After studying law I vectored towards journalism by accident and it's the only job I've done since. It's a job that has taken me on a private jet to Jaisalmer - where I wrote India's first feature on fractional ownership of business jets - to the badlands of west UP where India's sugar economy is inextricably now tied to politics. I'm a big fan of new business models and crafty entrepreneurs. Fortunately for me, there are plenty of those in Asia at the moment.
Rajiv Mittal, Managing Director and Group CEO, Va Tech WABAG Image: Balaji Gangadhara for Forbes India
On the outskirts of Chennai, in the village of Nemmeli, the outline of a vast desalination project has been functioning smoothly since 2013. At 100 million litres a day, it serves a critical need in supplying the water needs of a rain-starved region. It’s an important poster boy for desalination technologies that are likely to become more prominent in the years to come.
Desalination is just one area where Va Tech WABAG is making its presence felt. It also treats wastewater for both municipalities and industrial customers, and has recently become a player in the Namami Gange project—the National Mission for the Clean Ganga. In addition, it has operations that span countries as diverse as Switzerland, Malaysia, Bahrain, Tunisia and Russia.
The Chennai-headquartered multinational in which Rakesh Jhunjhunwala holds an 8 percent stake has the unique distinction of constructing 1,400 water treatment plants (including 60 desalination plants) and treating 30,000 million litres of water a day since 1995. It competes head on with global peers like Veolia Water and Suez, and says it is on track to break into the top three water technology companies in the world in five years.
Aiding it would be a lower cost structure—a lot of the backend operations are done out of India—and the realisation that “tech which cannot be cost effective is not marketable”, says Rajiv D Mittal, managing director and CEO of Va Tech WABAG. He believes that governments are now willing to see the merit in charging for water and points to the fact that industrial consumers across the country are willing to pay for reliable and assured water supply.
For now, the signs are encouraging. WABAG’s order book stands at Rs10,400 crore or almost 3.5 times its FY21 revenue of Rs2,834 crore. The company says it is on track to execute this in the next 18 to 24 months even as it continues to bid for projects with larger ticket sizes. In August, it won a Rs1,230 order from Russia-based Amur Gas Chemical Complex LLC and is on track to bid for a large Rs1,500 crore desalination project in Chennai.
Management takes control
In 1996, when Mittal was working in the London office, he was tasked with setting up the Southeast Asia operations of WABAG. After studying the market, they decided to locate their operations in India on account of its pool of educated people and the market potential. Mittal was sent to India to set up the business.
Their first job came in 1997 when Reliance gave them a contract to treat water at their Jamnagar refinery. “At the time, we were just a startup with five people,” says Mittal. Gradually, they moved to other industrial and municipal projects.
In 1999, Va Tech took over the water business of Deutsche Babcock that operated under the WABAG name. The Indian operations, which Mittal ran, were separated as an exclusive pure play water company. The company was then put up for sale, and while Mittal and his colleagues met a lot of prospective buyers, they were not convinced that anyone would be a good fit from a cultural or business point of view.
At the same time, the company had been introduced to private equity (PE) and venture capital (VC) firms, and in 2004-05 management buyouts were soaring. Until then, the management buyout of ICI Chemicals had been the largest and Va Tech WABAG had almost signed on with India Value Fund (now known as True North). At the last minute, ICICI Venture came in.
Renuka Ramnath, who headed the PE arm of ICICI Bank, had done her homework. She connected well with Mittal—they had both grown up in Chembur, an eastern suburb of Mumbai. She got the deal done in ICICI Venture’s favour with the understanding that after three years, the team could buy back ICICI Venture’s stake, subject to certain parameters being met. At about Rs80 crore, this was a large deal in the Indian context. Mittal along with three colleagues, Amit Sengupta, Shiv Narayan Saraf and S Varadarajan, hold 21.7 percent of the company. Eventually, they also acquired the European operations of VA Tech and became an Indian multinational.
Varadarajan, who was earlier CFO and now looks after human resources, remembers how far the company has come along since then. At that time, they would get excited with a Rs100 crore contract. Now even a $100 million (Rs750 crore) contract is considered par for the course. From 400 employees, it now has 1,500 across four continents. Revenues have risen from Rs1,224 crore to Rs2,834 crore in the last 10 years—an annual growth rate of 9 percent.
Political economy of water
One of the reasons why water has rarely gotten its fair share of attention is on account of the fact that people hate to pay for it. Residential consumers have long been used to low tariffs. In turn, supply is poor and unpredictable.
In 2005, a World Bank-funded project in Delhi to provide 24x7 water witnessed huge protests by a cross section of civil society. This was the first time Arvind Kejriwal, chief minister of Delhi, emerged as a mass leader. The Delhi Jal Board received flak for inviting a global tender to supply water on demand. The constant refrain was that this was de facto privatisation.
While that project was shelved, Rajneesh Chopra, global head, business development, says that in his assessment, “People are (now) willing to pay.” And there is also a realisation among politicians that municipal water resources need to take care of at least their operating costs. Capital costs are mostly met from grants by the central and state governments and multilateral agencies. In most states, industry pays market rates for water ranging between Rs30 to Rs80 per kilo litre. Even in Delhi, which saw strident protests against the 24x7 plan to supply water, now has both Suez and Veolia operating concessions to supply water.
With water projects becoming increasingly viable, WABAG’s business opportunity lies in three areas—municipal water systems (desalination and waste water purification), industrial projects and special initiatives like the mission to clean the Ganga and Jal Jeevan. Maharashtra, Haryana, Tamil Nadu, Gujarat and Karnataka now have a policy in place on treating waste water. In all these, the company says it has positioned itself as a technology player (it pioneered the removal of micro pollutants), leaving lower margin activities like construction to other players.
There is also the business of annual maintenance contracts. “Once we construct the project, we are also tasked with running it for a certain period and meeting certain quality requirements,” says Mittal. At present, about 10 percent of revenue comes from this business.
Challenges and valuation
When WABAG went public in 2010, the issue was well-received by the market. But it was in the 2014 bull market that the company really came into its own. Its market cap was twice the Rs2,081 crore it is today. There was an expectation that it would grow rapidly and the market priced it more as a technology player at an earnings multiple of 40 to 50 times. The market opportunity was there for the taking and all the business had to do was execute. It had all the makings of a predictable business.
Unfortunately, the valuation ran ahead of reality and in the last five years, sales have grown at 2 percent a year and profits 4 percent a year, according to data from Screener.in.
Part of the problem is in the peculiarities of the business. All government contracts work on L1 or lowest bids and this is where no matter how good the technology is, there is only so much a company can charge for it. For instance, the company has worked on Nereda technology that should play a significant role in the future, according to Sharekhan, a brokerage. Whether WABAG will be able to charge a premium for this in government contracts remains to be seen.
Chopra explains that the government is now moving to a quality-cum-cost-based system of evaluating bids, but that this has not been implemented yet. There is no timeline for the implementation either. In private projects that the company works on in the Middle East, as much as 70 percent of bid parameters could be based on qualitative aspects.
All this results in 6 to 8 percent Ebitda margins that give the business more of an EPC (engineering, procurement, construction) feel than a technology feel. Varadarajan does admit that this perception of the market needs to be changed. Chopra agrees that at the present valuation, the company is not priced like a technology company. At a 16 times multiple, the market is not pricing in a lot of growth.
“While the prospects are good, past execution has disappointed and so the market is now valuing the company on a trust-but-verify basis,” according to an analyst at a brokerage, who spoke on condition of anonymity. In the past, the company had a problem with receivables piling up and is owed Rs428 crore by Andhra Pradesh Genco. Varadarajan says after this episode, they have decided to bid for projects only with a government guarantee or where a multilateral agency is funding. WABAG also bids only for projects where it is the main partner in a consortium of bidders.
That’s one reason why analysts tracking the company maintain that its prospects are good and that its order book at three times the annual sales is healthy. Nomura has a buy rating on the stock with a target price of Rs546, implying a 53 percent upside from present levels of Rs334 a share. ShareKhan has put a target of Rs435 on the stock.
In the last year, WABAG has been going about its business with a point to prove. In FY21, despite the Covid lockdown, it grew its topline by 10.8 percent to Rs2,834 crore. Then there was the Rs1,400 crore order win in Russia and the Chennai desalination contract, which if it goes their way, would add more heft to their order book. On the human resource front, WABAG has an advantage in basing engineering manpower in India and this gives it an edge while bidding for contracts in Europe, Middle East and Africa. There has also been a conscious call to outsource the construction portion of a contract as that is the lower margin part of the order. Lastly, management plans to increase the annual maintenance portion of their business to 20 to 25 percent over the next three to five years.
As Mittal, who owns 15.6 percent of the company, looks back, he believes the business is well-positioned for the next decade. The technology is in place and governments are able to charge for water. The company can now bid for larger projects and has learnt to keep a close eye on its receivables. As its cash flow becomes more predictable, it’s possible that the company scales a billion dollar topline and valuation in the next decade. And that’s not a bad outcome for India’s first successfully management-bought out business.