The Company Keeping Ganga Clean - VA Tech Wabag Analysis

The supply of safe drinking water is a major issue in India. Rapid urbanisation and industrialization have made India’s water sources extremely polluted. Lack of access to safe water sources is a leading factor for infectious diseases, including cholera, typhoid, and diarrhoea. 

While considering India’s disease burden in terms of risk factors, air pollution and unsafe water sources collectively contribute nearly 60 million Disability Adjusted Life Year (DALY). One DALY is the equivalent of losing one year of good health. The degradation of freshwater resources due to acid rain and the dumping of industrial waste is one of the major issues that India faces today. This is where Rakesh Jhunjhunwala-backed VA Tech Wabag comes in.

In today’s article, we shall analyse VA Tech Wabag in detail.

VA Tech Wabag - Company Profile

VA Tech Wabag is a water treatment and management company with more than 90 years of experience. The company is headquartered in Chennai, Tamil Nadu. It is a global player in more than 20 countries, with three Research & Development (R&D) centres in India, Austria & Switzerland. The company was ranked 4th in Asia for the best private water management company.

What does Wabag do?

 The company has a strong water solution segment that includes:

1. Sewage water Treatment: It consists of the removal of contaminants from wastewater which are pushed from households and small industries.
2. Drinking-Water Treatment: Here, the company converts water from different sources to drinkable water. It consists of various methods such as sedimentation, filtration, disinfection, etc.
3. Industrial water/wastewater Treatment: Industries tend to release different types of waste which can pollute the environment. Wabag provides various methods to neutralize the water before flowing into freshwater sources like rivers and lakes.
4. Desalination: It refers to the conversion of saline water (seawater) to freshwater. Under this segment, the company uses processes like Reverse Osmosis (RO).

Wabag primarily implements projects of the following types:

1. Engineering, Procurement, and Construction (EPC) 
2. Operation & Maintenance (O&M): The company takeovers the operations and maintenance of existing water and wastewater plants.
3. Design-Build-Operate (DBO): These are long-term contracts. Wabag builds projects and gives operation & maintenance support throughout the life of the contract.

Who Gives Them projects?

The company’s order book majorly consists of orders from Central/state governments and other multilateral agencies. This makes their order book strong as there are zero chances for default of any of the contracts.

It is interesting to note that Wabag’s order book stands at more than Rs 9,500 crore at the end of March 2021. This is more than the market capitalization of the company itself. 

Let us look at some of the projects that the company is working on:

• Namami Gange Project: Wabag has received an order worth Rs 1,187 crore from Bihar Urban Infrastructure Development Corporation as part of the Namami Gange project. The project focuses on conserving the river Ganga.
• One City One Operator: In Agra and Ghaziabad, the company is executing an order worth Rs 1,477 crore for the operation and maintenance of 22 sewage treatment plants, 70 pumping stations, and an underground network of over 4,200 km. 
• Refinery and Petrochemicals: Wabag is executing orders worth Rs 467 crore and Rs 700 crore in Mangalore and Dangote (Nigeria), respectively. In Mangalore, the company is constructing a plant with a capacity of 30 million litres per day (MLD) and is also in charge of operation and maintenance for 10 years. In Nigeria, Wabag is constructing a Raw Water Treatment Plant, along with a recycling and reuse plant.

Who is Leading the Company?

Mr. Rajiv Mittal, MD & CEO: With an industrial experience of 3 decades, Mr. Mittal has been the backbone of the company in every business decision. He has helped the company to secure a global presence.

Mr. Maly Mukherjee, Chairman: With 40+ years of expertise in various roles in the mining and steel industry, Maly is an asset for Wabag. He served as CEO of Essar Steel Global before joining the company.

Ace investor Rakesh Jhunjhunwala also has a stake in Wabag worth around Rs 170 crore. Global asset management company (AMC) Hermes, KBI Water fund, along with Massachusetts Institute of Technology (MIT) are the major Foreign Institutional investors (FIIs). Mutual funds only hold 3%, with SBI Mutual Funds as the key player.

Wabag’s Financial Performance

For the financial year ended March 31, 2021 (FY21), VA Tech Wabag reported:

• Revenue from operations at Rs 2,834 crore in FY21, a growth of 10.8% YoY from Rs 2,557 crore in FY20. Revenue has grown at a 5 year compounded annual growth rate (CAGR) of 2.5%.
• Profit After Tax (PAT) stood at Rs 100.8 crore in FY21, compared to Rs 90.9 crore in FY20. Net profit has grown at a 5-year CAGR of 2.6%. 

Unfortunately, the company has been facing negative growth in its revenue since FY18.

Profitability

Now let us look at the company’s 5-year profitability in terms of Earnings Before Interest, Tax Depreciation, and Amortization (EBITDA) margin and PAT margin.

We can see Wabag has an EBITDA margin of 8.2% (and a 5 year average EBITDA of 8.4%). It means that for every Rs 100 earned as revenue, the company can retain Rs 8.2 before paying for Interest, tax, and depreciation. The company ultimately ends up with Rs 3.5 as net profit.

From past year performance, we can analyze that there is no growth in margins. This is a bit concerning.

Now, let us look at Return on Equity (ROE) & Return on Capital Employed (ROCE)

An ideal company is said to grow if ROE & ROCE is improving year on year. From the graph, we can see that both metrics are decreasing, which is a concern. Also, the gap between ROE & ROCE defines the debt of the company.

Leverage Analysis

Debt to Equity: It is the ratio that tells us the state of the company’s debt compared to its equity. The higher the ratio, the higher will be the debt.

The company has drastically decreased its debt in the last 3 years. Debt to Equity now stands at 0.22. It means that for every Rs 100 of Wabag’s equity, it has a debt of Rs 22.

Cash Flow Analysis

Cash flow for a company is like oxygen, it keeps the company alive. It shows how much money flows into the company from its core activities. In the case of Wabag, even though the company was in profit for the past 10 years, cash flow was negative for 4 years. (Cash has been flowing out of the company)

Conclusion

VA Tech Wabag is a dedicated water management company with a strong order book. Earlier this month, the company secured an order worth $11.45 million (~Rs 84 crore) for designing and building an effluent treatment plant in Johor, Malaysia. Thus, the company is looking for every route to establish itself as a global water-management firm. As India transitions towards becoming a strategic industrial hub, Wabag will tend to receive strong demand for its water treatment services. Moreover, the Indian government’s policy to supply 55 litres of freshwater to citizens every day (Jal Jeevan Mission) will highly benefit water management companies.

A major concern to be noted is Wabag’s financial performance. Such volatile cash flow and decreasing profitability will adversely affect the company’s efficiency. We will have to wait and see how the company’s management tackles this issue. 

The shares of VA Tech Wabag have surged 75.83% over the past year. Currently, it is trading at Rs 334, 17% below its 52-week high.

What are your views on VA Tech Wabag? Are you invested in the company? Let us know in the comments section of the marketfeed app.