VA Tech Wabag has entered the primary market on , with a fresh issue of Rs. 125 crore and offer for sale of 26.53 lakh equity shares of Rs. 5 each, both, in the price band of Rs. 1,230 to 1,310 per share. The company will make a fresh issue of 9.5 to 10.2 lakh equity shares, while the offer for sale will range between Rs. 326 to 348 crore, depending on the price discovered. The issue closes on 24th September for QIB bidders and on 27th September for HNI and retail category.

A water solution provider with presence in emerging markets of , , , Central and , , South East Asia, VA Tech Wabag has executed 113 projects and is currently executing 81 projects, as of . Overseas operations accounted for 55% of FY10 revenues.

The company was acquired from Siemens through a management buy-out (MBO) in September 2005 by its 4 existing promoters, along with the support of PE investor ICICI Ventures. Present promoters’ shareholding is very low at 34.34%, which will get reduced to 31.77% (assuming book to get discovered at upper end of price band) post-issue.

In the IPO, 35% of the fully diluted post-issue capital of the company is being offered to the public (at upper price band). About 73.6% of this comprises of offer for sale, by 5 funds (3 PE investors). It seems that the IPO is more an exit route for PE investors, wherein 2 funds (invested since 2007-08) are making a complete exit, while ICICI Ventures is making a part-exit from the company.

The fresh fund infusion will not augment the company’s financials significantly. Only Rs. 125 crore will flow into the company’s books, which are to be used to fund working capital of Rs. 65 crore, to implement IT systems at a cost of Rs. 11 crore and to build a corporate office at Chennai worth Rs. 35 crore. It is silly that the company has to tap the investors for building a fancy head-office, when it already has cash and bank balance of Rs. 219 crore, as on . The company’s claim of using the present cash surplus for strategic needs appears a mere eye-wash.   

The promoters claim that they are not selling a single share in the IPO. However, page 85-86 of the RHP states that between 20th to 24th August 2010, the 4 promoters, employees and existing PE investors have, in aggregate, already sold 10.2% stake in the company to a couple of funds and to their merchant bankers Enam and IDFC, at Rs. 1,231.55 per share (close to lower end of price band) for cash. This transaction, just a month before IPO opening, shows the confidence (or lack of it) and the vested interest of all the parties involved - the 4 individual promoters (having average cost price ranging between Rs. 3.14 to Rs. 11.72 per share), company’s employees (whose effective cost of shares is about Rs. 82.4 under ESOPs), existing PE investors as well as the merchant bankers.

The company likes to call itself a technology company, owning 157 process and product patents. However, its EBITDA and PAT margins are below average at 9.9% and 4% respectively, which does not reflect the ‘technology edge’ the company claims to enjoy. The PAT margin would have been lower, had the company been debt-laden, like most of the companies in the sector. Its debt-free status has somewhat helped keep the PAT margins to the present levels.

For FY10, on revenues of Rs. 1,224 crore, the company has outstanding debtors of Rs. 635 crore, as on , representing a collection period of 190 days. Even if we buy the argument that about 40% of revenues are generated in the fourth quarter, still a debtors balance representing over 6 months sales is very high, compared to the industry standards. Going forward, the company is estimating debtor days of 215 days, which itself is on the higher side.

Even on the business front, the company does not provide much comfort. Order book, as on , was Rs. 2,778 crore, comprising 88% of municipal clients and balance industrial clients. Also, it has large dependence on few clients as 66% of revenues in FY10 came from top 5 clients, while 82% of order book as on 31st March 2010, are from top 5 clients.

At the upper and lower end of the price band and considering FY10 EPS of Rs. 52.34 per share, the company is issuing shares at PE multiples of 23.5 times and 25 times respectively. The PBV multiple is 2.9 and 3.1 respectively on pre-money basis, and 2.4 and 2.6 respectively on post-money basis.

Page 96 of the RHP, which states the basis for issue price, has compared the company with other listed players, including IVRCL Infra and Nagarjuna Constructions. This comparison is erroneous and mis-leading as it has a footnote that the figures are on consolidated basis, where infact, standalone numbers of peers have been stated. The company and merchant bankers cannot get away with such wrong deeds by quoting a private publication, atleast not in the offer document!

There needs to be an apple to apple comparison. IVRCL Infra’s consolidated revenue for FY10 Rs. 5,830 crores with PAT at Rs. 215 crores, on equity base of Rs.53.40 crores,translating into an EPS  of Rs.8.05. This leads to a PE multiple of 21 times for IVRCL (in place of 63.2 stated in RHP) based on CMP of 167. On the other hand, Nagarjuna Constructions’ consol revenue, PAT  and EPS are Rs. 5,897 crore, Rs.282 crores and Rs. 11 on equity base of Rs. 51 crores, respectively, leading to PE multiple of less than 15 times, as against the stated PE of 19.2 times.

Even on price to book basis, stock of this company looks more expensive when compared to the two larger peers, with revenues of both by about 5 times, of the company. Nagarjuna Construction having BV of Rs.90 is ruling at a PBV of 1.8 times, while IVRCL having book value of Rs.101 is ruling at a PBV of 1.6 times, after adjusting of its 80.5% stake held in IVRCL Assets.

Even at the lower end of the price band, the issue seems expensive. Considering the recent transfer of shares, mere exit route for PE investors, lack of significant business upside in near future, cash in hand of the company, as well as peer comparison, the issue is a clear avoid.