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SectorReport|WaterIndustry

Contents

GlobalWaterIndustry 0304

HowbigistheGlobalWaterMarket? 0406

Whichgeographieswouldseehighspending? 0609

IndiaHugeOpportunityahead 0915

Howthelistedcompaniesfare? 1516


Companies

IONExchange(India)Ltd. 1729
MovingtothenextOrbit

VATechWabagLtd. 3043
Leaderwiththetechnologyedge

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GlobalWaterIndustry
INSTITUTIONALEQUITIES Water StayInvested,StayAfloat

WateralreadyascarceCommodity
Water is an essential commodity, with wide usage across all spheres of our life.
Rightfromgrowingfood,producinganytypeofgoodsrequiredforourexistence,
waterhasakeyroletoplay.Eventhoughwatercovers70%ofEarthssurface,only
1.5%ofitisfreshwater.Wearemoredependentonannualprecipitationforwater
supplies, which is not evenly distributed across geographies. ~65% of the annual
precipitation evaporates into atmosphere, 2025% of itflows into waterways, not
fit for human consumption. Only 10% of the rainfall is available for Personal,
AgriculturalandIndustrialusage.

Populationboomtodrivedemand
Weexpecttheglobalpopulationtocontinuegrowingfornext23decades,mainly
driven by African and some areas of the Asian subcontinent. This population
growthislikelytodriveurbanizationfrom54%in2015to60%in2030.
~12%ofavailablewatergloballyflowsintodomesticuse,69%intoAgricultureand
19% into Industrial production. Half the water consumed in developed world is
towards Industries, whereas 7080% of it in developing world is towards the
Agriculture.
RisingpopulationandrapidurbanizationwoulddrivetheFoodandEnergydemand
indevelopingworld.Thisinturnshoulddrivedemandforwater.Alsosurgeinthe
Industrialactivitywoulddrivedemandforwater.
As per United Nations Food and AgricultureOrganization(UNFAO) report ~1.2 bn
peoplearelivinginregionswithextremewaterscarcity.Thisisexpectedtoincrease
to ~1.8 bn people by 2020 (owing to rise in water pollution, decline in waterbed
levels,whichmakesthewaterundrinkableandunsafeforusage).
ANALYST

YellapuSantosh Asia,themoststressedWatermarket
Tel:+912262406456
Ifoneweretolookatcontinentwisedetailsthen,Asiaisexpectedtofacesevere
santosh.yellapu@indianivesh.in


water shortage. ~60% of the global population is based in Asia with only 36% of
SabyasachiMukerji global water supply. Within Asia, China and India are the two most populous
Tel:+912262406458 economies, who could face water shortage going forward, as they are majorly
sabyasachi.mukerji@indianivesh.in exploiting available water resources. On other hand, North America has access to

15%ofglobalfreshwaterwithjust8%ofglobalpopulation.

Fig.1: ~1.5%oftheGlobalWatersourcesareFreshWater Fig.2: 69%ofwatergloballyflowstowardsAgriculture


WaterVol. %offresh %oftotal 100%
WaterSource
(cu.kms) water water
25%
Oceans,Seas&Bays 1,338,000,000 96.5 80%
48%
IceCaps,Glaciers, 64%
24,064,000 68.7 1.7 69% 71%
PermanentSnow 60% 81% 81%
Groundwater 23,400,000 1.7 54%
SoilMoisture 16,500 0.1 0.0 40%
37%
GroundIce&Permafrost 300,000 0.9 0.0 16%
20% 19% 12%
4% 10%
Lakes 176,400 0.0 17% 21% 20%
12% 15% 14% 9%
Atmosphere 12,900 0.0 0.0 0%
World

SA
Africa

America

Asia

Oceania
Europe

SwampWater 11,470 0.0 0.0


Rivers&BiologicalWater 3,240 0.0 0.0
Total 1,386,000,000 100.0 Municipal Industrial Agricultural


Source:IgorShiklomanov'sChapter"Worldfreshwaterresources"inPeterH.Gleick, Source:IndustryReport,IndiaNiveshInstitutionalResearch
1993,IndiaNiveshInstitutionalResearch

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Fig.3: Asia,Europe&Africaaremoststressedcontinents Fig.4: Africatoseestrongpopulationgrowth.


1% 1% 1% 1%
70% 100%
60% 5% 5% 4% 4%
60% 9% 8% 8% 6%
7% 6%
80% 10% 9%
50%
40% 36%
60% 43%
30% 26% 54%
60% 58%
20% 13% 15% 13% 40%
11% 8% 6%
10% 5% 8%
1%
20% 40%
0% 26%
Africa North& South Asia Aust.& Europe 17% 20%
Central America Oceana 0%
America 2017 2030 2050 2100

%ofglobalpopulation %ofGlobalAvg.FreshwaterRes. Africa Asia Europe LatAm&Caribbean NorthAmerica Oceania


Source:IndustryReport,IndiaNiveshInstitutionalResearch Source:IndustryReport,IndiaNiveshInstitutionalResearch

Fig.5: Globally%ofUrbanpopulationtoincrease Fig.6: Asiahasmaximumno.ofcitieswith>1mn
inhabitants
400
100%

320
80% 40%
48% 46%
53%
71% 240
60%

160
40%
60% 80
52% 54%
47%
20%
29%
0
North Latam& Europe Africa Oceania Asia
0%
America Carribean
FY1950 FY2000 FY2010 FY2015 FY2030

Urban Rural 1950 2000 2010 2015 2030



Source:IndustryReport,IndiaNiveshInstitutionalResearch Source:IndustryReport,IndiaNiveshInstitutionalResearch

HowbigistheGlobalWaterMarket?
Industryexpertsexpectthe2017GlobalWatermarketsizetobe~$652bn(76%of
itfromMunicipalandtheremainingfromIndustrialsegment).

WithinMunicipality,APACisthebiggestmarket
Given the high water stress, inadequate infrastructure and continued increase in
demand,APACemergesasthelargestspenderwithinMunicipalitysegment.India,
China, Malaysia, Thailand, Sri Lanka, Japan, Philippines, Vietnam, Bangladesh are
few markets currently pursuing capacity augmentation within the Municipal
segment. In the domestic markets, we expect awarding traction to be seen from
Namami Gange, AMRUT and Smart City projects. Opening up of Japanese Water
markettoprivatesector,higherspendinginChinese,Vietnam,Philippinesmarket
and strong bid pipeline in Sri Lanka market (under Water Supply & Sanitation
Improvementscheme),comfortusabouttheawardingmomentumoutlook,going
forward.

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ProjectupgradestodriveEuropeanMunicipalmarkets
Higher spend is expected towards the up gradation of existing plants with new
technologies,inordertomaketheAssetmanagementsmarter.

Fig.7: WithinMunicipalitysegment,APACisthebiggest Fig.8: O&MaccountsforoverhalfoftheMunicipality
market Spending
LatinAmerica Design, Chemicals
6% Engineering 3%
&
Construction Process
18% Control&
North Management
APAC
America 16%
35%
26% Water&
Wastewater
Technology
11%
Operation&
Maintenance
52%
MiddleEast& Europe
Africa 23%
10%

Source:IndustryReports,IndiaNiveshInstitutionalResearch Source:IndustryReports,IndiaNiveshInstitutionalResearch

Fig.9: APAC&Europeare2largestmarketswithinIndustrial Fig.10: O&Maccountsfor46%ofIndustrialSpending
segment
Design, Chemicals
Latin Engineer.& 9%
America Construction
10% 10%
APAC Process
North 30% Control&
America Management
19% 17%

Operation&
Water&
MiddleEast Maintenance
Wastewater
&Africa 46%
Technology
14% 18%
Europe
27%


Source:IndustryReports,IndiaNiveshInstitutionalResearch Source:IndustryReports,IndiaNiveshInstitutionalResearch

KeytrendsinIndustrialWaterSpace
Government initiatives, favorable policy (like Zero Liquid Discharge)
announcements, fuelled by water scarcity and stress has propelled growth of
IndustrialWaterandWasteWatertreatmentintheAPACregion(especiallyinIndia
andChina).OilandGasandMiningsectorsarelikelytocontributemajorlytowards
Middle East Industrial Water treatment industry. Strong awarding outlook is
expectedfromSaudiArabia,OmanandUAEmarkets.FoodandBeverageindustry
inEuropeislikelytocontributetowardsthegrowthofIndustrialWaterandWaste
Water treatment, as demand for efficient treatment technology continues to
increase.WithMiningboom,stricterenforcementofregulations,adoptionofBOOT
model in Industrial Water treatment industry could lead to increase in awarding
fromtheLatinAmericanmarkets,goingforward.
Againifoneweretolookatthe~$652bnofGlobalWatermarketsize,then50.5%
istheshareofUtilitiesandtheremainingisheldbySolutions&Servicescompanies.

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Fig.11: Utilitiesaccountfor50.5%oftheGlobalWater Fig.12: SolutionsaccountformajorityofSolutions&


market Servicesmarket

Design/
Build/
Consulting
Construct 9%
16%

Solutions
&Services Utilities Operation
50% 50% Services
19% Solutions
50%

Maintenance
&Monitoring
Services
6%
Source:IndustryReports,IndiaNiveshInstitutionalResearch Source:IndustryReports,IndiaNiveshInstitutionalResearch

WithinSolutions,ProcessControl&Management(PCM)accountsforamajor47.4%
oftotalspends.Treatmenttechnologies&Chemicalsaccountfor36.3%and16.3%
ofthetotal$161bnbeingspenttowardsGlobalWaterSolutions.

Fig.13: PCMaccountsfor47.4%ofGlobalWaterSolutions Fig.14: Coagulants&Flocculantsaccountformajorityof
market Chemicalsmarketspending

Antifoam
Other pHConditioners
Chemicals 8%
Chemicals
Chemicals 5%
10%
16%

Process
Control& Scale&
Corrosion
Management
Inhibitors Coagulants&
48% Flocculants
19%
Treatement 42%
Technologies Disinfectants
36% andGeneral
Biocidal
Products
16%

Source:IndustryReports,IndiaNiveshInstitutionalResearch Source:IndustryReports,IndiaNiveshInstitutionalResearch

Withinthe$26.3bnGlobalWaterChemicalsmarketsize,Coagulants&Flocculants
accountforamajor$11bnoftheopportunity.

Whichgeographieswouldseehighspending?
We see strong awarding pipeline of Water/ Wastewater Treatment projects from
Asia,MiddleEastandotherAfricansubcontinents.
WeexpectspendingontheDesalinationprojectsinMiddleEastmarketstogrowon
the back of strong oil prices, which has been the backbone for many of these
economies.Withoilpricesinrecentmonthsbeingonanuptrend,weseethelong
pending pipeline of large value projects to get awardedin Saudi Arabia and UAE.
We also expect few Desalination orders to be awarded from the Yemen and Iran
marketsoveraperiodthenext23years.

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In addition to investments made towards Desalination, Water Treatment Projects


andSewageTreatmentProjects,SaudiArabia,UAE,Qatar,Oman,andBahrainare
alsosimultaneouslyinvestingonexpandingtheirwaterconnectivitynetworksand
enhanceStoragecapacities.

Fig.15: MiddleEastCountries
Country EmergingTrends/Comments
ReformsinWatersector(SplitWaterandElectricityMinistryinto2separateMinistries,reductionofWatersubsidies,
signMoUswithprivateplayers,privatizationofexistinggovernmentplants).
SaudiArabia FocusshiftstowardsWasteWaterTreatmentprojects(throughPPProute).3LargeWastewaterTreatmentplantstobe
awardedunderBOT/BOOscheme.
AnnouncedUAEWaterSecurityStrategy2036(reducedemandforwaterresourcesby21%,increasewaterproductivity
3 0
indexto$110/m ,reducewaterscarcityindexby3 ,increasethereuseoftreatedwaterto95%levels)
UAEspends~Dh12bn/yearonDesalinationtomeetitsdrinkingwaterrequirement.In2016,UAEhad~70Seawater
UAE Desalinationplantsaccountingfor14%ofworldstotaloutputofDesalinatedwater.
PipelineofDesalinationprojectslooksstrong.SomeofthemincludeSalalahIVIWP,Ajman,andHassyanprojects.
(1)WaterSecurityStrategy,(2)STEPand(3)MoUbetweenDEWAandADWEAforconnectivityofwaternetwork,
indicatesawardingandexecutionofWaterstorage,connectivityandlaydownofPipelinesduringFY1819.
PipelineofSewerageTreatmentPlants,IndustrialWasteManagement,Desalinationprojectslooksstrong.
6IndustrialSewerageTreatmentPlants(STPs)areplanned.2IndustrialWaterTreatmentPlants(IWPs;Salalah,Sharqiya)
onBOObasistobeawardedfirst.DuqmandKhasabIWPswouldbeawardedthereafter.
Oman Darsait,AlAthaibaSTPsprojectstobeawardedsoon.
Inadditiontotheongoing$1bnworthofprojects,HayaWaterplanstospendanother$4.3bnonnetworksand
TreatmentPlants.Majorityofitwouldbespentin201718.
PlansbeingdrawntointegrateRenewableEnergysourceswithupcomingSeawaterDesalinationprojects.
OneofthefewMiddleEastcountriesselfsufficientinitsWaterrequirements.
Qatar FocusismoreonStrategicWaterReservoirs(firstphasetobeoperationalin2017).
NextsetofopportunitiestobedrivenbytheproposedlawonIndustrialZones,whichinthelongruncouldcreate
opportunitiesforIndustrialWasteWatertreatmentalso.
Source:IndiaNiveshInstitutionalResearch

IndiaandChinaarethe2largestWater/WastewaterTreatmentmarketsinAsia.
Within Asia, countries like Sri Lanka and Bangladesh are spending to build basic
Infrastructure to supply drinking water. WorldBankin Aug2017 approved $47.5
mnloantoBangladeshforWatersupplyprojects(totalloansanctionedis$218.5
mn). Simultaneously, Philippines, Malaysia, Thailand, Vietnam, Cambodia, and
Taiwan are increasing their allocations and spending towards the Water/
WastewaterTreatmentplants.

Fig.16: AsianCountries
CountryEmergingTrends/Comments
A$3bnWaterTreatment(includesallsubsegments)market.Agricultureaccountsfor>75%ofWaterTreatmentmarket.
2015and2016droughtsinnorthernThailand,forcedgovernmenttoincreaseallocationtowardsWatersector.
Lawsinsistthat(1)newCommercialpropertiesshouldinstallWastewaterTreatmentSystems(2)wastewaterfrom
Thailand livestockbeforedischargingtopublicmustbetreated.
GWIexpectsWasteWatertreatmentmarkettogrow~10%yearly.90%ofEquipmentsusedforWatertreatmentsare
importedfromUSA,China,JapanandKorea.SeegooddemandforChemicals&Resinsfromthismarket.
Inadditiontotheexisting46SewerageTreatmentplants,Malaysiangovernmenthasannounced77newSewerage
Treatmentplantsby2040atestimatedcostofRM52bn(Singapore$16.8bn).
Malaysia AspartofWaterServicesIndustryAct(WSIA)Act,2006,IndahWaterKonsortium(IWK),governmentownedentitywill
besplitseparatelyintostatelevelentitiesandthereaftermergedwithstatewatersupplycompaniesinlongrun.
InMar2017,JohorbecamethefirststateinMalaysiatohaveaWasteWaterrecyclingplant.
AspartofWaterSupply&SanitationImprovementproject,SriLankangovernmentisspendingonbuildingthebasic
SriLanka Infrastructure.ThisprojectisbeingfundedbyJICA,ADBandothermultilateralfundingagencies.
Awardingpipelinelooksstronger(includesawardingofDesalinationprojects).


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OneofthefewAsianeconomiestosuccessfullyimplementPPPmodelinWatersector(recentlyawardedprojectsMetro
AgooWaterworksInc.baggedIlocosVillageWaterSupplyproject;ManilaWaterCompanygotBulacanproject;ApoAgua
InfrastructuraInc.gotthefirstWaterTreatmentprojectforDavaoCity;JFEEngineeringgottheupgradeworksforWater
Philippines purificationproject).
OneofthefewAsianeconomieswithaverystrongandrobustawardingpipelinewhichshouldlastfornextfewyears.
MayniladWaterServicesplanstospendP30.6bntowardsWastewatermanagementprogram,during201822(invested
P42bninlast5years).
OpenedtheWaterTreatmentindustryforwiderprivatesectorparticipation.1ofthe~10projectsisrecentlyawardedto
Japan VeoliaJapanalongwithconsortiumpartners.
Source:IndiaNiveshInstitutionalResearch

WeseelotofopportunityinLatinAmericanWaterTreatmentmarket.Despitethe
evolvingregulatoryframework,fundingcontinuestobeamajorconcerninsomeof
these countries. Peruis one of thefewcountries where we see alot of awarding
related to the Potable Water treatment projects. This is in addition to strong bid
pipelineseenatBrazil,ArgentinaandColumbia.

Fig.17: LatinAmericanCountries
CountryEmergingTrends/Comments...
Investmenttowardssanitizationwasbelow$3bnin2016(halftherequirementtofulfillsanitizationgoals,establishedby
BrazilianNationalPlanforBasicSanitation).Inmidtolongterm,sectorshouldbenefitfromInvestmentPartnerships
Brazil Programas18ofstateownedcompanieswouldbeprivatized.
BrazilianNationalWaterAgency(AWA)estimates$47.3bnofinvestmentstill2035toattainuniversalSewerageservices.
StrongpipelineofDesalination&Wastewatertreatmentprojects.
AspartofArgentinaNationalWaterplan,innext15yearsinvestmentsareplannedtothetuneof$44bn.Already
tendersworth$2.4bnhavebeenannouncedandfewofthemhavebeenawarded.
Argentina SantaFeprovincetospend1.1bnpeso($66mn)toincreasepotablewaterproductionby75%.
NorthernprovincesinArgentinawouldaward$494mnofWaterandSanitationprojectsin2017.
IdesaestimatesthatPPPscouldquadrupleArgentineInfra(includingWaterinvestments)to$97bnduring201820.
ColumbianHousingMinistryin2016announcedthatitplanstoaward100WastewaterTreatmentprojects.Someofthe
keyprojectstobeawardedinclude,Bogot'sElSalitreplant(waitingforWBfinancingapproval),Canoaswastewater
treatmentplant(aspartofWaterandSewerageUtilityEAAB'splanstocleanupcontaminatedBogotriver,already
Columbia raised4.5bnpesos),buildWastewatertreatmentplanttoservePereiraandDosquebradasonPPPbasis.
RegulatorSuperserviciosestimatesthetotalinstalledcapacityforWaterTreatmenttobeat33.1m3/svia562primary
andsecondaryfacilities.Thisisjust30%oftheCountrysWasteWatergettingtreated.
SEDAPAL(RegulatorybodyformanagingLimasWaterSystems)issittingonacashof$5mn(expectedtoreach$30mn
by2020).WiththenewOptimizedMasterplanlikelytobelaunched,weexpectawardingofWaterTreatmentprojectsto
gainmomentum(inadditiontorebuildingofCanalSystems,Builddams,FiltrationSystems,amongstothers).
Peru NationalWaterRegulatorSUNASS,planstoawardatleast3potableWaterTreatmentplants(LaAtarjea3,Huachipa2
andLurn)in2017.
SEDAPALhasplanstoinvest$6bntowards~200PotableWaterandSewerageprojectsoverthenext5years(201722).
PlanstoawardtheupgradationofLaPastoraDrinkingWaterTreatmentPlantin2017.
Source:IndiaNiveshInstitutionalResearch

Fig.18: AfricanCountries
CountryEmergingTrends/Comments
ONAS(OfficeNationaledeLAssainissement)planstodoubletheintegrationoftreatedwastewateruntil2020.
Strongpipelineof38(9tobeindustryoriented)newSewerageTreatmentplantstobeawardedinnext23yearsworth
Tunisia rd
~Euro1bn.Ofatotal113SewageTreatmentPlants,onlyfewareequippedwith3 cleaningstage.Thisindicatesscope
forupgradesinlongrun.
AsperHoldingCompanyforWaterandWastewater(HCWW)Masterplan,capexof$2bnand$3.5bnwouldbespent
towardsWaterSupply&WastewaterTreatmentduring201520.
Egypt NewWater&SanitationBillapprovedtoencourageprivatesectorparticipationinthesector.
Fundingagencies,like,AFESD,OFID,USAID,SwissandGermanDevelopmentBank,IslamicDevelopmentBankhavecome
forwardtofundvariousWaterSupply,Treatmentprojects.
Source:IndiaNiveshInstitutionalResearch

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WeseeincreasedinvestmentactivityinWatersectorfromNorthAfricancountries
like Tunisia, Ethiopia, Egypt. Most of these projects are funded by Multilateral
Agencies.Increasingwaterscarcity,moreofnaturalcalamitiesisdrivingtheWater
spendacrosstheAfricancountries.
Given that Europe has one of the best Water Infrastructure, focus for most of
thesecountriesisnowshiftedtowardsSmartAssetmanagement.Accordingly,we
expect Operation and Maintenance projects to see deployment of the next
generationtechnologieslikeSmartManagement,IOT,amongstotherareas.

Fig.19: EuropeanCountries
CountryEmergingTrends/Comments
AnnouncedtospendEuro46mntowardsdrinkingWaterprojects,expansionofWastewaterTreatmentplantsandflood
Austria protectioninJul17.OfthisEuro26.6mnwouldbeusedtowardsdrinkingWaterandWastewaterTreatment.
Source:IndiaNiveshInstitutionalResearch

IndiaHugeOpportunityahead
WaterResourcesataglance
Indiaaccountsfor2.45%oftheworldslandarea,4%ofwaterresources,but17%
oftheworldspopulation.Ofthetotal4,000BCMofannualprecipitationofwater
(includingsnowfall)seeninIndia,48%endsupinrivers(averageannualpotential
flow estimated at 1,869 BCM). Of this only 60% (1,123 BCM) is utilizable. Of the
totalpotentialoftheseriverbasins59.4%(accountingfor1,110BCM)comesfrom
GangaBrahmaputraMeghnabasinalone.

Fig.20: WaterResourcesatGlance Fig.21: WaterResourcepotentialandUtilisablelevels
WaterSource Qty.(inBCM) WaterReserves UtilizableSurface
RiverBasin
Potential(inBCM) Water(inBCM)
AverageannualPrecipitation 4,000 GangaBrahmaputra
1,110.2 273.9
Meghna
Avg.precipitationduringMonsoon(JunSept) 3,000
Indus(uptoborder) 72.9 46.2
WaterlossduetoEvaporation&SoilWater 2,131

AverageannualpotentialtoflowintoRivers 1,869 Godavari 110.3 76.6

NaturalRunoff 1,987 Krishna 78.5 58.0

EstimatedutilizablesurfaceWaterResources 690 Mahanadi 67.3 49.7


TotalUtilizablegroundWaterResources 433
Narmada 44.9 34.5
TotalAnnualUtilizableWaterResources 1,123

PercapitaWateravailability(200307average) 1,720 Others 385.0 151.1


Source:IndustryReports,IndiaNiveshInstitutionalResearch Source:IndustryReports,IndiaNiveshInstitutionalResearch

TheWaterChallenge
Indiafaceswaterissueowingto(1)excessiveandinefficientuseofwaterusedfor
Agriculture, (2) Depleting ground water levels, (3) increase in river pollution, (4)
extremity in the monsoon season. Water Resource Group (WRG) 2030 Report,
expectsburgeoningpopulation,urbanizationandrapideconomicgrowthtoleadto
50%gap(754BCM)inwatersuppliesandprojecteddemand.
Barring East India and J&K, entire country would be facing moderate to severe
water stress. The same report highlights 37 measures to bridge the water
availabilitygap.Thecheapestmeasurewouldentailinvestmentsof$5.9bnby2030
whereasthetotalgovernmentannualexpendituretowardswatersectorhasbeen

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tothetuneof$2.3bnin2009.Ifoneweretoexplorecheaperalternativestolower
this deficit then 80% of it is to be addressed by improving the efficiency and
productivityinAgriculturesector(accountsfor80%ofwaterdemandtill2030).
We expect the triple play effect, (1) River cleanup programs, (2) High
government spending, and (3) Change in the regulators perspective, to create
favourablelongtermoutlooktowardstheWaterTreatmentsector.

Rivercleanupgetsgovernmentattention
Environment and Forest Ministry is focusing on cleaningup of rivers across the
country. As per a 2015 Central Pollution Control Board (CPCB) report, Sewerage
generated from 650 urban cities along 302 river stretches has increased from
~38,000MLDin2009to62,000MLDin2015,reflecting63%increase.Againstthis,
816 STPs haveinstalled capacity of 23,277 MLD,indicating that only 37.5% of the
needisaddressed.

Fig.22: Detailsofpollutionacrossriverstretches Fig.23: PollutedriverstretchesStatewiseMix(%)
Range Countofrivers Length(inkms) WestBengal, A.P.,6%
6% Assam,5%
BoD>30mg/I 34 2,726
U.P.,18%
BoD2030mg/I 17 1,145

Others,20%
BoD1020mg/I 36 1,834
Telangana,
6%
BoD610mg/I 57 2,492
Orissa,5% Gujarat,5%
BoD36mg/I 158 4,166
Karnataka,
Maharashtra, 5%
Totals 302 12,363 M.P.,7%
17%


Note:BoDBiologicalOxygenDemand;Source:CPCB,IndiaNiveshInstitutionalResearch Source:CPCB,IndiaNiveshInstitutionalResearch

Under the National River Conservation Plan (NRCP) a total of Rs 45.1 bn is
sanctionedtowards30+riversflowingacross14states.Thissanctionedamountis
likelytocreate3,155MLDofSTPcapacities.AsofAug17,only78%(i.e.2,455MLD)
ofthetargetedcapacityiscreated.Notably,2riverswhichhaveseenwideinterest
from various stakeholders and large scale funding allocations are Ganga and
Yamuna.
Since1993,~Rs15.1bnhasbeenspentunderthePhaseIandIIofYamunaAction
Plan.PhaseIII(undernewpolicynamedasMailySeNirmalYamunaRevitalization
Plan) is expected to see Rs 16.5 bn of awarding activity towards STPs and Trunk
Sewers, over next 7 years. Already Rs 3.4 bn has been sanctioned by Water
Ministry, where 30% of the cost burden is to be shared by the respective state
government.
AnotherfocusareaforgovernmentistocleanriverGanga.NamamiGangeAction
Plan(NGAP)hasbeenrolledoutseparatelyundertheMinistryofWaterResources.
As per a CPCB 2017 report, ~10,705 MLD of water is discharged every year in to
riverGanga.Installedwatertreatmentcapacitiesin2012wereat1,231MLD.Inlast
3 years only 7 STPs (<250 MLD) got commissioned, indicating that not much has
changed in recent past. We estimate deficit levels to be >80%, that needs to be
addressed. Of all the operational plants monitored, current utilization stands at
~55% levels. We expect ~75% of Rs 200 bn planned expenditure during FY1820
wouldbetowardsSTP&EffluentTreatmentPlant(ETP).

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SectorReport|WaterIndustry

Fig.24: GangaRiverWaterdischargedversusWaterTreated Fig.25: Gangariver:Utilizationat55%oftheOperational


STPs
12,000 100% 1,200 100%
10,705
79% 82% 996
10,000 1,000
75% 80% 80%
84%
8,000 800
55% 56% 60% 55% 60%
6,000 4,974 600
462
40% 40%
400 336
4,000
2,638 2,723 20%
1,686 20% 20%
2,000 1,174 1,209 1,231 200 89 22%
109

0 0% 0 0%
2009 2012 2015 2017 UP Uttarakhand Bihar WB Total

SewageGen.(MLD) STPCapacity(MLD) Gap(%) Capacity(MLD) Utilization(%)



Source:CPCB,IndiaNiveshInstitutionalResearch Source:CPCB,IndiaNiveshInstitutionalResearch

Of the Rs 150 bn worth of EPC and HAM projects anticipated to be awarded
towardsETP/STPconstruction/upgradationduringFY1820,already~Rs65bnof
projectshavebeenapprovedinrecentmonths(Rs4.3bnofitisawardedandRs45
bn of it should get awarded in next 1218 months), thereby indicating us that
awardingmomentumshouldgainfurthermomentum.

Fig.26: AmountSanctionedtowardsriverGangatogrow... Fig.27: NamamiGangeMixofsourcesoffunding
250,000 75 80
JICA
200,679 5%
200,000 56
60
WB
150,000 30% Budget
34 40 Allocation
96,300
100,000 30%

20
50,000 35,810
Other
Sources
0 0
35%
200814 201417 201820

Sanctioned(Rsmn) Projects

Source:IndustryReports,IndiaNiveshInstitutionalResearch Source:IndustryReports,IndiaNiveshInstitutionalResearch


EventhoughtheamountsanctionedunderNamamiGangeduringFY1417stoodat
~Rs96bn,only7STPsgotcommissioned.Another27STPsareunderconstruction
stage (as of Jul17). We expect World Bank and budget allocations to account for
~60% of the planned spending, thereby allaying funding concerns up to certain
extent.





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SectorReport|WaterIndustry


InadequateInfrastructuretodrivehighergovernmentspending
TablehighlightsthatacrossUrbanIndia,thereisahugemismatchfortheSewage
generatedandtreated.

Fig.28: Statewise details (Urban) Sewage Generation versus the Operational
Capacities
Sewage Capacityof No.of Under
Operational Proposed
generationin Municipal Municipa Construction
State/UT Capacity Capacity
Urbanareas STPs l Capacity
(MLD) (MLD)
(MLD) (MLD) STPs (MLD)
A.P. 2,871 247 12 156 91
Assam 703 0 1 0
Bihar* 1,879 125 6 100 421
Delhi* 4,155 2,694 35 2,671 94
Goa 145 75 7 35 40
Gujarat 4,119 3,063 51 2,112 360 94
Haryana 1,413 853 41 805 45 70
H.P. 110 115 66 80
J&K 547 265 19 146 117
Jharkhand* 1,270 117 15 117 16
Karnataka 3,777 1,304 57 1,112 192
Kerala 2,552 153 10 113 37
Maharashtra 8,143 5,160 76 4,684 132
M.P. 3,214 482 17 475 0
Odisha 1,121 386 13 158 228
Punjab 1,664 1,245 86 921 277 32
Rajasthan 2,736 866 63 385 149 332
TamilNadu 5,599 1,800 73 1,141 521 133
Telangana 1,671 686 18 635 51
Uttar
7,124 2,647 73 2,372 170 494
Pradesh*
Uttarakhand* 495 153 24 91 39 155
WestBengal* 4,667 417 28 235 184
Total 59,975 22,851 791 18,543 2,448 2,024
Source:CPCB,*NamamiGangeprojectdocuments,IndiaNiveshInstitutionalResearch


Of the 59,975 MLD of Sewage generated by Urban India, 791 Urban STPs treat
~18,543 MLD of Sewage, indicating the urgent need to add more STP capacities.
Eventhepipelineof~4,400MLDofSTPcapacitieswouldnotaddressthisproblem.
AssumingbenchmarkcostofsettingupSewageplant(aspercurrenttechnologies
inuse),itisestimatedtocost~Rs5065mn/MLD(interceptionanddiversioncosts
Rs4050mn/MLDandtheplantcostisRs1015mn/MLD).Inordertoaddressthis
deficit,weexpecttherequiredinstalledcapacitiestobe~47,000MLD.AtRs5065
mn/MLDrange,thistranslatestoanopportunityofRs2.33.0tn.
Acknowledging the deficit, Government has rolledout Atal Mission for
RejuvenationandUrbanTransformation(AMRUT)SchemetoensureWaterSupply
and sewage networks for urban India. This program has been rolled out in
convergencewiththe100SmartCitiesProgram.Tablebelowhighlightsthatduring
FY1720,Rs191.5bnwouldbespenttowardssettinguptheSTPs.



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SectorReport|WaterIndustry

Fig.29: AMRUTSchemedetails:
Total
State No.of
Total Approvedfor Approved Sewage
(Rsmn) TimePeriod Sewage
Cost 201617 for201720 Project
Projects
Cost
Jharkhand FY201720 5,556 5,556 1 1,969
TamilNadu FY201720 41,111 41,111 13 32,873
AP FY201620 22,273 8,771 13,503 28 5,291
Bihar FY201520 24,698 10,304 1 377
Chhattisgarh FY201520 21,928 7,404 8,790 12 4,474
Karnataka FY201520 49,529 20,696 21 10,615
Gujarat FY201620 36,800 14,010 22,790 36 10,895
J&K FY201520 5,931 2,247 384
MP FY201618 45,449 20,509 24,940 24 15,788
Maharashtra FY201618 58,079 24,899 33,180 19 25,290
Mizoram FY201518 1,226 872 353 40
Odisha FY201618 11,377 5,304 6,073 4 844
Rajasthan FY201720 32,239 32,239 21,078
UP FY201520 114,217 38,952 42,392 47 21,495
Goa FY201520 3,964 696 2,673 2,220
HP FY201718 1,150 1,150 271
Uttarakhand FY201519 6,891 2,472 2,118
WB FY201718 15,537 15,537 0 0
Chandigarh FY201720 620 620 1 600
Meghalaya FY201720 1,418 1,418 3 775
Manipur FY201620 1,289 600 689 0 0
Tripura FY201720 639 639 25
Nagaland FY201720 452 452 55
Punjab FY201520 27,727 12,758 16,809
Sikkim FY201518 401 133 133 0 0
Telangana FY201720 7,313 7,313 2 1,260
Arunachal
FY201520 1,403 467 526 1 180
Pradesh
Assam FY201720 2,922 2,922 0 0
Delhi FY201718 3,386 3,386 3 1,771
Haryana FY201720 28,223 28,223 14,057
Total 573,744 122,616 345,084 216 191,555
Source:GoIWebsites

ChangeinRegulatorsperspective
Theyearsleadingupto2020,whenParisClimateAgreemententersintoforce,127
membercountrieshaveratifiedtheircommitments,whichincludewaterasoneof
thekeypriorities.Indiabeingmembernationcouldseechangesinthewaywateris
managed and utilized. We could see (1) increased adoption of free water getting
rationedinfuture,(2)waterforallusescouldgetpriced,(3)nomoreunrestricted
rightsovergroundwaterbelowthelandoneowes,and(4)mandatoryforindustries
touseonlytreatedwater.
Wealreadyseepolicylevelchangeshappening,(1)MoEFhastweakedstandardsfor
water discharged from STPs, (2) Central Pollution Control Board (CPCB) made it
mandatorytoinstallSTPs/ETPsforallTextilescompanies.

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SectorReport|WaterIndustry

In Oct2017, Ministry of Environment and Forest (MOEF) tweaked standards that


governthequalityofwatertobedischargedfromtheSTPs.
Fig.30: StandardsgoverningwaterqualitydischargedbySTPs
OldStandards NewStandards
Parameter Details Scope
(inmg/l) (inmg/l)
Captureslevelofacidityforaquatic
Ph 5.59 6.59 Everywhereinthecountry
lifetothrive
MetroareasandallstatecapitalsbarringHP,Uttarakhand,
BioChemicalOxygen AmountofOxygenneededperlitre, <100 <20 J&KandUTofAndamanandNicobarIslands,Dadarand
demand(BoD) permittedinthetreatedwater NagarHaveli,DamanandDiuandLakshadweep
<30 OtherAreas
MetroareasandallstatecapitalsbarringHP,Uttarakhand,
IndicateTurbidity;Dryweightof <100 <50 J&KandUTofAndamanandNicobarIslands,Dadarand
TotalSuspendedSolids
particlestrappedbyafilteratany NagarHaveli,DamanandDiuandLakshadweep
(TSS)
waterbody
<100 OtherAreas
FecalColiform(FC) PresenceofBacteria Nil <1,000 Everywhereinthecountry
Note:*MetroCitiesareMumbai,Delhi,Kolkata,Chennai,Bengaluru,Hyderabad,AhmedabadandPune;Source:MoEF,IndiaNiveshInstitutionalResearch

NewFaecalColiforms(FCstandards)dontapplyifthetreatedeffluentisusedfor
Industrialpurposes.Also,thetotalnitrogenandAmmonialevelsweresupposedto
beNILearlier.Nowthecriterionisupdatedtonotspecifiedlevels.
ThenewruleswouldapplytoallplantsgettingcommissionedafterJun2019andall
existingplantsarerequiredtocomplywithnewstandardswithinthenext5years.
IndustryexpertsareofviewthatSewagetreatmentcapacityinIndiaisinadequate
and ~40% of the existing facilities don't meet the new standards. We expect
deployment of new technologies in order to meet the new norms. As a result,
prices of STPs would increase to ~Rs 6080 mn/ MLD (interception and diversion
costsRs4050mn/MLDandtheplantcostisRs2030mn/MLD).Onawhole,If
one were to look at installed capacity of 23,277 MLD from 920 STPs (under the
Municipalsegmentasof2015),only18,883MLDistheutilization(from615STPs).
Againofthoseoperational,ifonegoesbyabovefigureof40%ofthemnotmeeting
thenewstandards,thenopportunityisfor~7,550MLDofupgrades.AtcostofRs
6080mn/MLD,ittranslatestoanopportunityofRs453604bn,spreadoverthe
next5years.
In Oct2017, CPCB amendedrules toensure that all typesof effluents get treated
(includingsuspendedsolids,biochemicaloxygen,oilandgrease)andarewithinthe
newprescribedlimitsandcomplywithnewammoniacalstandards.

Fig.31: WaterdischargenormsforTextilescompanies
Parameter NewStandards(inmg/l)
Ph 6.58.5
SuspendedSolids 100
Colour,P.C.U(PlatinumCobaltUnits) 150
BioChemicalOxygenDemand(BOD3) 30
OilandGrease 10
ChemicalOxygenDemand(COD) 250
TotalChromiumas(Cr) 2.0
Sulphide(asS) 2.0
PhenolicCompounds(asC6H5OH) 1.0
TotalDissolvedSolids,Inorganic(TDS) 2100
SodiumAbsorptionRatio(SAR) 26
AmmonicalNitrogen(asN) 50
Source:CPCB,IndiaNiveshInstitutionalResearch

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SectorReport|WaterIndustry

Fig.32: Detailsofnewlawsbeingrolledout
EnforcementAgency NewLaw Scope
SChasmandatedallSPCBstomakerulestohaveaprimaryfunctional
SupremeCourtRuling/StatePollutionControlBoards
ETPforrunningIndustrialplants,within3monthsfrom22022017. AcrossallIndustrialUnits
(SPCBs)
SPCBsaredirectedtosetupaonlinecontinuousmonitoringsystems.
BangaloreWaterSupplyandSewerageBoard
(BWSSB)andKarnatakaStatePollutionControlBoard ApartmentComplexeswithover50FlatsarerequiredtoInstallSTPs Apartments(both,oldandnew)
(KSPCB)
HealthcareEstablishmentswith100+bedsneedtomaintainSTPsin
AndhraPradeshPollutionControlBoard(APPCB) MidtoLargeHospitals
theirpremises
InstallSTPsmandatorilyatstructuresover10,000sq.mt.across Apartments,Commercialand
TelanganaGovt.
Hyderabad IndustrialBuildings(new)
Hospitals,Schools,Residential,
MandatorytoinstallMicrowaterandSTPsforallnewBuilding
DelhiGovernment(planstomakealaw) Commercial,GovernmentBuildings,
Complexes
amongstOthers.
InstallSTPsforallupcomingHousingprojectswithbuiltupareaof
ThaneMunicipalCorp.(planstomakealaw) 20,000sq.ft./2,000sq.m.(CurrentruleisapplicableonHousing NewHousingProjects
projectswithbuiltupareaof40,000sq.ft.)
Source:IndiaNiveshInstitutionalResearch

In recent months, few of the State Pollution Control Boards/ Municipalities have
turnedactiveinordertoimplementstricterWaterpollutionnorms.Withmoreand
more state bodies likely to join this trend, going forward, we expect demand
outlookforSTPstoimproveinthedomesticmarket.

Howthelistedcompaniesfare
Industry experts predict that the yearly Indian Water/ Wastewater treatment
market is Rs 110120 bn market opportunity. Higher water distress levels in
domestic market, fast changing regulatory landscape tell us about the potential
opportunityahead.Over2dozenplayershaveenteredthedomesticmarketinlast
decade. Currently there are too many midtosmall sized players present with
limited capabilities (most of them lack technology depth, product portfolio) and
veryfewcompanieswithscalehavingwiderangeofofferings.
Fig.33: Wabagreportedthefastestrevenuegrowthduring Fig.34: YearlyRevenuesoflargerplayers
FY1417
20,000
1320% Wabag 1 Numbersreflectexportsdonefrom
India
16,000

812% SFCEnviron.,IEL 2 12,000

8,000
07% Veoli 1 FollowsanAssetheavymodel
11,522
12,334
15,134
17,982

4,000
1,008
1,318
1,429
2,303
1,511
2,685
1,804
1,624
1,705

7,120
7,318
8,017
9,372
838
915
998

100% UEMIndia 1
Lostbusiness topeers 0
SFC Veolia UEM Wabag IEL
0 1 2 3 FY14 FY15 FY16 FY17

Source:IndustryReports,IndiaNiveshInstitutionalResearch Source:IndustryReports,IndiaNiveshInstitutionalResearch

Wabag, L&T and IEL are the 3 largest listed players in Indian Water Treatment
space. L&Ts Water division is not comparable as it offers wide range of Water
supply,distribution,conservationandothercomprehensiveInfrasolutions.Despite
the presence of toomany smaller players, unlisted players like, Veolia,UEM, SFC,
UEMhavegainedscaleindomesticWatertreatmentmarket.Thesecompaniesare
subsidiariesoflargeglobalplayerswitheasyaccesstoawiderangeoftechnologies.

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SectorReport|WaterIndustry

Ofthe~Rs110120bnmarketsize,largerplayersenjoy~30%ofthemarketshare
(Wabag enjoys ~1113% market share), followed by Veolia, Suez, who are distant
secondandthird.Theremaining70%ofthemarketshareishighlyfragmentedwith
manysmalltomidsizedplayersinthisspace.
We are of view that (1) wider presence across subverticals with a bouquet of
technology offerings, and (2) wide geographical diversity helped Wabag report
12.7%revenueCAGRduringFY1417versussingledigitCAGRreportedbydomestic
peers. Most of the domestic players are focused on 12 subverticals, thereby
restricting their growth prospects, whereas, large MNC players are ahead on the
curve with their presence across subverticals, as they enjoy easy access to
technologiesfromtheirparententity.

Fig.35: Areasofwatertreatment,wherethepeersoperate
VATech Ion Concorde AquaDesign Doshion
Technology Suez SFC UEMIndia
Wabag Exchange Enviro India Veolia
SludgeDisintegration
Desalination
NitrateRemoval
WaterReuse/Membrane
ZeroLiquidDischarge
Source:IndiaNiveshInstitutionalResearch


WTEGmBHisaGermancompanywithpresenceinslowgrowingEuropeanmarket;
Hydrotek is just focused on the Thailand markets. Hyflux is present across many
countriesinAsia,therebyhelpingitreport22.1%revenueCAGRduringFY1417.

Fig.36: FinancialsSnapshot CompaniesincorporatedinIndia GlobalPeers
Wabag SFC Veolia
Particulars IEL UEMIndia WTEGmBH Hydrotek Hyflux
(Standalone) Environ. India

RevenueCAGRduringFY1417(%) 12.5 8.9 6.3 4.7 (14.1) (20.4) (16.2) 22.1

Avg.EBITDAMarginduringFY1417(%) 12.0 7.0 17.0 5.7 (15.0) (5.8) (21.8) 9.0

Avg.PATMarginduringFY1417(%) 6.7 2.4 8.4 (4.5) (30.0) 2.4 (24.4) (7.2)

WCdays 68 Negative 97 Negative 121 Negative Negative 117

ROE(%) 9.4 14.5 14.4 Negative Negative 4.5 (27.8) (3.7)

CFO/Sales(%) 9.0 18.0 20.5 (30.0) (26.6) NA 7.4 (33.9)

Notes:WTEGmBHhasSeptember,HydrotekandHyfluxhaveDecemberyearending;WTE,Hydrotek,Hyfluxrevenue,EBITDA,PATnumbersarefor201316;WC
days,RoE,CFO/SalesareforlastreportedFinancialYear(i.e.2015forSFCandUEMand2016forVeolia);Source:Bloomberg,IndiaNiveshInstitutionalResearch

Withlargeopportunitiesopeningupwithinthedomesticmarkets,weexpectallthe
keyplayerstoseestronggrowth,goingforward.CompanieslikeWabag,IELwhoalso
arefocusedonexportsshouldseestronggrowthfromthatavenue.Thiswouldhelp
themreducetheirdependencyonanyonemarketandinsulatecompanyfinancials
ofanyslowdowninagivenmarket.










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SectorReport|WaterIndustry
IONExchange(India)Ltd.

Movinginto thenextOrbit
INSTITUTIONALEQUITIES

Current WeinitiateonIonExchange(IEL)withaBUYandpricetargetofRs616,implying
35.8%upsidefromcurrentlevels.Ourpositiveviewisbasedon(1)strong21.6%
CMPRs454 and 29.9% revenue and PAT CAGR, respectively, over FY1820 (2) impressive
RatingBUY cash generatingprofile (Rs 3.6bnduring FY1117), (3) unleveredbalance sheet
TargetRs616 (0.5xD/Eratio),and(4)RoEexpansionfrom14.5%inFY17to19.0%byFY20.
(CMPasonDecember04,2017closing)
STOCKINFO InvestmentRationale
INDEX Executionof$194mnSriLanka(SRL)WaterprojectwouldhelpIELtransition
BSE 500214 frommidsizedtolargescaleengineeringplayer.ThisstrategywouldhelpIEL
NSE NL quickly scale business and improvemargins. Withmajor concomitantrisk of
Bloomberg IONIN
project financing and preproject preparation mitigated, we expect IEL to
Reuters IONX.BO
Sector Water
successfully execute this project. This coupled with improved domestic
FaceValue(Rs) 10 business outlook should help engineering segment report 27.0% revenue
EquityCapital(Rsmn) 147 CAGR during FY1820. With some of the low margin projects nearing
MktCap(Rsmn) 6,651 completion and contribution of high margin SRL order kicking in, we expect
52wH/L(Rs) 638/276 segmentmarginstoimprovefrom5.0%inFY17to7.0%inFY20.
AvgDailyVol(BSE+NSE) 10,901
(NL=NotListed) Chemicals segment reported 8.1% revenue CAGR, during FY1417 reflecting
SHAREHOLDINGPATTERN % benefitsof(1)productdiversification,(2)entryintonewgeographies,and(3)
(asonSep,2017) marketsharegains(grewfasterthan67%industrygrowthrateduringFY14
Promoters 44.04 17).WithWHOGMPapprovalsinplacetocommencethePharmaResinplant,
Public&Others 55.96 coupled with higher utilization at existing plants, should help Chemicals

STOCKPERFORMANCE(%) 3m 6m 12m segment report 13.9% revenue CAGR during FY1820 (30.1% of consol.
IONExchange (13.0) (1.2) 56.9 revenuesandmajorityofFY17EBITDA).Also,postthecommencementofnew
SENSEX 3.7 5.1 25.3 plant,AssetturnoverratioofChemicaldivisionwouldimprove,therebyaiding
Source:Bloomberg,IndiaNiveshInstitutionalResearch segmentalEBITDAmarginexpansion.

IONExchangev/sSENSEX
Risks&Concerns
DelaysinexecutionofSRLorder,unfavorableforexmovement.

Valuation
At CMP of Rs 454, IEL is trading at FY19E and FY20E P/E multiple of 13.7x and
10.8x, respectively. Median of last 6years forward P/Emultiple stands at 14.9x.
During FY1117, IEL reported 9.1% revenue and 21.4% PAT CAGR, respectively.
Source:Bloomberg,IndiaNiveshInstitutionalResearch
RoEimprovedfromthelowof3.1%inFY14to14.5%inFY17,mainlydrivenbynet

marginexpansion.ExecutionofhighmarginSRLorder,completionoflowmargin
Engineering projects by 3QFY18, and revenue contribution from 2 new plants,
shouldhelpIELreportrevenueandPATCAGRof21.6%and29.9%,respectively,
duringFY1820.Giventhestrongoutlook,weassign16.4x(10%premiumtolast6
years median P/E) to average of our FY19 and FY20 EPS estimates, to arrive at
pricetargetofRs616.Given35.8%upside,weinitiateonIELwithBUYrating.

Fig.37: Financial Performance


Adj.EPS EBITDA Adj.P/E EV/EBITDA
Y/EMarch(Rsmn) NetSales EBITDA RoE(%)
(Rs) Margin (x) (x)
FY16 8,711 557 10.6 6.4 10.0 42.7 10.2
FY17 10,241 776 19.9 7.6 14.5 22.8 7.3
FY18E 12,296 995 25.0 8.1 16.3 18.2 5.7
FY19E 15,060 1,261 33.1 8.4 18.1 13.7 4.5
FY20E 18,169 1,543 42.1 8.5 19.0 10.8 3.7
Source:IEL,IndiaNiveshInstitutionalResearch

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SectorReport|WaterIndustry

InvestmentRationale
SriLankaProjectthegamechanger
During FY1417, IEL reported low value Engineering project order wins, when the
awarding environment in the Water treatment industry was muted. In order to
pursuegrowth,IELtooktheseprojects,resultinginlowmargins.Theselowmargin
projectsareexpectedtobecompletedby3QFY18.
Having attained scale and technical knowhow, 3years back IEL took a conscious
decisiontobidforlowrisk,largeticketprojects.Thisstrategicmovesuggeststhat
IELwantstoscaleitsbusinessatafasterpaceandalsoimprovethemargins.
In FY16, IEL reported $194 mn (>Rs 12 bn) of Sri Lanka (SRL) Water Supply order
win. The table below highlights that IELhas worked on possible areas to mitigate
projectexecutionrisk.WeareofviewthatsuccessfulexecutionofSRLorderwould
positionIEL tomovein to a bigger orbit. Project of this scale would be used as a
referencetobagmoreofsuchlargeticketorders(notmodelledinourestimates).

Fig.38: ExecutionriskmitigatedforSriLankaProject
ProjectRisks DesignWorks ExecutionApproval ExecutionWorks FinancingAgency

Grading

MinimalRisks,asitisa Landacquired,RightofWay EPCworkstobepartlydone TakenBuyerscreditfrom


Explanation
WaterSupplyProject. (RoW)received. bylocalEPCplayer. EXIMBank.

Toshow%riskcovered:Source:IEL,IndiaNiveshInstitutionalResearch


WeexpecttheSRLordertocontribute26.0%ofconsol.revenuesduringFY1820.
With designs approved and revenue booking started, we expect rampup in
execution. Water engineering companies like, Wabag, SFC India reported EBITDA
marginsin1114%rangeinlast5years.Considering(1)lackofscaleinIELslarge
ticketEngineeringbusiness,(2)dependencyonsubcontractinginanewgeography,
weexpectSRLordersEBITDAmarginstobelowerthanthepeersat8.59.5%range
(SRLprojectmarginstobeaheadofconsolidatedEBITDAmargins).

Fig.39: SRLcontributiontotheConsolidatedrevenues Fig.40: SRLversusConsolidatedEBITDAmargins

100% 10%
9.5%
10% 9.3%
80%

73% 69% 9%
60% 82% 8.5% 8.5%
93% 8.4%
9%
8.1%
40%
8%

20%
31% 8%
27%
18%
7%
0% 7%
FY17A FY18E FY19E FY20E FY18E FY19E FY20E

SRLProject Consolidated SRLProject Consolidated



Source:IEL,IndiaNiveshInstitutionalResearch Source:IEL,IndiaNiveshInstitutionalResearch

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SectorReport|WaterIndustry

ImprovedoutlooktowardstheEngineeringsegment
Within Engineering segment IEL (1) executes smalltomid sized Water/ Waste
Water treatment projects for Power, Steel and Refinery sectors, (2) supplies
Membrane and Engineering accessories to EPC, Engineering companies, and (3)
manufactures Preengineered Standard plants (ticket size as low as Rs 15mn) for
Pharma,Chemical,Sugar,CementandTextileplayers.Revenuesarereportedunder
WaterTreatmentPlant(WTP)&Accessoriessubsegment.
As diversification strategy, IEL takes up Annual Maintenance Contract (AMC),
Operations&Maintenance(O&M)contractsformidsizedprojectsandreportsthe
revenuesunderServicessubsegment.ThisstrategyassuresIELofrevenuevisibility
andcustomerstickiness.
Entry of new players in a muted awarding environment, and IEL managements
conscious decision to stay away from the low margin projects, led to just 9.8%
Engineering segment (consol.) revenue CAGR during FY1417. WTP & Accessories
subdivision(69.2%ofFY17consol.engineeringsegmentrevenues)reported9.3%
revenueCAGRduringFY1417.
Fig.41: ShiftinConsol.EngineeringRevenuemixduringFY1620
FY2016 FY2018E FY2020E

17% 13%

34%

43%
55%
66% 28%

44%

WTP&Accessories SRLProject Services&Others


Source:IEL,IndiaNiveshInstitutionalResearch
We are of the view that Engineering segment is likely to report 27.0% revenue
CAGRduringFY1820,onthebackof(1)increasedtractioninSriLankaproject,(2)
12.8% revenue CAGR in the WTP & Accessories subsegment. Higher government
allocation and increased focus towards AMRUT, Namami Gange scheme, coupled
with fast changing regulatory landscape across geographies indicate that Water
Treatment industry is poised for strong growth. With industry experts predicting
early double digitgrowth for Water Treatmentindustryin the next few years,IEL
beingoneofthekeyplayersinthisspace,islikelytoemergeasabigbeneficiary.
Anticipating huge opportunity ahead, IEL in Oct17 commissioned Integrated
AutomatedReverseOsmosisMembrane(8inch)plantatVerna,Goa.Thisplantis
alsobeingexploredforexportsopportunity.
IncreasedcontributionfromtheSRLprojectshouldleadtodeclineinrevenueshare
of the WTP & Accessories subsegment from 65.5% in FY16 to 43.4% in FY20. On
other hand, share of SRL project within Engineering segment would increase to
44.3%byFY20.
Withsomeofthelowmargin,lowvalueEngineeringprojectsnearingcompletionby
3QFY18 (some impact of it was seen in 2QFY18 quarterly performance) and
increased contribution of high margin projects kicking in, we expect Engineering
segmentmarginstoexpandfrom5.0%inFY17to7.0%byFY20.

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SectorReport|WaterIndustry

Fig.42: Consol.EngineeringSegmenttoreport27% Fig.43: Consol.EngineeringsegmentEBITDAmarginto


revenueCAGRduringFY1820 improve
14,000 12,766 40% 8%
31% 7.0%
30% 6.8%
12,000 26% 30% 7%
10,326 24% 5.9%
10,000 6%
20% 5.0%
12% 7,909
8,000 5%
6,103 10%
6,000 4% 3.4%
4,611 4,858 3.2% 3.2%
4,329
0% 3%
4,000

14% 10% 2%
2,000 6%
1%
0 20%
FY14A FY15A FY16A FY17A FY18E FY19E FY20E 0%
EngineeringRevenues(Rsmn) yoygrowth(%) FY14A FY15A FY16A FY17A FY18E FY19E FY20E

Source:IEL,IndiaNiveshInstitutionalResearch Source:IEL,IndiaNiveshInstitutionalResearch

PharmaResinsandexportstodriveChemicalsegmentgrowth
IEL has wide range of Chemicals and Resins product portfolio. Both, Resins and
Chemicals,contributealmostequallytotheChemicalsegmentrevenues.Chemicals
segmentcontributed30.1%ofconsolidatedrevenuesandmajorityofFY17EBITDA
(FY17Consol.ChemicalsegmentEBITDAmarginswereat19.1%).
Fig.44: Chemicals&ResinsProductPortfoliogrowthdrivers:
Chemical&ResinsPortfolio EndUserIndustry Demandgrowthdrivers
(1)EmergenceofChemical,Food&BeverageinAPACregiontodrivegrowth.India,China&Japan
tocontributesignificantlytotheglobalgrowth;(2)U.S.isexpectedtoseestronggrowthas
Chemical;Cosmetic;Mines;Pulp&
Polyelectrolytes polyelectrolyteisseeingincreasedusefordrugcoatingpurposesinthisregion;(3)Europeregion
Paper;Pharmaceutical
togrowatsatisfactorypaceona/cofgrowinguseofpolyelectrolytesinvariouspersonalcare
products(includesshampoo,soapsandothercosmetics).
(1)APACisthelargestmarket,giventhemaximumdependenceonthePowerGen.,(2)North
PowerGen,Cement,Steel&Metals,Oil
America&Europetoshowmoderategrowthowingtoongoingdrifttowardsnonconventional
BoilerWaterTreatmentChemicals Refineries,Sugar,Petrochem.,Paper&
andrenewablesourcesofenergy;(3)StronggrowthtobedrivenbySaudiArabia,SouthAfrica
Pulp,Textile&Dyes
andGCCowingtodemandinexistingOilRefineriesandPetrochemicalIndustries.
(1)Marketisexpandingduetointroductionofstringentregulationsonwaterconservation,
Power,Food&beverage,Steel,Mining
CoolingWaterTreatment wastewatermanagementinindustrialprocesses,legislationsonwatertreatmentmethods,and
&Metallurgy,Oil&Gas,Refinery&
Chemicals alignmentofwaterqualitystandardswithEuropeanUniondirectives;(2)APAC(China,India,
Petrochemicals,Textiles&Dyes
ThailandandIndonesia)isarapidlygrowingmarket;
(1)HighTDSlevelsinvariousregionsacrossthecountryisdrivingdemandforROCleaning
Pharmaceutical,FoodandBeverage
ROCleaningChemicals Chemicalsinthedomesticmarkets;(2)IntensifyingR&Dexpenditure,usageofperfluoropolymer,
(both,accountfor40%ofmarketsize)
solidpolymerelectrolytetodrivedemandforROCleaningChemicals
Demandtobedrivenby(1)onesidedspecialty(coated)papers;(2)RisingdemandforValue
addedPaperproductswoulddrivethedemandforFunctionalChemicals(almosthalfthemarket
Pulp,Paper&ProcessChemicals Paper&Pulp sizeofPaper&Pulpchemicals);(3)Bleaching&processchemicalswouldbenefitfromrising
demandforrecycledpaper;(4)LatinAmericaandAPACmarketstogain,whereas,EuropeandNA
marketswillbeaffectedwiththeadventofdigitalage.
(1)Tighteningenvironmentallawsandeffortstoboostgasolineanddieselfuelyieldstodrive
RefineryChemicals Oil&Gas demandforRefineryChemicals;(2)NorthAmericatoremainasthedominantregionalmarket,
whiletheAsia/PacificandAfrica/Mideastregionswillgrowfastest.
(1)ReductionofemissionsandfocusonfuelefficiencytocreatedemandforAutomobile
Chemicals;(2)RisingpopularityofSUV'sinIndia,China,Brazil;(2)marketisexpectedtowitness
slowdownowingtoincreasingrestrictionsonuseofsolventsbasedpaintsusedinAutosector,
AutomobileChemicals Automobile
whicharehighinvolatileorganicchemicals(VOC).(3)Focusondevelopinginnovativechemicals
suchasbiobasedAutomotivechemicalsareexpectedtoprovidenewopportunitiesformarket
growth;
Decliningorequality,complicatedprocessingmethodstodrivethelongtermdemand;Grinding
Limestone(forCement),Coal,Other
Metal&Mining aids,Explosives&Drillingsegmentstoseestronggrowth;APACregion(India,China,Indonesia,
Metals
Malaysia)toseestronggrowth;Europetoseesluggishgrowth.
Source:IndustryReports,IndiaNiveshInstitutionalResearch

(1)RegularadditionstotheChemicalsegmentproductportfolioand(2)entryinto
newverticalsandgeographies,helpedIELreport8.1%Chemicalsegmentrevenue

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SectorReport|WaterIndustry

CAGR during FY1417. Notably, the growth reported by IEL is ahead of the 67%
industrygrowthseenduringsametimeperiod,indicatingmarketsharegains.
BeingoneoftheearlyentrantsindomesticWatertreatmentChemicalsmarket,IEL
currently is the market leaderwithin the industry. As of FY17, IEL enjoys ~20% of
thedomesticWaterTreatmentChemicalsmarket(estimatedatRs7.28.7bnrange).
ChembondChemicalsisthedistantnumbertwo,with~1012%marketshare.
IELplanstopursuedualgrowthstrategytogrowChemicalsbusiness:(1)growthe
shareofPharmaverticalwithinChemicalssegment(enjoyshigherrealizationthan
currentofferings),and(2)increasedexportsthrust,goingforward.
Inordertoincreasetherealizationmix(fromthecurrentlevelsofRs80280/kg),IEL
hassetupaResinsplantatAnkleshwar,exclusivelytocatertoU.S.andEuropean
Pharmaclients.IELhasalreadygotWHOGMPcertificationforthisplant.Theyare
currently negotiating with few larger Pharma players and are awaiting approvals
from U.S. FDA. We expect 64.7% of our incremental revenue growth assumption
fromChemicalsegmenttobedrivenbythenewResinsplantduringFY1820.
Outside India revenues accounted for 42.5% of the FY17 Chemical segment sales.
Entry in to new geographies (South East Asia, Middle East countries) should help
Chemicaldivisionreportstronggrowth.

Fig.45: Consol.Chemicalsegmenttoreport13.9%revenue Fig.46: Consol.ChemicalsegmentEBITDAmarginsto
CAGRduringFY1820 expand
5,000 20% 25%
16% 17%
19.5% 20.1%
4,000 16% 19.1% 18.9%
20% 17.9%

11% 15.1%
3,000 12%
15%
11.6%
2,000 8%
5% 5% 10%
4% 4%
1,000 4%
2,443

2,838

2,977

3,553

4,141

5%
3,083

3,192

0 0%
FY14A FY15A FY16A FY17A FY18E FY19E FY20E 0%
FY14A FY15A FY16A FY17A FY18E FY19E FY20E
ChemicalsRevenues(Rsmn) yoygrowth(%)
Source:IEL,IndiaNiveshInstitutionalResearch Source:IEL,IndiaNiveshInstitutionalResearch
WeexpectChemicalsdivisiontoreport13.9%revenueCAGRduringFY1820.Shift
inbusinessmixtowardshigherrealizationfromPharmaResinsshouldhelpsegment
marginstoimprovefrom18.9%inFY18to20.1%inFY20.

Newinitiativestodrivefinancialperformance
Inlast23years,IELhastakenfewinitiatives,whichincludestrategicfocustomove
upthevaluechaininengineeringdivision(intendstotakeuptheentirelargeticket
projects,ratherthanjustsupplySTP/WTPstolargeplayers).Also,IELhasinvested
intwoplants(MembraneplantatVerna,andResinsplantatAnkleshwar).

Fig.47:SegmentwiserevenueCAGRtrends
FY1417 FY1820
Division(Segment) Comments
RevenueCAGR RevenueCAGR
EngineeringSegment ImprovedIndustryoutlook,Membranes
9.8% 11.3%
(ExcludesSRLproject) planttocontributetosegmentrevenue
SRLproject Tocontribute26%ofFY1820consol.
NA 61.2%
(EngineeringSegment) revenues
Productdiversification,NewResinsplantto
ChemicalsSegment 8.1% 13.9%
drivesegmentrevenues;
ConsumerProducts 6.6% 7.9% LowfocusareaforIEL
Note:NANotApplicableastheprojectstartedinFY17;Source:IEL,IndiaNiveshInstitutionalResearch

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SectorReport|WaterIndustry

On the whole, we expect these initiatives to help IEL (consolidated) report 21.6%
revenueCAGRduringFY1820toRs18.1bn.Loweringoflossesatsubsidiarylevel,
completionoflowmarginEngineeringsegmentprojects,andshiftinbusinessmix
towardshighmarginareas,wouldtranslateto24.6%/29.9%Consol.EBITDA/PAT
CAGR,respectively,duringFY1820.

StrongBS,withlikelyimprovementintheReturnRatios
IELintendstomaintainitsstrategyofhavinganunleveredbalancesheet(D/Eratio
remained under 0.6x during FY1117). At FY17end, D/E ratio stood at 0.5x
(reflecting Rs 906.5mn debt). This low D/E ratio is despite making investment
towards the 2 new plants. As a result, Asset turnover ratio declined slightly from
thehighsof1.3xto1.2xinFY17.Also,completionoflowmarginorders,SRLorder
and higher realization from the Resin plant would support our margin expansion
assumption (net margins to improve from 2.8% in FY17 to 3.4% in FY20). On the
back of slight improvement in Asset turnover ratio (to 1.4x during FY1920),
improvementinnetmarginsandlowleveragefactor,weexpecttheRoEtoimprove
fromthelowsof10.0%inFY16to19.0%inFY20.
DuringFY17,IELreceivedRs1.8bnofAdvancefortheSriLankaproject.Asaresult,
thecashbalanceofthecompanyhasincreasedfromRs334mninFY16toRs1.6bnin
FY17. We expect the cash balance to get normalized as the project execution gets
rampedupandthesubsequentbillinggetsadjustedagainstthecustomeradvance.

UnderstandingtheFinancials

SnapshotofStandaloneFinancials
IELreported9.6%revenueCAGRduringFY1417,reflecting(1)11.1%revenueCAGR
inEngineeringsegment(57%ofFY17revenues),(2)8.0%revenueCAGRinChemicals
segment(32%ofFY17revenues),and(3)6.9%revenueCAGRinConsumersegment
(11%ofFY17revenues).
Engineering segment revenue growth during FY1417 was driven by Rs 760mn of
revenuesbookedfromSriLankaprojectinFY17alone(69%ofincrementalrevenues
bookedinFY17werefromtheSRLproject).Corebusinesswasimpactedduetoslow
downinthedomesticmarkets.AdditionstoproductportfolioandexportsfromIndia
helpedtheChemicalssegmentreportslightlybetterthantheindustrygrowth.
Fig.48: Standalonerevenuestoreport22.8%revenue Fig.49: Standalonebusinessmarginprofiletoimprove
CAGRduringFY1820
20,000 30% 10%
25.1% 9.1%
24.3% 8.5% 8.7%
18,000 25% 9% 8.2%
21.4%
7.7%
16,000 8%
16.9% 20% 6.9%
14,000 7%
15% 5.8%
12,000 6%
9.5% 4.9% 4.9% 5.2%
10,000 10% 5% 4.6% 4.6%
8,000 7.2% 2.8% 5% 4% 3.6%
2.9%
6,000
7,120

3%
0%
4,000
11,726

14,570

17,689

2%
7,318

8,017

9,372

2,000 5%
1%
0 10% 0%
FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY14A FY15A FY16A FY17A FY18E FY19E FY20E
StandaloneRevenues(Rsmn) yoygrowth(%) EBITDA% PAT%

Source:IEL,IndiaNiveshInstitutionalResearch Source:IEL,IndiaNiveshInstitutionalResearch

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SectorReport|WaterIndustry

Weexpectthestandalonebusinesstoreport22.8%revenueCAGRduringFY1820,
reflecting(1)RevenuecontributionfromtheSRLproject,and(2)commencementof
operationsinthePharmaResinsandMembraneplant.
During FY1117, IEL witnessed continuous improvement in its EBITDA margins,
whichhaveexpandedfromthelowsof4.2%inFY11to8.5%inFY17.ThisEBITDA
margin expansion is attributed to (1) capacity additions and shift in mix towards
higherrealizationfromChemicalssegment,(2)executionofhighmargincontracts
fromengineeringsegment.
We expect IEL to report 86 bps EBITDA margin improvement during FY1820 to
9.1%,mainlydrivenbysharpimprovementinEngineeringsegmentmargins(from
6.4%inFY17to7.4%inFY20).Weexpectthestandalonebusinesstoreport29.8%
PAT CAGR during FY1820, reflecting (1) strong 29.1% EBITDA CAGR, (2) 11.4%
depreciation CAGR (expect Rs 260270 mn of capex during FY1920), and (3) just
15.6%CAGRinfinancecosts.

Subsidiariesperformancetomarginallyimprove
Performance of domestic as well as International subsidiaries has been a drag on
theoverallprofitabilityofIEL.Allsubsidiariesputtogetherreported3.5%negative
revenue CAGR during FY1417. Capex deferment in domestic Industrial segment
(Power,SteelandPetrochemicalsectors),Bangladesh,SouthEastAsianMarketsled
to such poor performance. Also, operational inefficiencies at few subsidiaries,
contributedtooperationallosses.
(1)Implementationofnewlawsinthedomesticmarkets,(2)uptickinspendingby
Bangladesh Textiles industry, and (3) better outlook in South East Asia markets,
coupled with cost optimization initiatives at some of the subsidiaries, indicate
improvedperformancefromthesubsidiariesinthefuture.

SnapshotofConsolidatedFinancials
IEL derived 91.5% of FY17 consolidated revenues from Standalone business. Also,
IELderived32%ofitsFY17consolidatedrevenuesfromoutsideIndia(majorityofit
beingfromtheEngineeringsegment).

Fig.50: EngineeringSegmentaccountsfor60%ofFY17 Fig.51: Indiabusinessaccountsfor68%ofFY17
Consolidatedrevenues Consolidatedrevenues
Consumer
Products
10%

RestofWorld
32%

Chemicals
30% Engineering
60% India
68%


Source:IEL,IndiaNiveshInstitutionalResearch Source:IEL,IndiaNiveshInstitutionalResearch

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SectorReport|WaterIndustry

Expect21.6%revenueCAGRduringFY1820
3.5%negativerevenueCAGRfromthesubsidiariesduringFY1417restrictedconsol.
revenue growth. IEL reported 8.9% consolidated revenue CAGR during FY1417.
Segmentwise,Engineering&Chemicalssegmentreported9.8%and8.1%revenue
CAGR, respectively during FY1417. Changing regulatory landscape and
implementationofgovernmentschemes(AMRUTandNamamiGanga),shouldlead
toimprovementindomesticWaterTreatmentindustryawardingenvironment.This
coupled with rampup in execution of Sri Lanka project, should help Engineering
segmentreport27.0%revenueCAGRduringFY1820toRs12.7bn.Commencement
of revenue booking from the new Pharma Resins plant (enjoys higher realization
thancurrentbusiness),shouldhelpChemicalssegmentreport13.9%revenueCAGR
duringFY1820.IELisalsopresentinConsumerssegment,whereitprovidesWater
purifiers under the brand name, Zero B. Water Purifiers are sold to residential/
hospitals/hotels.Inthisspace,IELcompeteswithEurekaForbes,HLL,Kent&other
smallerWaterPurificationplayers.IELfocusesonthestrategyoftargetingmarkets
with lower price point (i.e. Tier II & III markets). This segment reported 6.9%
revenue CAGR during FY1417. Increase in consumer awareness, despite high
competition should help Consumers segment report 7.9% revenue CAGR during
FY1820.

Fig.52: Consol.segmentalrevenuemovementonyoybasis Fig.53: Consol.revenuestoreport21.6%revenueCAGR


40% 20,000 30%
22% 18,169
18,000 20% 21%
19% 18%
30% 16,000 15,060 20%
14,000 12,296
20% 12,000 10%
10,241
10,000 8,711
7,930
10% 7,318
8,000 0%
8%
6,000
0% 4,000 10%
FY14A FY15A FY16A FY17A FY18E FY19E FY20E 8%
2,000
10%
0 20%
EngineeringSegmentyoygrowth(%) FY14A FY15A FY16A FY17A FY18E FY19E FY20E
ChemicalsSegmentyoygrowth(%)
20% ConsumersSegmentyoygrowth(%) ConsolidatedRevenues(Rsmn) yoygrowth(%)

Source:IEL,IndiaNiveshInstitutionalResearch Source:IEL,IndiaNiveshInstitutionalResearch


Fig.54: SegmentalEBITDAmarginsmovement Fig.55: EBITDA/PATmarginstoexpandbyFY20
25% 9% 8.4% 8.5%
8.1%
19.5% 20.1% 7.6%
19.1% 18.9% 8%
20% 17.9%
7% 6.4%
15% 6%
5%
10%
5.9% 6.8% 7.0%
5.0% 4% 3.4%
5% 3.4% 2.8% 3.0% 3.2%
3%
1.8%
0% 2%
FY16A FY17A FY18E FY19E FY20E 1%
5% 3.0% 3.0% 3.0% 3.0%
3.9% 0%
FY16A FY17A FY18E FY19E FY20E
10%
Engineering Chemicals Consumer EBITDAMargin PATMargin

Source:IEL,IndiaNiveshInstitutionalResearch Source:IEL,IndiaNiveshInstitutionalResearch

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SectorReport|WaterIndustry

TractioninEngineeringandChemicalssegment,shouldhelpconsol.businessreport
21.6%revenueCAGRduringFY1820.

ConsolidatedEBITDA/PATmarginstoexpandto8.5%/3.4%byFY20
WeexpectIELtoreport40bpsEBITDAmarginexpansionduringFY1820,owingto
shiftinbusinessmixtowardshighmarginSRLproject,andtherevenuecontribution
kickingin from the Pharma Resins plant. Inline with EBITDA margin movements,
PATmarginsarelikelytoexpandfrom3.0%inFY18to3.4%inFY20.

StrongpotentialforCashfromOperationstobegenerated,RoEtoexpand
If we look in to segment details, then both, Engineering and Chemicals division
enjoynegativetoshortworkingcapitalcycle.Asaresult,IELsnetWorkingCapital
cycleatFY17endstoodatnegative17days.IELinFY17endreceivedRs1.8bnas
advancesfromcustomer(almost10%ofSRLprojectcost).Onconsideringprudent
capitalmanagement,weexpectWCcycletoimprovefromnegative13daysinFY17
tonegative18daysbyFY20.
Despitestronggrowthinprofitability,adjustmentofadvancefromtheSRLproject
on rampup in execution should restrict Cash generated from Operations to Rs
97mnandRs21mninFY19andFY20,respectively.

Fig.56: WCmovement(indays) Fig.57: Consol.CashfromOperations(Rsmn)toturn
positiveduringFY1920
5 2,000 1,840
1
IncludesRs1.8bnof
0 Advancereceivedfor
FY12A FY13A FY14A FY15A FY16A FY17A FY18E FY19E FY20E theSRLproject
1,500
(5)

(10)
1,000
(15) (13)
(17) (16) 498
(20) (18) (18) 453
500 311
(25) 145
(24) 52 97
21
(30) 0
FY12A FY13A FY14A FY15A FY16A FY17A FY18E FY19E FY20E
(35) (33)
(34) (106)
(40) (500)


Source:IEL,IndiaNiveshInstitutionalResearch Source:IEL,IndiaNiveshInstitutionalResearch

Risks&Concern
AnyexecutiondelaysoftheSRLorderwouldaffectourestimates.

Anyunfavourableforexmovementcouldaffectthecompanysfinancials.


Valuation
AttheCMPofRs454,IELstockistradingat13.7xFY18Eand10.8xFY19EEPS.IEL
stock in last six years has traded at 1year forward P/E multiple median of 14.9x.
During FY1117, IEL reported 9.1% revenue and 21.4% PAT CAGR, respectively.
RoEsimprovedfromlowsof9.5%inFY11to14.5%inFY17,mainlydrivenbynet
marginexpansion.

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SectorReport|WaterIndustry

OnconsideringrampupinexecutionoftheSRLorder,contributionof2newplants
and improved industry outlook, we expect IEL to report 21.6% revenue CAGR
during, FY1820. Completion of low value, low margin Engineering projects, SRL
project contribution (enjoys high margins than the ongoing Engineering projects)
shouldhelpIELreport24.6%EBITDACAGRduringFY1820,respectively.Unlevered
balancesheet,andstrongEBITDAgrowth,shouldhelpIELreport29.9%PATCAGR
duringFY1820,respectively.Netmarginexpansion,shouldhelpIELreportfurther
RoEexpansion(from16.3%inFY18to19.0%inFY20).
Onthebackofstrongearningsoutlook,goingforward,weexpectIELstocktotrade
atpremiumtoitshistorical1yearforwardMedianP/Eband.Accordingly,weassign
16.4x(10%premiumtolast6yearsmedianP/E)toaverageofourFY19andFY20
EPS estimates, to arrive at price target of Rs 616. Given the 35.8% upside, we
initiateonIELstockwithBUYrating.


AbouttheCompany
Formed in 1964, IEL is one of the leading players in Industrial Water and Waste
WaterTreatmentspace,providingendtoendWaterSolutionstolargeIndustries.
The company was formed as subsidiary of Permutit (U.K) to become a wholly
ownedIndianentityin1985whenPermutitdivesteditsholding.
IEL is one of the few players to be present across entire Water Solutions value
chain,includingEngineering,ChemicalandConsumersegments.Withinengineering
space,IELconstructsWater/WasteWaterTreatment&Recyclingplants(ticketsize
of Rs 200250mn). IEL also takes up Operations & Maintenance works of these
plants.
Fig.58: ApplicationofWatertreatmentChemicals
Sector Application
Refinery Toimprovetheunitrunlengthandprotectsystems.
Utilizeslargequantitiesofwatertoseparateandrecovervaluableminerals,wherepolyelectrolytesassistintheseparationofsolidparticles
Metals&Minerals
fromaqueoussuspensions.
Paper ProcessChemicaladditivesthatimpartsuperiorqualitiestoPapersuchasthickness,brightnessandstrength.
Sugar IELshighmolecularweightpolyelectrolytesofapprovedqualityareusedinsugarjuiceclarification.Allleadingtoimprovedsugarrecovery
NewminingtechniquesresultinfineCoalparticles.FlocculantsareusedincreasinglytorecoverCoalfromtailingsasasettingaidorby
Coal filtration/centrifugationbydewateringmethods.GiventhelargequantumofWaterusedatWasheries,recyclingofwaterisdoneusing
Polyelectrolytes.
Highperformancepolymersareusedacrossindustryproductiondrilling,coredrilling,watershutoff,mobilitycontrol,Fracturing,work
OilFieldServices
overs,completions,solidsremoval,shaleinhibition,producedfluidtreatmentandincertainEOR(enhancedoilrecovery)techniques.
Source:IEL,IndiaNiveshInstitutionalResearch

In FY16, IEL entered bigleague, whenit bagged its first large ticket Water Supply
contractfromSriLankaWaterBoard,worth$194mn(approximatelyRs12bn)after
competingagainstlargerplayerslike,Wabag,Veolia.
IELhasstrongmarketpositioningwithinIndustrialChemicals(usedtotreatWater
across Industrial processes and systems) and Resins space. IEL competes with
Chembond and other smaller players. IELs chemicals have wide range of
application,includingforEffluent,BoilerandCoolingWatertreatmentpurposes.
Lastly, IEL sells Water Purifiers under brand name Zero B competes with Eureka
Forbes,HLL,Kent&otherRetailWaterPurificationplayers.
IEL has 6 stateoftheart Manufacturing and Assembly facilities across 5 states in
IndiaandoneeachinUAEandBahraintocatertoMiddleEastAsia(MEA)markets.
IELhas2inhouseR&Dfacilities,oneeachforChemicals(atPatancheru,Telengana)
andEngineeredProducts(atVashi,Mumbai).IELclaimstohave50+Patentstoits

IndiaNiveshSecuritiesLtd 04Dec2017 26 of43




SectorReport|WaterIndustry

creditand100+Productscommercialized,whichcouldhelpitexpanditsfootprint
acrosstheglobe.
Fig.59:Plantlocationdetails
Plantlocation Product Certifications Manufacture/Makes
Ankleshwar,Gujarat Resins ISO9001&14001,USFDA ResinsforWaterTreatment,SpecialtyApplications,PharmagradeResins
PackagedWasteWater Fabrication,AssemblyofpredesignedpackagedandpreengineeredWater
Hosur,TamilNadu ISO9001
Plant andWastewaterTreatmentPlants
Patancheru,
Chemicals ISO9001,14001,OHSAS18001 Polyelectrolytes,SpecialtyprocessChemicals,FiresideandFueladditives
Telengana
Rabale,Maharashtra Assembly&Testingplant ISO9001 SkidmountedAssemblyandTestingofCustombuiltPlantsbeforeshipment
Verna,Goa Membranes ISO9001 Membrane,MembraneproductsandSystemsforDrinkingWaterapplications
FRP(HLP)HandLayUp&FRP(FW)FilamentWindingproducts,RO&UF
Wada,Maharashtra Pressuretubes&Vessels ISO9001
PressureTubesandCompositePressureVessels
AssemblyandtestingofSkidmounted,CustombuiltWaterandWastewater
Sharjah,UAE Assembly&Testingplant
TreatmentPlants
Bahrain Chemical Chemicalblendingplant,servesasexporthubforNorthArabia
Source:IEL,IndiaNiveshInstitutionalResearch

ExperiencedManagementTeam
IELhasmixaofyoung,experiencedmanagementteamfromdiversebackgrounds.

Fig.60: Managementteamdetails
IndustryExp. Age
ManagementTeam Designation Profile
(inyrs.) (inyrs.)
Has been with IEL since 1974. Since then he has worked in different Sales,
ExecutiveChairman&
RajeshSharma 31 63 MarketingandManagementpositionsatIEL.HehasbeentheManagingDirector
ManagingDirector
ofIELsinceApr2000.HehasdoneB.Sc.andLLB.
He has served as the Director from Jan2006 to Apr 2009. Thereafter, he has
been the Executive Director of IEL since Apr2009. He is also the Chairman of
DineshSharma ExecutiveDirector 22 53 UltrapureTechnology&AppliancesIndiaLtdspecializedin themanufactureand
marketing of Kitchen Appliances. He also sits on board of other companies. He
hasdonehisB.Sc.
HehasdonehisB.Com,ACA,CISA.HehasbeenservingastheAdditionalDirector
AankurPatni ExecutiveDirector 15 46
ofIELsinceJan2006.
HehasbeentheNonExecutive&IndependentDirectorofIELsinceJul1995.He
NonExecutive, is a Civil and Structural Engineer with B.E. (Civil) from Bombay University and
VNGupchup 52 80
IndependentDirector M.Sc. & Doctor of Science in Civil Engineering, from Massachusetts Institute of
Technology(MIT),USA.
MPPatni NonExecutiveDirector 38 72 HehasbeentheNonExecutiveDirectorofIELsinceSep2001.
Mr.NambiarhasdonehisB.ComandACA.Currently,servesasthePresident of
NonExecutive,
TNambiar 40 80 Cement Manufacturers' Association (CMA). He has 40 years of total experience
IndependentDirector
(27ofthemarewithACC)invariouscapacities.
HehasheldSeniorpositionsTajGroupofHotels,GrandHyatt,OberoiHotelsand
NonExecutive, servedinothercapacitiesatGlaxoandGreatEasternShipping.Hehasbeenthe
SampathKumar 41 79
IndependentDirector NonExecutive & Independent Director of IEL since Mar2005. He is a Marine
EngineerandCharteredEngineer,U.K.
Source:IEL,IndiaNiveshInstitutionalResearch

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SectorReport|WaterIndustry

Fig.61:IncomeStatement(Consolidated)
YEMarch(Rsm) FY16 FY17 FY18E FY19E FY20E
NetSales 8,711 10,241 12,296 15,060 18,169
Growth(%) 18 20 22 21
OperatingExpenses 8,154 9,465 11,302 13,798 16,626
OperatingProfit 557 776 995 1,261 1,543
OtherOperatingIncome 0 0 0 0 0
EBITDA 557 776 995 1,261 1,543
Growth(%) 39 28 27 22
Depreciation 126 133 156 174 189
OtherIncome 65 58 60 62 65
EBIT 496 700 899 1,150 1,419
FinanceCost 149 163 192 222 239
ExceptionalItem 0 0 0 0 0
Profitbeforetax 346 537 707 928 1,179
Tax(current+deferred) 177 251 332 436 554
Profit/(Loss)fortheperiod 169 287 375 492 625
Associates,Minint (16) (3) (9) (7) (7)
Reportednetprofit 153 284 366 485 618
ExtraordinaryItem 0 0 0 0 0
AdjustedNetProfit 153 284 366 485 618
Growth(%) 85 29 32 27
Source:IEL,IndiaNiveshInstitutionalResearch

Fig.62:BalanceSheet(Consolidated)
YEMarch(Rsm) FY16 FY17 FY18E FY19E FY20E
ShareCapital 141 142 142 142 142
Reserves&Surplus 1,560 1,837 2,152 2,582 3,140
NetWorth 1,701 1,979 2,294 2,724 3,282
MinorityInterest 62 63 71 79 87
TotalLiabilities 5,397 8,002 8,544 9,428 10,174
NoncurrentLiabilities 531 584 651 771 891
Longtermborrowings 230 299 350 450 550
Deferredtaxliabilities 44 41 41 41 41
OtherLongtermliabilities 128 126 135 145 155
Longtermprovisions 129 118 125 135 145
CurrentLiabilities 4,866 7,418 7,893 8,657 9,283
Shorttermborrowings 567 608 750 800 750
TradePayables 3,314 3,960 4,687 5,849 7,115
OtherCurrentLiabilities 781 2,650 2,220 1,720 1,070
Shorttermprovisions 204 201 236 289 348
TotalLiabilitiesandEquity 7,160 10,045 10,909 12,232 13,543

NonCurrentAssets 1,888 2,210 2,310 2,485 2,663
NetBlock 1,050 1,453 1,443 1,465 1,511
Goodwill 0 0 0 0 0
NoncurrentInvestments 24 29 29 29 29
LongtermLoansandAdvances 543 453 550 650 720
DeferredtaxAssets 8 9 9 9 9
OthernoncurrentAssets 263 266 280 332 394
CurrentAssets 5,272 7,835 8,599 9,747 10,880
Inventories 813 1,109 1,280 1,609 1,941
SundryDebtors 3,630 4,405 5,249 6,232 7,424
Cash&BankBalances 334 1,669 1,385 1,175 728
OthercurrentAssets 5 5 5 6 6
Loans&Advances 489 646 680 725 780
TotalAssets 7,160 10,045 10,909 12,232 13,543
Source:IEL,IndiaNiveshInstitutionalResearch

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SectorReport|WaterIndustry

Fig.63:CashFlowStatement(Consolidated)
YEMarch(Rsm) FY16 FY17 FY18E FY19E FY20E
Profitbeforetax 346 537 707 928 1,179
Depreciation 126 133 156 174 189
ChangeinWorkingCapital 23 1,182 (811) (775) (1,017)
Totaltaxpaid (144) (241) (332) (436) (554)
Others(inc.InterestIncome) 148 228 175 207 224
CashFlowfromOperations(a) 498 1,839 (106) 97 21
Capitalexpenditure (299) (440) (146) (196) (235)
Changeininvestments 0 0 0 0 0
Others 0 0 0 0 0
CashFlowfromInvesting(b) (299) (440) (146) (196) (235)
Freecashflow(a+capex) 199 1,399 (251) (99) (214)
Equityraised/(repaid)/(buyback) 2 10 0 0 0
Debtraised/(repaid) 31 138 194 150 50
Dividend(incl.tax) (64) (57) (51) (55) (60)
Others (136) (142) (192) (222) (239)
CashFlowfromfinancing(c) (167) (51) (50) (127) (249)
Netchangeincash(a+b+c) 33 1,349 (301) (226) (463)
Reconciliationofotherbalances 0 (13) 16 16 16
CashasperBalanceSheet 334 1,669 1,385 1,175 728
Source:IEL,IndiaNiveshInstitutionalResearch

Fig.64:KeyRatios(Consolidated)
YEMarch FY16 FY17 FY18E FY19E FY20E
AdjustedEPS(Rs) 10.6 19.9 25.0 33.1 42.1
Growth(%) NA 88 25 32 27
Dividend/share(Rs) 3.0 0.0 3.0 3.2 3.5
Dividendpayoutratio 28.3 0.1 12.0 9.7 8.3
EBITDAmargin 6.4 7.6 8.1 8.4 8.5
EBITmargin 5.7 6.8 7.3 7.6 7.8
Netmargin 1.9 2.8 3.0 3.3 3.4
Taxrate(%) 51.1 46.7 47.0 47.0 47.0
Debt/Equity(x) 0.5 0.5 0.5 0.5 0.4
Inventorydays 34 40 38 39 39
SundryDebtordays 163 166 164 159 157
TradePayabledays 230 223 215 214 214
DuPontAnalysisROE
Netmargin 1.9 2.8 3.0 3.3 3.4
Assetturnover(x) 1.2 1.2 1.2 1.3 1.4
Leveragefactor(x) 4.1 4.3 4.6 4.2 3.9
ROE(%) 10.0 14.5 16.3 18.1 19.0
ROCE(%) 17.9 23.0 25.7 28.2 30.2
Valuation(x)
PER 42.7 22.8 18.2 13.7 10.8
Price/Book 3.8 3.3 2.8 2.4 2.0
EV/EBITDA 10.2 7.3 5.7 4.5 3.7
Note:NANotApplicable;Source:IEL,IndiaNiveshInstitutionalResearch



IndiaNiveshSecuritiesLtd 04Dec2017 29 of43




SectorReport|WaterIndustry
VATechWabagLtd.
INSTITUTIONALEQUITIES Leaderwiththetechnologyedge

Current WeinitiateonVATechWabag(Wabag)withACCUMULATEratingandpricetarget
CMPRs595 of Rs 642, implying 7.9%upside. Ourpositive view on the stock is basedon (1)
RatingACCUMULATE OB/LTM sales ratio of 2.35x, coupled with uptick in awarding momentum, (2)
strongtoplineandPATCAGRof6.8%and13.8%,respectivelyoverFY1820E,(3)
TargetRs642
(CMPasonDecember04,2017closing)
unlevered balance sheet with net D/E ratio of 0.3x, and (4) RoE expansion to
STOCKINFO 15.9%byFY20.
INDEX
BSE 533269 InvestmentRationale
NSE WABAG
Wabag has presence in 15+ Asian countries, including Sri Lanka, Philippines,
Bloomberg VATWIN
Reuters VATE.BO MalaysiaandVietnam,whichportrayfavorableawardingoutlookinthewater
Sector Water treatmentspace.GovernmentinitiativetocleanGangaandimplementationof
FaceValue(Rs) 2 strictpollutionnormssuggeststrongawardingoutlookinthedomesticmarket.
EquityCapital(Rsmn) 109 ThiscoupledwithWabagsstrategytoenternewgeographieswithhighgrowth
MktCap(Rsmn) 32,503 potential, and a model entailing project funding by multilateral agencies
52wH/L(Rs) 750/450 comfortusonstronggrowthprospectswithminimalrisks.
AvgDailyVol(BSE+NSE) 138,914
Wabag has an asset light business as it outsources the civil & construction
SHAREHOLDINGPATTERN % works and focuses on project management and technology aspects of the
(asonSep,2017)
project. With working capital cycle peaking at 107 days and cash flow
Promoters 24.72
generatingpotentialfrombusinessestimatedat~Rs5.5bnduringFY1820,we
Public&Others 75.28
seeminimaldebtrequirementstofundgrowth.ConsolidatedD/Eratioislikely
STOCKPERFORMANCE(%) 3m 6m 12m to be capped at 0.3x during FY1820. With such strong cash flows getting
VATechWabag (2.3) (11.4) 20.5 generated from business, we see Wabag well placed to fund its equity
SENSEX 3.7 5.1 25.3 requirementstowardsHAMordersunderNamamiGangeproject.
Source:Bloomberg,IndiaNiveshInstitutionalResearch


VATechWabagv/sSENSEX
Risks&Concerns
Equitydilution,unfavorableforexmovement,delaysinmunicipalawarding.

Valuation
At CMP of Rs 595, Wabag is trading at 18.6x FY19E EPS and 15.1x FY20E EPS,
respectively. Given the favorable business outlook, we expect Wabag to report a
toplineandPATCAGRof6.8%&13.8%,respectively,duringFY1820.Onassigning
Source:Bloomberg,IndiaNiveshInstitutionalResearch atargetmultipleof18.0xtotheaverageofourFY19andFY20EPSestimates(atpar

withlast6yearsmedianP/Emultiple),wearriveatapricetargetofRs642.Given
the 7.9% potential upside from CMP, we initiate coverage on Wabag stock with
ACCUMULATErating.




Fig.65:FinancialPerformance
Y/EMarch Adj.EPS EBITDA Adj.P/E EV/EBITD
NetSales EBITDA RoE(%)
(Rsmn) (Rs) Margin (x) A(x)
FY16 25,083 2,330 16.3 9.3 9.7 36.5 14.0
FY17 32,079 2,966 18.8 9.2 10.7 31.7 11.1
FY18E 38,035 3,562 30.4 9.4 15.5 19.6 9.1
FY19E 38,211 3,622 32.1 9.5 14.4 18.6 8.5
FY20E 43,379 4,176 39.4 9.6 15.9 15.1 7.3
Source:VATechWabag,IndiaNiveshInstitutionalResearch

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SectorReport|WaterIndustry

InvestmentRationale
Tobenefitfromwidegeographicalpresence
We are of the view that it takes 510 years for Water Treatment project (non
industrialsegment)awardingcycletomatureinanEmergingeconomy.Wabaghas
a long list of reference projects in amatureEuropean Water Treatmentindustry.
Accordingly, in the last few years, Wabag started entering new geographies
(MiddleEast,AsiaandAfricancountries),whichhavelongtermgrowthpotential.
ThisstrategytogeographicallydiversifywouldhelpWabagreduceitsdependence
on European markets (share of Austria consolidated revenues to total revenues
woulddeclinefrom44.9%inFY11to20.3%inFY20E).
Few countries where Wabag has been successfully able to penetrate themarkets
include Turkey, Tunisia, Oman, Philippines, Namibia, Nepal, Bahrain, Malaysia
amongst other smaller countries. Wabag in order to mitigate market entry risk
ensures that (1) it tiesup with a local Engineering player, and (2) the project is
fundedbyamultilateralfundingagency(likeJICA,ADB,&EXIMamongstothers).
Thereafterongainingexposureinagivenmarket,Wabagsubsequentlystartstaking
upprojectsonitsown.Thisstrategyhelpsinavoidingexecutionandpaymentrisks.

Fig.66: Emergingeconomiesreportstrongrevenuegrowth Fig.67: SouthEastAsianeconomiesseemaximumgrowth


100% 100%

27% 26%
31% 37% 34% 80%
80% 38% 43%
45% 52% 48%
60%
73% 70%
60% 18% 60% 29%
13% 38%
7% 24% 32%
21%
40% 40%
30% 42% 23%
49% 51% 49% 10%
20% 20% 45%
36% 39% 35% 34% 16%
20% 18% 17%
10% 10%
0% 0%
FY11A FY12A FY13A FY14A FY15A FY16A FY17A FY12A FY13A FY14A FY15A FY16A FY17A

Domestic Asia(Consol.) Austria(Consol.) MEA SEAsia Others

Source:VATechWabag,IndiaNiveshInstitutionalResearch Source:VATechWabag,IndiaNiveshInstitutionalResearch

InOman,Wabagformed2separateJVswithNCCandZawawiTrading.TheRs1.7bn
project from Majis Industrial Services along with JV partner NCC is completely
executed.JVpartnershipwithZawawihasseenthebusinessgrowingover5xduring
FY1217.SimilarlyWabagbaggedRs3.4bnorderthroughJVroutefromPhilippines
in Jul2013. During FY201317, Wabag has grown its revenues over 4.0x from the
Philippines (from Rs 220mn in FY13 to Rs 1,004mn in FY17) market. Wabag is
currently reaping benefits of entering the Sri Lanka, Philippines, Oman, Turkey,
Nepalmarketsalmost5yearsback.
Inlast23years,Wabaghasenteredthenewgeographieslike,Malaysia,Vietnam,
and Ecuador markets through the JV route. Wabag is executing pilot projects in
these countries, which offer huge market opportunity. Going forward, we expect
geographical strategy to help Wabag reduce business dependency on any one
countryandalso,insulatethebusinessfromanyslowdowninonemarket.
BeneficiaryofstrongawardingoutlookindomesticandAsianmarkets
(1) Fast changing regulatory environment (roll out of new CPCB norms), (2)
IncreasedawarenessandstrongbidpipelineacrossMunicipalities,and(3)Uptickin

IndiaNiveshSecuritiesLtd 04Dec2017 31 of43




SectorReport|WaterIndustry

awarding from Namami Gange, indicates that good times are ahead for Water
Treatment industry. Being one of the largest players in domestic markets, we
expectWabagtobenefitthemost.
In order to maintain financial discipline, management has indicated that it would
participate in opportunities emerging from Tier1 cities only. Strong tendering
pipelineofWTPs/DesalinationplantsseenacrossTierIcities(Chennai,Bangalore,
Mumbai) bodes well for the company. With increased visibility on funding for
Namami Gange being tiedup, we expect the awarding momentum to catchup
fromhereon.
Also, we are of view that Wabag stands a strong chance of reporting order wins
fromSriLanka,Philippines,Thailand,Vietnammarketsinthenext13years.

Continuestoleverageonitstechnologycapabilities
WABAG over the years has added 100+ global technology patents. Wabag has
establishedR&DcentresinWinterthur(Switzerland),Vienna(Austria)andChennai
(India), which drive the technologyup gradation, thereby helping to take up
complexprojectsanddeliverthemontime.

Fig.68:WabagstechnologyportfolioacrossSubverticals
Segment Technologies
ActivatedSludgeProcess(ASP)|UpflowAnaerobicSludgeBlanket
Reactor(UASB)|SequentialBatchReactors(SBR)BioActiveFixedFilm
SewageWaterTreatment Technology(BAFF)|MembraneBioReactor(MBR)|Submerged
MembraneSystem|MembraneBedBioReactor(MBBR)|
StabilizationPond
Aeration|Disinfection|Sedimentation|SludgeDewatering
DrinkingWaterTreatment
Filtration
Rawwaterpretreatment|ThermalDesalinationofseawater
IndustrialWater treatment|FiltrationPlants|Demineralization|
Treatment NanoFiltration/Ultrafiltration|ZeroLiquidDischarge|
SofteningPlants|TertiaryTreatmentSystem/EffluentRecycling
PhysicoChemicalTreatmentOilRemovalsystemusingDAF/API/CPI
IndustrialWastewater separators|Neutralizationandprimarysedimentationandgrit
Treatment removal|BiologicalanaerobictreatmentUASB|TertiaryTreatment
activatedcarbon/sandfiltration,disinfection
MultiStageFlash|MechanicalVaporCompression|Multieffect
Desalination Distillation|ReverseOsmosisandElectrodialysis|
ThermalVaporCompression
Recycling Microfiltration|MembraneBioReactors
Source:VATechWabag,IndiaNiveshInstitutionalResearch

Water Treatment industry sees emergence of new technologies once every 45


yearsandnoplayercanmaintainedgeunlessitregularlyupdatesitstechnologies.
WeidentifythatWabagispresentacrosstechnologieswithhighgrowthpotential,
like, Thermal Desalination, Membrane Filtration, Electrodialysis (as per Industry
reports,thesetechnologieshave>15%yearlygrowthpotential).Wabagcontinues
to maintain strong holdover the technologies which have very high demand, like
ReverseOsmosisMunicipal,MembraneBioreactor(MBR)andotherIonExchange
Technologies. Wabag is also built executioncapabilities across nano technologies,
which are the nextgen technologies and have a long way to go. On a whole, we
sense that the company is fairly positioned across the water technology value
chain.

IndiaNiveshSecuritiesLtd 04Dec2017 32 of43




SectorReport|WaterIndustry

RisingorderbookcontributionofthehighmarginO&Mbusiness
Inthelastfewyears,thecompanyhasbuiltinawiderangeofcapabilitiestospread
itswingsacrossgeographiesintheoperationsandmaintenance(O&M)space.The
O&M division is well positioned to take projects irrespective of the technology
deployed.
In FY09, the O&M vertical contributed 9.5% of the total order book andits share
has now increased to 16.1% as of FY17. We expect further surge in the verticals
contribution, going forward. Apart from the high margins, this business provides
certainty of midtolong term cash inflows, thereby derisking companys growth
outlooktoanextent.

Assetlightmodelofferscomfortonthegrowthprospects
One of the key reasons for Wabags longterm growth is its Asset light business
model.AspartofthisstrategyWabagdoesinhousedesign,technologyaspectsand
projectmanagementandoutsourcesthecivilandconstructionworks.Thisstrategy
hasalsohelpedWabagmakequickentryandexitfromagivenmarketwithminimal
losses/damage.

Fig.69: Businessareas&theiradvantages
Inhouse

Design&Engineering Costoptimization
Matchcustomerrequirements

Inhouse
Compliancewithdesigns
Technology
Proprietary&BoughtoutTechnology
Testing,QualityControl
Mostlyoutsourced
CivilConstruction
Allowstofocusoncorecompetencies
Inhouse
Operation&Maintenance HighPlantOperationEfficiency
LeastDowntime
Source:VATechWabag,IndiaNiveshInstitutionalResearch

Withworkingcapitalcyclepeakingat107daysandcashflowgeneratingpotential
from business estimated at ~Rs 5.5bn during FY1820, we see minimal debt
requirementstofundgrowth.ConsolidatedD/Eratioislikelytobecappedat0.3x
during FY1820. With such strongcash flows getting generated from business, we
seeWabagwellplacedtofunditsequityrequirementstowardsHAMordersunder
NamamiGangeproject.

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SectorReport|WaterIndustry

UnderstandingtheFinancials
Orderinflowstoreport13.0%CAGRduringFY1820
Wabag is looked upon as an Engineering player in Water treatment space, with
majority of its business from Municipal segment. Wabags dependency on
Municipalsegmentinrecentyearsisdeclining(shareofthesegmentintotalOrder
Inflows declined from 73.0% in FY14 to 52.3% in FY17). On the other hand, the
contribution of the Indian cluster in total order inflows which had been in 51.1
54.6%rangeduringFY1416,hasrisento83.9%inFY17.Notably,withintheIndian
cluster,majorportionoforderinflowswerefromoutofIndia.Waterscarcityissues
in metro cities, rollout of Namami Ganga plan, and implementation of stringent
pollutionnormsshoulddriveawardingenvironmentinIndianmarkets.Weexpect
theIndianclustertocontribute~74%oftotalorderinflowsduringFY1820.
During8mFY18,Wabaghasreportedonly28%ofthetargetedRs43bnofprojects
awarded. Given the strong bid pipeline, we are optimistic that Wabag should be
abletoattainitsOrderInflowguidanceforFY18.Accordingly,weexpectWabagto
report13.0%orderinflowCAGRduringFY1820(versus2.6%CAGRpostedduring
FY1417).

Fig.70: Indianclustertocontribute74%oftotalOrder Fig.71: Municipalitiestocontribute~55%ofFY1820Order
InflowsduringFY1820 Inflows
100% 100%
16
24 26 29 27
80% 80% 41 40 45 44
49 45 45 48 47

60% 60%

40% 84 40%
77 75 72 73
55 55 59 60 56 57
51 52 54
20% 20%

0% 0%
FY14A FY15A FY16A FY17A FY18E FY19E FY20E FY14A FY15A FY16A FY17A FY18E FY19E FY20E
India Overseas Municipality Industrial

Source:VATechWabag,IndiaNiveshInstitutionalResearch Source:VATechWabag,IndiaNiveshInstitutionalResearch

We expect awarding from Indian Metro Municipalities, Namami Ganga (under


Indian cluster) to contribute ~6% of total order inflows during FY1820. Another
33% of the orderinflows (to be spread acrossIndia,Middle East and Asia) during
FY1820wouldbeaccountedbytheIndustrialsegmentoftheIndiancluster.
Fig.72: EPCtoaccountfor~85%ofFY1820OrderInflows Fig.73: OrderInflowstoreport13%CAGRduringFY1820
100% 70,000 73 80
15 11 16 16 16 16
32 60,000 60
80%
50,000 35
40
60% 19 18
40,000 15
20
89 30,000 11
40% 85 84 85 85 85
68 30 0
20,000
33,539

29,767

51,401

36,198

43,000

49,450

58,351

20% (20)
10,000

0% 0 (40)
FY14A FY15A FY16A FY17A FY18E FY19E FY20E FY14A FY15A FY16A FY17A FY18E FY19E FY20E
EPC O&M OrderInflows(Rsmn) yoychange(%)

Source:VATechWabag,IndiaNiveshInstitutionalResearch Source:VATechWabag,IndiaNiveshInstitutionalResearch

IndiaNiveshSecuritiesLtd 04Dec2017 34 of43




SectorReport|WaterIndustry

In terms of the overseas business, we expect Wabag to report majority of the


overseasorderwinsfromSouthAmericaandAfricanmarkets.

Orderbooktoreport11.2%CAGRduringFY1820
Wabagsstrongorderinflowscoupledwithuptickinprojectexecutionshouldhelp
generate 11.2% Order book CAGR during FY1820. Shift in order inflow mix in
favourofIndianclustershouldalsoleadtoashiftinorderbookmix(Indiancluster
toaccountfor70.8%oftheOrderBookduringFY1820).

Fig.74: Indianclustertoaccountfor~70%ofOrderBook Fig.75: OrderBooktoreport11.2%CAGRduringFY1820
duringFY1820

100% 120,000 4
3.3
32 29 27 100,000
80% 37 2.8 2.8
52 48 50 2.6 2.5 3
2.5
80,000 2.3
60%
60,000 2
40%
68 71 73 40,000
63

107,487
49 52 50 1

62,373

68,442

83,151

81,943

86,908

95,998
20% 20,000

0% 0 0
FY14A FY15A FY16A FY17A FY18E FY19E FY20E FY14A FY15A FY16A FY17A FY18E FY19E FY20E
Indian Overseas OrderBook(Rsmn) OB/LTMSales(x)

Source:VATechWabag,IndiaNiveshInstitutionalResearch Source:VATechWabag,IndiaNiveshInstitutionalResearch


Onthebackofstrongexecution,weexpecttheOB/LTMsalesratiotodeclinefrom
thepeaksof3.27xinFY16to2.48xinFY20.

Executionacrossprojectstocatchupfromhereon
Wabagissuccessfullyrealizingitsgeographicaldiversificationstrategywithrevenue
contribution of Asian subsidiaries having increased significantly from 1.9% in FY11
to 38.3% in FY17. At the same time, the Austrian (consolidated) business posted
2.2%revenueCAGRoverFY1417(sharetototalrevenuesdeclinedfrom42.9%in
FY14to27.4%inFY17).Increaseinawardingactivity,withWabagreportingmajor
orderwinshelpedtheDomesticbusinessreport12.5%revenueCAGRduringFY14
17. Going forward, we expect the contribution of domestic business to remain at
33.8%byFY20.Simultaneously,theshareofrevenuesfromAustria(consolidated)
woulddeclinefrom27.4%inFY17to20.3%inFY20.
During FY1417, Wabag on consolidated basis reported 12.7% revenue CAGR,
mainlydrivenby18.1%revenueCAGRintheWabagIndiaEPCsegment.Withfew
large orders getting completedin FY18, we expect Wabag to report strong 18.6%
yoyincreaseinFY18revenues.MajorityoftheorderinflowsforFY18(only28%of
the Rs 43 bn of guidance were reported in 1HFY18) are likely to be reported in
2HFY18(mostifitbeingbackended).Giventhattheseneworderwinswouldtake
atleast69monthsfromthen,tohittherevenuerecognitionmilestone,thereisa
strong chance that Wabag may report just 0.5% yoy revenue growth in FY19.
However, on considering 2HFY18 and FY19 order wins, coupled with traction in
executionofprojects,shouldhelpWabagreport13.5%yoyrevenuegrowthinFY20.
Onawhole,weexpectWabagtoreport6.8%revenueCAGRduringFY1820.

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SectorReport|WaterIndustry

Fig.76: RevenuemixmovementduringFY1720
FY2017 FY2018 FY2020

Austria Austria
Austria (Consol.)
(Consol.) Domestic
Domestic (Consol.) Domestic 20%
27% (onlyIndia) (onlyIndia)
(onlyIndia) 23%
34% 34% 34%

Asia
(Consol.)
Asia 43% Asia
(Consol.) (Consol.)
39% 46%


Source:VATechWabag,IndiaNiveshResearch

ConsolidatedEBITDAmarginstoexpandduringFY1820
Restructuring of business operations helped Wabag report expansion in its
consolidated EBITDA margins during FY0810 (sharp EBITDA expansion seen in
standalone business, which improved from 0.8% in FY08 to 12.1% in FY10).
Thereafter, the consol. EBITDA margins have hovered in 11.512.5% range during
FY1017(FY13beinganexception,whenmarginstouchedapeakof13.1%).

Fig.77: Employee&OtherExpensesas%ofsalesdeclined Fig.78: FY17EBITDAmarginmix
duringFY1417
12.0
Austria
9.9 (Consol.)
8.4 8.4 5%
9.0 8.2 8.3
7.6 7.5

5.8 Asia(Consol.)
6.0 4.7 4.9 27%
4.0 4.1 4.2 4.3

Standalone
3.0
68%

0.0
FY14A FY15A FY16A FY17A FY18E FY19E FY20E
EmployeeExp.as%ofsales OtherExp.as%ofsales

Source:VATechWabag,IndiaNiveshInstitutionalResearch Source:VATechWabag,IndiaNiveshInstitutionalResearch


FY17 standalone margins were impacted due to low contribution of high margin
O&Mbusiness.Currentorderbookgivesstrongvisibilityonrevenuebookingfrom
Municipal segment, which enjoys higher EBITDA margin. Accordingly, we expect
standaloneEBITDAmargintoexpandfrom11.2%inFY17to12.4%byFY20.
In last few years, Wabag restructured and streamlined its operations. As a result,
theirconsolidatedemployeeandotherexpensesasa%ofsalesdeclinedfromthe
highsofFY14,enablinganimprovementinEBITDAmarginto89.5%levels,asseen
in the last few years. FY17 consolidated margins were impacted due to lower
standalonemargins.Notwithstandinglowmarginprofileofinternationalbusiness,
weexpecttheconsolidatedEBITDAmarginstoexpandfrom9.2%inFY17to9.6%in
FY20supportedbyashiftinthemixinfavorofthehighmargindomesticbusiness.

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SectorReport|WaterIndustry

Fig.79: Consol.EBITDAmarginstoexpandto9.6%byFY20 Fig.80: EBITDAtoreport8.3%CAGRduringFY1820

14.0 13.1 4,500 27.3 30


12.2 12.5 12.4
12.1 11.9 12.1
11.5 11.2 4,000
12.0 22.4 25
9.6 3,500 20.1
9.5 9.3 9.2 9.3 9.5
10.0 9.0 18.4
8.4 8.6 3,000 20
8.0 15.3
2,500
15
2,000 11.1 11.2

3,622
6.0
1,500 10
4.0
1,000
5

1,540

1,885

2,095

2,330

2,966

3,562

4,176
2.0 1.7
500
0.0 0 0
FY12A FY13A FY14A FY15A FY16A FY17A FY18E FY19E FY20E FY13A FY14A FY15A FY16A FY17A FY18E FY19E FY20E
Standalone Consol. EBITDA(Rsmn) yoygrowth(%)

Source:VATechWabag,IndiaNiveshInstitutionalResearch Source:VATechWabag,IndiaNiveshInstitutionalResearch

InadditiontoEBITDAgrowth,lowercontributionfromMinorityInterestandShare
ofprofitfromJVs,shouldhelpWabagreport13.8%PATCAGRduringFY1820.

Fig.81: Consol.PATmarginstoexpandby60bpsto5.0%by Fig.82: PATtoreport13.8%CAGRduringFY1820
FY20
10.0 2,500 62.0 70
8.5
60
7.5 7.7 7.5 7.7 7.5
8.0 7.3 7.2 7.3 2,000 50
40
6.0 5.6 25.5 22.9
5.1 5.1 1,500 22.5 30
5.0
4.4 4.4 4.6 15.4
20
3.5 5.4
4.0 3.2 1,000 10
(4.4)
0
2.0 500 (18.1) 10
1,134

1,084

1,024

1,659

1,749

2,149
903

887

20
0.0 0 30
FY12A FY13A FY14A FY15A FY16A FY17A FY18E FY19E FY20E FY13A FY14A FY15A FY16A FY17A FY18E FY19E FY20E
Standalone Consol. PAT(Rsmn) yoygrowth(%)

Source:VATechWabag,IndiaNiveshInstitutionalResearch Source:VATechWabag,IndiaNiveshInstitutionalResearch

Fig.83: Consol.D/Eratiotoremainat0.3x Fig.84: WCdaystopeakat107days
0.5 120
107
100 100 100
0.4
0.4
90
0.3 0.3 0.3 0.3
0.3 66 66

0.2 0.2 60
48
0.2

30
0.1

0.0 0
FY14A FY15A FY16A FY17A FY18E FY19E FY20E FY14A FY15A FY16A FY17A FY18E FY19E FY20E

Source:VATechWabag,IndiaNiveshInstitutionalResearch Source:VATechWabag,IndiaNiveshInstitutionalResearch

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SectorReport|WaterIndustry

AssumeWCcycletoremainat100daysgoingforward
Wabaghaswitnessedanaccentuationinitsworkingcapital(WC)cycleoverthelast
fewyears,i.e.from34daysinFY11to66daysinFY17(aftertouchingapeakof107
days in FY16). Such a stretch is despite Wabag following the practice of starting
works on international projects only after receiving the Letter of Credit or after
receivingsomeadvancefromtheclients.TheManagementattributedthisstretch
to higher WC requirements at some of its international projects. However, with
theseprojectsnownearingcompletion,ManagementexpectspressureonWCcycle
toeaseoff.Also,thecompanyhasbeenproactiveinnegotiatingmorenumberof
milestones(whichhelpsitinhavingshorterWCcycle)atsomeoftherecentlywon
projects.
But as per our contention, with Wabags geographical diversification strategy
requiringittoregularlyscoutfornewmarketsinordertomaintaingrowth,weare
oftheviewthatthelongtermWCcyclecouldcontinuetoremainunderpressure.
Hence,weassume100daysofWCcycleforFY1820.

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SectorReport|WaterIndustry

Valuation
AtCMPofRs595,Wabagistradingatamultipleof18.6xFY19Eand15.1xFY20E
EPS.Wabagstockiscurrentlytradingatslightpremiumtoitslastsixyears,1year
forward P/E median of 18.0x. This is attributable to (1) the impact of FY17 order
inflowguidancemiss(reportedRs36.1bnvs.Rs4042bnofguidance),(2)slowdown
inNamamiGangetendering,whereWabagstandsagood chanceofwinninghigh
margin orders, (3) delay in execution of few large ticket projects (including AP
GENCO;whicharenownearingcompletion),and(4)stretchinWCcycle.
WeexpectWabagtoattainlowerendofitsorderinflowguidance,i.e.Rs43bnfor
FY18.WithAPGENCOprojectnearingcompletionandincreasedtractionfromnew
projects, we expect Wabag to report 6.8% revenue CAGR during FY1820 (versus
12.6% CAGR during FY1417). On the back of improved EBITDA margin and
adjustingforMinorityinterestandshareofprofit/lossfromJVs,weexpectWabag
toreport13.8%PATCAGRduringFY1820(versusnegative3.3%CAGRduringFY14
17).
Fig.85: 1yearforwardPEBand Fig.86: 6yearsMedianofthe1yearforwardP/EBand
1,200 60
Median 1-year fwd. P/E- 18.0x
1,000 50

800 40

600 30

400 20

200 10

0 0
Mar11
Jul11
Nov11
Mar12
Jul12
Nov12
Mar13
Jul13
Nov13
Mar14
Jul14
Nov14
Mar15
Jul15
Nov15
Mar16
Jul16
Nov16
Mar17
Jul17
Aug11
Jan12

Apr13
Sep13
Feb14

Oct15

Aug16
Jan17
Mar11

Jun12
Nov12

Jul14
Dec14
May15

Mar16

Jun17
Nov17

Price 17.0x 19.0x 21.0x 23.0x 1yrFwdPE(x) Last6yrs.Avg.Median


Source:VATechWabag,IndiaNiveshInstitutionalResearch Source:VATechWabag,IndiaNiveshInstitutionalResearch

Expecteduptickinneworderwins,comfortableOB/LTMsalesratioof2.35x,recent
quarters decent performance and low margin projects nearing completion,
comfort us that profitability would catch up from hereon. Asset light business
coupled with improved business outlook should translate to improvement in the
RoEfrom10.7%inFY17to15.9%inFY20.Onassigningtargetmultipleof18.0xto
averageofFY19andFY20EPSestimates,wearriveatpricetargetofRs642.Given
the7.9%upside,weinitiateonWabagwithACCUMULATErecommendation.

AbouttheCompany
WabaginIndiawasincorporatedin1995bytheDeutscheBabcockGroup,withits
headquarters based at Chennai. Since then, Wabag has evolved as one of the
leading water treatment players (water and waste water treatment space). The
scope of companys operations includes planning, design, engineering, supply,
installation,constructionandoperation&maintenanceofdrinkingwaterandwaste
water plants for bothmunicipal and industrial sectors. Over theyears Wabag has
built strong domain capabilities across sewage, drinking water, effluents, sludge

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SectorReport|WaterIndustry

treatment and desalination projects. Headquartered in Chennai and with


subsidiaries spread across the globe, it is primarily focused on the emerging and
developing regions of South East Asia, Africa, Middle East, India, Latin America
(LATAM)andCentral&EasternEurope.

Fig.87: QuickdetailsofWabagearlyhistory
Year Details

1995 HeldbyDeutscheBabcockGroup

1996 NamechangedtoBlackeDurr&WabagTechnologiesLtd

AustriangroupVATechacquiredpartofWabagsbusinessfromBabcockgroup;Name
19992000
changedtoVATechWabag(India)

2005 SiemensacquiredVATech;HeldviaVATechAustria

2005 MBOoftheIndianbusinessbackedbyICICIVenture&VATechWabag(India)

2007 VATechWabag(India)acquireditserstwhileparentVATech(Austria)fromSiemens

Source:VATechWabag,IndiaNiveshInstitutionalResearch

Wabagsinceitsinceptionhasbuiltastrongtrackrecordofcompletingmorethan
2,300projectscateringtovariousmunicipal&industrialclients.
Employees
Wabagcurrentlyhas~2,100employeesspreadacross20+countries.Thecompany
has successfully moved its noncore functions (human resource management,
finance, treasury, MIS reporting) from its international offices to India in the last
fewyears.
WeestimatetheIndianofficeemployingaheadcountof~875,withamajorityof
these delegated on the operations side. In India, Wabag has three offices, ie one
eachatChennai,VadodaraandPune.Amajorityofthesupportoperationsteamis
attheChennaioffice,thePuneofficelooksafternoncorefunctionslike,HR,MIS
and Finance employing ~100130 employees, whereas, the Vadodara office hosts
engineering&designingteam.

Fig.88: EmployeeTeamStructure
Sales R&D,E&D Operations,Others Total
India 95 150 630 875
Austria 15 40 55 110
EuropeanNations 20 0 75 95
OtherCountries 65 0 955 1,020
Totals 195 190 1,715 2,100

Source:VATechWabag,IndiaNiveshInstitutionalResearch

Wabag has strong R&D teams based across Vienna, Winterthur and Chennai. The
R&DteamsatViennaandWassertechnikshare100+patentsamongthem.

ExperiencedManagement
Top management of Wabag comprises of experienced professionals from the
industry.




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SectorReport|WaterIndustry

Fig.89: DetailsoftheExperiencedManagementteam
Industry Age
ManagementTeam Designation TeamProfile
Exp.(inyrs.) (inyrs.)

Has been with Wabag since inception. Prior to joining Wabag, he has
ManagingDirector workedwithlargewaterengineeringcompanieslikeHindustanDorrOliver,
RajivMittal 34 57
&GroupCEO John Brown, etc. He is agraduate in Chemical Engineering from University
ofBombay.
ChiefFinancial He was earlier the COO of CRH Plc. He is a Chartered Accountant and has
ParthasarathyGopalan 24 49
Officer donehisBScandPGDBA.
PriortoassumingtheCOOsrole,heservedasPresidentofIndustrialWater
ChiefOperating GroupandHeadofIndustrialWaterGroupatWabag.Healsoworkedwith
PatrickAndrade 35 55
Officer AquatechInternationalasDirectorSales(SouthEastAsia).HasDiplomain
ChemicalEngineeringfromKarnatakaPolytechnic,Mangalore.
Director&Chief He has earlier served as the CFO at Wabag. Prior to Wabag he was
SVaradarajan 31 52
GrowthOfficer associatedwithPLAgroTechnologies.HehasdonehisCS&CWA.
Is the Global Head of Business Development at Wabag since Dec 2015. He
GlobalHead
RajneeshChopra 32 54 has also served as Senior Vice President Operations & Maintenance
BusinessDevelop.
BusinessGroupandthenHeadofOperations&Maintenance.
ChiefInformation Has served BHEL prior to joining Wabag. He has done his B.E in Industrial
VenkatasamyV 34 57
Officer EngineeringandMBA.
PriortoWabag,heworkedatFeddersLloydasExecutivePresident.Hehas
workedwithleadingMNCsinthefieldofPower,Energy,Infrastructureand
PankajSachdeva CEOIndiaCluster 30 56 Assetcreation.HeisanElectronicsEngineer(Hons)fromThaparInstituteof
EngineeringandTechnologyandhasdoneManagementCertificationcourse
fromIIMD,Switzerland.
Source:VATechWabag,IndiaNiveshInstitutionalResearch

Risks&Concern
Thestockcouldpossiblyseesomepressureowingtolackofclarityonitsfund
raising plans. This again would be dependent on the HAM order wins from
NamamiGange.
65.9%ofWabagsexistingorderbookismadeupbythemunicipalitybusiness.
Municipalitiesaregovernedandregulatedbyregionalgovernments.Wesense
any change in regulatory environment would impact profitability of ongoing
projectsaswellastheawardingpipelineoftheupcomingprojects.
Anyunfavorableforexmovementcouldaffectthecompanysfinancials.

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SectorReport|WaterIndustry

Fig.90:IncomeStatement(Consolidated)
YEMarch(Rsm) FY16 FY17 FY18E FY19E FY20E
NetSales 25,083 32,079 38,035 38,211 43,379
Growth(%) 28 19 0 14
OperatingExpenses 22,753 29,113 34,473 34,589 39,202
OperatingProfit 2,330 2,966 3,562 3,622 4,176
OtherOperatingIncome 0 0 0 0 0
EBITDA 2,330 2,966 3,562 3,622 4,176
Growth(%) 27 20 2 15
Depreciation 205 191 196 225 254
OtherIncome 79 112 75 110 110
EBIT 2,204 2,887 3,441 3,507 4,032
FinanceCost 457 526 526 581 597
ExceptionalItem 0 0 0 0 0
Profitbeforetax 1,746 2,362 2,914 2,926 3,436
Tax(current+deferred) 668 667 1,079 1,083 1,271
Profit/(Loss)fortheperiod 1,078 1,695 1,835 1,843 2,164
Associates,Minint (191) (671) (176) (95) (15)
Reportednetprofit 887 1,024 1,659 1,749 2,149
ExtraordinaryItem 0 0 0 0 0
AdjustedNetProfit 887 1,024 1,659 1,749 2,149
Growth(%) 15 62 5 23
Source:VATechWabag,IndiaNiveshInstitutionalResearch

Fig.91:BalanceSheet(Consolidated)
YEMarch(Rsm) FY16 FY17 FY18E FY19E FY20E
ShareCapital 109 109 109 109 109
Reserves&Surplus 9,094 9,822 11,424 12,665 14,191
NetWorth 9,203 9,931 11,533 12,774 14,300
MinorityInterest 82 173 351 445 461
TotalLiabilities 19,930 23,402 26,517 27,210 30,113
NoncurrentLiabilities 2,225 2,695 2,881 3,431 3,981
Longtermborrowings 501 632 700 800 900
Deferredtaxliabilities 31 31 31 31 31
OtherLongtermliabilities 1,523 1,897 2,000 2,400 2,800
Longtermprovisions 170 136 150 200 250
CurrentLiabilities 17,706 20,707 23,637 23,779 26,132
Shorttermborrowings 3,272 2,459 3,000 3,000 3,000
TradePayables 10,287 12,574 14,837 14,679 16,632
OtherCurrentLiabilities 3,216 4,643 4,800 5,100 5,500
Shorttermprovisions 931 1,030 1,000 1,000 1,000
TotalLiabilitiesandEquity 29,216 33,506 38,401 40,429 44,873

NonCurrentAssets 2,912 2,625 2,671 2,653 2,609
NetBlock 1,779 1,744 1,743 1,689 1,610
Goodwill 0 0 0 0 0
NoncurrentInvestments 205 33 33 33 33
LongtermLoansandAdvances 0 0 0 0 0
DeferredtaxAssets 249 247 249 252 252
OthernoncurrentAssets 679 601 645 680 715
CurrentAssets 26,304 30,881 35,730 37,776 42,264
Inventories 976 385 824 816 924
SundryDebtors 19,424 25,115 28,135 28,265 32,088
Cash&BankBalances 3,626 2,617 3,821 5,545 5,802
OthercurrentAssets 1,887 2,163 2,200 2,350 2,500
Loans&Advances 273 409 450 400 450
CurrentInvestments 118 192 300 400 500
TotalAssets 29,216 33,506 38,401 40,429 44,873
Source:VATechWabag,IndiaNiveshInstitutionalResearch

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Fig.92:CashFlowStatement(Consolidated)
YEMarch(Rsm) FY16 FY17 FY18E FY19E FY20E
Profitbeforetax 1,571 1,789 2,917 2,926 3,436
Depreciation 205 191 196 225 254
ChangeinWorkingCapital (3,954) (2,568) (1,076) 336 (1,363)
Totaltaxpaid (531) (770) (1,079) (1,083) (1,271)
Others(inc.InterestIncome) 536 1,419 621 237 280
CashFlowfromOperations(a) (2,173) 61 1,579 2,642 1,335
Capitalexpenditure (145) (111) (195) (170) (175)
Changeininvestments 94 118 (108) (100) (100)
Others 1,018 601 110 110 110
CashFlowfromInvesting(b) 966 608 (193) (160) (165)
Freecashflow(a+capex) (2,319) (50) 1,384 2,472 1,160
Equityraised/(repaid)/(buyback) 37 14 0 0 0
Debtraised/(repaid) 2,287 (748) 609 100 100
Dividend(incl.tax) (263) (264) (481) (507) (624)
Others (245) (267) (310) (350) (390)
CashFlowfromfinancing(c) 1,816 (1,265) (182) (757) (914)
Netchangeincash(a+b+c) 609 (596) 1,203 1,724 257
Reconciliationofotherbalances 0 (413) 0 0 0
CashasperBalanceSheet 3,626 2,617 3,821 5,545 5,802
Source:VATechWabag,IndiaNiveshInstitutionalResearch

Fig.93:KeyRatios(Consolidated)
YEMarch FY16 FY17 FY18E FY19E FY20E
AdjustedEPS(Rs) 16.3 18.8 30.4 32.1 39.4
Growth(%) 15 62 5 23
Dividend/share(Rs) 4.0 4.5 7.3 7.7 9.5
Dividendpayoutratio 24.6 24.0 24.0 24.0 24.0
EBITDAmargin 9.3 9.2 9.4 9.5 9.6
EBITmargin 8.1 7.2 9.1 9.2 9.3
Netmargin 3.5 3.2 4.4 4.6 5.0
Taxrate(%) 42.5 37.3 37.0 37.0 37.0
Debt/Equity(x) 0.4 0.3 0.3 0.3 0.3
Inventorydays 18.4 5.5 10 10 10
SundryDebtordays 282.7 241.6 270 270 270
TradePayabledays 193.5 180.8 180 180 180
DuPontAnalysisROE
Netmargin 3.5 3.2 4.4 4.6 5.0
Assetturnover(x) 0.9 1.0 1.1 1.0 1.0
Leveragefactor(x) 3.0 3.3 3.4 3.2 3.2
ROE(%) 9.7 10.7 15.5 14.4 15.9
ROCE(%) 7.5 8.4 12.0 11.1 12.1
Valuation(x)
PER 36.5 31.7 19.6 18.6 15.1
Price/Book 3.5 3.3 2.8 2.5 2.3
EV/EBITDA 14.0 11.1 9.1 8.5 7.3
Source:VATechWabag,IndiaNiveshInstitutionalResearch

IndiaNiveshSecuritiesLtd 04Dec2017 43 of43



InitiatingCoverage


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IndiaNiveshSecuritiesLimited
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