[T.S.R:18259] Water-Nascent Industry, Big Potential

 

Why look at the water sector? —

Companies in CIRA coverage like L&T, IVRCL,

NCC and Thermax have a presence in water treatment/management/distribution. While

this segment is currently a small percentage of business for companies like L&T,

Thermax (we estimate <10% of revenues, although granularity in information is

limited), we believe this is a nascent industry and given the huge demand for water in

the country it could become a compelling investment theme over a multi-year horizon.

Pure play water treatment/management companies like VA Tech Wabag and Ion

Exchange could also benefit from opportunities in this space.



India's water demand set to rise… — Although India has been endowed with large

freshwater resources, recent overdrawing of ground water has resulted in a strain on its

resources. Key factors driving India's water usage include: (1) Fast population growth;

(2) Traditional and inefficient agricultural practices; (3) Populist political practices (free

power leading to over-drawing of ground water via pumps); (4) Rising urbanization and

shift in consumption patterns to more water-intensive products like showers and

automatic washing machines; and (5) Rapid industrial growth in hinterland,

necessitating requirement of freshwater.



…driving increased investments in the sector — The water sector in India is a

~US$2.5bn industry (in 2007), and is expected to grow (Fig 13) to US$6.9bn by 2016.

The sector, being highly localized in nature, assumes particular importance in the

context of rising competition from Asian and global companies in India's infrastructure

and industrial capex opportunity. VA Tech Wabag (VTW) management estimate it takes

~2-3 years to enter a new market due to entry barriers such as: (1) Political and

bureaucratic environment: (2) Regulatory framework; and (3) Competitive landscape.



Opportunities in this segment — The major opportunities in India lie in waste water

treatment and recycling segments. Agri-based industries, such as sugar, fertilizers and

textiles, are among the top producers of waste water in the country, offering significant

opportunities in waste water treatment and recycling, thereby allowing the treated water

to be reused in the production process. In the domestic sector, major opportunities are

in water treatment (~29% of the waste water is treated in Class I cities) and in water

supply infrastructure in Class II cities, which drive the municipal water utility capex.



VA Tech Wabag: Management meeting takeaways — A diversified water treatment

company, VTW is present in 12 of the 15 fastest growing water markets globally.

Management envisages growing revenues 400% in the next five years on the back of:

(1) Focus on an asset-light strategy – VTW performs value added and high margin

work processes in-house and outsources the civil construction process to third party

contractors; (2) Strong R&D focus; (3) VTW has ~Rs2.75bn cash on its balance sheet,

which empowers it to evaluate inorganic growth opportunities to gain access to new

markets.

 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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