Seeking buyouts, 1b euro sales in 5 yrs: VA Tech Wabag

VA Tech Wabag is seeking acquisition targets to expand its footprint in South America and hopes to become a 1 billion euro company by revenue in the next five years. Here's a full transcript of the interview with Rajiv Mittal, the company's Managing Director.

Q.  Your firm is one of the leading players in the water and waste water treatment business. Tell us what your competitive advantages are?

A.  We are a leading global company, in fact, Indian multi-national. Some of our competitive advantages are the brand itself, our brand is almost 90 years old and is well recognized globally. The other thing is we are a technology company; we have a lot of our proprietary technologies, trademarked technologies, which are also recognized well. Over the last 90 years, we have more than 6,000 plants, which we have built, which give us good references, because whenever clients are looking to place orders, they want to make sure you have done it before.  And we have done many times before and in different geographies. We also have presence in fastest growing economies, almost 20 offices we have, we have local presence there, which keeps our guys in contact with the local client and we can serve them better, this is another competitive advantage. Plus our manpower, because that’s one of our biggest assets, the skilled and experienced man power.

Q. What is your current revenue model and which are the key areas of growth going forward?

A. Our revenue model presently is from three verticals. Basically, EPC that is engineering, procuring and construction contracts, where we build a complete treatment plant on a turnkey basis, design and build; the other one is a service model, where we operate and maintain (O&M) the plants built by us or built by our competitors; and the third one is through the BOOT contracts, which is built own operate transfer contracts, where we always go with some other developer, but we go as a technical partner, where we build the plant and also help them in operating and maintaining for a longer term. Our key growth areas are going to be into this sector. We are looking at growing faster in O&M and BOOT, because this is something, which gives us long-term visibility and sustainability.

Q. You have recently mentioned of desalination becoming a big business in India. How do you see the market for that and your core waster water treatment business?

A. See the core waster water business is always going to be large, because that’s the need of the hour and most of the cities don’t have even the basic treatment facility, including some of our own cities, where the sewage is directly discharged, either into rivers or sea or into just open nullahs. So there is definitely going to be a big investment going into that. But starting from a small base, the rate of growth of desalination is going to be much much faster. As a percentage growth year-on-year, desalination is something that is going to grow faster. So that is where I had mentioned desalination is definitely something we are going to keep our eye on. And especially the interest that we are getting from other states, other than Tamil Nadu, I am sure in decades to come, desalination will be a technology of future.

Q. You are doing a desalination project in Chennai. But apart from that any other municipal bodies across the country that have shown interest in it?

A. There are states, which have a large coastline, like Kerala, Andhra, Gujarat. Some of these states have shown interest, they have come and seen our plant, we have given them some initial information. But I am sure all these states will take some time to make up their mind. But in the years to come, I clearly see that all the states will have to go for it to supplement their water need.

Q. Currently then, what is your order flow position and what is the kind of revenue growth you are seeing this year?

A. See we always give a…if its guidance you are looking for, we always say our order book is going to grow about 20% year-on-year, which would mean an order intake of about Rs 2,000-2,200 crore this year. And revenue, we have given a guidance of 15-18% year-on-year growth, which is in the region of Rs 1,650-1,700 crore this year.

Q. There was some talk about slowdown in decision making by municipal bodies in India. Is that affecting your orders as well?

A. It is, I think it is affecting everybody and it is affecting us also. But, I think the difference is we are one of those companies, which is not fully dependent on municipal bodies. We are equally comfortable in doing projects for industries as we are for the municipal bodies, we also see that industries, there are orders coming, and especially the core sector, where we are very interested, like steel, power and oil and gas, we see enough orders coming to fill up this gap of slow decision making in municipal bodies; and I also see that this is a temporary phenomenon, they will have to expedite these projects, which have been waiting for some time, and I am sure the municipal sector will also catch up.

Q. How is the position in the international markets? Europe is going through a lot of economic turmoil. Is that hurting your business in that region?

A. Not really, because you know that we may be present in some of the European economies, but our business doesn’t come from Western or the Central Europe, except in Switzerland, where we are the market leaders and we have 60% market share in advanced water treatment. There we have a continuous steady flow of orders and this year also we see that. Other than that, we are not into Spain or Greece or Portugal kind of countries or UK or France or Germany.  We are then in the Eastern European part, which is Turkey, Romania, Czech Republic, these kind of countries where we have not seen any slowdown. We have still seen European money coming in and we have been quite successful, in fact even last year, some of the good orders we have got from Romania and Czech and Turkey. We are expecting a similar order flow this year also.

Q. And how are other markets like Middle East and North Africa? That is another region where your focus is.

A.  Absolutely right, and last year was bad. Because we all know, because of Arab spring everything came to a standstill.  But we have already seen some of these countries already limping back to normal. Like Tunisia, Algeria was more or less always normal, Tunisia is another big market, we have seen decision making, we have got some orders, we are executing orders normally. We have seen elections happen in Egypt, every body is hopeful things will come back, Libya though there is a delay in election, there is a hope that in next one or two quarters things will come back. So we are seeing these North African markets will slowly limp back this year. Though we have not taken any revenues this year from this market for Libya. But I am sure, if there is any upside in the last two quarters, that will be upside to our numbers. But on the Middle East side its been quite steady for us. Oman, Qatar, they have been good markets, we have been getting orders, we are executing orders, everything is normal. So we have not seen effect last year and we are not expecting any effect this year.

Q. So what is the current mix of domestic and international revenues and what are your plans for the international business, are you expanding into more countries?

A. Revenue mix last year was 70% coming from India and 30% coming from overseas business. This year it is going to be 65% from India and 35% from overseas and this is because, last year our overseas subsidiaries have won good orders and they will have to execute these orders and the revenues will flow in from all these new countries we talked about -- Romania, Saudi Arabia and Turkey. They are all going to give us good overseas revenue this year.

Q. Are you looking at expanding into other emerging markets, be it Asian countries or Latin America or African markets?

A. In Africa we are well place in North Africa, sub-Sahara, yes we are not that well placed, expect in Namibia, where we are there for last 10-12 years, and we are doing good business there in Namibia. Last ye also we got another BOOT contract, waste water treatment we are doing well, we are bidding for a new contract for desalination in Namibia. But other east part of Africa or south of Africa we are not well present there. It’s a area we are looking at but not made up our mind whether we want to be using that markets as target markets or will continue to use them as spot markets… Latin America, no, we don’t want to do it organically, unless we can find a good company, which we can acquire. And that’s how we want to enter that market, only through acquisition and not organically.

Q. Are you in talks with any company right now, or are you seeking any targets?

A. We are. In fact that has been our target for the last year and a half.  Because you know, we have cash of almost Rs 400 crore on our balance sheet, we are a debt free company. So this cash is definitely assigned for acquisition and we have been talking to many companies and many investment bankers to see if there are right targets available. In the present scenario, we don’t want to take something, which are under stress or we are not convinced about their business model. But as soon as we find something, which is suitable, we will inform you much more at that point of time.

Q. Coming back to your earnings, you have given 15-18% revenue guidance, but your operating margins kind of declined in FY12. What is the outlook on that front for the year?

A. Let me clarify this, because I think there’s been some miscommunication there. Because, if you see the results, as you see it, probably what you are saying is right. But we had mentioned on the concall and also on various presentations, I don’t believe that our margins have declined. The only thing we did this year, every year we have some fixed pay and a variable pay. And on the variable pay till last year, we used to pay on an annual basis. Based on the annual results, we used to pay and we used to immediately recognize that cost as soon as we had made the payment. But after listing we decided it is appropriate not do it on an annual basis but to do it on a quarter-on-quarter basis. So our variable pay to our staff was also aligned to that. And that’s how last year we had to take a double hit. That means, FY11 variable pay was paid in June, which we had to take hit in last year, plus, complete last year, because we paid quarter-on-quarter, we took that hit. And that was the kind of Rs 6.5 crore. If you add those Rs 6.5 crore to our margins, you will find the margins have not declined, they were dot on what we were year before.

Q. Your receivables are also higher than the industry average. Any particular reason for that?

A. That’s true. Our receivables are higher.  And we have said this before. This is because of predominantly two reasons. 1.  Because of the Sri Lanka contract, which we had, we had to do last quarter a big sale. Because all the approvals were done, the procurements were done, and then we had to supply and construct locally. So that in last quarter we got good sale.  In India alone, the last quarter sale was close to Rs 500 crore. So that is how you see receivable as end of March 31.  So you see this complete Rs 500 crore is sitting there, plus few Rs 100 crore from the previous quarters. That was one reason. 2. We had also told in earlier discussions that we are executing a desalination contract, which is a government of India funded contract. For almost six months, the flow from government of India to the state government didn’t happen, which built up our receivables. These are the two reasons  you see as end of March 31 these receivables were high. But post that we have got money from central government to the state government for this desalination project. We have already reduced our receivables by almost 50% and in next couple of months, the balance receivable will also come down.  Plus, what ever sales we did in the last quarter, we will receive in next couple of months, and you will see our receivables back to the normal industry standard in next couple of months.

Q. What is your vision for this company then? Five years from now, where do you see this company?

A.  For us as a company, we are pure play water company. We are a international global player. So our vision is always to be in top three global water companies. And that means, our revenue has to be close to around 1 billion euro in next five years. So that is the game plan we have. That is the blue-print we have drawn out for the next five years, to reach one billion in next five years, which means it’s about 4.5-5.0 times of what we are today. And I believe strongly that this is possible with the structure we have and with the decentralized operation we have, which we call it a multi-domestic unit, where each company has the full empowerment, and responsibility to do their business and are responsible for their top and bottomline, I see this happening in next five years.