INSTITUTIONAL EQUITY RESEARCH Namami Gangabackoffice.phillipcapital.in/Backoffice/Research...Uttar Pradesh and Uttarakhand state elections will allow better centre‐state coordination

INSTITUTIONAL EQUITY RESEARCH

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Namami Ganga

Revisiting the scheme: Its cleanup time INDIA | CAPITAL GOODS | Sector Update

24 April 2017

Three recent events have put the focus back on the government’s Namami Ganga Program (NGP) and on Va Tech Wabag (VATW), a beneficiary of this program. In this report, we revisit NGP, three years after its launch. To form a updated view we met with officials from UP State Pollution Control Board (UP SPCB), Central Pollution Control Board (CPCB), National Mission for Clean Ganga (NMCG), Ministry of Water Resources (MoWR), and two other companies in the sector.

Why are we focusing on Namami Ganga now? We believe that three events will provide the required momentum to NGP: (1) BJP’s win in Uttar Pradesh and Uttarakhand state elections will allow better centre‐state coordination to resolve bottlenecks. 40% of the river’s length is in Uttar Pradesh, which contributes the most to sewerage and effluent generation. (2) The Supreme Court’s verdict on 22nd February 2017 for all Gross Polluting Industries (GPI) on the Ganga to compulsorily set up / operate effluent treatment plants. 764 GPIs dump 500MLD of effluent into the river daily, as per CPCB. (3) Uttarakhand High Court’s verdict classified the rivers Ganga and Yamuna as ‘living beings’ and appointed the Director General of NMCG as their guardian.

Feedback from our meetings We gather that most of the work related to data collection, hiring of consultants, and legalities is done. Interception and Diversion (I&D) has been added to NMCG’s scope. Additionally, projects on the Yamuna have been brought under the ambit of NGP. Interestingly, the unanimous feedback was that data on effluent discharge is understated. Competition is expected to be low as NMCG is only looking to award projects to companies with good execution track records. Areas where we believe there is still fluidity are the mode of execution – EPC vs. PPP (hybrid annuity). In March 2016, it was decided that NGP projects (excluding the legacy NGRBA projects) will be awarded on PPP. However, the new thought process is to award projects on PPP only in large 10‐12 cities while the rest of the projects will be awarded on EPC.

Our view: Pace of ordering to pick up Based on the new award structure, we expect total capex on NGP at Rs 200bn, of which Rs 140bn will be on sewerage treatment plants (STPs) and the balance Rs 60bn on effluent treatment plants (ETPs). NMCG has already approved Rs 16.6bn of STP projects in April 2017; we expect it to approve Rs 20‐25bn more in 2HFY18. Both these tranches of approved projects should be awarded in FY18, and the balance (Rs 100bn) in FY19. Capex on ETPs should be back‐ended as compliance is weak, and it would take more time for the government to push industrial units to set up plants. Key beneficiaries from NGP and effluent‐related capex would be – Va Tech Wabag (Buy), L&T (Neutral), Voltas (Neutral), Thermax (Sell), and Ion Exchange (Not Rated).

Va Tech Wabag: Retain Buy, TP Rs 740 In our January 2017 report we highlighted that VATW should benefit from improving visibility on new orders and contraction in working capital to 21% by FY19 from 34% in 1HFY17. Our investment argument on higher orders is playing out. We have raised our FY18 order inflow estimates by 24% and our FY19 earnings by 7%, on improving visibility on order inflows – not just from NGP, but from other domestic and international projects such as Bangalore, Chennai, Pune, and Bangladesh. We expect our thesis on reducing working capital intensity to play out in FY18‐19, which should lead to a further rerating of the stock. We maintain our Buy rating with a revised target price of Rs 740 (Rs 600 earlier). The stock currently trades at 19x our FY19 earnings; our target PE of 20x FY19 is at a discount to VATW’s long‐term average of 21.5x.

Jonas Bhutta (+ 9122 6246 4119) [email protected] Vikram Rawat (+ 9122 6246 4120) [email protected] VALUATION COMP

PE (x) RoE (%)

Company FY17E FY18E FY17E FY18E

LT IN 26.9 23.2 12.5 13.2

TMX IN 39.6 36.4 12.1 12.1

ION IN 14.3 12.4 14.8 14.8

VOLT IN 29.5 25.5 16.5 15.5

VATW IN 27.9 21.3 13.1 15.5 CHANGE IN ESTIMATES

__Revised Est. __ __% Revision__Rs mn FY18E FY19E FY18E FY19ERevenue 36,347 38,442 ‐2.9% 1.3%EBITDA 3,486 3,834 ‐2.0% 1.1%Core PAT 1,763 2,016 0.6% 6.2%EPS (Rs) 32.3 37.0 1.0% 6.6%


NAMAMI GANGA SECTOR UPDATE

Why focus on Namami Ganga now? Recent events (BJP’s state election victory in Uttar Pradesh and Uttarakhand, Supreme Court’s verdict that 764 polluting industrial units across the Ganga should set up effluent treatment plants, and Uttarakhand High Court’s decision to classify Ganga and Yamuna as living beings) has put the spotlight back on the government’s Namami Ganga Program (NGP) – a project that has not seen much physical progress in the past three years. In order to understand if recent developments will put much‐required pressure on kick‐starting NGP capex, we interacted with officials of State Pollution Control Boards (SPCBs), Central Pollution Control Board (CPCB), National Mission for Clean Ganga (NMCG), and many companies that are likely to be beneficiaries of NGP investments. Based on the feedback we received from our meetings, we believe that ordering for STPs will now pick up pace, as most of the challenges on data availability and legal backing are now overcome. In addition, in this report we have highlighted the potential sewage capacity addition required by India over the next five years. Progress on NGP has been slow so far... Almost three years into the BJP government’s tenure, its most talked‐about project ‘Namami Gange’ has seen no material progress. Two key reasons for the delay: 1. Change in business model to hybrid annuity from EPC: In order to take the

benefit of leverage, the government chose to shift its business model while awarding projects to ‘hybrid annuity’ from the earlier turnkey (EPC) model – this led to a delay of almost 18 months.

2. Lack of coordination between central and state governments: Water forms a

part of the state subject. Hence, despite a thrust from the central government, the state (UP, which did not have a BJP government) was slow in implementing NGP reforms.

As a result, no major projects were awarded in the past three years.



...but, that is about to change Three events give us confidence that the government’s Rs 200bn NGP capex will now take off: 1. BJP won the Uttar Pradesh (UP) and Uttarakhand state elections: These wins (in

contiguous states) will help the central government to pass policies and award projects faster. Notably, UP accounts for the highest municipal and industrial pollution in the Ganga.

Execution should pick up as BJP has won UP and Uttarakhand state elections

Source: PhillipCapital India Research 2. The Supreme Court (SC)’s verdict on industrial polluting units: The SC verdict on

22nd February 2017 said that all industrial units would compulsorily have to set up an effluent treatment plant within the next three years. Units that do not comply stand to lose their ‘consent to operate’. This judgement will put much‐needed pressure on industrial clusters along the Ganga river to comply.

Industry‐wise wastewater generation Industry type Total Units Effluent discharge (MLD)Chemical 27 98 Distillery 35 37 Food, Dairy & Beverage 22 7 Pulp & Paper 67 201 Sugar 67 96 Textile, Bleaching & Dyeing 63 11 Tannery 442 22 Others 41 29 Total 764 501

Source: Company, PhillipCapital India Research Uttarakhand High Court’s verdict classifying Ganga and Yamuna as living

beings: Recently, New Zealand became the first country to grant a river the same legal rights as a human being (River Whanganui). On 20th March 2017, the Uttarakhand HC passed a landmark judgement, giving rivers Ganga and Yamuna the same status as living beings, making India the second country to provide a river with such rights. The Director of NGP, Chief Secretary of Uttarakhand, and



Advocate General of Uttarakhand have been appointed guardians of these rivers. Even as the court judgement fails to give tight timelines and does not elaborate on the detailed repercussions of such a verdict, it is a move in the right direction – one that will help curtail dumping of sewage and effluents into the rivers.

A recap on what is wrong with the Ganga 5000MLD of sewerage is discharged into the Ganga daily Availability of data on sewage generation in the Ganga basin has significantly improved between 2009 and 2015, even as sewage treatment capacity in this period has remained flat at 1,230 MLD. Data suggests that 75% of the generated sewage is dumped into the Ganges, untreated. Sewage generation and treatment capacity on the Ganga

2009 2012 2015Sewage generation (mld) 2,638 2,723 4,974 STPs capacity (mld) 1,174 1,209 1,231 Gap (mld) 1,464 1,515 3,743 Gap (%) 55% 56% 75%

Even existing capacity is under utilised Out of the existing 65 sewage treatments plants with a total capacity of 1230MLD, 10 plants are currently not operational and the ones that are operational are currently running at 55% capacity. Operational STPs are running at 55% of capacity STPs Installed STPs Monitored

State Nos Capacity (MLD) STPs Nos

Capacity (MLD)

Utilization (MLD)

Non functional STPs (Nos)

Uttarakhand 7 93 6 89 70 0Uttar Pradesh 15 464 14 462 377 1Bihar 6 153 4 109 22 1Jharkhand ‐ ‐ ‐ ‐ ‐ 0West Bengal 37 521 23 336 74 8Total 65 1,231 47 996 542 10

Source: Company, PhillipCapital India Research

90% of the wastewater is domestic The Central Pollution and Control Board (CPCB) monitors 144 drains in the main stem of the river and 90% of the wastewater generated in these drains is from domestic sources while the rest is from industrial units. Sources of water pollution in the Ganga


Domestic Waste water92%

Industrial Effluents8%



Uttar Pradesh is the biggest polluting state in the Ganga basin Almost 40% of the length of the river is in UP. Of the four states that form the Ganga basin, UP has the highest contribution to sewerage and effluent pollution in the river. With 51 drains, Uttar Pradesh is the most polluting state on the Ganga State Drains Sewage (MLD) BOD load (TPD) Uttarakhand 14 444 43 Uttar Pradesh 51 3,811 188 Bihar 25 580 100 West Bengal 54 1,779 96 Total ‐ Main Ganga 144 6,614 426 Ramganga 4 258 53 Kali ‐ east 9 595 165 Total ‐ Tributary 13 853 218

Total 157 7,467 644 Source: Company, PhillipCapital India Research 11 out of 20 locations in UP has seen an increase in water pollution between 2015‐16 2015 2016

S. No. District Sample location DO

(mg/l) BOD

(mg/l) Total Coliform (MPN/100 ml)

DO (mg/l)

BOD (mg/l)

Total Coliform (MPN/100 ml)

1 Ghaziabad Down Stream, Garh Muktaswar 8.1 2.8 1,233 8.2 2.3 1,033 2 Bulandshahr Up Stream AnoopShahr 7.7 2.3 590 8.2 2.3 614 3 Bulandshahr Down Stream AnoopShahr 7.6 2.2 547 8.3 2.2 539 4 Bulandshahr Raj Ghat Down Stream, Naurara 7.8 3.0 774 7.9 3.0 1,432 5 Bulandshahr Kachlaghat, Budaun 8.2 2.6 673 7.6 2.5 549 6 Kannauj Up Stream, Kannauj 8.4 3.5 3,900 8.4 3.2 4,033 7 Kannauj Down Stream, Kannuaj 7.9 3.7 5,158 8.3 3.8 5,642 8 Kanpur Bithoor, Kanpur 8.4 2.8 4,350 8.6 2.9 4,083 9 Kanpur Up Stream, Kanpur 8.4 2.9 5,200 8.1 3.5 4,575 10 Kanpur Down Stream, Kanpur 6.5 5.5 56,500 6.1 6.0 69,583 11 Raibareilly Dal Mau, Raibarilly 8.1 4.2 8,408 7.6 4.4 8,275 12 Pratapgarh Kalakankar, Pratapgarh 8.3 4.0 8,083 7.7 4.2 7,983 13 Kaushambi Kadaghat, Kaushambi 8.1 4.1 32,583 7.9 4.2 41,167 14 Allahabad Up Stream, Allahbad 8.2 3.9 32,000 8.0 3.9 39,250 15 Allahabad Down Stream, Allahbad 8.0 4.1 34,750 8.0 4.2 42,833 16 Mirzapur Up Stream, Vindhyachal, Mirzapur 7.4 2.1 2,355 8.1 2.2 2,433 17 Mirzapur Down Stream, Mirzapur 7.7 2.2 2,718 8.0 2.5 2,792 18 Varanasi Up Stream, Varanasi 8.3 3.1 3,208 8.6 3.1 3,075 19 Varanasi Down Stream, Varanasi 7.4 5.1 45,000 7.1 5.8 46,500 20 Ghazipur Ganga River, Tarighat,Gazipur 7.6 4.3 34,500 7.5 4.8 33,417

Source: UPPCB, PhillipCapital India Research Industrial pollution of the Ganga is the highest in UP 764 Grossly Polluting Industries (GPIs) are directly discharging their effluent into the Ganges – of these, 90% are in Uttar Pradesh while 58% are from the tannery sector. Pulp and paper sector contributes the highest quantity of bio‐chemical oxygen demand (BOD) load at 65%, and 55% of effluent discharge, while the distillery sector is responsible for maximum average BOD. The drains in Uttar Pradesh contribute 57% of wastewater flow and 44% of the BOD load into the river Ganga. 55% of the effluent discharged is from UP‐based industries State GPI Water Consumption (MLD) Effluent discharge (MLD)Uttarakhand 42 224 127 Uttar Pradesh 687 693 269 Bihar 13 91 17 West Bengal 22 116 87 Total 764 1,123 501 Source: Company, PhillipCapital India Research



So what is the opportunity from Namami Ganga? We base our assessment of the potential opportunity from NGP on: • Official budgetary allocations to the scheme and the recent changes in

project funding structure (EPC vs. PPP) • Realistic estimates based on our on‐ground checks We estimate a Rs 200bn opportunity under NGP

Source: NMCG, PhillipCapital India Research We estimate the total opportunity from NGP for sewage treatment plants (STPs) at Rs 140bn and Rs 60bn for effluent treatment – thus taking the total opportunity to Rs 200bn. Changes to the mode of execution... Our recent meetings with NMCG (the nodal agency for NGP) suggested that not all projects will be awarded on Hybrid Annuity (HBA) / PPP, as earlier envisaged. PPP projects will be restricted to 10‐12 large cities while for the balance cities/towns, projects will be awarded as EPC. ...could lead to orders worth Rs 140‐150bn vs. earlier estimate of Rs 200bn Assuming that 50% of the allocated funds for STPs (Rs 80bn) will be kept aside for viability gap funding (VGF) for PPP projects, the balance will be for EPC. In that case, we believe that the total investment on STPs under NGP would be Rs 140‐150bn over FY18‐20. Rs 16.6bn worth of projects approved recently The NMCG recently approved STPs worth Rs 16.6bn – of these 35% (by value) will be awarded on PPP and the rest on EPC. This suggests that the pace of ordering is likely to pick up. Based on our interaction with NMCG, we gather that it is in the process of approving another Rs 20‐25bn projects over the next three months.

Namami Ganga (Rs 200bn)

Allocation for STPs Rs 80bn Legacy Projects (World Bank Funded) ‐ Rs 72bn

Industrial PollutionAbatement ‐Rs 10bn

Hybrid Annuity (PPP) Rs40bn to be used as 40% VGF

Awarded till March'17 (Rs 60bn)

To be awarded ‐ Rs 10bnTo be awarded over FY18‐20 (Rs 12bn)

Can award Rs 140bn over FY18‐20

Others (Ghat renovation etc) ‐Rs 38bn

Rs 40 bn for EPC



Rs 16.5bn of projects approved by the government recently S.No Name of the project town Project Cost (Rs mn) (MLD / kms) Creation of new STP capacity and I&D works 1 Haridwar (Jagjeetpur and Sarai) 2,734 82.0 2 Joshimath 484 3.8 3 Rudraprayag 132 0.5 4 Karnaprayag 121 0.2 5 Kirtinagar 42 0.6 6 Rishikesh 1,580 27.0 7 Muni Ki Reti 805 12.5 8 Chamoli, Gopeshwar 616 4.4 9 Badrinath 182 1.0 10 Srinagar 225 1.0 11 Nandprayag 65 1.5 12 Ramana, Varanasi 1,510 50.0 13 Rajmahal 502 3.5

Total 8,998 187.9 Rehabilitation of existing STP capacity 14 Jagjeetpur,Haridwar 146 27.0 15 Vrindavan 338 5.0 16 Okhla, Delhi 6,658 564.0

Total 7,142 596.0 Up gradation of existing STP capacity 17 Tapovan, Rishikesh 22 3.5 18 Uttarkashi 100 2.0 19 Sarai,Haridwar 96 18.0 20 Swargashram 45 3.0 21 Srinagar‐Garhwal 154 3.5

Total 418 30.0 Total STP capex 16,557 813.9


Updated baseline data could necessitate higher allocation Data on sewerage generation for the entire river was last compiled in 2012. As per the recent survey (2016), the flow of sewerage in the Haridwar‐Kanpur belt is 40‐250% higher than what was estimated in 2012. Even in the case of effluent treatment, current data suggests that every operational industrial unit in the Haridwar to Kanpur region (90% of the effluent generation happens in this stretch) has an ETP – hence, there is no material capex required on industrial pollution. However, based on our visit to UP and meetings with CPCB, we gathered that official data on effluent discharged into the river is highly understated since there is no proper monitoring system yet.

Our contacts cited examples of the tannery industry in Kanpur, which has 422 units, with an official effluent discharge of just 22MLD – in reality, this figure is likely to be significantly higher.

As per latest survey, the discharge by drains between Haridwar to Kanpur has increased by 75% between 2012 and 2016 Sewage / Industrial effluent (mld) River 2012 2016 Change (%) Ganga 497 701 41% Ram Ganga 210 728 246% Kali East 675 996 48% Total 1,382 2,425 75%

Source: CPCB, PhillipCapital India Research



Industry‐wise wastewater generation Industry type Total Units Effluent discharge (MLD)

Chemical 27 98 Distillery 35 37

Food, Dairy & Beverage 22 7 Pulp & Paper 67 201 Sugar 67 96 Textile, Bleaching & Dyeing 63 11

Tannery 442 22

Others 41 29

Total 764 501


Grossly understated



All‐India data is equally alarming All‐India sewerage treatment capacity is 37% of total requirement – this would entail a capex of at least Rs 970bn. Only 37% of India's sewerage generation is treated S. No. States / UTs Sewerage Generation (mld) STP capacity (mld)1 Andaman & Nicobar 22 ‐2 Andhra Pradesh 2,871 2473 Arunachal Pradesh 50 ‐4 Assam 703 05 Bihar 1,879 1256 Chandigarh 164 3157 Chhattisgarh 951 ‐8 Dadra & Nagar Haveli 26 ‐9 Daman & Diu 29 ‐10 Goa 145 7511 Gujarat 4,119 3,06312 Haryana 1,413 85313 Himachal Pradesh 110 11514 Jammu & Kashmir 547 26515 Jharkhand 1,270 11716 Karnataka 3,777 1,30417 Kerala 2,552 15318 Lakshadweep 8 ‐19 Madhya Pradesh 3,214 48220 Maharashtra 8,143 5,16021 Manipur 132 ‐22 Meghalaya 95 123 Mizoram 90 1024 Nagaland 92 ‐25 Delhi 4,155 2,69426 Odisha 1,121 38627 Puducherry 136 6928 Punjab 1,664 1,24529 Rajasthan 2,736 86630 Sikkim 24 3231 Tamil Nadu 5,599 1,80032 Telangana 1,671 68633 Tripura 154 034 Uttar Pradesh 7,124 2,64735 Uttarakhand 495 15336 West Bengal 4,667 417 Total 61,948 23,277




State‐wise ‘polluted river stretches’ as per the CPCB State / UT River stretch identified Nos

1 Andhra Pradesh Godavari, Hundri, Krishna, Tungabhadra, Pennar, Kundu 6

2 Assam Mora Bharali, Barak, Beki, Bharalu, Bhogdoi, Boginadi, Brahamputra, Burhidihing, Deepar Bill, Dhansiri, Digboi, Disang, Jia Bharali, Jhanji , Kalong, Kapili, Kharsang, Kohora, Kundli, Kushiara, Manas, Pagldia, Panchnai, Ranga Nadi, Sankosh, Sonai,Subansiri, Kathakal

28

3 Bihar Ganga, Harbora, Manusmar, Ram Rekha, Sirsia 5

4 Chhattisgarh Hasdeo, Kelo, Kharoon, Mahanadi, Seonath 5

5 Daman, Diu and Dadra Nagar Haveli

Damanganga 1

6 Delhi Yamuna 1

7 Goa Mandovi, Assonora, Bicholim, Chapora, Khandepar, Mapusa, Sal, Valvant 8

8 Gujarat Mahi, Narmada, Ambika, Amlakhadi, Anas, Balehwar Khadi, Bhadar, Damanganga, Kaveri, Khari, Kim, Kolak, Panam, Bhogavo, Dhadar, Purna, Sabarmati, Shedhi, Tapi, Triveni,

20

9 Haryana Ghaggar, Yamuna 2

10 Himachal Pradesh Beas, Tons, Sirsa, Swan, Sukhana, Suketi Khad, Binwa, Markanda 8

11 Jammu & Kashmir Banganga, Basanter, Chenab, Chunt Kol, Dewak, Gawkadal, Jhelam, Lidder, Tawi 9

12 Jharkhand Bokaro, Koel, Damodar, Jumar, Karo, Sankh, Subarnarekha, Koel 8

13 Karnataka Arkavathi, Bhadra, Bhima, Cauvery, Ghatprabha, Kabini, Kagina, Kali, Krishna, Lakshmantirtha, Malprbha, Manjira, Shimsha, Tungabhadra, Tungha

15

14 Kerala Chitrapuzha, Kadambayar, Kallai, Karamana, Keecheri, Kuppam, Manimala, Neeleswaram, Periyar, Pullur, Puzhackal, Thirur, Uppala

13

15 Madhya Pradesh Banjar, Betwa, Bichia, Chambal, Chillar, Denwa, Gohad, Gour, Jammer, Kalisot, Khan, Kolar, Kshipra, Kunda, Malei, Narmada, Parvati, Shivna, Tapi, Tons, Wainganga

21

16 Maharashtra Wena, Wainganga, Godavari, Bhima, Krishna, Ulhas, Kundalika, Tapi, Girna, Panchganga, Nira, Bhatsa, Rangavali, Indrayani, Chandrabhaga, Vashisti, Mithi, Kanhan, Koyna, Amba, Amravati, Bindusara, Darna, Ghod, Gomai, Hiwara, Kan, Manjara, Mor, Morna, Mula, Mula‐ Mutha, Mutha, Panzara, Patalganga, Pawna, Pedhi, Pelhar, Penganga, Purna, Savitri, Sina, Surya, Urmodi, Vaitrana, Vel, Venna, Waghur, Wardha

49

17 Manipur Barak, Imphal, Iril, Khuga, Khujairok, Lokchao, Maha, Manipur, Nambul, Sekmai, Thoubal, Wangjing 12

18 Meghalaya Bugi, Kynshi, Kyrhukhla, Lukha, Myntdu, Nonbah, Umkhrah, Umshyrpi, Umtrew, Wahblei 10

19 Nagaland Chathe, Dhansiri, Dzu 3

20 Odisha Baitrani, Brahamani, Budhabalnaga, Daya, Kathajodi, Koel, Kuakhai, Mahanadi, Nagavalli, Rushikulya, Serua, Vansadhara

12

21 Punjab Ghaggar, Satluj 2

22 Rajasthan Banas, Chambal, Chappi, Ghaggar, Kali Sindh, Parvati, Jawai, Ujad 8

23 Sikkim Dikchu, Maney Khola, Rangit, Ranichu, Teesta 5

24 Tamil Nadu Bhavani, Cauvery, Palar, Sarabanga, Tambirapani, Thirumanimuthar, Vasista 7

25 Telangana Godavari, Krishna, Manjeera, Musi, Nakkavagu, Sabari, Maner 7

26 Tripura Gumti, Haora 2

27 Uttar Pradesh Betwa, Ghaghara, Gomti, Hindon, Kalinadi, Ramganga, Rapti, Rihand, Sai, Saryu, Ganga, Yamuna, Kosi 13

28 Uttarakhand Bhela, Dhela, Suswa, Ganga, Kosi 5

29 West Bengal Barakar, Churni, Damodar, Dwarakeshwar, Dwarka, Ganga, Jalangi, Kaljani, Kansi, Karola, Mahananda, Mathabhanga, Mayurkashi, Rupnarayan, Silabati, Teesta, Vindhadhari

17

Total 302




Our view Pace of ordering will pick up Our channel checks suggest that ordering from NGP will pick up pace in FY18‐19. Rs 16.6bn worth of projects have recently been approved, and we expect another Rs 20‐25bn to receive approval and be awarded in the next six months. Competition will be limited for large projects We expect competitive intensity for large projects, particularly for PPPs, to be limited. NMCG will allow companies with proven execution track record and restrict fringe players from participating in PPP projects.

Va Tech Wabag (Buy, TP Rs 740) Improved visibility on FY18 order inflows We believe VATW will be one of the primary beneficiaries of NGP capex. In addition, in the near term, we expect opportunities for municipal STPs from Pune, Bangalore, and AMRUT projects in MP and Bangladesh. Consequently, we raise our FY18 order inflow estimate by 24% to Rs 44bn (+14% yoy), which leads us to raise our FY19 earnings estimate by 7%. Chennai desalination plant could offer a upside risk to FY18 inflow We expect the 150MLD Nemmeli desalination plant (Rs 14bn) to be awarded in 1HFY18. VATW is one of the technically shortlisted companies for the project. Presently, we do not build this project into our estimates. In case VATW wins this project, it would imply a 30% upside to our FY18 order inflow estimates. Our thesis on improvement in working capital is yet to play out In our January 2017 report, we highlighted that VATW should benefit from improving visibility on new orders, and contraction in working capital to 21% by FY19 from 34% in 1HFY17. Even as visibility on orders has improved, we see our thesis on improvement in working capital to play out over FY18‐19. Retain BUY; revise target price to Rs 740 VATW’s stock has rallied 40% in the past three months (23% relative outperformance to BSE Cap Goods) mainly on improving climate for domestic order inflows. We believe that the stock will rerate further on improving working capital. Hence, we maintain our Buy rating with a revised target of Rs 740 (Rs 600 earlier). The change in our target price is because of: (1) a 4% revision in our FY19 earnings estimates, (2) increase in our target multiple to 20x vs. 18x earlier, and (3) rolling forward our valuation to March 2019 (September 2018 earlier). The stock currently trades at 19x our FY19 earnings – our target multiple (20x) is at discount to VATW’s long‐term average of 21.5x.



Assumptions VATW's order inflows assumptions (Rs mn) FY2016 FY2017e FY2018e FY2019eMunicipal EPC 25,839 22,919 29,605 30,887

Change (% yoy) 169.5% ‐11.3% 29.2% 4.3%Industrial EPC 19,717 10,769 8,889 7,821

Change (% yoy) 86.0% ‐45.4% ‐17.5% ‐12.0%O&M 5,845 5,121 5,676 6,357

Change (% yoy) ‐39.0% ‐12.4% 10.8% 12.0%Total Order inflows 51,401 38,808 44,170 45,064 Change (% yoy) 73% ‐24% 14% 2%

Source: PhillipCapital India Research VATW's order book assumptions (Rs mn) FY2016 FY2017e FY2018e FY2019eMunicipal EPC 39,857 47,894 58,122 66,755

Change (% yoy) 54.8% 20.2% 21.4% 14.9%Industrial EPC 21,026 21,945 18,718 16,150

Change (% yoy) 86.1% 4.4% ‐14.7% ‐13.7%O&M 12,199 12,084 13,087 13,823

Change (% yoy) ‐29.7% ‐0.9% 8.3% 5.6%Total Order Book 73,082 81,924 89,927 96,729 Change (% yoy) 34.4% 12.1% 9.8% 7.6%

Source: PhillipCapital India Research VATW's revenue assumptions (Rs mn) FY2016 FY2017e FY2018e FY2019eMunicipal EPC 10,178 14,881 19,378 22,253

Change (% yoy) ‐21.5% 46.2% 30.2% 14.8%Industrial EPC 10,050 9,850 12,116 10,389

Change (% yoy) 53.8% ‐2.0% 23.0% ‐14.3%O&M 5,193 5,236 4,674 5,620

Change (% yoy) 8.4% 0.8% ‐10.7% 20.3%Other Operating Income 65 180 180 180

Change (% yoy) ‐3.7% 176.1% 0.0% 0.0%Total Order inflows 25,486 30,147 36,347 38,442 Change (% yoy) 4.7% 18.3% 20.6% 5.8%

Source: PhillipCapital India Research Our assumptions for recovery of receivables from APGENCO Rs mn FY16 FY17e FY18e FY19e Receivables from APGENCO as of 3QFY17 3,800 Pending execution to be completed by 3QFY18 2,750 Total receivables due from APGENCO 6,550

Recovery of dues Best case scenario 5,080 1,470 Our estimates 3,500 3,050

NWC to Sales (as per our estimates) 32.2% 32.2% 23.9% 20.8% FCF (2,233) 80 3,398 3,272

Source: PhillipCapital India Research



With improving profitability and working capital, RoE should expand

Source: PhillipCapital India Research VA Tech currently trades below its long‐term average PE, despite recent rerating

Source: PhillipCapital India Research

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Apr‐13

Jul‐1

3Oct‐13

Jan‐14

Apr‐14

Jul‐1

4Oct‐14

Jan‐15

Apr‐15

Jul‐1

5Oct‐15

Jan‐16

Apr‐16

Jul‐1

6Oct‐16

Jan‐17

Apr‐17

VATW PE (x) Average +1SD ‐1SD



Financials

Income Statement Y/E Mar, Rs mn FY16 FY17e FY18e FY19eNet sales 25,486 30,147 36,347 38,442Growth, % 5 18 21 6Total income 25,486 30,147 36,347 38,442Raw material expenses ‐19,889 ‐23,506 ‐28,534 ‐29,999Employee expenses ‐2,177 ‐2,426 ‐2,729 ‐2,915Other Operating expenses ‐1,207 ‐1,352 ‐1,598 ‐1,695EBITDA (Core) 2,213 2,862 3,486 3,834Growth, % 4.8 29.3 21.8 10.0Margin, % 8.7 9.5 9.6 10.0Depreciation ‐205 ‐191 ‐212 ‐234EBIT 2,008 2,671 3,274 3,599Growth, % 0.3 33.0 22.6 9.9Margin, % 7.9 8.9 9.0 9.4Interest paid ‐471 ‐566 ‐622 ‐621Other Non‐Operating Income 47 85 119 180Pre‐tax profit 1,617 1,817 2,771 3,158Tax provided ‐689 ‐792 ‐958 ‐1,092Profit after tax 928 1,025 1,813 2,066Others (Minorities, Associates) ‐6 ‐50 ‐50 ‐50Net Profit 922 975 1,763 2,016Growth, % (20.5) 51.6 30.8 14.4Net Profit (adjusted) 889 1,347 1,763 2,016Unadj. shares (m) 55 55 55 55 Balance Sheet Y/E Mar, Rs mn FY16 FY17e FY18e FY19eCash & bank 3,584 3,552 6,045 8,401Debtors 20,430 23,126 24,411 23,772Inventory 976 966 938 822Loans & advances 1,254 1,471 1,769 1,860Other current assets 1,688 1,967 2,355 2,470Total current assets 27,931 31,082 35,518 37,325Investments 277 277 277 277Gross fixed assets 2,580 2,754 2,934 3,134Less: Depreciation ‐825 ‐1,016 ‐1,228 ‐1,462Add: Capital WIP 24 0 0 0Net fixed assets 1,779 1,738 1,706 1,672Total assets 30,035 33,145 37,549 39,322 Current liabilities 12,904 14,674 17,284 17,291Provisions 3,248 3,153 3,496 3,630Total current liabilities 16,151 17,827 20,780 20,922Non‐current liabilities 3,884 4,459 4,422 4,375Total liabilities 20,036 22,286 25,202 25,297Paid‐up capital 109 109 109 109Reserves & surplus 9,808 10,577 11,975 13,563Shareholders’ equity 9,999 10,858 12,346 14,024Total equity & liabilities 30,035 33,145 37,548 39,322 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY16 FY17e FY18e FY19ePre‐tax profit 1,617 1,817 2,771 3,158Depreciation 205 191 212 234Chg in working capital ‐2,920 ‐1,507 1,011 691Total tax paid ‐538 ‐792 ‐958 ‐1,092Cash flow from operating activities ‐2,081 230 3,578 3,472Capital expenditure ‐66 ‐150 ‐180 ‐200Chg in investments 100 0 0 0Cash flow from investing activities 910 ‐150 ‐180 ‐200Free cash flow ‐1,171 80 3,398 3,272Debt raised/(repaid) 2,078 575 ‐37 ‐47Dividend (incl. tax) ‐264 ‐205 ‐365 ‐428Other financing activities 99 ‐521 ‐543 ‐481Cash flow from financing activities 1,941 ‐112 ‐905 ‐916Net chg in cash 770 ‐32 2,493 2,356 Valuation Ratios

FY16 FY17e FY18e FY19ePer Share data EPS (INR) 16.3 24.7 32.3 37.0Growth, % (20.8) 51.6 30.8 14.4Book NAV/share (INR) 182.0 196.1 221.7 250.9FDEPS (INR) 16.3 24.7 32.3 37.0CEPS (INR) 19.5 35.1 36.2 41.3CFPS (INR) (30.9) (6.9) 53.5 51.6DPS (INR) 4.0 3.1 5.5 6.5Return ratios Return on assets (%) 4.4 4.4 6.2 6.4Return on equity (%) 9.4 13.1 15.5 15.7Return on capital employed (%) 7.8 7.8 11.3 11.6Turnover ratios Asset turnover (x) 2.1 2.2 2.6 2.8Sales/Total assets (x) 0.9 1.0 1.0 1.0Sales/Net FA (x) 13.8 17.1 21.1 22.8Working capital/Sales (x) 0.4 0.4 0.3 0.3Working capital days 163.9 155.7 122.4 110.4Liquidity ratios Current ratio (x) 2.2 2.1 2.1 2.2Quick ratio (x) 2.1 2.1 2.0 2.1Interest cover (x) 4.3 4.7 5.3 5.8Dividend cover (x) 4.1 7.9 5.8 5.7Total debt/Equity (%) 39.2 41.7 36.6 32.0Net debt/Equity (%) 3.0 8.5 (13.4) (29.4)Valuation PER (x) 42.4 27.9 21.4 18.7Price/Book (x) 3.8 3.5 3.1 2.8Yield (%) 0.6 0.5 0.8 0.9EV/Net sales (x) 1.5 1.3 1.0 0.9EV/EBITDA (x) 17.1 13.5 10.3 8.8EV/EBIT (x) 18.9 14.4 11.0 9.3



Stock Price, Price Target and Rating History

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%

SELL <= ‐15% Target price is less than or equal to ‐15%.

N (TP 465)

N (TP 525)

N (TP 617)

B (TP 900) B (TP 820)B (TP 780)

B (TP 770)

N (TP 570) N (TP 585)N (TP 585)

B (TP 575)B (TP 590)B (TP 600)

0

100

200

300

400

500

600

700

800

900

1000

A‐14M‐14 J‐14 A‐14 O‐14 N‐14 J‐15 F‐15 A‐15M‐15 J‐15 A‐15 O‐15 N‐15 D‐15 F‐16M‐16M‐16 J‐16 A‐16 S‐16 N‐16 D‐16 F‐17M‐17



Management Vineet Bhatnagar (Managing Director) (91 22) 2483 1919 Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946 Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735 Research Automobiles IT Services Pharma & Specialty Chem Dhawal Doshi (9122) 6667 9769 Vibhor Singhal (9122) 6667 9949 Surya Patra (9122) 6667 9768 Nitesh Sharma, CFA (9122) 6667 9965 Shyamal Dhruve (9122) 6667 9992 Mehul Sheth (9122) 6667 9996 Banking, NBFCs Infrastructure Strategy Manish Agarwalla (9122) 6667 9962 Vibhor Singhal (9122) 6667 9949 Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Pradeep Agrawal (9122) 6667 9953 Deepak Agarwal (9122) 6667 9944 Aashima Mutneja, CFA (9122) 6667 9764 Paresh Jain (9122) 6667 9948 Logistics, Transportation & Midcap Telecom Consumer & Retail Vikram Suryavanshi (9122) 6667 9951 Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Media Manoj Behera (9122) 6667 9973 Jubil Jain (9122) 6667 9766 Manoj Behera (9122) 6667 9973 Technicals Preeyam Tolia (9122) 6667 9950 Metals Subodh Gupta, CMT (9122) 6667 9762 Cement Dhawal Doshi (9122) 6667 9769 Production Manager Vaibhav Agarwal (9122) 6667 9967 Yash Doshi (9122) 6667 9987 Ganesh Deorukhkar (9122) 6667 9966 Economics Mid-Caps & Database Manager Editor Anjali Verma (9122) 6667 9969 Deepak Agarwal (9122) 6667 9944 Roshan Sony 98199 72726 Shruti Bajpai (9122) 6667 9952 Oil & Gas Sr. Manager – Equities Support Engineering, Capital Goods Sabri Hazarika (9122) 6667 9756 Rosie Ferns (9122) 6667 9971 Jonas Bhutta (9122) 6667 9759 Vikram Rawat (9122) 6667 9986 Sales & Distribution Corporate Communications Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976 Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747 Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745 Bhavin Shah (9122) 6667 9974 Ashka Mehta Gulati (9122) 6667 9934 Execution Archan Vyas (9122) 6667 9785 Mayur Shah (9122) 6667 9945

Contact Information (Regional Member Companies)

SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 RafflesCityTower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA: Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG: Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN: Phillip Securities Japan, Ltd 4‐2 Nihonbashi Kabutocho, Chuo‐ku

Tokyo 103‐0026 Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141

www.phillip.co.jp

INDONESIA: PT Phillip Securities Indonesia ANZTower Level 23B, Jl Jend Sudirman Kav 33A,

Jakarta 10220, Indonesia Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809

www.phillip.co.id

CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, OceanTower Unit 2318

Shanghai 200 001 Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940

www.phillip.com.cn

THAILAND: Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, VorawatBuilding, 849 Silom Road,

Silom, Bangrak, Bangkok 10500 Thailand Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921

www.phillip.co.th

FRANCE: King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance

75008 Paris France Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017

www.kingandshaxson.com

UNITED KINGDOM: King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street

London, EC4N 6AS Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835

www.kingandshaxson.com

UNITED STATES: Phillip Futures Inc. 141 W Jackson Blvd Ste 3050

The Chicago Board of TradeBuilding Chicago, IL 60604 USA

Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA: PhillipCapital Australia Level 10, 330 Collins Street

Melbourne, VIC 3000, Australia Tel: (61) 3 8633 9800 Fax: (61) 3 8633 9899

www.phillipcapital.com.au

SRI LANKA: Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha,

Colombo 2, Sri Lanka Tel: (94) 11 2429 100 Fax: (94) 11 2429 199

www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in



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This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

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Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co‐managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the

company(ies) covered in the Research report No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.



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For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S.‐regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account.

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