0)

2.4

(24.4)

(7.2)

WC days

68

Negative

97

Negative

121

Negative

Negative

117

ROE (%)

9.4

14.5

14.4

Negative

Negative

4.5

(27.8)

(3.7)

CFO / Sales (%)

9.0

18.0

20.5

(30.0)

(26.6)

NA

7.4

(33.9)

Particulars

Notes: WTE GmBH has September, Hydrotek and Hyflux have December year ending; WTE, Hydrotek, Hyflux revenue, EBITDA, PAT numbers are for 2013‐16; WC days, RoE, CFO/Sales are for last reported Financial Year (i.e. 2015 for SFC and UEM and 2016 for Veolia); Source: Bloomberg, IndiaNivesh Institutional Research

With large opportunities opening‐up within the domestic markets, we expect all the key players to see strong growth, going forward. Companies like Wabag, IEL who also are focused on exports should see strong growth from that avenue. This would help them reduce their dependency on any one market and insulate company financials of any slow‐down in a given market.


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ION Exchange (India) Ltd. Moving into the next Orbit


We initiate on Ion Exchange (IEL) with a BUY and price target of Rs 616, implying 35.8% upside from current levels. Our positive view is based on (1) strong 21.6% and 29.9% revenue and PAT CAGR, respectively, over FY18‐20 (2) impressive cash generating profile (Rs 3.6bn during FY11‐17), (3) unlevered balance sheet (0.5x D/E ratio), and (4) RoE expansion from 14.5% in FY17 to 19.0% by FY20.

Current CMP

Rs 454

Rating

BUY

Target

Rs 616

(CMP as on December 04, 2017 closing)

Investment Rationale

STOCK INFO

INDEX BSE NSE Bloomberg Reuters Sector Face Value (Rs) Equity Capital (Rs mn) Mkt Cap (Rs mn) 52w H/L (Rs) Avg Daily Vol (BSE+NSE) (NL=Not Listed)

SHAREHOLDING PATTERN

%

(as on Sep, 2017)

Promoters Public & Others STOCK PERFORMANCE(%)

ION Exchange SENSEX



Execution of $194 mn Sri‐Lanka (SRL) Water project would help IEL transition from mid‐sized to large scale engineering player. This strategy would help IEL quickly scale business and improve margins. With major concomitant risk of project financing and pre‐project preparation mitigated, we expect IEL to successfully execute this project. This coupled with improved domestic business outlook should help engineering segment report 27.0% revenue CAGR during FY18‐20. With some of the low margin projects nearing completion and contribution of high margin SRL order kicking in, we expect segment margins to improve from 5.0% in FY17 to 7.0% in FY20.



Chemicals segment reported 8.1% revenue CAGR, during FY14‐17 reflecting benefits of (1) product diversification, (2) entry in to new geographies, and (3) market share gains (grew faster than 6‐7% industry growth rate during FY14‐ 17). With WHO‐GMP approvals in place to commence the Pharma Resin plant, coupled with higher utilization at existing plants, should help Chemicals segment report 13.9% revenue CAGR during FY18‐20 (30.1% of consol. revenues and majority of FY17 EBITDA). Also, post the commencement of new plant, Asset turnover ratio of Chemical division would improve, thereby aiding segmental EBITDA margin expansion.

500214 NL ION IN IONX.BO Water 10 147 6,651 638 / 276 10,901

44.04 55.96 3m 6m (13.0) (1.2)

3.7

5.1

12m

56.9 25.3

Source: Bloomberg, IndiaNivesh Institutional Research

ION Exchange v/s SENSEX

Risks & Concerns Delays in execution of SRL order, unfavorable forex movement.

Valuation


At CMP of Rs 454, IEL is trading at FY19E and FY20E P/E multiple of 13.7x and 10.8x, respectively. Median of last 6‐years forward P/E multiple stands at 14.9x. During FY11‐17, IEL reported 9.1% revenue and 21.4% PAT CAGR, respectively. RoE improved from the low of 3.1% in FY14 to 14.5% in FY17, mainly driven by net margin expansion. Execution of high margin SRL order, completion of low margin Engineering projects by 3QFY18, and revenue contribution from 2 new plants, should help IEL report revenue and PAT CAGR of 21.6% and 29.9%, respectively, during FY18‐20. Given the strong outlook, we assign 16.4x (10% premium to last 6‐ years median P/E) to average of our FY19 and FY20 EPS estimates, to arrive at price target of Rs 616. Given 35.8% upside, we initiate on IEL with BUY rating.

Fig. 37: Financial Performance Net Sales

EBITDA

Adj. EPS (Rs)

EBITDA Margin

RoE (%)

Adj. P/E (x)

EV/EBITDA (x)

FY16

8,711

557

10.6

6.4

10.0

42.7

10.2

FY17

10,241

776

19.9

7.6

14.5

22.8

7.3

FY18E

12,296

995

25.0

8.1

16.3

18.2

5.7

FY19E

15,060

1,261

33.1

8.4

18.1

13.7

4.5

FY20E

18,169

1,543

42.1

8.5

19.0

10.8

3.7

Y/E March (Rs mn)

Source: IEL, IndiaNivesh Institutional Research


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Investment Rationale Sri Lanka Project‐ the game changer During FY14‐17, IEL reported low value Engineering project order wins, when the awarding environment in the Water treatment industry was muted. In order to pursue growth, IEL took these projects, resulting in low margins. These low margin projects are expected to be completed by 3QFY18. Having attained scale and technical know‐how, 3‐years back IEL took a conscious decision to bid for low risk, large ticket projects. This strategic move suggests that IEL wants to scale its business at a faster pace and also improve the margins. In FY16, IEL reported $194 mn (>Rs 12 bn) of Sri Lanka (SRL) Water Supply order win. The table below highlights that IEL has worked on possible areas to mitigate project execution risk. We are of view that successful execution of SRL order would position IEL to move in to a bigger orbit. Project of this scale would be used as a reference to bag more of such large ticket orders (not modelled in our estimates). Fig. 38: Execution risk mitigated for Sri Lanka Project Project Risks

Design Works

Execution Approval

Execution Works

Financing Agency

Minimal Risks, as it is a

Land acquired, Right of Way

EPC works to be partly done

Taken Buyers credit from

Water Supply Project.

(RoW) received.

by local EPC player.

EXIM Bank.

Grading

Explanation

To show % risk covered: Source: IEL, IndiaNivesh Institutional Research

We expect the SRL order to contribute 26.0% of consol. revenues during FY18‐20. With designs approved and revenue booking started, we expect ramp‐up in execution. Water engineering companies like, Wabag, SFC India reported EBITDA margins in 11‐14% range in last 5 years. Considering (1) lack of scale in IEL’s large ticket Engineering business, (2) dependency on sub‐contracting in a new geography, we expect SRL order’s EBITDA margins to be lower than the peers at 8.5‐9.5% range (SRL project margins to be ahead of consolidated EBITDA margins). Fig. 39: SRL contribution to the Consolidated revenues

Fig. 40: SRL versus Consolidated EBITDA margins

100%

10%

80%

10%

9.5%

60% 93%

82%

73%

69%

9.3%

9% 8.5%

8.4%

9%

8.5%

8.1%

40% 8% 20% 0%

7% FY17A

18%

27%

31%

FY19E

FY20E

8% 7%

FY18E SRL Project



Consolidated

FY18E

FY19E SRL Project

FY20E Consolidated


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Improved outlook towards the Engineering segment Within Engineering segment IEL (1) executes small ‐to‐mid sized Water/ Waste Water treatment projects for Power, Steel and Refinery sectors, (2) supplies Membrane and Engineering accessories to EPC, Engineering companies, and (3) manufactures Pre‐engineered Standard plants (ticket size as low as Rs 15mn) for Pharma, Chemical, Sugar, Cement and Textile players. Revenues are reported under Water Treatment Plant (WTP) & Accessories sub‐segment. As diversification strategy, IEL takes up Annual Maintenance Contract (AMC), Operations & Maintenance (O&M) contracts for mid‐sized projects and reports the revenues under Services sub‐segment. This strategy assures IEL of revenue visibility and customer stickiness. Entry of new players in a muted awarding environment, and IEL management’s conscious decision to stay away from the low margin projects, led to just 9.8% Engineering segment (consol.) revenue CAGR during FY14‐17. WTP & Accessories sub‐division (69.2% of FY17 consol. engineering segment revenues) reported 9.3% revenue CAGR during FY14‐17. Fig. 41: Shift in Consol. Engineering Revenue mix during FY16‐20 FY2016

FY2018E

FY2020E

13%

17% 34%

43%

55% 66%

28% 44%



WTP & Accessories



SRL Project



Services & Others


We are of the view that Engineering segment is likely to report 27.0% revenue CAGR during FY18‐20, on the back of (1) increased traction in Sri Lanka project, (2) 12.8% revenue CAGR in the WTP & Accessories sub‐segment. Higher government allocation and increased focus towards AMRUT, Namami Gange scheme, coupled with fast changing regulatory landscape across geographies indicate that Water Treatment industry is poised for strong growth. With industry experts predicting early double digit growth for Water Treatment industry in the next few years, IEL being one of the key players in this space, is likely to emerge as a big beneficiary. Anticipating huge opportunity ahead, IEL in Oct‐17 commissioned Integrated Automated Reverse Osmosis Membrane (8‐inch) plant at Verna, Goa. This plant is also being explored for exports opportunity. Increased contribution from the SRL project should lead to decline in revenue share of the WTP & Accessories sub‐segment from 65.5% in FY16 to 43.4% in FY20. On other hand, share of SRL project within Engineering segment would increase to 44.3% by FY20. With some of the low margin, low value Engineering projects nearing completion by 3QFY18 (some impact of it was seen in 2QFY18 quarterly performance) and increased contribution of high margin projects kicking in, we expect Engineering segment margins to expand from 5.0% in FY17 to 7.0% by FY20.


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Fig. 42:

Consol. Engineering Segment to report 27% revenue CAGR during FY18‐20

14,000 30%

12,000

26%

31% 10,326

12,766 24%

4,611

4,329

‐14%

5.0%

0%

3%

‐10%

2%

‐20% FY16A

6%

4%

‐6%

FY15A

FY17A

7.0%

5.9%

4,858

0 FY14A

10%

4,000 2,000

30%

7%

5%

6,103 6,000

8%

20%

7,909

12%

40%

6.8%

10,000 8,000

Fig. 43: Consol. Engineering segment EBITDA margin to improve

FY18E

Engineering Revenues (Rs mn)

FY19E

FY20E

3.2%

3.2%

FY14A

FY15A

3.4%

1% 0%

yoy growth (%)


FY16A

FY17A

FY18E

FY19E

FY20E


Pharma Resins and exports to drive Chemical segment growth IEL has wide range of Chemicals and Resins product portfolio. Both, Resins and Chemicals, contribute almost equally to the Chemical segment revenues. Chemicals segment contributed 30.1% of consolidated revenues and majority of FY17 EBITDA (FY17 Consol. Chemical segment EBITDA margins were at 19.1%). Fig. 44:

Chemicals & Resins Product Portfolio growth drivers:

Chemical & Resins Portfolio

End‐User Industry

Demand growth drivers

Polyelectrolytes

Chemical; Cosmetic; Mines; Pulp & Paper; Pharmaceutical

(1) Emergence of Chemical, Food & Beverage in APAC region to drive growth. India, China & Japan to contribute significantly to the global growth; (2) U.S. is expected to see strong growth as polyelectrolyte is seeing increased use for drug coating purposes in this region; (3) Europe region to grow at satisfactory pace on a/c of growing use of polyelectrolytes in various personal care products (includes shampoo, soaps and other cosmetics).

Boiler Water Treatment Chemicals

Power Gen, Cement, Steel & Metals, Oil Refineries, Sugar, Petrochem., Paper & Pulp, Textile & Dyes

(1) APAC is the largest market, given the maximum dependence on the Power Gen., (2) North America & Europe to show moderate growth owing to ongoing drift towards non‐conventional and renewable sources of energy; (3) Strong growth to be driven by Saudi Arabia, South Africa and GCC owing to demand in existing Oil Refineries and Petrochemical Industries.

Cooling Water Treatment Chemicals

Power, Food & beverage, Steel, Mining & Metallurgy, Oil & Gas, Refinery & Petrochemicals, Textiles & Dyes

(1) Market is expanding due to introduction of stringent regulations on water conservation, wastewater management in industrial processes, legislations on water treatment methods, and alignment of water quality standards with European Union directives; (2) APAC (China, India, Thailand and Indonesia) is a rapidly growing market;

RO Cleaning Chemicals

Pharmaceutical, Food and Beverage (both, account for 40% of market size)

(1) High TDS levels in various regions across the country is driving demand for RO Cleaning Chemicals in the domestic markets; (2) Intensifying R&D expenditure, usage of perfluoro polymer, solid polymer electrolyte to drive demand for RO Cleaning Chemicals

Pulp, Paper & Process Chemicals

Paper & Pulp

Demand to be driven by (1) one‐ sided specialty (coated) papers; (2) Rising demand for Value added Paper products would drive the demand for Functional Chemicals (almost half the market size of Paper & Pulp chemicals); (3) Bleaching & process chemicals would benefit from rising demand for recycled paper; (4) Latin America and APAC markets to gain, whereas, Europe and NA markets will be affected with the advent of digital age.

Refinery Chemicals

Oil & Gas

(1) Tightening environmental laws and efforts to boost gasoline and diesel fuel yields to drive demand for Refinery Chemicals; (2) North America to remain as the dominant regional market, while the Asia/Pacific and Africa/Mideast regions will grow fastest.

Automobile Chemicals

Automobile

(1) Reduction of emissions and focus on fuel efficiency to create demand for Automobile Chemicals; (2) Rising popularity of SUV's in India, China, Brazil; (2) market is expected to witness slow‐down owing to increasing restrictions on use of solvents based paints used in Auto sector, which are high in volatile organic chemicals (VOC). (3) Focus on developing innovative chemicals such as bio‐ based Automotive chemicals are expected to provide new opportunities for market growth;

Metal & Mining

Limestone (for Cement), Coal, Other Metals

Declining ore quality, complicated processing methods to drive the long‐term demand; Grinding aids, Explosives & Drilling segments to see strong growth; APAC region (India, China, Indonesia, Malaysia) to see strong growth; Europe to see sluggish growth.


(1) Regular additions to the Chemical segment product portfolio and (2) entry in to new verticals and geographies, helped IEL report 8.1% Chemical segment revenue


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CAGR during FY14‐17. Notably, the growth reported by IEL is ahead of the 6‐7% industry growth seen during same time period, indicating market share gains. Being one of the early entrants in domestic Water treatment Chemicals market, IEL currently is the market leader within the industry. As of FY17, IEL enjoys ~20% of the domestic Water Treatment Chemicals market (estimated at Rs 7.2‐8.7bn range). Chembond Chemicals is the distant number two, with ~10‐12% market share. IEL plans to pursue dual growth strategy to grow Chemicals business: (1) grow the share of Pharma vertical within Chemicals segment (enjoys higher realization than current offerings), and (2) increased exports thrust, going forward. In order to increase the realization mix (from the current levels of Rs 80‐280/kg), IEL has set‐up a Resins plant at Ankleshwar, exclusively to cater to U.S. and European Pharma clients. IEL has already got WHO‐GMP certification for this plant. They are currently negotiating with few larger Pharma players and are awaiting approvals from U.S. FDA. We expect 64.7% of our incremental revenue growth assumption from Chemical segment to be driven by the new Resins plant during FY18‐20. Outside India revenues accounted for 42.5% of the FY17 Chemical segment sales. Entry in to new geographies (South East Asia, Middle East countries) should help Chemical division report strong growth. Fig. 45:

Consol. Chemical segment to report 13.9% revenue CAGR during FY18‐20

5,000

4,000

20%

12%

5% 4% 8 3 8 , 2

7 7 9 , 2

3 8 0 , 3

0 FY14A

16%

8%

5% 3 4 4 , 2

25%

FY15A

FY16A

FY17A

Chemicals Revenues (Rs mn)

20.1% 19.1% 18.9% 19.5%

17.9% 15.1%

11%

3,000

1,000

20% 17%

16%

2,000

Fig. 46: Consol. Chemical segment EBITDA margins to expand…

15%

11.6%

10%

4% 2 9 1 , 3

FY18E

3 5 5 , 3

1 4 1 , 4

4%

0% FY19E

FY20E

5%

0% FY14A

yoy growth (%)


FY15A

FY16A

FY17A

FY18E

FY19E

FY20E


We expect Chemicals division to report 13.9% revenue CAGR during FY18‐20. Shift in business mix towards higher realization from Pharma Resins should help segment margins to improve from 18.9% in FY18 to 20.1% in FY20.

New initiatives to drive financial performance In last 2‐3 years, IEL has taken few initiatives, which include strategic focus to move‐ up the value chain in engineering division (intends to take up the entire large ticket projects, rather than just supply STP/ WTPs to large players). Also, IEL has invested in two plants (Membrane plant at Verna, and Resins plant at Ankleshwar). Fig. 47: Segment‐wise revenue CAGR trends FY14‐17 Revenue CAGR

FY18‐20 Revenue CAGR

Engineering Segment (Excludes SRL project)

9.8%

11.3%

Improved Industry outlook, Membranes plant to contribute to segment revenue

SRL project (Engineering Segment)

NA

61.2%

To contribute 26% of FY18‐20 consol. revenues

Chemicals Segment

8.1%

13.9%

Product diversification, New Resins plant to drive segment revenues;

Consumer Products

6.6%

7.9%

Low focus area for IEL

Division (Segment)

Comments

Note: NA‐ Not Applicable as the project started in FY17; Source: IEL, IndiaNivesh Institutional Research


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On the whole, we expect these initiatives to help IEL (consolidated) report 21.6% revenue CAGR during FY18‐20 to Rs 18.1 bn. Lowering of losses at subsidiary level, completion of low margin Engineering segment projects, and shift in business mix towards high margin areas, would translate to 24.6%/ 29.9% Consol. EBITDA/ PAT CAGR, respectively, during FY18‐20.

Strong BS, with likely improvement in the Return Ratios IEL intends to maintain its strategy of having an unlevered balance sheet (D/E ratio remained under 0.6x during FY11‐17). At FY17‐end, D/E ratio stood at 0.5x (reflecting Rs 906.5mn debt). This low D/E ratio is despite making investment towards the 2 new plants. As a result, Asset turnover ratio declined slightly from the highs of 1.3x to 1.2x in FY17. Also, completion of low margin orders, SRL order and higher realization from the Resin plant would support our margin expansion assumption (net margins to improve from 2.8% in FY17 to 3.4% in FY20). On the back of slight improvement in Asset turnover ratio (to 1.4x during FY19‐20), improvement in net margins and low leverage factor, we expect the RoE to improve from the lows of 10.0% in FY16 to 19.0% in FY20. During FY17, IEL received Rs 1.8bn of Advance for the Sri Lanka project. As a result, the cash balance of the company has increased from Rs 334mn in FY16 to Rs 1.6bn in FY17. We expect the cash balance to get normalized as the project execution gets ramped up and the subsequent billing gets adjusted against the customer advance.

Understanding the Financials Snapshot of Standalone Financials IEL reported 9.6% revenue CAGR during FY14‐17, reflecting (1) 11.1% revenue CAGR in Engineering segment (57% of FY17 revenues), (2) 8.0% revenue CAGR in Chemicals segment (32% of FY17 revenues), and (3) 6.9% revenue CAGR in Consumer segment (11% of FY17 revenues). Engineering segment revenue growth during FY14‐17 was driven by Rs 760mn of revenues booked from Sri Lanka project in FY17 alone (69% of incremental revenues booked in FY17 were from the SRL project). Core business was impacted due to slow‐ down in the domestic markets. Additions to product portfolio and exports from India helped the Chemicals segment report slightly better than the industry growth. Fig. 48:

Standalone revenues to report 22.8% revenue CAGR during FY18‐20

20,000

25.1%

18,000 16.9%

14,000

4,000

25%

9%

20% 15%

9.5%

10,000

6,000

10%

‐7.2% 2.8% 0 2 1 , 7

2,000

8 1 3 , 7

7 1 0 , 8

6 2 7 , 1 1

2 7 3 , 9

0 7 5 , 4 1

9 8 6 , 7 1

0 FY14

FY15

FY16

FY17

FY18E

Standalone Revenues (Rs mn) Source: IEL, IndiaNivesh Institutional Research


FY19E

FY20E

yoy growth (%)

6%

10%

5%

5%

4%

0%

8.5%

3%

8.2%

7.7%

8% 7%

12,000

8,000

30% 24.3% 21.4%

16,000

Fig. 49: Standalone business margin profile to improve

8.7%

9.1%

6.9% 5.8% 4.6%

4.9%

4.6%

4.9%

5.2%

3.6% 2.9%

2%

‐5%

1%

‐10%

0% FY14A

FY15A

FY16A

FY17A

EBITDA %

FY18E

FY19E

FY20E

PAT %


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We expect the standalone business to report 22.8% revenue CAGR during FY18‐20, reflecting (1) Revenue contribution from the SRL project, and (2) commencement of operations in the Pharma Resins and Membrane plant. During FY11‐17, IEL witnessed continuous improvement in its EBITDA margins, which have expanded from the lows of 4.2% in FY11 to 8.5% in FY17. This EBITDA margin expansion is attributed to (1) capacity additions and shift in mix towards higher realization from Chemicals segment, (2) execution of high margin contracts from engineering segment. We expect IEL to report 86 bps EBITDA margin improvement during FY18‐20 to 9.1%, mainly driven by sharp improvement in Engineering segment margins (from 6.4% in FY17 to 7.4% in FY20). We expect the standalone business to report 29.8% PAT CAGR during FY18‐20, reflecting (1) strong 29.1% EBITDA CAGR, (2) 11.4% depreciation CAGR (expect Rs 260‐270 mn of capex during FY19‐20), and (3) just 15.6% CAGR in finance costs.

Subsidiaries performance to marginally improve Performance of domestic as well as International subsidiaries has been a drag on the overall profitability of IEL. All subsidiaries put together reported 3.5% negative revenue CAGR during FY14‐17. Capex deferment in domestic Industrial segment (Power, Steel and Petrochemical sectors), Bangladesh, South East Asian Markets led to such poor performance. Also, operational inefficiencies at few subsidiaries, contributed to operational losses. (1) Implementation of new laws in the domestic markets, (2) uptick in spending by Bangladesh Textiles industry, and (3) better outlook in South East Asia markets, coupled with cost optimization initiatives at some of the subsidiaries, indicate improved performance from the subsidiaries in the future.

Snapshot of Consolidated Financials IEL derived 91.5% of FY17 consolidated revenues from Standalone business. Also, IEL derived 32% of its FY17 consolidated revenues from outside India (majority of it being from the Engineering segment). Fig. 50:

Engineering Segment accounts for 60% of FY17 Consolidated revenues

Fig. 51: India business accounts for 68% of FY17 Consolidated revenues

Consumer Products 10%

Rest of World 32% Chemicals 30%



Engineering 60%

India 68%


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Expect 21.6% revenue CAGR during FY18‐20 3.5% negative revenue CAGR from the subsidiaries during FY14‐17 restricted consol. revenue growth. IEL reported 8.9% consolidated revenue CAGR during FY14‐17. Segment‐wise, Engineering & Chemicals segment reported 9.8% and 8.1% revenue CAGR, respectively during FY14‐17. Changing regulatory landscape and implementation of government schemes (AMRUT and Namami Ganga), should lead to improvement in domestic Water Treatment industry awarding environment. This coupled with ramp‐up in execution of Sri Lanka project, should help Engineering segment report 27.0% revenue CAGR during FY18‐20 to Rs 12.7bn. Commencement of revenue booking from the new Pharma Resins plant (enjoys higher realization than current business), should help Chemicals segment report 13.9% revenue CAGR during FY18‐20. IEL is also present in Consumers segment, where it provides Water purifiers under the brand name, Zero B. Water Purifiers are sold to residential/ hospitals / hotels. In this space, IEL competes with Eureka Forbes, HLL, Kent & other smaller Water Purification players. IEL focuses on the strategy of targeting markets with lower price point (i.e. Tier‐ II & III markets). This segment reported 6.9% revenue CAGR during FY14‐17. Increase in consumer awareness, despite high competition should help Consumers segment report 7.9% revenue CAGR during FY18‐20.

Fig. 52: Consol. segmental revenue movement on yoy basis 40%

Fig. 53: Consol. revenues to report 21.6% revenue CAGR 20,000

22%

18,000 30%

19%

16,000 14,000

20%

10,000

6,000 FY14A

FY15A

FY16A

FY17A

FY18E

FY19E

FY20E

7,930

8,711 7,318

0%

‐8%

4,000

‐10%

‐8%

2,000

‐10%

10%

10,241

8,000

0%

20%

15,060 12,296

12,000

10%

20%

18%

0 Engineering Segment yoy growth (%) Chemicals Segment yoy growth (%) Consumers Segment yoy growth (%)

‐20%

‐20% FY14A

FY15A

FY16A

FY17A

FY18E

FY19E

Consolidated Revenues (Rs mn)

FY20E

yoy growth (%)



Fig. 54: Segmental EBITDA margins movement

Fig. 55: EBITDA/ PAT margins to expand by FY20

25% 20%

9% 17.9%

19.1%

18.9%

19.5%

20.1%

15%

8.4%

8.5%

6.4%

6% 5%

10% 5.0%

3.4%

5.9%

6.8%

7.0%

4% 2.8%

3% 2%

0% FY16A

‐5%

8.1%

7.6%

8% 7%

5%

30%

18,169 21%

‐3.9%

FY17A

FY18E

‐3.0%

‐3.0%

FY19E

‐3.0%

FY20E

‐3.0%

Engineering

Chemicals



Consumer

3.0%

3.2%

3.4%

1.8%

1% 0% FY16A

‐10%

FY17A

FY18E

EBITDA Margin

FY19E

FY20E

PAT Margin


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Traction in Engineering and Chemicals segment, should help consol. business report 21.6% revenue CAGR during FY18‐20.

Consolidated EBITDA/ PAT margins to expand to 8.5%/ 3.4% by FY20 We expect IEL to report 40bps EBITDA margin expansion during FY18‐20, owing to shift in business mix towards high margin SRL project, and the revenue contribution kicking‐in from the Pharma Resins plant. In‐line with EBITDA margin movements, PAT margins are likely to expand from 3.0% in FY18 to 3.4% in FY20. Strong potential for Cash from Operations to be generated, RoE to expand If we look in to segment details, then both, Engineering and Chemicals division enjoy negative to short working capital cycle. As a result, IEL’s net Working Capital cycle at FY17‐end stood at negative 17 days. IEL in FY17‐end received Rs 1.8bn as advances from customer (almost 10% of SRL project cost). On considering prudent capital management, we expect WC cycle to improve from negative 13 days in FY17 to negative 18 days by FY20. Despite strong growth in profitability, adjustment of advance from the SRL project on ramp‐up in execution should restrict Cash generated from Operations to Rs 97mn and Rs 21mn in FY19 and FY20, respectively. Fig. 56: WC movement (in days) 5

Fig. 57: Consol. Cash from Operations (Rs mn) to turn positive during FY19‐20 2,000

1

1,840 Includes Rs 1.8 bn of Advance received for the SRL project

0 FY12A FY13A FY14A FY15A FY16A FY17A FY18E

FY19E

FY20E

(5)

1,500

(10) 1,000 (15)

(13)

(20) (25)

(16)

(17)

(18)

(18)

498

311 145

(24)

(30) (35)

453

500

97

52

21

0 FY12A FY13A FY14A FY15A FY16A FY17A FY18E FY19E FY20E (34)

(33) (500)

(40) Source: IEL, IndiaNivesh Institutional Research

(106)


Risks & Concern 

Any execution delays of the SRL order would affect our estimates.



Any unfavourable forex movement could affect the company’s financials.

Valuation At the CMP of Rs 454, IEL stock is trading at 13.7x FY18E and 10.8x FY19E EPS. IEL stock in last six years has traded at 1‐year forward P/E multiple median of 14.9x. During FY11‐17, IEL reported 9.1% revenue and 21.4% PAT CAGR, respectively. RoE’s improved from lows of 9.5% in FY11 to 14.5% in FY17, mainly driven by net margin expansion.


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On considering ramp‐up in execution of the SRL order, contribution of 2 new plants and improved industry outlook, we expect IEL to report 21.6% revenue CAGR during, FY18‐20. Completion of low value, low margin Engineering projects, SRL project contribution (enjoys high margins than the ongoing Engineering projects) should help IEL report 24.6% EBITDA CAGR during FY18‐20, respectively. Unlevered balance sheet, and strong EBITDA growth, should help IEL report 29.9% PAT CAGR during FY18‐20, respectively. Net margin expansion, should help IEL report further RoE expansion (from 16.3% in FY18 to 19.0% in FY20). On the back of strong earnings outlook, going forward, we expect IEL stock to trade at premium to its historical 1‐year forward Median P/E band. Accordingly, we assign 16.4x (10% premium to last 6‐years median P/E) to average of our FY19 and FY20 EPS estimates, to arrive at price target of Rs 616. Given the 35.8% upside, we initiate on IEL stock with BUY rating.

About the Company Formed in 1964, IEL is one of the leading players in Industrial Water and Waste Water Treatment space, providing end‐to‐end Water Solutions to large Industries. The company was formed as subsidiary of Permutit (U.K) to become a wholly owned Indian entity in 1985 when Permutit divested its holding. IEL is one of the few players to be present across entire Water Solutions value chain, including Engineering, Chemical and Consumer segments. Within engineering space, IEL constructs Water/Waste Water Treatment & Recycling plants (ticket size of Rs 200‐250mn). IEL also takes up Operations & Maintenance works of these plants. Fig. 58: Application of Water‐treatment Chemicals Sector

Application

Refinery

To improve the unit run length and protect systems.

Metals & Minerals

Utilizes large quantities of water to separate and recover valuable minerals, where polyelectrolytes assist in the separation of solid particles from aqueous suspensions.

Paper

Process Chemical additives that impart superior qualities to Paper such as thickness, brightness and strength.

Sugar

IEL’s high molecular weight polyelectrolytes of approved quality are used in sugar juice clarification. All leading to improved sugar recovery

Coal Oil Field Services

New mining techniques result in fine Coal particles. Flocculants are used increasingly to recover Coal from tailings as a setting aid or by filtration/centrifugation by de‐watering methods. Given the large quantum of Water used at Washeries, recycling of water is done using Polyelectrolytes. High performance polymers are used across industry ‐ production drilling, core drilling, water shut off, mobility control, Fracturing, work‐ overs, completions, solids removal, shale inhibition, produced fluid treatment and in certain EOR (enhanced oil recovery) techniques.


In FY16, IEL entered big league, when it bagged its first large ticket Water Supply contract from Sri Lanka Water Board, worth $ 194mn (approximately Rs 12bn) after competing against larger players like, Wabag, Veolia. IEL has strong market positioning within Industrial Chemicals (used to treat Water across Industrial processes and systems) and Resins space. IEL competes with Chembond and other smaller players. IEL’s chemicals have wide range of application, including for Effluent, Boiler and Cooling Water treatment purposes. Lastly, IEL sells Water Purifiers under brand name ‘Zero B’ competes with Eureka Forbes, HLL, Kent & other Retail Water Purification players. IEL has 6 state‐of ‐the‐art Manufacturing and Assembly facilities across 5 states in India and one each in UAE and Bahrain to cater to Middle‐East Asia (MEA) markets. IEL has 2 in‐house R&D facilities, one each for Chemicals (at Patancheru, Telengana) and Engineered Products (at Vashi, Mumbai). IEL claims to have 50+ Patents to its


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credit and 100+ Products commercialized, which could help it expand its footprint across the globe. Fig. 59: Plant location details Plant location

Product

Certifications

Manufacture/ Makes

Ankleshwar, Gujarat

Resins

ISO 9001 & 14001, US FDA

Resins for Water Treatment, Specialty Applications, Pharma ‐grade Resins

Hosur, Tamil Nadu

Packaged Waste Water Plant

ISO 9001

Fabrication, Assembly of pre‐designed packaged and pre‐engineered Water and Waste water Treatment Plants

Patancheru, Telengana

Chemicals

ISO 9001, 14001, OHSAS 18001

Polyelectrolytes, Specialty process Chemicals, Fireside and Fuel additives

Rabale, Maharashtra

Assembly & Testing plant

ISO 9001

Skid‐mounted Assembly and Testing of Custom ‐built Plants before shipment

Verna, Goa

Membranes

ISO 9001

Membrane, Membrane products and Systems for Drinking Water applications

Wada, Maharashtra

Pressure tubes & Vessels

ISO 9001

Sharjah, UAE

Assembly & Testing plant

Bahrain

Chemical

FRP (HLP) Hand Lay Up & FRP (FW) Filament Winding products, RO & UF Pressure Tubes and Composite Pressure Vessels Assembly and testing of Skid ‐mounted, Custom ‐built Water and Waste water Treatment Plants Chemical blending plant, serves as export hub for North Arabia


Experienced Management Team IEL has mix a of young, experienced management team from diverse backgrounds. Fig. 60: Management team details Industry Exp. (in yrs.)

Age (in yrs.)

Executive‐ Chairman & Managing Director

31

63

Dinesh Sharma

Executive Director

22

53

Aankur Patni

Executive Director

15

46

V N Gupchup

Non‐Executive, Independent Director

52

80

M P Patni

Non‐Executive Director

38

72

T Nambiar


40

80

Sampath Kumar


41

79

Management Team

Designation

Rajesh Sharma

Profile Has been with IEL since 1974. Since then he has worked in different Sales, Marketing and Management positions at IEL. He has been the Managing Director of IEL since Apr ‐2000. He has done B.Sc. and LLB. He has served as the Director from Jan ‐2006 to Apr ‐ 2009. Thereafter, he has been the Executive Director of IEL since Apr ‐2009. He is also the Chairman of Ultrapure Technology & Appliances India Ltd specialized in the manufacture and marketing of Kitchen Appliances. He also sits on board of other companies. He has done his B.Sc. He has done his B.Com, ACA, CISA. He has been serving as the Additional Director of IEL since Jan ‐2006. He has been the Non ‐Executive & Independent Director of IEL since Jul ‐1995. He is a Civil and Structural Engineer with B.E. (Civil) from Bombay University and M.Sc. & Doctor of Science in Civil Engineering, from Massachusetts Institute of Technology (MIT), USA. He has been the Non ‐Executive Director of IEL since Sep‐2001. Mr. Nambiar has done his B.Com and ACA. Currently, serves as the President of Cement Manufacturers' Association (CMA). He has 40 years of total experience (27 of them are with ACC) in various capacities. He has held Senior positions Taj Group of Hotels, Grand Hyatt, Oberoi Hotels and served in other capacities at Glaxo and Great Eastern Shipping. He has been the Non‐Executive & Independent Director of IEL since Mar ‐2005. He is a Marine Engineer and Chartered Engineer, U.K.



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Fig. 61: Income Statement (Consolidated) Y E March (Rs m) Net Sales

FY16

FY17

FY18E

FY19E

FY20E

8,711

10,241

12,296

15,060

18,169

18

20

22

21

8,154

9,465

11,302

13,798

16,626

557

776

995

1,261

1,543

Growth (%)

Operating Expenses Operating Profit

Other Operating Income

0

0

0

0

0

557

776

995

1,261

1,543

39

28

27

22

126

133

156

174

189

65

58

60

62

65

EBIT

496

700

899

1,150

1,419

Finance Cost

EBITDA Growth (%)

Depreciation Other Income

149

163

192

222

239

Exceptional Item

0

0

0

0

0

Profit before tax

346

537

707

928

1,179

Tax (current + deferred)

177

251

332

436

554

Profit / (Loss) for the period

169

287

375

492

625

Associates, Min int

(16)

(3)

(9)

(7)

(7)

Reported net profit

153

284

366

485

618

0

0

0

0

0

153

284

366

485

618

85

29

32

27

FY16

FY17

FY18E

FY19E

FY20E

141

142

142

142

142

Reserves & Surplus

1,560

1,837

2,152

2,582

3,140

Net Worth

1,701

1,979

2,294

2,724

3,282

62

63

71

79

87

Extraordinary Item Adjusted Net Profit Growth (%) Source: IEL, IndiaNivesh Institutional Research

Fig. 62: Balance Sheet (Consolidated) Y E March (Rs m)

Share Capital

Minority Interest Total Liabilities

5,397

8,002

8,544

9,428

10,174

Non‐current Liabilities

531

584

651

771

891

Long ‐term borrowings

230

299

350

450

550

Deferred tax liabilities

44

41

41

41

41

Other Long term liabilities

128

126

135

145

155

Long term provisions

129

118

125

135

145

4,866

7,418

7,893

8,657

9,283

567

608

750

800

750

Current Liabilities

Short‐term borrowings Trade Payables

3,314

3,960

4,687

5,849

7,115

Other Current Liabilities

781

2,650

2,220

1,720

1,070

Short term provisions

204

201

236

289

348

Total Liabilities and Equity

7,160

10,045

10,909

12,232

13,543

Non Current Assets

1,888

2,210

2,310

2,485

2,663

Net Block

1,050

1,453

1,443

1,465

1,511

Goodwill Non‐current Investments Long ‐term Loans and Advances Deferred tax Assets Other non current Assets Current Assets

Inventories Sundry Debtors Cash & Bank Balances Other current Assets Loans & Advances Total Assets

0

0

0

0

0

24

29

29

29

29

543

453

550

650

720

8

9

9

9

9

263

266

280

332

394

5,272

7,835

8,599

9,747

10,880

813

1,109

1,280

1,609

1,941

3,630

4,405

5,249

6,232

7,424

334

1,669

1,385

1,175

728

5

5

5

6

6

489

646

680

725

780

7,160

10,045

10,909

12,232

13,543



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Fig. 63: Cash Flow Statement (Consolidated) Y E March (Rs m)

FY16

FY17

FY18E

FY19E

FY20E

Profit before tax

346

537

707

928

1,179

Depreciation

126

133

156

174

189

23

1,182

(811)

(775)

(1,017)

(144)

(241)

(332)

(436)

(554)

Change in Working Capital Total tax paid Others (inc. Interest Income)

148

228

175

207

224

Cash Flow from Operations (a)

498

1,839

(106)

97

21

(299)

(440)

(146)

(196)

(235)

Change in investments

0

0

0

0

0

Others

0

0

0

0

0

(299)

(440)

(146)

(196)

(235)

199

1,399

(251)

(99)

(214)

2

10

0

0

0

Capital expenditure

Cash Flow from Investing (b) Free cash flow (a+capex)

Equity raised/(repaid)/ (buyback) Debt raised/(repaid)

31

138

194

150

50

(64)

(57)

(51)

(55)

(60)

Others

(136)

(142)

(192)

(222)

(239)

Cash Flow from financing (c)

(167)

(51)

(50)

(127)

(249)

33

1,349

(301)

(226)

(463)

0

(13)

16

16

16

334

1,669

1,385

1,175

728

Dividend (incl. tax)

Net change in cash (a+b+c)

Reconciliation of other balances Cash as per Balance Sheet Source: IEL, IndiaNivesh Institutional Research

Fig. 64: Key Ratios (Consolidated) Y E March

FY16

FY17

FY18E

FY19E

FY20E

Adjusted EPS (Rs)

10.6

19.9

25.0

33.1

42.1

Growth (%)

NA

88

25

32

27

Dividend/share (Rs)

3.0

0.0

3.0

3.2

3.5

Dividend payout ratio

28.3

0.1

12.0

9.7

8.3

EBITDA margin

6.4

7.6

8.1

8.4

8.5

EBIT margin

5.7

6.8

7.3

7.6

7.8

Net margin

1.9

2.8

3.0

3.3

3.4

Tax rate (%)

51.1

46.7

47.0

47.0

47.0

0.5

0.5

0.5

0.5

0.4

Debt/ Equity (x) Inventory days

34

40

38

39

39

Sundry Debtor days

163

166

164

159

157

Trade Payable days

230

223

215

214

214

Net margin

1.9

2.8

3.0

3.3

3.4

Asset turnover (x)

1.2

1.2

1.2

1.3

1.4

Du‐Pont Analysis ‐ ROE

Leverage factor (x)

4.1

4.3

4.6

4.2

3.9

ROE (%)

10.0

14.5

16.3

18.1

19.0

ROCE (%)

17.9

23.0

25.7

28.2

30.2

42.7

22.8

18.2

13.7

10.8

3.8

3.3

2.8

2.4

2.0

EV/EBITDA 10.2 7.3 Note: NA‐ Not Applicable; Source: IEL, IndiaNivesh Institutional Research

5.7

4.5

3.7

Valuation (x)

PER Price/Book


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VA Tech Wabag Ltd.


Leader with the technology edge

Current

We initiate on VA Tech Wabag (Wabag) with ACCUMULATE rating and price target

CMP

Rs 595

of Rs 642, implying 7.9% upside. Our positive view on the stock is based on (1)

Rating

ACCUMULATE

Target

Rs 642

OB/LTM sales ratio of 2.35x, coupled with uptick in awarding momentum, (2) strong top‐line and PAT CAGR of 6.8% and 13.8%, respectively over FY18‐20E, (3) unlevered balance sheet with net D/E ratio of 0.3x, and (4) RoE expansion to

(CMP as on December 04, 2017 closing)

15.9% by FY20.

STOCK INFO

INDEX BSE NSE Bloomberg Reuters Sector Face Value (Rs) Equity Capital (Rs mn) Mkt Cap (Rs mn) 52w H/L (Rs) Avg Daily Vol (BSE+NSE)

533269 WABAG VATW IN VATE.BO Water 2 109 32,503 750 / 450 138,914

SHAREHOLDING PATTERN

Investment Rationale 

Wabag has presence in 15+ Asian countries, including Sri Lanka, Philippines, Malaysia and Vietnam, which portray favorable awarding outlook in the water treatment space. Government initiative to clean Ganga and implementation of strict pollution norms suggest strong awarding outlook in the domestic market. This coupled with Wabag’s strategy to enter new geographies with high growth potential, and a model entailing project funding by multi‐lateral agencies comfort us on strong growth prospects with minimal risks.



Wabag has an asset light business as it outsources the civil & construction works and focuses on project management and technology aspects of the project. With working capital cycle peaking at 107 days and cash flow generating potential from business estimated at ~Rs 5.5bn during FY18‐20, we see minimal debt requirements to fund growth. Consolidated D/E ratio is likely to be capped at 0.3x during FY18‐20. With such strong cash flows getting generated from business, we see Wabag well placed to fund its equity requirements towards HAM orders under Namami Gange project.

%

(as on Sep, 2017)

Promoters Public & Others STOCK PERFORMANCE(%)

VA Tech Wabag SENSEX

24.72 75.28 3m

6m

12m

(2.3) (11.4)

20.5

3.7

5.1

25.3


VA Tech Wabag v/s SENSEX

Risks & Concerns Equity dilution, unfavorable forex movement, delays in municipal awarding.

Valuation


At CMP of Rs 595, Wabag is trading at 18.6x FY19E EPS and 15.1x FY20E EPS, respectively. Given the favorable business outlook, we expect Wabag to report a top‐line and PAT CAGR of 6.8% & 13.8%, respectively, during FY18‐20. On assigning a target multiple of 18.0x to the average of our FY19 and FY20 EPS estimates (at par with last 6 years median P/E multiple), we arrive at a price target of Rs 642. Given the 7.9% potential upside from CMP, we initiate coverage on Wabag stock with ACCUMULATE rating.

Fig. 65: Financial Performance Y/E March (Rs mn)

Net Sales

EBITDA

Adj. EPS (Rs)

EBITDA Margin

RoE (%)

Adj. P/E (x)

EV/EBITD A (x)

FY16

25,083

2,330

16.3

9.3

9.7

36.5

14.0

FY17

32,079

2,966

18.8

9.2

10.7

31.7

11.1

FY18E

38,035

3,562

30.4

9.4

15.5

19.6

9.1

FY19E

38,211

3,622

32.1

9.5

14.4

18.6

8.5

FY20E

43,379

4,176

39.4

9.6

15.9

15.1

7.3

Source: VA Tech Wabag, IndiaNivesh Institutional Research


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Investment Rationale To benefit from wide geographical presence We are of the view that it takes 5‐10 years for Water Treatment project (non‐ industrial segment) awarding cycle to mature in an Emerging economy. Wabag has a long list of reference projects in a mature European Water Treatment industry. Accordingly, in the last few years, Wabag started entering new geographies (Middle East, Asia and African countries), which have long‐term growth potential. This strategy to geographically diversify would help Wabag reduce its dependence on European markets (share of Austria consolidated revenues to total revenues would decline from 44.9% in FY11 to 20.3% in FY20E). Few countries where Wabag has been successfully able to penetrate the markets include Turkey, Tunisia, Oman, Philippines, Namibia, Nepal, Bahrain, Malaysia amongst other smaller countries. Wabag in order to mitigate ‘market entry’ risk ensures that (1) it ties‐up with a local Engineering player, and (2) the project is funded by a multi ‐lateral funding agency (like JICA, ADB, & EXIM amongst others). Thereafter on gaining exposure in a given market, Wabag subsequently starts taking up projects on its own. This strategy helps in avoiding execution and payment risks. Fig. 66: Emerging economies report strong revenue growth

100%

100%

80%

31%

38%

45%

60%

43%

37%

34%

27%

26% 80%

60%

18%

13%

7%

21%

24%

32%

29%

73%

52%

48%

30%

42%

60%

70%

38% 40%

40%

20%

Fig. 67: South East Asian economies see maximum growth

49%

51%

49% 36%

39%

35%

34%

20%

45%

FY11A

FY12A

FY13A

Domestic

FY14A

Asia (Consol.)

FY15A

FY16A

Austria (Consol.)

Source: VA Tech Wabag , IndiaNivesh Institutional Research

FY17A

FY12A

23%

16% 10%

0%

0%

10%

FY13A MEA

20%

18%

FY14A

FY15A

SE Asia

10% FY16A

17% FY17A

Others


In Oman, Wabag formed 2 separate JVs with NCC and Zawawi Trading. The Rs 1.7bn project from Majis Industrial Services along with JV partner NCC is completely executed. JV partnership with Zawawi has seen the business growing over 5x during FY12‐17. Similarly Wabag bagged Rs 3.4 bn order through JV route from Philippines in Jul‐2013. During FY2013‐17, Wabag has grown its revenues over 4.0x from the Philippines (from Rs 220mn in FY13 to Rs 1,004mn in FY17) market. Wabag is currently reaping benefits of entering the Sri Lanka, Philippines, Oman, Turkey, Nepal markets almost 5 years back. In last 2‐3 years, Wabag has entered the new geographies like, Malaysia, Vietnam, and Ecuador markets through the JV route. Wabag is executing pilot projects in these countries, which offer huge market opportunity. Going forward, we expect geographical strategy to help Wabag reduce business dependency on any one country and also, insulate the business from any slow‐down in one market.

Beneficiary of strong awarding outlook in domestic and Asian markets (1) Fast changing regulatory environment (roll out of new CPCB norms), (2) Increased awareness and strong bid pipeline across Municipalities, and (3) Uptick in


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awarding from Namami Gange, indicates that good times are ahead for Water Treatment industry. Being one of the largest players in domestic markets, we expect Wabag to benefit the most. In order to maintain financial discipline, management has indicated that it would participate in opportunities emerging from Tier‐1 cities only. Strong tendering pipeline of WTPs/ Desalination plants seen across Tier‐I cities (Chennai, Bangalore, Mumbai) bodes well for the company. With increased visibility on funding for Namami Gange being tied‐up, we expect the awarding momentum to catch‐up from here‐on. Also, we are of view that Wabag stands a strong chance of reporting order wins from Sri Lanka, Philippines, Thailand, Vietnam markets in the next 1‐3 years.

Continues to leverage on its technology capabilities WABAG over the years has added 100+ global technology patents. Wabag has established R&D centres in Winterthur (Switzerland), Vienna (Austria) and Chennai (India), which drive the technology ‐up gradation, thereby helping to take up complex projects and deliver them on time. Fig. 68: Wabag’s technology portfolio across Sub‐verticals Segment

Technologies

Sewage Water Treatment

Activated Sludge Process (ASP) | Upflow Anaerobic Sludge Blanket Reactor (UASB) | Sequential Batch Reactors (SBR) Bio Active Fixed Film Technology (BAFF) | Membrane Bio Reactor (MBR) | Submerged Membrane System | Membrane Bed Bio Reactor (MBBR) | Stabilization Pond

Drinking Water Treatment

Aeration | Disinfection | Sedimentation | Sludge Dewatering Filtration

Industrial Water Treatment

Industrial Wastewater Treatment

Desalination Recycling

Raw water pre‐treatment | Thermal Desalination of sea water treatment | Filtration Plants | Demineralization | Nano Filtration/ Ultra filtration | Zero Liquid Discharge | Softening Plants | Tertiary Treatment System/ Effluent Recycling Physico Chemical Treatment – Oil Removal system using DAF/ API/ CPI separators | Neutralization and primary sedimentation and grit removal | Biological anaerobic treatment– UASB | Tertiary Treatment – activated carbon/ sand filtration, disinfection Multi Stage Flash | Mechanical Vapor Compression | Multi‐effect Distillation | Reverse Osmosis and Electro dialysis | Thermal Vapor Compression Micro filtration | Membrane Bio Reactors


Water Treatment industry sees emergence of new technologies once every 4‐5 years and no player can maintain edge unless it regularly updates its technologies. We identify that Wabag is present across technologies with high growth potential, like, Thermal Desalination, Membrane Filtration, Electrodialysis (as per Industry reports, these technologies have >15% yearly growth potential). Wabag continues to maintain strong hold over the technologies which have very high demand, like Reverse Osmosis‐ Municipal, Membrane Bioreactor (MBR) and other Ion Exchange Technologies. Wabag is also built execution capabilities across nano technologies, which are the next‐gen technologies and have a long way to go. On a whole, we sense that the company is fairly positioned across the water technology value chain.


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Rising order book contribution of the high margin O&M business In the last few years, the company has built in a wide range of capabilities to spread its wings across geographies in the operations and maintenance (O&M) space. The O&M division is well positioned to take projects irrespective of the technology deployed. In FY09, the O&M vertical contributed 9.5% of the total order book and its share has now increased to 16.1% as of FY17. We expect further surge in the vertical’s contribution, going forward. Apart from the high margins, this business provides certainty of mid‐to‐long term cash inflows, thereby de‐risking company’s growth outlook to an extent.

Asset light model offers comfort on the growth prospects One of the key reasons for Wabag’s long‐term growth is its Asset light business model. As part of this strategy Wabag does in‐house design, technology aspects and project management and outsources the civil and construction works. This strategy has also helped Wabag make quick entry and exit from a given market with minimal losses/ damage. Fig. 69: Business areas & their advantages Design & Engineering

Technology

Civil Construction

Operation & Maintenance



In‐house



Cost optimization



Match customer requirements



In‐house



Compliance with designs



Proprietary & Bought out Technology



Testing, Quality Control



Mostly outsourced



Allows to focus on core competencies



In‐house



High Plant Operation Efficiency



Least Downtime


With working capital cycle peaking at 107 days and cash flow generating potential from business estimated at ~Rs 5.5bn during FY18‐20, we see minimal debt requirements to fund growth. Consolidated D/E ratio is likely to be capped at 0.3x during FY18‐20. With such strong cash flows getting generated from business, we see Wabag well placed to fund its equity requirements towards HAM orders under Namami Gange project.


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Understanding the Financials Order inflows to report 13.0% CAGR during FY18‐20 Wabag is looked upon as an Engineering player in Water treatment space, with majority of its business from Municipal segment. Wabag’s dependency on Municipal segment in recent years is declining (share of the segment in total Order Inflows declined from 73.0% in FY14 to 52.3% in FY17). On the other hand, the contribution of the Indian cluster in total order inflows which had been in 51.1‐ 54.6% range during FY14‐16, has risen to 83.9% in FY17. Notably, within the Indian cluster, major portion of order inflows were from out of India. Water scarcity issues in metro cities, roll‐out of Namami Ganga plan, and implementation of stringent pollution norms should drive awarding environment in Indian markets. We expect the Indian cluster to contribute ~74% of total order inflows during FY18‐20. During 8mFY18, Wabag has reported only 28% of the targeted Rs 43 bn of projects awarded. Given the strong bid pipeline, we are optimistic that Wabag should be able to attain its Order Inflow guidance for FY18. Accordingly, we expect Wabag to report 13.0% order inflow CAGR during FY18‐20 (versus 2.6% CAGR posted during FY14‐17). Fig. 70: Indian cluster to contribute 74% of total Order Inflows during FY18‐20

Fig. 71: Municipalities to contribute ~55% of FY18‐20 Order Inflows 100%

100% 16 80%

49

45

24

26

29

45

60%

41

40

59

60

FY15A

FY16A

48

47

45

44

52

54

56

57

FY17A

FY18E

FY19E

FY20E

60%

84

40% 20%

27 80%

51

55

FY14A

FY15A

77

75

72

40%

73

55 20%

0%

0%

FY16A India

FY17A

FY18E

FY19E

FY14A

FY20E

Overseas

Municipality


Industrial


We expect awarding from Indian Metro Municipalities, Namami Ganga (under Indian cluster) to contribute ~6% of total order inflows during FY18‐20. Another 33% of the order inflows (to be spread across India, Middle East and Asia) during FY18‐20 would be accounted by the Industrial segment of the Indian cluster. Fig. 72: EPC to account for ~85% of FY18‐20 Order Inflows 100%

11

15

16

16

16

16

50,000 60% 40%

73

70,000

80

60,000

32

80%

Fig. 73: Order Inflows to report 13% CAGR during FY18‐20

60 35

40 19

40,000 89

85

84

85

85

85

68 20%

10,000

20

‐11

30,000 20,000

15

18

‐30 9 3 5 , 3 3

7 6 7 , 9 2

FY14A

FY15A

1 0 4 , 1 5

8 9 1 , 6 3

0 0 0 0 , 3 4

0 5 4 , 9 4

1 5 3 , 8 5

0

0% FY14A

FY15A

FY16A EPC

FY17A

FY18E

O&M



FY19E

FY20E

(20) (40)

FY16A

FY17A

Order Inflows (Rs mn)

FY18E

FY19E

FY20E

yoy change (%)


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In terms of the overseas business, we expect Wabag to report majority of the overseas order wins from South America and African markets.

Order book to report 11.2% CAGR during FY18‐20 Wabag’s strong order inflows coupled with uptick in project execution should help generate 11.2% Order book CAGR during FY18‐20. Shift in order inflow mix in favour of Indian cluster should also lead to a shift in order book mix (Indian cluster to account for 70.8% of the Order Book during FY18‐20). Fig. 74: Indian cluster to account for ~70% of Order Book during FY18‐20

Fig. 75: Order Book to report 11.2% CAGR during FY18‐20

100%

120,000

4 3.3

80%

52

48

32

37

29

27

100,000

50

2.8

2.8 2.6

80,000

2.3

2.5

2.5

3

60% 60,000 40% 20%

49

52

68

63

71

73

40,000

50 20,000

0%

2

3 7 3 , 2 6

2 4 4 , 8 6

1 5 1 , 3 8

3 4 9 , 1 8

8 0 9 , 6 8

8 9 9 , 5 9

7 8 4 , 7 0 1

0 FY14A

FY15A

FY16A Indian

FY17A

FY18E

Overseas


FY19E

FY20E

1

0 FY 14A

FY 15 A FY 16A FY 17A Order Book (Rs mn)

FY 18E FY 19E FY 20E OB/ LTM Sales (x)


On the back of strong execution, we expect the OB/LTM sales ratio to decline from the peaks of 3.27x in FY16 to 2.48x in FY20.

Execution across projects to catch ‐up from here‐on Wabag is successfully realizing its geographical diversification strategy with revenue contribution of Asian subsidiaries having increased significantly from 1.9% in FY11 to 38.3% in FY17. At the same time, the Austrian (consolidated) business posted 2.2% revenue CAGR over FY14‐17 (share to total revenues declined from 42.9% in FY14 to 27.4% in FY17). Increase in awarding activity, with Wabag reporting major order wins helped the Domestic business report 12.5% revenue CAGR during FY14‐ 17. Going forward, we expect the contribution of domestic business to remain at 33.8% by FY20. Simultaneously, the share of revenues from Austria (consolidated) would decline from 27.4% in FY17 to 20.3% in FY20. During FY14‐17, Wabag on consolidated basis reported 12.7% revenue CAGR, mainly driven by 18.1% revenue CAGR in the Wabag India‐EPC segment. With few large orders getting completed in FY18, we expect Wabag to report strong 18.6% yoy increase in FY18 revenues. Majority of the order inflows for FY18 (only 28% of the Rs 43 bn of guidance were reported in 1HFY18) are likely to be reported in 2HFY18 (most if it being back‐ended). Given that these new order wins would take at least 6‐9 months from then, to hit the revenue recognition milestone, there is a strong chance that Wabag may report just 0.5% yoy revenue growth in FY19. However, on considering 2HFY18 and FY19 order wins, coupled with traction in execution of projects, should help Wabag report 13.5% yoy revenue growth in FY20. On a whole, we expect Wabag to report 6.8% revenue CAGR during FY18‐20.


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Fig. 76: Revenue‐mix movement during FY17‐20 FY2017

Austria (Consol.) 27%

FY2018


Domestic (only India) 34%

FY2020



Asia (Consol.) 43%

Asia (Consol.) 39%


Asia (Consol.) 46%

Source: VA Tech Wabag , IndiaNivesh Research

Consolidated EBITDA margins to expand during FY18‐20 Restructuring of business operations helped Wabag report expansion in its consolidated EBITDA margins during FY08‐10 (sharp EBITDA expansion seen in standalone business, which improved from 0.8% in FY08 to 12.1% in FY10). Thereafter, the consol. EBITDA margins have hovered in 11.5‐12.5% range during FY10‐17 (FY13 being an exception, when margins touched a peak of 13.1%). Fig. 77: Employee & Other Expenses as % of sales declined during FY14‐17 12.0 9.9 8.2

9.0

8.4

8.4 7.6

8.3

4.7

4.9 4.0


7.5

5.8 6.0

Fig. 78: FY17 EBITDA margin mix

4.1

4.2

4.3

Asia (Consol.) 27%

Standalone 68%

3.0

0.0 FY14A

FY15A

FY 16A

FY17A

Employee Exp. as % of sales

FY18E

FY19E

FY20E

Other Exp. as % of sales



FY17 standalone margins were impacted due to low contribution of high margin O&M business. Current order book gives strong visibility on revenue booking from Municipal segment, which enjoys higher EBITDA margin. Accordingly, we expect standalone EBITDA margin to expand from 11.2% in FY17 to 12.4% by FY20. In last few years, Wabag restructured and streamlined its operations. As a result, their consolidated employee and other expenses as a % of sales declined from the highs of FY14, enabling an improvement in EBITDA margin to 8‐9.5% levels, as seen in the last few years. FY17 consolidated margins were impacted due to lower standalone margins. Notwithstanding low margin profile of international business, we expect the consolidated EBITDA margins to expand from 9.2% in FY17 to 9.6% in FY20 supported by a shift in the mix in favor of the high margin domestic business.


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Fig. 79: Consol. EBITDA margins to expand to 9.6% by FY20 13.1

14.0 12.0 10.0

12.2

11.5 9.0

12.5

12.1

11.9

11.2 9.5

9.3

8.6

8.4

12.1

9.5

9.3

9.2

12.4

Fig. 80: EBITDA to report 8.3% CAGR during FY18‐20 4,500

30

27.3

4,000 9.6

3,000

8.0

2,500

6.0

2,000

25

22.4

3,500

20.1

18.4

20 15.3 11.1

15

11.2

2 2 6 , 3

1,500

4.0

1,000 2.0

500

0.0

0 FY12A FY13A FY14A FY15A FY16A FY17A FY18E Standalone

FY19E FY20E

0 4 5 , 1

5 8 8 , 1

5 9 0 , 2

FY13A FY14A

0 3 3 , 2

6 6 9 , 2

FY15A FY16A

FY17A FY18E

EBITDA (Rs mn)

Consol.


2 6 5 , 3

10 6 7 1 , 4

1.7

FY19E

5 0

FY20E

yoy growth (%)


In addition to EBITDA growth, lower contribution from Minority Interest and Share of profit from JV’s, should help Wabag report 13.8% PAT CAGR during FY18‐20. Fig. 81: Consol. PAT margins to expand by 60 bps to 5.0% by FY20 10.0

6.0

7.7

7.5

5.1

5.6

62.0

2,500

8.5 8.0

Fig. 82: PAT to report 13.8% CAGR during FY18‐20

7.5

7.3

7.7

70 60

7.3

7.2

7.5

2,000

50 40

5.1 4.4

4.4 3.5

4.0

4.6

5.0

1,500

22.5

22.9

30

15.4

20 5.4

1,000

3.2

10

(4.4)

2.0

500

0

0.0

3 0 9

4 3 1 , 1

FY13A FY14A

FY12A FY13A FY14A FY15A FY16A FY17A FY18E FY19E FY20E Standalone

25.5

4 8 0 , 1

0 (18.1)

4 2 0 , 1

7 8 8

FY15A FY16A

FY17A FY18E

PAT (Rs mn)

Consol.

9 5 6 , 1

9 4 7 , 1

‐10

9 4 1 , 2

FY19E

‐20 ‐30

FY20E

yoy growth (%)



Fig. 83: Consol. D/E ratio to remain at 0.3x

Fig. 84: WC days to peak at 107 days

0.5

120

107

0.4

100

100

100

FY18E

FY19E

FY20E

0.4 90 0.3

0.3

0.3

0.3 66

0.3 0.2

60

0.2

0.2

66

48

30

0.1

0.0 FY14A

FY15A

FY16A

FY17A

FY18E



FY19E

FY20E

0 FY 14A

FY15A

FY16A

FY17A


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Assume WC cycle to remain at 100 days going forward Wabag has witnessed an accentuation in its working capital (WC) cycle over the last few years, i.e. from 34 days in FY11 to 66 days in FY17 (after touching a peak of 107 days in FY16). Such a stretch is despite Wabag following the practice of starting works on international projects only after receiving the Letter of Credit or after receiving some advance from the clients. The Management attributed this stretch to higher WC requirements at some of its international projects. However, with these projects now nearing completion, Management expects pressure on WC cycle to ease off. Also, the company has been proactive in negotiating more number of milestones (which helps it in having shorter WC cycle) at some of the recently won projects. But as per our contention, with Wabag’s geographical diversification strategy requiring it to regularly scout for new markets in order to maintain growth, we are of the view that the long‐term WC cycle could continue to remain under pressure. Hence, we assume 100 days of WC cycle for FY18‐20.


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Valuation At CMP of Rs 595, Wabag is trading at a multiple of 18.6x FY19E and 15.1x FY20E EPS. Wabag stock is currently trading at slight premium to its last six years, 1‐year forward P/E median of 18.0x. This is attributable to (1) the impact of FY17 order inflow guidance miss (reported Rs 36.1bn vs. Rs 40‐42bn of guidance), (2) slowdown in Namami Gange tendering, where Wabag stands a good chance of winning high margin orders, (3) delay in execution of few large ticket projects (including AP GENCO; which are now nearing completion), and (4) stretch in WC cycle. We expect Wabag to attain lower ‐end of its order inflow guidance, i.e. Rs 43bn for FY18. With AP GENCO project nearing completion and increased traction from new projects, we expect Wabag to report 6.8% revenue CAGR during FY18‐20 (versus 12.6% CAGR during FY14‐17). On the back of improved EBITDA margin and adjusting for Minority interest and share of profit/ loss from JV’s, we expect Wabag to report 13.8% PAT CAGR during FY18‐20 (versus negative 3.3% CAGR during FY14‐ 17). Fig. 85: 1‐year forward PE Band

Fig. 86: 6 years Median of the 1‐year forward P/E Band

1,200

60 Median 1-year fwd. P/E- 18.0x

1,000

50

800

40

600

30

400

20

200

10

0

1 1 1 1 r g a u M A

2 1 n a J

2 1 n u J

2 1 v o N

3 1 r p A

3 1 p e S

4 1 b e F

4 1 l u J

4 1 c e D

5 5 1 1 y t a c M O

6 6 1 1 r g a u M A

7 1 n a J

7 1 n u J

7 1 v o N

‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Price

17.0x

19.0x


21.0x

23.0x

0

1 1 1 1 r l u a J M

1 2 2 1 1 1 l v r u o a J N M

2 1 v o N

3 3 1 1 r l u a J M

3 4 4 1 1 1 l v r u o a J N M

4 5 5 1 1 1 l v r u o a J N M

5 6 6 1 1 1 l v r u o a J N M

6 7 7 1 1 1 l v r u o a J N M

‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

1‐yr Fwd PE (x)

Last 6‐yrs. Avg. Median


Expected uptick in new order wins, comfortable OB/LTM sales ratio of 2.35x, recent quarter’s decent performance and low margin projects nearing completion, comfort us that profitability would catch up from here‐on. Asset light business coupled with improved business outlook should translate to improvement in the RoE from 10.7% in FY17 to 15.9% in FY20. On assigning target multiple of 18.0x to average of FY19 and FY20 EPS estimates, we arrive at price target of Rs 642. Given the 7.9% upside, we initiate on Wabag with ACCUMULATE recommendation.

About the Company Wabag in India was incorporated in 1995 by the Deutsche Babcock Group, with its headquarters based at Chennai. Since then, Wabag has evolved as one of the leading water treatment players (water and waste water treatment space). The scope of company’s operations includes planning, design, engineering, supply, installation, construction and operation & maintenance of drinking water and waste water plants for both municipal and industrial sectors. Over the years Wabag has built strong domain capabilities across sewage, drinking water, effluents, sludge


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treatment and desalination projects. Headquartered in Chennai and with subsidiaries spread across the globe, it is primarily focused on the emerging and developing regions of South East Asia, Africa, Middle East, India, Latin America (LATAM) and Central & Eastern Europe.

Fig. 87: Quick details of Wabag early history Year

Details

1995

Held by Deutsche Babcock Group

1996

Name changed to Blacke Durr & Wabag Technologies Ltd

1999 ‐ 2000

Austrian group VA Tech acquired part of Wabag’s business from Babcock group; Name changed to VA Tech Wabag (India)

2005

Siemens acquired VA Tech; Held via VA Tech Austria

2005

MBO of the Indian business backed by ICICI Venture & VA Tech Wabag (India)

2007

VA Tech Wabag (India) acquired its erstwhile parent VA Tech (Austria) from Siemens


Wabag since its inception has built a strong track record of completing more than 2,300 projects catering to various municipal & industrial clients.

Employees Wabag currently has ~2,100 employees spread across 20+ countries. The company has successfully moved its non‐core functions (human resource management, finance, treasury, MIS reporting) from its international offices to India in the last few years. We estimate the Indian office employing a head count of ~875, with a majority of these delegated on the operations side. In India, Wabag has three offices, ie one each at Chennai, Vadodara and Pune. A majority of the support operations team is at the Chennai office, the Pune office looks after non‐core functions like, HR, MIS and Finance employing ~100‐130 employees, whereas, the Vadodara office hosts engineering & designing team. Fig. 88: Employee Team Structure Sales

R&D, E&D

Operations, Others

Total

India

95

150

630

875

Austria

15

40

55

110

European Nations

20

0

75

95

Other Countries

65

0

955

1,020

Totals

195

190

1,715

2,100


Wabag has strong R&D teams based across Vienna, Winterthur and Chennai. The R&D teams at Vienna and Wassertechnik share 100+ patents among them.

Experienced Management Top management of Wabag comprises of experienced professionals from the industry.


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Fig. 89: Details of the Experienced Management team Management Team

Designation

Rajiv Mittal

Managing Director & Group CEO

Parthasarathy Gopalan

Chief Financial Officer

Industry Exp. (in yrs.)

Age (in yrs.)

Team Profile

34

57

Has been with Wabag since inception. Prior to joining Wabag, he has worked with large water engineering companies like Hindustan Dorr‐Oliver, John Brown, etc. He is a graduate in Chemical Engineering from University of Bombay.

24

49

He was earlier the COO of CRH Plc. He is a Chartered Accountant and has done his BSc and PGDBA.

Patrick Andrade

Chief Operating Officer

35

55

Prior to assuming the COO’s role, he served as President of Industrial Water Group and Head of Industrial Water Group at Wabag. He also worked with Aquatech International as Director– Sales (South East Asia). Has Diploma in Chemical Engineering from Karnataka Polytechnic, Mangalore.

S Varadarajan

Director & Chief Growth Officer

31

52

He has earlier served as the CFO at Wabag. Prior to Wabag he was associated with PL Agro Technologies. He has done his CS & CWA.

Rajneesh Chopra

Global Head ‐ Business Develop.

32

54

Is the Global Head of Business Development at Wabag since Dec 2015. He has also served as Senior Vice President‐ Operations & Maintenance Business Group and then Head of Operations & Maintenance.

Venkatasamy V

Chief Information Officer

34

57

Has served BHEL prior to joining Wabag. He has done his B.E in Industrial Engineering and MBA.

56

Prior to Wabag, he worked at Fedders Lloyd as Executive President. He has worked with leading MNCs in the field of Power, Energy, Infrastructure and Asset creation. He is an Electronics Engineer (Hons) from Thapar Institute of Engineering and Technology and has done Management Certification course from IIMD, Switzerland.

Pankaj Sachdeva

CEO ‐ India Cluster

30


Risks & Concern




The stock could possibly see some pressure owing to lack of clarity on its fund raising plans. This again would be dependent on the HAM order wins from Namami Gange.



65.9% of Wabag’s existing order book is made up by the municipality business. Municipalities are governed and regulated by regional governments. We sense any change in regulatory environment would impact profitability of on‐going projects as well as the awarding pipeline of the upcoming projects.



Any unfavorable forex movement could affect the company’s financials.

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Fig. 90: Income Statement (Consolidated) Y E March (Rs m) Net Sales

FY16

FY17

FY18E

FY19E

FY20E

25,083

32,079

38,035

38,211

43,379

28

19

0

14

22,753

29,113

34,473

34,589

39,202

2,330

2,966

3,562

3,622

4,176

Growth (%)

Operating Expenses Operating Profit

Other Operating Income EBITDA

0

0

0

0

0

2,330

2,966

3,562

3,622

4,176

27

20

2

15

205

191

196

225

254

79

112

75

110

110

2,204

2,887

3,441

3,507

4,032

Growth (%)

Depreciation Other Income EBIT

Finance Cost

457

526

526

581

597

Exceptional Item

0

0

0

0

0

Profit before tax

1,746

2,362

2,914

2,926

3,436

668

667

1,079

1,083

1,271

Profit / (Loss) for the period

1,078

1,695

1,835

1,843

2,164

Associates, Min int

(191)

(671)

(176)

(95)

(15)

Reported net profit

887

1,024

1,659

1,749

2,149

0

0

0

0

0

887

1,024

1,659

1,749

2,149

15

62

5

23

FY16

FY17

FY18E

FY19E

FY20E

109

109

109

109

109

Reserves & Surplus

9,094

9,822

11,424

12,665

14,191

Net Worth

9,203

9,931

11,533

12,774

14,300

Tax (current + deferred)

Extraordinary Item Adjusted Net Profit Growth (%)


Fig. 91: Balance Sheet (Consolidated) Y E March (Rs m)

Share Capital

Minority Interest

82

173

351

445

461

19,930

23,402

26,517

27,210

30,113

Non‐current Liabilities

2,225

2,695

2,881

3,431

3,981

Long ‐term borrowings

501

632

700

800

900

Deferred tax liabilities

31

31

31

31

31

1,523

1,897

2,000

2,400

2,800

Total Liabilities

Other Long term liabilities Long term provisions Current Liabilities

Short‐term borrowings Trade Payables Other Current Liabilities Short term provisions

170

136

150

200

250

17,706

20,707

23,637

23,779

26,132

3,272

2,459

3,000

3,000

3,000

10,287

12,574

14,837

14,679

16,632

3,216

4,643

4,800

5,100

5,500

931

1,030

1,000

1,000

1,000

29,216

33,506

38,401

40,429

44,873

Non Current Assets

2,912

2,625

2,671

2,653

2,609

Net Block

1,779

1,744

1,743

1,689

1,610

Goodwill

0

0

0

0

0

205

33

33

33

33

0

0

0

0

0

249

247

249

252

252

Total Liabilities and Equity

Non‐current Investments Long ‐term Loans and Advances Deferred tax Assets Other non current Assets Current Assets

Inventories

679

601

645

680

715

26,304

30,881

35,730

37,776

42,264

976

385

824

816

924

19,424

25,115

28,135

28,265

32,088

Cash & Bank Balances

3,626

2,617

3,821

5,545

5,802

Other current Assets

Sundry Debtors

1,887

2,163

2,200

2,350

2,500

Loans & Advances

273

409

450

400

450

Current Investments

118

192

300

400

500

29,216

33,506

38,401

40,429

44,873

Total Assets



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Fig. 92: Cash Flow Statement (Consolidated) Y E March (Rs m)

FY16

FY17

FY18E

FY19E

FY20E

Profit before tax

1,571

1,789

2,917

2,926

3,436

205

191

196

225

254

(3,954)

(2,568)

(1,076)

336

(1,363)

(531)

(770)

(1,079)

(1,083)

(1,271)

Depreciation Change in Working Capital Total tax paid Others (inc. Interest Income) Cash Flow from Operations (a)

536

1,419

621

237

280

(2,173)

61

1,579

2,642

1,335

(145)

(111)

(195)

(170)

(175)

Capital expenditure Change in investments

94

118

(108)

(100)

(100)

1,018

601

110

110

110

966

608

(193 )

(160 )

(165 )

(2,319)

(50)

1,384

2,472

1,160

37

14

0

0

0

Debt raised/(repaid)

2,287

(748)

609

100

100

Dividend (incl. tax)

(263)

(264)

(481)

(507)

(624)

Others

(245)

(267)

(310)

(350)

(390)

Cash Flow from financing (c)

1,816

(1,265)

(182)

(757 )

(914 )

609

(596)

1,203

1,724

257

0

(413)

0

0

0

3,626

2,617

3,821

5,545

5,802

Others Cash Flow from Investing (b) Free cash flow (a+capex)

Equity raised/(repaid)/ (buyback)

Net change in cash (a+b+c)

Reconciliation of other balances Cash as per Balance Sheet


Fig. 93: Key Ratios (Consolidated) Y E March

FY16

FY17

FY18E

FY19E

FY20E

Adjusted EPS (Rs)

16.3

18.8

30.4

32.1

39.4

15

62

5

23

Growth (%)

Dividend/share (Rs)

4.0

4.5

7.3

7.7

9.5

24.6

24.0

24.0

24.0

24.0

EBITDA margin

9.3

9.2

9.4

9.5

9.6

EBIT margin

8.1

7.2

9.1

9.2

9.3

Net margin

3.5

3.2

4.4

4.6

5.0

Tax rate (%)

Dividend payout ratio

42.5

37.3

37.0

37.0

37.0

Debt/ Equity (x)

0.4

0.3

0.3

0.3

0.3

Inventory days

18.4

5.5

10

10

10

Sundry Debtor days

282.7

241.6

270

270

270

Trade Payable days

193.5

180.8

180

180

180

Net margin

3.5

3.2

4.4

4.6

5.0

Asset turnover (x)

0.9

1.0

1.1

1.0

1.0

Leverage factor (x)

3.0

3.3

3.4

3.2

3.2

ROE (%)

9.7

10.7

15.5

14.4

15.9

ROCE (%)

7.5

8.4

12.0

11.1

12.1

Du‐Pont Analysis ‐ ROE

Valuation (x)

PER

36.5

31.7

19.6

18.6

15.1

Price/Book

3.5

3.3

2.8

2.5

2.3

EV/EBITDA

14.0

11.1

9.1

8.5

7.3



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Water Industry - IndiaNivesh

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