CB HAVE SEBI CHAIRMAN UNCOMFORTABLW WITH CURRENT IPOS EXPENSIVE VALUATION N REQUESTS INVESTMENT BANKERS TO BE LESS GREEDY N LEAVE SOMETHING ON TABLE FOR INVESTORS.
ATTENTION EVERBODY REPUTED RESEARCH HOUSE EQUITYMASTER IS SAYING TO AVOID VATECH ipo.
MARKETS ARE EXPECTED TO CRASH IN NEXT FIORTNIGHT SO AVOID THESE HIGH PRICED IPO FEQUITYMASTER SAYS AVOID THE VA TECH WABAG IPO
Issue structure ________________________________________
Qualified Institutional Bidders (QIBs) Non-institutional Investors Retail Investors
Percentage of issue size 50% 15% 35%
Minimum Bid/Application size Such number of equity shares so that the bid amount exceeds Rs 100,000 Such number of equity shares so that the bid amount exceeds Rs 100,000 5 Equity Shares
Minimum Bid/Application size Not exceeding issue size Not exceeding issue size Such Number of equity shares so that the bid amount does not exceed Rs 100,000
Objects of the issue ________________________________________
The company mainly proposes to use the issue's net proceeds to fund its working capital requirements. Based on its consolidated order book of Rs 27.7 bn as on end June 2010, it plans to utilise more than half of its issue's net proceeds to part fund the working capital requirement for this orders, while balance portion of the orders is expected by way of short term bank loans.
It also plans to use the fund for construction of its corporate office at Chennai and towards implementation of its global IT system.
The following table illustrates detail break-up towards the utilisation of issue's net proceeds.
Particulars Amt (Rs m)
Funding working capital requirement 645
Construction of corporate off. at Chennai 347
Implementation of global IT systems 111
General corporate purposes 147*
Total fresh issue 1,250
* based on higher end of price band
Company background ________________________________________
• Business
VA Tech Wabag (VA Tech) is a multinational player in the water treatment industry. The company has a presence in most emerging markets that include India, Austria, UAE, Libya, Czech Republic, the Middle East, North Africa, Central and Eastern Europe, China and South East Asia. It offers complete life cycle solution from conceptualization, design, engineering, procurement, supply, installation, construction to operation and maintenance (O&M) services. Further, it has a presence in entire value chain of the water treatment ranging from sewage, drinking water, effluents, desalination and reuse. And caters to institutional clients like municipal corporations and corporate from industries like power, steel and oil & gas. It is headquartered in Chennai that manages its global operations along with its subsidiaries.
The company has strategic and technical expertise, while it subcontracts its general civil works. It has technology focused R&D centres in India, Austria and Switzerland. It also owns 157 patents that include both product and process patents. Moreover, it has already applied for 51 patents through its subsidiary that are pending for approval.
In 2007, the company management acquired its parent Wabag Austria and hence took over the entire Wabag group. The Wabag group was founded in 1924. And has a project reference list of more than 2,250 projects over the last three decades.
• Key management personnel
Rajiv Mittal, 50, is the Managing Director of the company and is in the position since September 2000. He is a graduate in chemical engineering from the University of Bombay. Before 2000, he worked with Wabag Water Engineering Limited, UK as a deputy director (international sales). He has 27 years of experience in the water industry.
Shiv Narayan Saraf, 58, is the head of operations. He holds a bachelor's degree in engineering from Karnataka Regional Engineering College. He has been associated with the company's since August 2000. Before that, he was employed with Ion Exchange India Limited and has over 38 years of work experience.
Amit Sengupta, 54, is the head of corporate strategy. He holds a bachelor's degree in chemical engineering from IIT, Kharagpur and has been working with the company since June 2001. Before joining the company, he was employed with Kirloskar AAF Limited and has over 32 years of work experience. He is responsible for strategy for growth, technology acquisitions and synergising strengths within the Wabag group to improve efficiency, apart from heading the corporate marketing and communications.
S. Varadarajan, 44, is the chief financial officer and the head of the OBG SBU of the Company. He is an associate member of the Institute of Company Secretaries of India and the Institute of Cost and Works Accountants of India. He has been working with the company since January 1997. Before that, he was employed with PL Agro Technologies Limited as finance manager and company secretary and has 24 years of work experience. He is in charge for finance, commercial, legal, secretarial, information technology, income tax and general administration functions of the company.
• Sector
The demand for water - the life-sustaining natural resource that has no substitute, continues to escalate at an unsustainable rate, fueled by population growth and industrial expansion. Water use has been growing at more than twice the rate of population increase in the last century, and, although there is no global water scarcity as such, an increasing number of regions are chronically short of water. Most countries in the Near East and North Africa suffer from acute water scarcity, as do countries such as Mexico, Pakistan, South Africa, and large parts of China and India.
The world's fresh water supply is shrinking due to pollution, draining of underground aquifers, and climate change. This situation is reflected in the fact that in a world three-quarters covered by water, approximately 18% of the population does not have access to fresh drinking water and almost 40% of the population lacks improved sanitation facilities. As a result, supply of clean, potable water and sanitation are among the key challenges of the 21st century.
The global supply of freshwater is relatively fixed, and unevenly distributed. Total global water reserves are estimated to be 1.4 billion cubic kilometers, of which nearly 97.5% is salt water in oceans, and the balance 2.5% forms the available fresh water reserves. Groundwater and surface water, which together constitute approximately 0.76% of the total water on the planet are the most easily accessible and used sources of water. Rest of the fresh water is either locked up in the form of glaciers and permanent snow cover, or is inaccessible to humans.
Reasons to apply ________________________________________
• Growing industry: We being about 70% covered by water, are yet left with minuscule amount of fresh accessible water. In fact, as per World Water Development report, of the total water only 2.5% is fresh, while rest is salted water. And of that 2.5%, only 0.4% is surface and atmosphere water that is accessible to us, while the rest 99.6% is in form of glaciers and ground water. This points out to huge opportunities for companies catering to this space. And VA Tech is no exception.
• Present in the entire value chain of the water treatment: Being in the water treatment industry, the company caters to the entire range of water treatment services. Its services range from sewage treatment, processing and drinking water treatment, effluents treatment, sludge treatment to desalination and reuse for its client. We believe this helps it to diversify its portfolio of offerings. It also benefits by way of bids for projects that involve complete water treating solution.
• Geographical advantage: VA Tech is entirely present in the emerging markets of Asia, African continent, Europe and the Middle east. In fact, these regions are highly populated in the world (that include India and China) and, thus, require high demand for water treatment. Going forward, with increasing population and lower accessible fresh water, more opportunity towards treating water will be generated.
• Huge technological advantage: The company mainly offers technical solution and sub contracts civil works. This helps it to keep its requirement of assets low and, in fact, entails far lower capital expenditure. For instance, the company has 157 patents under its portfolio, besides 51 which are already pending for approval.
Reasons not to apply ________________________________________
• Orders entirely skewed towards municipal clients: Around 88% of company’s latest order book comes from State and Central government controlled municipal corporations. And company’s revenues are highly dependent on them. Moreover, these institutions have bad history. Any delays, termination or cancellation of projects would affect its business operations.
• High client concentration ratio: During FY10, around 2/3rd of the company’s standalone revenues came from its top 5 clients. And 82% of the standalone order book during the period came from its top 5 clients. Further, its major subsidiary, Wabag Austria’s concentration remained at 36% and 53% of revenues and order book respectively during the same period. This leads to high business risk in the hands of few clients. So in future, if company loses any one of its top clients, its business operations will face huge risks. However, diversification benefits may accrue on account of more activity in the industry going forward.
• Higher dependency on third party contractors: As per the company, its Indian business, that constitutes 60% of its total consolidated revenues, comprises of around 25% to 30% of civil works that are sub contracted to third party contractors. This is mainly towards development and construction of proposed projects and supply of certain key equipments. Though the company does not have direct control on them, any uncertainty with respect to timing and quality of work will impact its operations immensely.
Financials Analysis ________________________________________
Consolidated financials
Profit & Loss (Rs m) FY08 FY09 FY10
Operating revenue 6,109 11,333 12,237
Expenditure 5,933 10,718 11,125
EBITDA 176 614 1,113
EBITDA Margin 2.9% 5.4% 9.1%
Interest Expense 144 354 299
Depreciation 53 84 139
Other Income 123 217 100
Prior period & other adjustments (38) 69 22
Profit Before Tax 65 462 797
Tax 10 40 304
Net Profit/(Loss) 54 422 494
Net Margin 0.9% 3.7% 4.0%
Weighted Average no. of shares(m) 9.2 9.5 9.5
Diluted EPS (as reported by the company) (Rs) 5.9 44.4 51.9
Balance Sheet (Rs m)
Net Block 289 350 378
Net Worth 3,117 3,715 4,008
Debt 447 459 391
D/E 0.1 0.1 0.1
RoNW 1.7% 11.4% 12.3%
RoIC 11.4% 24.4% 26.0%
Concluding remarks ________________________________________
VA Tech Wabag Ltd. comparative analysis
Particulars (FY10) Unit VA Tech Wabag NALCO Holding
Revenue Rs m 12,237 170,479
No. of shares(m)* m 10.3 138.6
Current price* Rs 1,310 1,159
Market cap. Rs m 13,512 160,685
D/E# x 0.1 5.8
EPS Rs 47.9 20.01
RONW# % 9.4 12.9
P/BV# x 2.6 7.5
P/E x 27.4 23.9**
* Shares outstanding post issue, price Rs. 1310 higher price band ** on TTM earnings
# Networth calculated post issue on higher price band NAlCO's financial are as of CY09; 1 US$= Rs 45.5
We believe that water treatment is going to be a big industry going forward and the company does have competitive advantages to exploit the potential growth. Besides, its asset light model and a strong balance sheet also bode well for it. However, factors like limited financial history, inconsistent trend in margins and negative cash flow generation in the last couple of years do raise some amount of concerns.
Besides, the price band that the management has fixed for the IPO seems to leave very little on the table for IPO investors. The original investors who are exiting the company however, stand to gain from the hefty exit price that they are being offered. All in all, we would advise investors to give a pass to the IPO issue currently and have a re-look in the future when the valuations come down to more meaningful levels and the company starts having a decent financial history so as to make evaluation of its fundamentals a worthwhile exercise. In view of these factors, we recommend investors to "AVOID" this IPO.
Zerodha (Trading & Demat Account)
RHP
