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Published on: June 19, 2023, 3:35 p.m.
Rerating VA Tech Wabag
  • VA Tech Wabag has a presence in over 25 countries and a track record of having built over 6,500 projects with a 100-year-old brand

By Daksesh Parikh. Executive Editor, Business India

May 2023 brought good tidings to investors of VA Tech Wabag, a pure-play technology-driven water treatment company with market capitalisation of Rs3,055 crore. On 24 May the share prices shot up to Rs456, a 5-year high, rising by nearly 10 per cent over the previous day’s close of Rs415. Apart from one occasion in 2021, the company’s share prices had struggled to cross the Rs400 mark over the last 5 years. What was noteworthy was that the rise, in May 2023, was accompanied by high volumes. The daily volumes on the BSE and NSE were Rs11.58 crore and Rs144 crore respectively – significantly higher than the usual daily turnover. The shares continued their upward trend and reached a 52-week, intra-day high of Rs505 on 12 June. 

One may infer that this sudden spurt in the share prices could potentially mark a turning point in the company’s fortunes. Despite having a headstart in water projects, it has not been able to take its operating revenues above Rs3,000 crore. The highest recorded was around Rs3,500 crore in 2018. PBDIT was also around Rs200 crore, apart from 2018. The financial performance of FY23 which truly triggered the rally.

While the operating income continued to languish below Rs3,000 crore, the operating profit shot up to Rs318 crore. The management decided to use these profits to write off some past dues which amounted to roughly Rs294 crore – pending dues from a project executed by the company as a part of a consortium in the Andhra Pradesh Power Generating Company (APGENCO) in FY15.

“It is true that the last 5 years was a tough period, barring last year,” concurs Rajiv Mittal, Chairman-cum-MD and group CEO of the company. A chemical engineer from UDCT, Mumbai, Mittal has worked for more than three decades in the water industry in various companies including Hindustan Dorr Oliver; his last tenure being with VA Tech Wabag, UK. He has played a key role in the metamorphosis of the 100-year-old German company.

Mittal, who had been sent to India to start the water division, successfully engineered a management buyout of the Indian company and thereafter, through a reverse merger, took over the entire water business from Siemens AG, the new owners of VA Tech Wabag. (See box: Evolution of VA Tech Wabag). Mittal has largely been responsible for growing this company. “Projects are a lumpy business. Delays in collection, write-offs etc, are also a challenge which adversely impact business.”

In a bid to mitigate risks and charter a sustainable growth path, the company is executing a strategy put in place over the past two years. Expounding on the new strategy, Mittal explains: “We are a technology company. We decided to take up more projects involving technology. Secondly, we decided to exclude civil (construction) work from our scope and focus on engineering procurement. To concentrate on more design-oriented projects that will give us a higher value-added proposition. Thirdly, we decided to concentrate on our service business which includes the operation and maintenance of projects. Fourthly, we wish to concentrate on industrial projects, rather than municipal projects. Lastly, we decided to focus on international projects which provide us better visibility, cash flows and an opportunity to use our advanced technology. We are a service provider and want to remain a service provider. We neither want to invest in construction nor manufacturing units. We are a design company and will get our technology components outsourced but we will not invest in manufacturing them. Where the project owner normally wants a single point entity to take on the onus of completing the project, the company would get the construction done by some other entity, even if the entire EPC project is undertaken by VA Tech Wabag. The cost of the civil works in a normal EPC project is between 15-20 per cent of the project. Our aim is to operate as an asset light company and avoid taking the entire project risks on our books,” says Mittal. In some projects the company ties up with partners to mitigate risks.

  • Mittal: playing a key role

The Kolkata Metro Development project bagged by the company on a Hybrid Annuity Model, with 15 years of Operation and Maintenance, required it to build three sewage treatment plants at various places along with the associated pumping system and sewage transmission lines. The project, which needs to be executed in 24 months was under the National Mission for Clean Ganga, KMDA and funded by the World Bank.

The financial closure of the project was achieved through a tie-up for the debt part with IFC and Tata Clean Capital. The equity part was partly funded through a tie-up with Kathari Waste Management, a subsidiary of EverSource Capital which is a fund manager of Green Growth Equity Fund. Tata Clean and IFC are also partners in the project. 

Taking projects across various modes, EPC, BOT, HAM, the company has built a steady stream of income through Operation & Maintenance (O&M) which in many cases lasts for over a decade. Building up an O&M stream is beneficial in balancing the cyclical nature of projects. Geographical diversification is also another strategy followed by the company. Projects in India and globally should, according to the management, contribute in the ratio of 50:50.

The company, which has a presence in over 25 countries and a track record of having built over 6,500 projects with a 100-year-old brand, does not want to undertake plain vanilla projects. Besides the high competition, the margins are low and it would prefer to take on complex projects. Unlike some global players the company prefers to utilise its own technology, patents and proprietary IPs for its projects. “We like to take on challenging and complex projects,” says Rajneesh Chopra, Head, Global Business Development.

As per its new strategy, the company has committed to take on projects which have Central government funding, multi-lateral funding or G20 funding. “This is followed both for execution of projects in India as well as globally,” explains Chopra, who adds that it is focussing on projects involving high technology and high value margins.

Currently, state funded projects comprise just 2 to 3 per cent of the total revenue. 95 per cent of projects are funded centrally or through multilateral sources. In the case of international projects, funding is often sourced through sovereign sources or letters of credit.

The timely execution of projects, whether vanilla or complex, has been one of the hallmarks of Wabag. Given the immense opportunity in India, the ADB has also subscribed Rs200 crore ($25 million in non-convertible debentures of 5 years duration) in December 2022. This marked the first investment in the Indian corporate water sector and will support the construction of a sewage treatment plant. 

Given the rapid depletion of ground water in India, many states are compelling companies to treat waste water and recycle. Increased compliance towards water discharge norms provides more business opportunities. With many companies opting for wastewater treatment and purchasing recycled potable water, the company has executed projects for several clients including Reliance Industries, Indian Oil, BPCL and Adani, among others. Referring to it as manufactured water, the company is ranked no 3 by Global Water Intelligence for clean water and sanitation for 8.8 crore people. 

  • Chopra: ‘we like challenging projects’

Desalination projects

Desalination projects are another major contributor to the company’s income. Wabag is amongst the top 10 companies undertaking desalination projects. It has successfully executed some desalination projects despite the presence of international bidders. Its first desalination project of 110 million litres of water per day was in Chennai and consisted of ensuring potable water from sea water. It was funded by the state government through a grant provided by the Central Government.

The design and construction of the project had to be completed in 3 years, followed by a 10-year O&M period, given that the technology was new to India. The government has extended the O&M period by another two years. A similar but larger project of 200 MLD was undertaken in Oman, followed by projects for Reliance, Adani and HPCL. More recently the company won Asia’s largest desalination project from Chennai Metro Water. The timeline for execution is 4 years with 20 years of O&M. Large scale projects have been announced globally by countries including Saudi Arabia and Egypt. 

Over the past 27 years the company has not been diverted from its stated aim of undertaking water projects, be it potable water, sewage, desalination, reuse and recycle or industrial and waste water treatment. In India the central government programmes include Namami Ganga, launched in 2014 with a corpus of Rs20,000 crore.

The project aims at rejuvenating the river, and preventing the discharge of waste and industrial water into it. Wabag is one of the major beneficiaries of this programme funded by the World Bank through the Central Government. In one project in Varanasi, Wabag has been generating power from sewage. The company has been undertaking projects in Uttarakhand, Delhi and Kolkata.

Even water flowing from nallas is treated and used for commercial, industrial, and agricultural purposes. The company’s projects include treating sewage water to produce industrial-grade water, which can also be considered potable-grade water. According to Mittal, the only hindrance in using it as drinking water is psychological.

Various government initiatives, such as the Atal Mission for Rejuvenation and Transformation, Jal Jivan Nigam, and community water programs, are focused on conserving and managing water resources. State governments are also taking steps to conserve groundwater, as seen in Punjab’s ‘Paani bachao, paisa kamao’ scheme. In addition to government efforts, international agencies are investing significantly in water projects.

A recent UN water summit held in March projected a 40 per cent increase in demand for fresh water, surpassing supply. Governments worldwide are increasingly recognising the impending water crisis and taking it seriously. This global crisis, combined with government emphasis, bodes well for companies like VA Tech Wabag.

The company’s current model is volume-driven, with incremental profits tied to incremental income, supported by annuity-like income from operation and maintenance contracts. With a growing number of projects in its order book, the company’s model appears promising.

  • The company treats sewage water to produce industrial-grade water

However, the company’s scope for non-linear growth is limited as government projects are still awarded based on the lowest bidder basis (LI, L2, L3 basis). In global projects, cost advantage works in favour of the company. Looking ahead, there is potential for the company to monetise its patents and trademarks and offer platform-like solutions to others, generating non-linear income.

By becoming a technology supplier and expanding its offerings to other sectors, the company can aim to join the ranks of major global water companies. Veolia Group, a French company operating in water treatment, waste management, and energy, achieved a turnover of €42.8 billion (Rs380,920 crore) after acquiring another large company, Suez. Scaling up and diversifying into adjacent areas beyond water will be crucial for VA Tech Wabag to compete at the global level.

The company’s potential for growth has captured the attention of investors. Starting as a small-cap company on the Indian stock markets, it has the potential to become one of the largest companies in India. Mittal and his team, who have led the company’s growth from a ‘start-up’ phase (as he likes to call it), are well-positioned to guide it further.

An Indian multinational focussed on providing water treatment solutions, VA Tech Wabag will be celebrating 100 years next year. Over the last 100 years, the company has undergone multiple restructuring and has changed hands several times. It is currently driven by a team of professionals under Mittal, CMD who is also the largest individual promoter, holding 16 per cent stake in the equity.

  • The company's Koyambedu plant

Evolution of VA Tech Wabag

The Indian company was incorporated in 1995 as Balcke Durr Cooling Towers, a subsidiary of the German company ultimately owned by Deutsche Babcock. Its main focus was on the design and manufacturing of cooling towers. In 1996, BDT introduced a water division under the name of Wabag, leading to a renaming of the company as Balcke Durr & Wabag Technologies Ltd. In 1999, VA Tech, an Austrian company, acquired the water division from Deutsche Babcock.

The Indian company’s water and non-water divisions were demerged in 2000, with BDT retaining the non-water division, while the other company, primarily focused on water, was renamed VA Tech Wabag. The company was involved in the design, supply, construction, and maintenance of water and wastewater treatment plants. Siemens AG acquired VA Tech Wabag in 2005, and though it sold off some of its subsidiaries globally, it retained the Indian arm.

In 2006, a significant management buyout worth Rs100 crore took place, resulting in a change of ownership from the Austrian owners to Indian professionals. Rajiv Mittal, S Varadarajan, Amit Sengupta, and Shiv Narayan Saraf, backed by ICICI Ventures, a leading private equity fund, took the majority stake in the company. ICICI Ventures held 65 per cent equity, Rajiv Mittal held 15 per cent, and the remaining 20 per cent was held by VA Tech Wabag. By 2007, the order book of the company had crossed Rs500 crore.

With the assistance of ICICI Ventures, the Indian arm took over its parent company, VA Tech Wabag, and its subsidiaries, for a consideration of around $100 million. The rationale behind this move was to balance the cyclical nature of the business, with slowdowns in one geography being compensated by openings in other regions. 

In addition to acquiring subsidiaries in Europe and securing 100 patents, VA Tech Wabag, under Rajiv Mittal’s leadership, expanded its presence to other countries, including the Gulf region and Singapore.

In 2010, the company went public with an IPO, raising Rs125 crore by issuing Rs5 paid-up shares at a price of s,310 per share. The IPO was oversubscribed by nearly 31 times. The offering also included an offer for sale by ICICI Ventures. This marked the only time the company raised funds through equity from public markets.

By 2011, ICICI Ventures had completely exited from the company. In the same year, the Rs5 shares were split into shares with a face value of Rs2. In 2020, the company raised Rs120 crore through a preferential issue made to Rakesh Jhunjhunwala, Anand Jain, and his family at a price of Rs160 per share. Since then there has not been any fund raise through equity.

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