VA Tech Wabag IPO Analysis – Quality Global Water Management Company with Good Management,Technology and Strong Order Book

VA Tech Wabag is one of the best quality companies to come out with an IPO in the Indian Market in 2010.The Company boasts of a quality management,good technology and fast growth.Despite a hiccup in 2009,the company has picked up its growth in 2010 and operating in a fast growing Water Industry with good execution,it looks to have little downsides.While Low Net Margins and High Working Capital is a characteristic of the EPC sector it operates in,the company has constantly been able to improve on those parameters.Only Rs 125 crores will be raised by the company while Rs 350 crores will be sold by existing investors.Given 30%+ ROCE  and a good cash position of Rs 225 crores,the company has little need for cash.Here are the reasons for you to invest in this company

1) Management – The Management of the company bought over the VA Tech Wabag’s Indian Operations in 2005 and the global parent itself in 2007.The Company has managed to perform and grow well under the present management personnel.

2) Technology – VA Tech Wabag Austria which is a subsidiary of the Company possesses many Water Treatment Patents which gives a substantial technology edge to the company.The company has 3 R&D centers and over 157 patents.

3) Diversification – While the Company is focused on the Water Sector,its operates in various countries with almost 40% of its revenues coming from outside India.The company is truly global in character a trait difficult to find in companies of this size.A downturn in the Indian economy would be much better managed by the company.While the current profitability of the international operations is not high,there is potential to improve as integration of VA Tech Wabag Austria took place 3 years ago.

4) Improving Margins – The Company’s Operating and Net Margins have been constantly improving over the past few years with scale,efficiencies and decreasing the WC.While overall Net Margins at 5% are not great,the ROCE is over 30% plus.The company is in a sweet spot where it manages to generate high revenues and profits by expending little capex

5) Order Book – The Company has an overall order book of Rs 2774 crores while its new orders for the parent company grew by 100% this year.The Strong growth in Orders implies a high level of continued topline growth in future as well

6) Debt Free and Cash – The Company is virtually debt free with Rs 225 crore of cash which is quite surprising for an EPC company which has high level of debt.This means that the company has funded most of its high WC from advance payments by customers and payables.

7) Sector – The Company operates in the $530 Billion Water Industry which is growing strongly.India is expected to double investment in the Water Industry over the next 5 years with growing urbanization,water shortage problems and increasing pollution.This is one sector that remains recession free growing on a secular basis.

Summary

There is almost nothing to dislike about the company except the valuation which is a tad expensive at around around 28-30x,however the sector P/E is also around  30-35x and VA Tech Wabag deserves a premium.Given the high quality of the company and the Water Sector it operates in,I would invest in the company as the future growth is very promising.Also the international diversification and the Recession Proof Water Industry makes this investment safer than your normal Indian EPC company which  are asking for the same valuations.