Water's not free anymore, and look who is smiling

Water water everywhere, not a drop to drink! Though poetic, Coleridge’s words may not be far from truth. A McKinsey report titled ‘Charting our Water Future’ states that global water requirement would grow to 6.9 trillion metre cube in 2030 from current levels of 4,500 billion metre cube, representing a 40 percent demand-supply gap given the currently accessible water supply. No wonder there is so much of noise about water technology, especially those used to recycle and reuse waste water or desalinate sea water to increase usage possibilities.

According to the Global Market Report, 2008, the global water industry is expected to grow at a compound rate of 5 percent over FY07-16. The water utilities and industrial segments - water supply and water/waste treatment - comprise three-fourths of the $460-billion market and could become a $530-billion market by 2016. Of this, around 20 percent consists of water management, which is increasingly gaining focus in India and many other emerging economies so that recycled water can be used for both agricultural and industrial applications.

VA Tech Wabag, with a market cap of Rs 1,360 crore, is the only pure play water infrastructure company in India which offers end-to-end solutions including conceptualisation, design, engineering, technology identification, installation and project management services, but outsources the civil work and technological equipment manufacturing.

It was a subsidiary of VA Tech Wabag (Austria), which was a part of Siemens. In

2005, the Indian promoters, along with ICICI Ventures Management Fund, bought VA Tech (India) from Siemens. In 2007, VA Tech (India), in a rare instance in corporate history, acquired its erstwhile parent VA Tech Wabag (Austria) from Siemens and became a global player in the water treatment industry. The company since its listing in October last year has given an unimpressive performance on the bourses. Moreover, Indian companies like IVRCL, Voltas, L&T and KEC International are slowly focusing more and more on this segment as these have realised its potential in coming years.

However, the great opportunities in the water segment, VA Tech’s technological expertise and global presence and experience in 19 countries make it a lucrative bet. Firstpost speaks to Rajiv Mittal, managing director, VA Tech Wabag, to understand the opportunities and challenges the company faces.

Tell us about some of the projects that you are handling in India now?

In India, we are part of a Rs 1,000 crore Nemmeli desalination plant that is 70 percent complete. It is a cash project for us which is constructed through a grant Chidambaram had made for this purpose five years ago. We will build and then maintain and operate the plant. We are also doing a Rs 250-crore project for Indian Oil Corporation. It is waste water recycling and reusing plant at Paradeep which is challenging in terms of the technological expertise it demands. There are also three large projects with the Delhi Jal Board where power will be produced from waste water so that the plant is self-sufficient for power.

With so many players entering the water business, what sets you apart other than the technological expertise?

There are two things here. First, is this technology available locally? If it is available locally, the game is merely that of pricing and margins can be under stress. But if the technology is unavailable here, the main bids will come from foreign companies, maybe in partnership with Indian companies. Here it becomes easy for us as we are very competitive in international standards.

So, are you suggesting that with more competition and infrastructure companies coming into the sector, there are concerns emerging with margins?

Yes and no. It’s correct to the extent that the infra sector has seen a slowdown and most players now realise the scope in water. So, they come and quote as infra projects without realising the technical aspects of the job. And they may even offer very low prices. But here, we curve out projects for ourselves. It is true that we have to cherry-pick projects, but there is enough opportunity in the sector to choose projects, not suffer on margins and yet grow.

Your revenue growth for the last fiscal has been almost flat. What are the major reasons for the disappointment?

One of the biggest factors was Libya. Last quarter is the most crucial quarter for us when there was a washout there. In Sri Lanka, we are doing a Rs 360-crore project funded by Exim Bank. We were supposed to get the order by August which we got only in March. And there were losses due to foreign exchange issues. Euro fell from Rs 68 per euro to Rs 60 where we had to show dismal performance in the books.

How much of your revenue comes from Libya? What is your assessment of Libya now?

Things are still at a standstill in Libya. They consist of 8 percent of our order book. But for this fiscal, we have calculated no revenue from there. If it opens up and we earn something, that will be a bonus.

How much of your revenue comes from abroad? Which are the more lucrative markets there?

Sixty-five percent of our revenue comes from India and the rest from abroad. China is increasingly becoming a great market with the government getting concerned about reusing waste water. In South Asian and South-East Asian markets, important markets are the Philippines, Vietnam, and in the Middle East, it’s Saudi Arabia, Qatar and Oman. In eastern Europe, there are lots of funds channelised into water infrastructure and Bulgaria, Poland, Czechoslovakia, Romania provide immense scope. In a couple of years, 40-45 percent of revenue should come from abroad.

You have Rs 350 crore cash on your books with plans of some inorganic expansion. Have you shortlisted the companies for acquisition?

We have shortlisted three companies for this purpose. We are not looking at any company in India. All are abroad. There could be two purposes. One is to gain a new technology or improve what we have. Or it could be to gain a new market. We should complete two acquisitions in around four to six months.

What kind of topline and bottomline growth do you see this fiscal?

Revenue should grow by 20 percent. As a listed company, I should not be giving any guidance. But there is no reason why we should not be able to achieve 30 percent growth at a net profit level.

Since we spoke about profit margins, guide me as to how margins are in India and abroad for different projects?

At operating levels, the margins are higher abroad, but then cost of setting up a plant abroad is also higher than in India. But at net margin levels, India offers better margins. Overall, the margins are around 12-12.5 percent at operating levels and 7-8 percent at net level.

Because of dominance of municipality orders, do you feel threatened since you are dependent on single-party orders in most geographies?

That will be obvious for us as abroad, there will be one municipality controlling the water sector. But we only take up projects that are funded either by the central government or multilateral agencies. Whenever we see funding and therefore, execution facing trouble, we do not take up those projects.

How much is your orderbook at present? What are your Bot projects (where companies invest in the projects and can take assets in their book)?

Our total order book is Rs 3, 400 crore. We are doing a couple of BOT projects in Ullasnagar and Ahmednagar and have just achieved financial closure. We entered into a strategic partnership with Sumitomo of Japan last year. We are in talks for a couple of projects that we cannot reveal right now. The orderbook should go up to Rs 5,000 crore in two years.