VA Tech Wabag Limited (Wabag) IPO

VA Tech Wabag Limited (Wabag) is entering in the capital markets with an initial public offering (IPO) of up to 3.7 mn equity shares of Rs. 5 each at a price band of Rs. 1,230–1,310 to raise up to Rs. 4.7 bn. The issues consisting of a fresh issue of up to 1.0 mn equity shares aggregating up to Rs. 1.25 bn by the company and an offer for sale of equity shares aggregating up to Rs. 3.5 bn by India Advantage Fund I, Dynamic India Fund I, Rainbow Fund Trust, GLG Emerging Markets Fund and Passport India Investments (Mauritius) Limited. Valuation and recommendation: We value Wabag’s stock at Rs. 1,419, by using the DCF method (WACC of 15.4% and terminal growth of 5%), which offers an upside potential of 15% over the lower end of the price band and 8% over the upper end of the price band. We expect the Company to enjoy better margins over the average of its peer set (IVRCL Infrastructures & Projects Ltd.,Nagarjuna Construction Co. Ltd. and Consolidated Construction Consortium Ltd.) with an EBITDA margin and a net margin of 10.3% and 4.6%, respectively, as compared to an EBITDA and a net profit margin of 9.6% and 4.2%, respectively, of its peer set for FY11E. This is primarily attributable to its focused approach on technology and diversified international presence. The issue opens on September 22, 2010 and closes on September 27, 2010.