VA Tech Wabag Limited (VA Tech) is tapping the capital markets with a public issue which opened on Wednesday the 22nd of September and closed for QIB’s on Friday the 24th of September. The issue closes for HNI’s and retail on Monday the 27th of September and the price band is Rs 1230-1310 for an Rs 5 paid up share. The issue has been subscribed over 36 times by QIB’s

Business
VA tech is an Indian multinational player in the water treatment industry with market presence in India, the Middle East, North Africa, Central and Eastern Europe, China and South East Asia through its offices in India, Austria, the Czech Republic, China, Switzerland, Algeria, Romania, Tunisia, UAE, Libya and Macao. The company is headquartered in Chennai and conducts business through its subsidiaries and branch representative offices.

VA Tech offers complete life cycle solutions including conceptualization, design, engineering, procurement, supply, installation, construction and O&M (operation and maintenance) services. The company provides services and solutions for sewage treatment, processed and drinking water treatment, effluents treatment, desalination and reuse for institutional clients like municipal corporations and companies in the infrastructure sector such as power, steel and oil and gas companies.

The company is currently executing 81 projects as of 31st July 2010 and has an order book of approximately 2780 crs as of 30th June 2010. This is one of the few cases of management buyout and the present promoters are all professionals and were working with the company when they bought out the promoters. The company focuses on technology and has R&D centres in India, Austria and Switzerland. The present promoters have an average work experience of twenty years in the business and the operating margins have been improving over the last three years.

The company has been awarded a desalination project in Chennai in December 2010 with an order value of Rs 1030 crs and this was the first 1000 crs order for the company. The company does the design, technology part of the business and outsources the civil construction part. It has a global brand and a footprint in the key fastest growing markets.

Objects of Issue
The objects of the issue are as follows: –
Funding working capital requirements of the company   Rs 6450.59 lacs
Construction of Corporate office at Chennai    Rs 3474.19 lacs
Implementation of global IT systems     Rs 1105.13 lacs
General corporate purposes       Rs XX

Financials
VA Tech reported revenues on a standalone basis of Rs 573.54 crs for the year ended March 2009 and Rs 707.66 crs for the year ended March 2010. The net profit for the year was Rs 25.99 crs for March 2009 and Rs 46.92 crs for the year ended March 2010.

On a consolidated basis the revenue for March 2009 was Rs 1154.95 crs in March 2009 and Rs 1233.76 crs in March 2010. The net profit after tax was Rs 42.22 crs for March 2009 and Rs 49.39 crs for March 2010. The pre-IPO share capital as of 31st March was 95,40,813 shares implying an EPS of Rs 44.25 for the year ended March 2009 on a consolidated basis and Rs 51.77 for the year ended March 2010.

Valuation
The competitors in this business are people like IVRCL Infra, Engineers India, Thermax Limited, Hindustan Construction, Nagarjuna Construction and Gammon India. None of these players are pure water players but have multiple activities and one of them includes water. Strictly speaking therefore they are not comparable but in terms of valuations if one were to compare them than the earnings multiple vary between 20 and 32 for all except IVRCL which quotes at a multiple of 63 times. All these comparisons are on the basis of March 2010 numbers.

The second difference is in the size of operations where the smallest player Engineers India has a turnover of Rs 2177 crs and the largest player IVRCL has a turnover of Rs 5492 crs. EPC is a major activity for the infrastructure players and hence these differences.

Based on the fully diluted and post IPO share capital of 105.57 lakh shares at the lower end of the price band of Rs 1230 the EPS would be Rs 46.78. At the upper end of the price band of Rs 1310 the EPS would be Rs 47.06. The price earnings multiple at which these shares are being offered is 26.29 at the lower end and 27.84 at the upper end.

Opportunity
The opportunity is huge and it is for the company to seize the opportunity going forward. VA Tech is in a sweet spot being a design and engineering company that it has the full opportunity to exploit. Its presence is not in the developed markets of USA and Europe but in the developing markets. Being a research driven company and having access to technology from Austria and Switzerland it is well poised to take advantage of the same.

Conclusion
VA Tech is in an exciting industry where there are huge prospects. The company is well poised to take advantage of its strong track record and the fact that its expertise lies in the design and engineering space. The shares are being offered at attractive valuations. The issue is a must apply for investors. There is however a small issue which needs to looked at when applying. The response to this issue is going to be overwhelming and allotment will be on a lottery system even in the retail category. The allotment to all retail applicants would be the minimum allotment of 5 shares and would be by basis of lottery as this category would in all probability be oversubscribed more than 15 times.

SEBI Disclaimer: – I intend to subscribe to the above issue.