Water and Air Conditioning Stocks

Water hasbecome aprecious resource. In Bangalore and sorrounding areas, I could see acute shortage of water. Ground water has gone below 1000 feet. I could see a lot of tractors carrying water tankers and distributing water to industries and households.

In last 10 years, I could see a drastic climatic changes in Bangalore. Now I could see a lot of air conditioners around in a city which was once called as ’ Air Conditioned City’.

So water scarcity and Global warming are going to be big issues in future.

These sectors have not caught market fancy yet. If wepick some quality stocks in these sectors, hold them for longer term, we could benefit.

One stock comes to my mind is VA Tech Wabag. Thermax, ION Exchange are also involved in water treatment business

Voltas is there in both these segments Water treatment and Ref, Air Conditioning.

Bluestar in Air Conditioning.

Is there any company which manufactures refrigerants? I guess Gujarat Fluro Chemicals is into .

BHEL says it has growth plans to enter water treatment business.

I have a few queries

1). I am not sure whether water treatment will go infrastrucure way. Every Tom,Dick and Harry can lay roads, build bridges etc or technology knowhow plays a major role.

2). Both retail and Commerical air conditioning has become a commodity business.There would be pressure on margins due to stiff competition.

Folks who have fair idea about these segements can give their valuable feedback which would be helpful for many of us.

Hi Govindarajan,

I fully agree with you points regarding climate change and the high demand for water, water treatment, distribution, storage, etc. Whenever there is a scarcity in Bangalore particularly in summer, you will typically see water tankers all around supplying water in a big way. This segment consists of contractors approved by the local authorities as well as various unorganized players, mafias, etc. They is no control on them and they can dictate terms and high rates when demand is high, and when there is enough water they will act nice and call you asking if you need water… so the sector is not yet organized fully.

And water being a state or government subject will be subject to govt. control, regulation, tendering process, etc. This will have all the bottlenecks like infrastructure projects. I’m not denying that there are several companies doing good work. But if you ask me if its profitable…I’m doubtful on that.

Im not an expert in this sector, but just looking at VA Tech Wabag and its numbers I find the margins too low - NPM of 7% or less, (current ratio of 1.32 and a declining trend in last few years), and not so impressive earnings per share if I look at the trend.

Even the mainstream infrastructure sector and companies are not doing well - there are several issues - poor project viability, increase in material costs, high labor cost, lack of incentives, overshooting of costs/budgets due to delays in getting approvals/permissions, changes in rules related to environment, land acquisition, etc and several factors. Some companies have even stopped bidding for Road and Highways projects since the projects are too long, highly competitive, and low bidding prices affects profitability.

In my view (with my limited knowledge) the situation in water business may not be different, unless some company has already secured large contracts in the past, which may be profitable now. There are some niche areas like water treatment, which can become attractive in future…but only time will tell if this space is significant enough.

How about VA Tech Wabag?

They recently started their 100 Cr plant at Chennai and based on few articles the TN govt may move forward with additional and bigger plants.

The company plans to be a 1Bn Pound company in next 5 years.

Conference Call key takeaways by Capital Market
Company was represented by Rajiv Mittal, Managing Directorand S. Varadrajan, CFO.

The company maintains its FY14 revenue guidance of Rs 1850-1950 crore (or a revenue growth of 15-20%) and order inflow guidance of Rs 2600-2700 crore.

Notwithstanding the challenging times the company has built a robust order pipeline across geographies. It has bagged orders worth Rs 1025 crore in Q1FY14. Consolidated order backlog of the company as end of June 2013 was Rs 5023 crore and the frame work contracts stood at Rs 1098 crore as end of June 2013.

Barring Libya and Ulhasnagar projects all orders in the book are active and moving. On a healthy order book and a strong balance sheet, the company stands committed towards the execution of the order book and future growth of the business.

Industrial orders in its book are good and active and there is no fear of client going slow.

Some of the large orders will come from municipal and technological complex orders from domestic O&G.

The company is not compromising profits for the sake of growth in orders/revenue. Select project where there is technology edge for the company and low funding risk etc. Maintaining its threshold margin in all orders secured. Moreover on execution it has further mechanism to improve margin.

Developing and increasing its presence in future markets of Latin America, China, Turnkey and Saudi Arabia which will power the growth of the company going forward. The MDUs in Philippines and turkey are adding manpower. So the international numbers will go up from about 600. However the high cost manpower in Austria, Switzerland is not increasing much.

There is a forex loss of Rs 6 crore as part of other expenses it is notional numbers against gain of Rs 6 crore in corresponding previous period.

Invoicing of O&M in case of Chennai Nemili Desal project will start from Q1FY14. The original cost of the Nemili Desal project is Rs 533 crore and with variation in design and other the cost latter escalated to Rs 580 crore. Against the Rs 580 crore of EPC part the company so far has received a payment upto Rs 440 crore. The company is hopeful of getting the balance amount barring the 5% performance guarantee money.

Chennai Nemeli Expansion Project â Consultant nominated to preparing DPR. Tenders will be published by last quarter of current fiscal and the order will be finalized in H1FY2014-15 by Government of TamilNadu.

Two of the company's Multi Domestic Units (MDUs) at Philippines and Turkey has been very successful in bagging orders. Philippines MDU has bagged 2 orders of 100 crore plus in size in the last 2 months and poised to get one more. The Turkey MDU has won more than 3 contracts in Q1FY14 and it is poised to get some more large contracts. Both Philippines & Turkey MDUs are expected to turn profitable by this fiscal itself.

Turkey and Philippines investment cycle is over. These 2 subsidiaries will not require any more support. Spain just started and that along with China requires some support. Once these MDUs mature and generate profit the overseas margin will improve.

Gross debt is Rs 108 crore as end of June 2013. Increase in gross debt is largely on account of the company raising packaging credit in India as it come at a lower rate of 2% Opportunity to get lower cost. The company used that to invest in Namibia BOOT project.

The Philippines MDU has bagged one more order from Manila Water Company (in Philippines). This is an additional project to the earlier one it bagged from the same company and its scope involves design and construction of 100 MLD STP. The order won in consortium and the Wabagâs share is about Rs 150 crore. This order is not part of order book mentioned as end of June 2013.

Nemili project the company has collected Rs 132 crore in FY13 but in Q1FY14 it has collected Rs 34 crore.

Tangible assets in the balance sheet are the investment in BOOT Company in Namibia. Until the project is completed that remain as intangible asset. The investment in Namibia is about Euro 12 man.

The company spent Rs 15-20 crore in Wabag House in Q1FY14.

Higher margin EPC project contribution in standalone and 22% standalone revenue from O&M has resulted in high margin in standalone.

It is optimistic about its prospects in India and overseas to achieve a good growth in order book this year. Order pipeline is healthy. Well geared to complete execution of current order book.

Highlights of the call by Capital Mkt:

For the quarter ended September 2013, Va Tech Wabag reported a solid 34% rise its consolidated sales to Rs 465.54 crore. OP was down 1% to Rs 31.84 crore. Net profit fell 2% to Rs 17.42 crore.

For the six month ended September 2013, consolidated sales grew 30% to Rs 751.64 crore. OP grew 5% to Rs 44.45 crore. Consolidated net profit grew 2% to Rs 20.25 crore.

There was turnaround in international business as it broke even at the PAT level largely due to focus on multi domestic unit adopted few years ago. Also cost reduction helped the turn around.

The company has used significant part of standalone capacity for different geographies in Africa, part of Europe and Middle East on Overseas projects as a matter of strategy to optimize utilization of manpower apart from leveraging larger presence in lower cost economy. Thus looking at consolidated results is more meaningful.

Forex impact

For the six months, OP without forex impact was Rs 57.40 crore against 40.1 crore, up 43%

For six months, EBIDTA as % has grown from 7% to 8% excluding Forex impact.

Forex impacted largely on account of reinstatement of packing credit in forex on Indian export jobs.

Packing Credit has natural hedge and is against future export receivables on export projects. This has significantly lowered the interest cost in CY.


The company has given order intake guidance in the range of Rs 2600 crore and Rs 2700 crore.

Revnue guidance is in the range of Rs 1850 crore and Rs 1950 crore.

The company fee;ls that it will meet its guidance for FY 2014 by December 2013 itself and then it will give guidance for Q4 or increase the guidance for FY 2014.

Order intake

Order book already exceeded order for full FY 2013.

During the quarter order Intake stood at Rs 2034 crore, up 135%.

Total Order Book stood at Rs 6610 crore including framework contracts of Rs 1040 crore.

The company is focusing on high value projects and avail benefit of productivity in large projects.

A few major orders won during Q2 FY 13-14 are as follows:

A World Bank funded 100 MLD STP order from Manila Water Company, Philippines â Rs. 148 crores:

Wabag in partnership with a local civil construction company, JV Angeles Construction Corporation, Philippines bagged an STP order from Manila Water Company, Philippines for a total value of Rs.344 Crores. Wabag’s share in the contract is Rs. 148 Crores. The scope comprises design and construction of 100 MLD Ilugin Sewage Treatment Plant for Pasig River Wastewater Catchment, Pasig city, Metro Manila with operation of the plant for a period Two years. The project is funded by World Bank.

MadinatyWWTP project, Egypt â Euro 14.8 Mn :

Wabag bagged a Waste Water Treatment plant order for a new district of Cairo-Madinaty. The municipal effluent after treatment, will be reused. The order includes Operation and Maintenance for a period of 12 months.

O&M Arpechim, Romania â Euro 6.3 Mn :

The Romanian Oil & Gas Company PETROM OMV SA has awarded WABAG Water Services with another extension of the operations & maintenance services for the next three years. The refinery effluent treatment plant with a capacity of 30,000 m3/d has been managed by WABAG since 2009.

192 MLD WTP Order for Aurangabad Municipal Corporation - Rs.135 crore:

WABAG in partnership with two other infra companies bagged a comprehensive water supply project for the city of Aurangabad. WABAG’s scope under EPC contract comprises of design, build and commission a 192 MLD water treatment Plant and Operation and Maintenance of the plant for 17 years. The BOOT project has since achieved Financial Closure now forms part of the Company’s firm order book.

Using good cash position to execute orders faster

As a matter of strategy, the company decided to use the advantage of its good cash position to execute Projects on hand faster notwithstanding the liquidity stress in the market.

This has saved the company from levy of Liquidated Damages and helped to avoid cost escalations.

Also, this increases the capacity to execute the fresh orders booked and ensures optimum utilization of the manpower capacity.

Receivables position to be better in next two quarters

Receivable as a % of sales had reduced q-o-q.

The Receivables is higher y-o-y partly because of increase in sales by 31% and partly due to significant forex translation impact in consolidation.

Receivables in India has come down â though there is liquidity stress in the Indian market, the company expects that its focused approach will result in better receivable position in next two quarters.

Receivables will improve in the next two quarters.

The company is focusing on being asset light company.

Desalinization project will grow fast in future. Desalinization project is yielding good results in Africa.

The company is focusing on shifting focus from underperforming geographies to geographies where it is performing well.

The company is doing well in Oman for its desalinization business.

The company sees good potential in Middle East, South East Asia and Latin Markets.

India will continue to grow at 15% and the outlook remains same. International business will grow 20%. If it adds Albubra business, growth will be 25%. (Albubra did sales of Rs 95 crore in first six months)

Second half is always better than the first half.

VA Tech Wabag held its analyst meet.Rajiv Mittal, MD of the company addressed the meet.

Highlights of the meet by Capital Mkt;

VA Tech Wabag is a Complete Water Treatment Solution Provider.

It provides a complete range of Water and Waste Water Treatment solutions

Offering spans across Municipal Drinking Water, Municipal Sewage, Industrial Water, Industrial Effluents, Desalination and Recycle.

The company is a technology focused company.

It owns more than 100 patents.

The company has R&D centers located in India, Austria and Switzerland.

It is an Indian Multinational player in the water treatment industry.

The company has strong execution track record. It has executed more than 2250 projects in last 3 decades.

It is a professionally managed company with promoters having an average of 30 years work experience in the industry.

The company offers a complete range of solutions across project lifecycle. It is a pure play water company catering to both Municipal & Industrial customers. Its offerings spans across segments of water treatment.

Its domestic business can be divided into desalination, Municipal, Industrial and O&M.

The company has range of services from concept / design stage to implementation to operations of plant.

The company has Technical Know-howâAccess to over 100 Patents & Experienced Manpower.

It has Perennial Rights to “WABAG” brand since 1924.

Project References in more than 19 countries helps the company in project qualification.

The company’s international business comes from Sri Lanka, Indonesia, Qatar, Nepal, Tanzania and Bahrain.

It has Subsidiaries / JV in China, Oman, Philippines and Spain.

In Europe, the company is also present in Austria, Czech Republic, Switzerland, Romania and Turkey.

It has presence in Sub Saharan / North African Countries which are Tunisia, Libya, Iran, Namibia, Algeria and Macao.

It is also strongly present in Saudi Arabia, Egypt, Latin America.

The company has envious growth rate in India business. Revenue grew over 3 times From Rs 332 crore to Rs 1041 crore.

The company has strong opportunity to leverage low cost economic advantage in global market.

It has also seen smart rise in order intake. Order intake was Rs 1774 crore in FY 2012, which rose 19% to Rs 2155 crore in FY 2013.

The company has managed to reduce expenses in high cost geography by investing in high potential water markets by establishing local presence (MDUs). For example, total cost of operation in Wabag Austria Group was Euro 35 Mn in FY 2009, which fell to Euro 26 Mn in FY 2013.

The company has presence in High Growth Potential Water Markets like China, Italy, brazil Spain, Saudi Arabia, Mexico, South Africa, India, UAE

The company believes in asset light business model which it feels is critical for cost optimization.

Focus on âValue-Added & High Margin’ work processes Limits investment in asset base.

The company’s strengths are

Ability to handle large and complex projects

Execution skill for high value projects & in emerging geographies

Strong Balance Sheet

Asset light & Cash generating business

For the quarter ended December 2013 its consolidated sales grew 66% to Rs 589.30 crore.

The company’s asset light model results in low depreciation and finance cost. Thus any improvement in OPM directly flows through PBT. Thus a 66% growth in sales with 110 bps expansion in OPM powered the OP to grow 95% to Rs 44.34 crore. Interest cost, depreciation and Forex loss though stand higher, helped by lower tax incidence, the PAT more than doubled (up 120%) to Rs 21.66 crore. Eventually the net profit (after minority interest) was higher by 116% to Rs 21.71 crore.

Revenue from Indian Operations (excluding sales figures of Wabag India’s overseas order book) was up 36% to Rs 239.02 crore. But the non-Indian business (Rest of the World) was up 102% to Rs 358.96 crore with the revenue of Wabag Overseas (figures of overseas subsidiaries excluding revenue out of Wabag standalone overseas order book) was up 140% to Rs 308.93 crore but that of ROW (out of Wabag India’s order book) was up just 3% to Rs 50.03 crore with lower contribution from Dambulla (SriLanka) project.

For the nine months consolidated sales were higher by 44% to Rs 1340.94 crore and with 80 bps expansion in OPM the operating profit was up by 61% to Rs 101.70 crore. Eventually the net profit (after MI) was higher by 40% to Rs 41.96 crore.

The company’s strong positioning has resulted in consistent order intake across geographies.

It has converted threat into opportunity as it has successfully seen robust order intake growth in overseas business.

As on December 2013, it had added Rs 398 crore of Framework Contracts of which Rs 244 crore moved to firm Order Book in Jan 14.

The company has also seen 70% increase in ticket size since FY 2012. The ticket size was Rs 108 crore in FY 2012, which rose to Rs 136 crore in FY 2013. During the nine month period ending December 2013 it stood at Rs 183 crore.

The company’s current order book is of Rs 6000 crore.

EPC âMunicipal segment account for the bulk (58%) of the order book, which in value terms stands at Rs 3486 crore.

O&M accounts for 27% of the order book (or Rs 1611 crore) and Industrial orders account for 15% or Rs 901 crore.

Average execution period for Municipal Orders is 24 months & Industrial orders is 12 to 15 months.

Framework Contract standa at Rs 1,169 crore of which Rs 244 crore moved to firm Order Book in Jan 14.

The company has well diversified geographical presence which reduces dependence on single country.

The company enjoys strong ability to convert order book in to revenue despite temporary geographical set back and other economic issues.

The company is gaining margin on account of better absorption of overhead.

The company’s Multi Domestic Unit (MDU) strategy is paying off. International business managed and operated out of India has started to contribute to the stellar performance. Going forward the management’s aim is to further improve the margins in international business. The management is confident that with a robust order book backed by funded projects and with strong inherent execution capability, it will have a rewarding FY2013-14.

Order intake for the Q3FY14 was up 70% to Rs 1014 crore and for nine months was up 108% to Rs 3048 crore. Consolidated order backlog of the company as end of Dec 2013 was Rs 7167 crore (up from Rs 6122 crore as end of June 2013). The order backlog is including framework contracts of Rs 1169 crore.

Nine month order intake in FY14 surpasses full year order Intake of each of last 3 FY.

The company raised its sales and order intake guidance.

The company had given order intake guidance in the range of Rs 2600 crore and Rs 2700 crore for FY 2014. Revenue guidance was in the range of Rs 1850 crore and Rs 1950 crore for FY 2014.

It has raised revenue guidance to Rs 2,000 crore and Order Intake guidance to Rs. 3,500 crore for FY 2014.

Receivables & payables are higher on balance sheet date because Q4 generally accounts for 40-45% of annual turnover. Moreover, invoice raised & recognized as revenue that appear in receivables, are not due for payment as per contract. This applies to payables to major vendors also. The company receives and makes payment as per contracted terms in due course of time.

In the quarter, the company had net forex loss of Rs 3.4 crore against Rs 50 lakh and for the nine month it had foex loss of 16.3 crore against profit of Rs 1.7 crore. This was largely on account of translation losses pertaining to assets/liabilities.

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Can anyone share more about the topic during the present situation
Thank you