Tuesday, May 29, 2012


Earnings Highlights
• Strong revenue growth across segments: VATW’s 4QFY12 revenue of Rs6.71bn (31.8% YoY) was well above our estimate of Rs5.85bn, led by strong performance in the standalone and overseas businesses.

• Adjusted Ebitda beat our estimates: Adjusted for prior-period staff cost provisions, Ebitda grew 13.2% YoY, which is commendable considering that VATW has been expanding into new geographies. Ebitda beat was due to overseas staff costs reducing 16% YoY, indicating that the company’s efforts to reduce overheads through measures such as a new ERP system are bearing fruit. PAT was 8% above our estimates due to higher other income and lower tax.

• Order inflow miss due to slippage from 4QFY12 to 1QFY13:
Order inflow in 4QFY12 was below expectation at Rs9.3bn (vs.Rs11bn) due to lower standalone order inflow. This was because of a delay in industrial orders worth ~Rs3bn-4bn in India, which the company was expecting. However, the company is confident of winning these orders in 1QFY13. Order backlog stands at Rs37.3bn.

• Key order highlights: The Rs3.3bn Ulhasnagar WTP BOOT project moved into the order book and there were O&M orders worth Rs33m. The company highlighted a number of overseas order wins below the EUR10m mark. Revenue from Sri Lanka WTP has started kicking in from 4Q with 40% of the EPC work being completed. The company has completed 88% of the EPC work in the Chennai desalination plant and it expects O&M revenue to commence from 3QFY13.

Management commentary
• Higher focus by the government on water projects: The highpowered expert committee on new improved JNNURM envisages overall capex spending of Rs39trn over 20 years of which 20% would be on water, sewage and waste management. The overall O&M spending would be Rs20trn of which 55% would be on these areas.

• Order inflow strong despite trying circumstances: Order intake was strong despite slow decision making in municipalities in India. Orders worth Rs3bn-4bn in oil & gas and steel verticals did not materialise in 4QFY12 but are expected to be closed in 1QFY13. The company also received the first order in Qatar, a sea water reverse osmosis desalination project worth EUR7.5m.

• Strong order pipeline: VATW has set its sights on sewage treatment plants in seven sites in Mumbai. It is also in negotiation with municipalities in Delhi, Karnataka, Tamil Nadu and Orissa (each worth Rs2bn-5bn). There are also overseas orders worth EUR125m expected. The JV with Sumitomo is looking at orders of US$200mn– 1bn and is expected to win a large order this year.

• Business restructuring with increased focus on clients: The company continues with its decentralisation drive with local staff manning its offices in the overseas subsidiaries. This has helped cut down overheads in the overseas business. It is changing its segment classification from geography based to product based (such as municipal water, industrial water and desalination).

• Focus on emerging economies; little presence in troubled European economies: VATW is increasing its focus on emerging economies such as Romania and Turkey in Europe. It receives <20% of overseas revenue from the developed markets. The company expects the Middle East and North Africa (MENA) markets to return to normalcy this year. The EUR90m order from Libya is expected to materialise in 2012.

• Multiple margin drivers: Decentralisation, focus on emerging markets, and BOOT contracts will be the margin levers. There is little balance sheet impact from the BOOT projects as VATW only holds 10% equity in these projects.

• Actively exploring M&A opportunities: VATW has cash of Rs4bn and is looking at prospective M&A targets in Latin America and South East Asia.