VA Tech Wabag (VTW) is a leading company in the water treatment industry with activities including design, installation, supply and operational management of drinking water and waste water treatment plants.
Headquartered in Chennai, VTW also has a market presence in the Middle East, North Africa, Central and Eastern Europe, China and South East Asia. We recently met Mr. S. Varadarajan, a promoter and CFO of VTW for Management Meeting Takeaways) .
Business Strategy — Management envisages growing revenues by 400% in the next five years on the back of: (1) Focus on an asset-light strategy – VTW
performs the 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 in its balance sheet, which empowers it to evaluate inorganic growth opportunities to gain access to new markets.
ndustry Overview — Although India has been endowed with large freshwater resources, recent overdrawing of ground water has resulted in a strain on its
resources. 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.
Competitive Analysis — Management mentioned that it competes with
Thermax and Hindustan Dorr Oliver in the industrial water treatment segment,
and IVRCL, NCC, Ramky Infrastructure and L&T in the conventional
technologies. VTW also competes with other water technology companies like
Ion Exchange, Doshion, Driplex and global competitors like Suez, Befesa, and
Cadagua.
Recent Results — In 2QFY12, VTW registered revenues of ~Rs2.7bn, up 12%
YoY and EBITDA margins expanded by ~320bps. The company registered a PAT of Rs69mn, compared to a loss of Rs19mn in 2QFY11. Management mentioned that the business is highly seasonal with H1 accounting for ~35-40% of full year revenues. This has historically led to a margin expansion in 2H due to operating leverage.
Strengths — (1) Long association with Wabag brand name; (2) Project reference list of over 2,250 projects across various sub-segments; (3) Professional management team with immense industry experience; (4) Focus on asset-light strategy yields high returns. Weaknesses — Smaller size compared to other diversified competitors, who can pose a competitive threat when the market size scales up.
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