My Thoughts: VA Tech Wabag : A Promising Mid-Cap Bet

History:

The company was incorporated as a public limited company called Balcke Durr Cooling Towers Limited on February 17, 1995 at Chennai. The name of Company was changed to Balcke Durr and Wabag Technologies Limited on September 12, 1996 by a special resolution of the members dated July 29, 1996. The name of this company was further changed to VA Tech Wabag Limited on April 4, 2000 by a special resolution of the members dated March 10, 2000.

Industry: Engineering.

Business:

VA Tech Wabag Ltd. designs and builds water and sewage treatment plants. The Company constructs sewage treatment, processed and drinking water treatment, effluents treatment, sludge treatment, desalination and reuse plants. VA Tech Wabag serves municipalities and customers in the power, steel, and oil and gas industries.

Shareholding Pattern:

As on 31 March 2011, the promoters hold 31.02% of VA Tech while public shareholding (excluding Institutional investments) was 24.87%.The institutions hold 44.11% of VA Tech.

In Institutions category, Mutual Funds/UTI hold 17.03%, FI/Banks hold 0.16%, FII hold 24.47% and Foreign Venture Capital investors hold 2.47% in VA Tech.

Analyzing the trend of last 3 SHP’s posted, FII holdings has risen from 12.34% (as on 11-Oct-10) to 24.47% (as on 31-Mar-11). DII holdings has dipped marginally from 22.15% to 19.64%.In others, it has changed from 34.29% to 24.87%.Going with the trend, FIIs continue to like this stock and DIIs have also not distanced themselves much from this stock.

Corporate Actions:

The company has recently announced a dividend of Rs.10 (200%) on it’s Face Value of Rs. 5. in the board meeting dated 26-May-2011. Also, the company BOD’s have approved sub-division of shares from Rs. 5 to Rs. 2 in the same board meeting.

Analyzing VA Tech Wabag:

The company, which has reported a 35 per cent growth in net profit for 2010-11 over the previous year, sees rising costs as a challenge that can be addressed through improved efficiencies, growth in new markets, and focus on O&M contracts which offer twice as much margin as EPC contracts.

For the fourth quarter ended March 31, 2011, VA Tech Wabag has reported a 11 per cent growth in net profit over the corresponding quarter previously. Its net profit was Rs 39.1 crore (Rs 35.3 crore) on revenue of Rs 356.3 crore (Rs 340.8 crore).

For 2010-11 it reported a net profit of Rs 55.3 crore (Rs 41 crore) on an income of Rs 733.5 crore (Rs 705.5 crore).

VA Tech Wabag's March '11 quarter profit came on the back of exceptional one-time expenses and weakness in Euro, it wasn't much of a surprise. Although trading below its IPO price, the scrip did not witness any sudden jolt following the announcement.

The company which has operations in 19 countries has bagged over Rs 1,802 crore firm orders taking its order backlog to Rs 3,402 crore.With a strong order book and a war chest for possible acquisitions, the company is well placed to capitalise on growth prospects.

Price Movements & Returns:

VA Tech had a dream debut on the bourses, listing at 1655 and touching a high of 1806 on it’s listing day(13-Oct-10) against the issue price of 1310. The company’s issued shares in a price range of 1230-1310 in it’s IPO which lasted from 22-Sep-10 to 27-Sep-10 IPO. The company’s IPO which received a ICRA grading 4 got an enthusiastic response from investors and closed with a subscription of 35.11 times.

Since then, things have not been so rosy for VA Tech, currently quotes tad below the issue price at 1287.30 (close price of 09-Jun-11).The share price slipped below the lower band of the issue price in March and made a 52 week low at 1131 on BSE and 1000 on NSE respectively.

The company has been a low volume stock. The sub-division initiative by the BOD is being looked as an effort to enthuse some kind of investor interest at low market prices (post sub-division) of shares. Although, any such efforts usually don’t fructify, it may just lead to some short term investor interest.

If we compare it’s performance for a period starting from 13-Oct-10 (listing day) till 07-06-2011, it has posted -29.16% returns. Analysing the performance of BSE-IPO and BSE-MIDCAP (where it acts as a constituent) in the same period, they have posted returns of -22.84% and -24.08% respectively.

Let's focus on the positives, yet again. Firstly, it is an internationally acclaimed player operating in a niche segment of water-treatment technology which has huge demand in the foreseeable future. Secondly, the company has strong cash reserves, which can prove handy for any inorganic growth opportunities. Thirdly, it’s available at a discount from it’s IPO issue price and way below it’s all-time high.

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