Weak execution, guidance hints a strong Q4FY16 February 08, 2016 Nishna Biyani nishnabiyani@plindia.com +91 22 66322239 Keyur Pandya keyurpandya@plindia.com +91 22 +91 22 66322247 Rating BUY Price Rs577 Target Price Rs733 Implied Upside 27.0% Sensex 24,287 Nifty 7,387 (Prices as on February 08, 2016) Trading data Market Cap. (Rs bn) 31.3 Shares o/s (m) 54.3 3M Avg. Daily value (Rs m) 46.4 Major shareholders Promoters 28.96% Foreign 28.11% Domestic Inst. 22.45% Public & Other 20.48% Stock Performance (%) 1M 6M 12M Absolute (15.3) (24.9) (23.6) Relative (12.7) (10.9) (8.1) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 30.1 34.2 12.1 2018 36.6 40.5 9.6 Price Performance (RIC:VATE.BO, BB:VATW IN) Standalone Performance stable, Q4 to be stronger: VATW reported revenues of Rs 3.7bn (up 26% YoY), EBIDTA of Rs 391m and PAT of Rs 207m (up 17%). Domestic operations have shown significant improvement YoY for 9MFY16 with PAT of Rs 612m (Vs Rs 385m for 9MFY15) Other concall Highlights: (1) Euro depreciation of 11%, delay in Nepal project due to local conditions & many overseas Projects being under engineering completion stage contributed to drop in overseas revenues for 9M FY16 (2) Increase in Net Finance cost is due to Interest charges on account of Ujams BOOT Project in Namibia and reduction in interest income (3) Early ordering started for Petronas RAPID Malaysian order (Rs 13.4bn), 75 engineers deployed and execution to be completed within 3 yrs (4) Order backlog now stands ~ Rs75bn including frameworks contracts (5) working capital days have improved from 59 to 54 days YoY (6) Management sounded confident of improvement in consol. margins to 10%. European operations Sluggish: VATW has been impacted adversely on account of sluggish European activity and depreciation in Euro. For 9MFY16, the overseas arm has posted a loss of Rs 375m impacting the overall consolidated performance. Guidance Maintained: Management has guided for Rs 28 30bn turnover, order intake of Rs 35 37bn for FY16. This implies a Rs 11bn+ revenues for Q4 (22% YoY growth) Valuation and Recommendation: VATW trades at 19x FY17E earnings and 9.9x EV/EBITDA FY17E, which are at a premium to its average valuations, post listing in 2010. However, a 29% earnings growth over FY16 FY18E period, continuous flow of new orders from both domestic and international businesses, excellent project execution track record, marquee client reference list, asset light business model, strong balance sheet and limited options available in water space makes VATW a long term portfolio stock. Maintain BUY Key financials (Y/e March) 2015 2016E 2017E 2018E Revenues (Rs m) 24,284 27,707 32,724 35,845 Growth (%) 8.9 14.1 18.1 9.5 EBITDA (Rs m) 2,044 2,318 2,940 3,503 PAT (Rs m) 1,101 1,167 1,632 1,990 EPS (Rs) 20.3 21.5 30.1 36.6 Growth (%) (4.8) 6.0 39.9 21.9 Net DPS (Rs) 4.0 4.5 5.5 6.5 Q3FY16 Result Update (Rs) 1,000 800 600 400 200 0 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Profitability & Valuation 2015 2016E 2017E 2018E EBITDA margin (%) 8.4 8.4 9.0 9.8 RoE (%) 12.6 12.3 15.5 16.6 RoCE (%) 11.0 10.0 11.8 12.6 EV / sales (x) 1.2 1.1 0.9 0.8 EV / EBITDA (x) 14.7 12.8 10.4 8.4 PE (x) 28.5 26.8 19.2 15.7 P / BV (x) 3.5 3.2 2.8 2.5 Net dividend yield (%) 0.7 0.8 1.0 1.1 Source: Bloomberg Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q3FY16 Result Overview Consolidated (Rs m) Y/e March Q3FY16 Q3FY15 YoY gr (%) Q2FY16 9MFY16 9MFY15 YoY gr (%) Net Sales 6,308 6,194 1.8 6,025 16,897 15,274 10.6 Expenditure Raw Materials 4,898 5,116 (4.3) 4,890 13,291 11,996 10.8 % of Net sales 77.7 82.6 81.2 78.7 78.5 Personnel 532 463 14.8 502 1,581 1,537 2.9 % of Net sales 8.4 7.5 8.3 9.4 10.1 Selling, dist & Other Exp 416 192 117.3 193 1,001 785 27.6 % of Net sales 6.6 3.1 3.2 5.9 5.1 Total Expenditure 5,846 5,771 1.3 5,585 15,873 14,318 10.9 EBITDA 462 423 9.1 440 1,024 957 7.1 Margin (%) 7.3 6.8 7.3 6.1 6.3 Depreciation 50 55 (8.4) 53 154 143 7.7 Other Income 60 EBIT 412 369 11.7 387 870 874 (0.4) Net Interest 101 61 66.5 109 282 181 55.7 Foreign Exchange Fluctuation (Gain)/Loss (14) (37) 25 9 (37) NA PBT 296 271 9.5 303 598 656 (8.9) Tax 115 130 (11.7) 149 361 264 36.5 Tax Rate (%) 38.7 48.0 49.2 60.4 40.3 Adjusted PAT before minority 182 141 29.0 154 237 392 (39.5) Share of profit/(loss) in associates 4 1 4 12 11 13.2 Minority Interest 3 (3) NA (12) (12) (6) NA Adjusted PAT 189 138 36.7 146 237 396 (40.3) Adjusted EPS (Rs) 3.5 2.5 36.4 2.7 4.3 7.4 (41.1) Exhibit 2: Business is seasonal with execution picking up from Q3 Revenues EBIDTA Margin (RHS) (Rs m) 10000 8000 6000 4000 2000 0 7.5% 12.0% 5.1% 6.5% 6.8% 12.7% 2.7% 7.3% 7.3% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 (%) February 08, 2016 2
Exhibit 3: H2 contributes significantly to the Full year earnings PAT % share of profit in H2 (Rs m) 1000 800 600 400 200 0 200 95.9% 77.9% 82.1% 76.6% Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16E 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Exhibit 4: Order Intake and Order backlogs on a rise providing strong visibility Order Intake Order backlogs 75,000 60,000 45,000 30,000 15,000 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 (Rs m) Exhibit 5: Revising estimates to factor in sluggish exports and weak 9MFY16 earnings Revised estimates Earlier estimates % revision FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E Net sales (Rs m) 27,707 32,724 35,845 27,312 30,733 35614 1.4% 6.5% 0.6% Adj. PAT (Rs m) 1,167 1,632 1,990 1,263 1,747 2057 7.6% 6.6% 3.3% EPS (Rs) 21.5 30.1 36.6 23.3 32.2 37.9 7.8% 6.6% 3.3% Source: PL Research February 08, 2016 3
Exhibit 6: Current order Book split EPC O&M Municipal Industrial Municipal Industrial Total Wabag India 10,498 14,371 7,838 350 33,057 Wabag overseas 19,809 9,173 1,281 784 31,047 Framework contracts 15,420 Total 30,307 23,544 9,119 1,134 79,524 Exhibit 7: Key Contracts in order book (Rs m) Petronas RAPID ETP, Malaysia 13,416 AMAS, Bahrain 40 MLD STP 5,733 APGENCO BOP with Water Management 4,467 UP Jal Nigam 140 MLD STP with O&M 2,131 OWSSB, Orissa 100 MLD STP with O&M 2,094 Dangote, Nigeria 60 MLD RWTP 1,854 Istanbul, Turkey O&M 1,713 Valenzuela, Philippines 60 MLD STP 1,574 Sanliurfa WWTP, Turkey 1,501 Habra, West Bengal 147 MLD WTP 1,334 Exhibit 8: Order book Split tilting towards high margin O&M Segment O&M 16% Exhibit 9: Municipal Business forms a significant chunk of order book Industrial 38% Municipal 62% EPC 84% February 08, 2016 4
Income Statement (Rs m) Net Revenue 24,284 27,707 32,724 35,845 Raw Material Expenses 18,328 21,738 24,742 26,851 Gross Profit 5,956 5,969 7,983 8,994 Employee Cost 2,777 2,180 3,540 3,845 Other Expenses 1,136 1,471 1,503 1,646 EBITDA 2,044 2,318 2,940 3,503 Depr. & Amortization 109 200 226 242 Net Interest 392 362 379 410 Other Income 129 36 167 198 Profit before Tax 1,671 1,792 2,503 3,049 Total Tax 566 609 851 1,037 Profit after Tax 1,104 1,183 1,652 2,012 Ex Od items / Min. Int. 35 3 5 Adj. PAT 1,101 1,167 1,632 1,990 Avg. Shares O/S (m) 54.3 54.3 54.3 54.3 EPS (Rs.) 20.3 21.5 30.1 36.6 Cash Flow Abstract (Rs m) C/F from Operations 55 659 (509) 1,448 C/F from Investing (676) (600) (200) (200) C/F from Financing 21 314 (83) (123) Inc. / Dec. in Cash (599) 373 (792) 1,126 Opening Cash 3,304 2,395 2,768 1,976 Closing Cash 2,395 2,768 1,976 3,102 FCFF (1,304) 569 (365) 1,640 FCFE (1,081) 1,211 (47) 1,990 Key Financial Metrics Growth Revenue (%) 8.9 14.1 18.1 9.5 EBITDA (%) 1.9 13.4 26.8 19.1 PAT (%) (2.9) 6.0 39.9 21.9 EPS (%) (4.8) 6.0 39.9 21.9 Profitability EBITDA Margin (%) 8.4 8.4 9.0 9.8 PAT Margin (%) 4.5 4.2 5.0 5.6 RoCE (%) 11.0 10.0 11.8 12.6 RoE (%) 12.6 12.3 15.5 16.6 Balance Sheet Net Debt : Equity (0.1) (0.2) (0.1) (0.2) Net Wrkng Cap. (days) 60 63 70 61 Valuation PER (x) 28.5 26.8 19.2 15.7 P / B (x) 3.5 3.2 2.8 2.5 EV / EBITDA (x) 14.7 12.8 10.4 8.4 EV / Sales (x) 1.2 1.1 0.9 0.8 Earnings Quality Eff. Tax Rate 33.9 34.0 34.0 34.0 Other Inc / PBT 7.7 2.0 6.7 6.5 Eff. Depr. Rate (%) 4.3 7.4 7.7 7.7 FCFE / PAT (98.2) 103.8 (2.9) 100.0. Balance Sheet Abstract (Rs m) Shareholder's Funds 9,028 9,909 11,192 12,768 Total Debt 1,806 2,448 2,766 3,116 Other Liabilities 2,471 2,864 3,119 3,374 Total Liabilities 13,305 15,220 17,076 19,257 Net Fixed Assets 1,919 1,913 1,888 1,846 Goodwill Investments 377 780 1,030 1,280 Net Current Assets 10,780 12,277 13,878 15,811 Cash & Equivalents 3,112 4,011 3,590 5,132 Other Current Assets 20,041 22,444 25,871 28,341 Current Liabilities 12,372 14,178 15,582 17,661 Other Assets 229 250 280 320 Total Assets 13,305 15,220 17,076 19,257 Quarterly Financials (Rs m) Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16 Net Revenue 9,077 4,565 6,025 6,308 EBITDA 1,155 123 440 462 % of revenue 12.7 2.7 7.3 7.3 Depr. & Amortization (34) 51 53 50 Net Interest 134 72 109 101 Other Income (40) (2) 25 (14) Profit before Tax 1,015 (2) 303 296 Total Tax 302 97 149 115 Profit after Tax 705 (99) 146 189 Adj. PAT 705 (99) 146 189. February 08, 2016 5
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