VA Tech WABAG: Finding waterways

Last year in July, the government of the water-scarce, drought-prone state of Tamil Nadu was forced to lug 2.5 million litres of water by train from the district of Vellore to the thirsty capital of Chennai around 217 km away. It was a desperate time—all four reservoirs in the city had run dry—calling for extreme measures. Things could have been (and would be) worse, but for a 96-year-old pure-play water company, VA Tech WABAG, that, for the last couple of years, has been providing 590 of the 950 million litres per day (MLD) needed by Chennai for its daily consumption.

“We can treat any kind of water, be it from industrial or municipal waste, sludge or the desalination of sea and brackish water,’’ says 59-year-old Rajiv Devaraj Mittal, managing director and group CEO, VA Tech WABAG, making the Chennai-headquarteredIndian multinational a significant player in helping manage India’s water crisis. It also has expertise in the technical integration of various processes in desalination and wastewater treatment, adds 56-year-old Rajneesh Chopra, global head, business development, WABAG.

For instance, of the 590 MLD it supplies to Chennai, 110 MLD is potable water from its Nemmeli desalination plant, 480 MLD for domestic consumption from its water treatment plants at Red Hills and Veeranam lakes. Besides, it provides 45 MLD for industrial use from treated waste water, and 16MLD from reused treated water from Chennai Petrochemical Corporation. (WABAG treats nearly 200 MLD of the 650-700 MLD sewage generated from its waste water plant.)

Situated on the East Coast Road, some 50 km from the main city, the Nemmeli desalination plant, a ₹570-crore project, is of particular pride to the company. It took three years to be set up but, when it was completed in February 2013, it was considered a technological breakthrough because its complex design was achieved at a cost of just over ₹1,000 crore. “I challenge anyone to do such a complex project at such low costs,’’ says Mittal, a chemical engineer from Mumbai University; he is one of the four promoters, and the first employee, of WABAG in India.

The Japan International Cooperation Agency (JICA), the financing arm of the Japanese government, has recently announced funding for another desalination plant of 400 MLD in Chennai, for which a consultant has already been appointed. WABAG will be bidding for it, says 54-year-oldS. Varadarajan, director and chief growth officer, as well as a promoter, of the company.

WABAG has a high hit-rate with bids; even as recently as 2017, it entered into a $125-million deal with the $4.1-billion Dangote Group, owned by Aliko Dangote, Nigerian billionaire and Africa’s richest man. This was for the treatment of water and waste water emanating from its petroleum refinery in Lekki FreeZone, near Lagos, Nigeria.

The 63-year-old Dangote, whose business interests include cement, sugar, salt, beverages, and real estate, had recently forayed into cash-guzzling businesses like fertilisers, oil and gas, and petrochemicals. Apart from the refinery, one of the world’s largest with a capacity of 650,000 barrels of crude per day, it also sought a partner to treat the industrial waste water and other effluents generated from its fertiliser plant in Lagos.

WABAG triumphed over competition, French major Veolia, one of the biggest global players in the water business, and two other Indian companies, Triveni and Paramount. This was during a second round bidding which had to be called after first round winner, a Chinese company, China State Construction Engineering, failed to meet the quality norms set by Dangote. “Six months into the first bid, the Nigerian company called us for a second round of bidding after it realised that the Chinese company was unable to meet the water and waste water standards laid down by them and we emerged victorious,’’ says Mittal.

Not surprising, given its long-established expertise in treating “the cocktail of effluents”—petrochemical and other chemical wastes—emerging from refineries. Since WABAG took on its first waste water project in India—the Jamnagar refinery of Reliance in 1997, with a team of six people—many other projects have followed: Building a recycling plant for Indian Oil Corporation’s Paradip refinery, a waste water treatment plant for Saudi Arabia’s Aramco plant, and an effluent treatment plant for Petronas of Malaysia. (Operation and maintenance of the plant can either be taken care of by WABAG, like the Nemmeli plant, or other companies.) Currently, the company is constructing an effluent treatment plant and a recycled water treatment plant for Guru Gobind Singh Refinery, jointly owned by Hindustan Petroleum Corporation and Mittal Energy, for ₹290 crore.

Though the order book is flourishing, WABAG wants to stay on the cutting edge of water technology through its three state-of-the-art R&D facilities in Switzerland, Austria, and India.“We are trying to develop ceramic membranes so that impurities can be burnt without damaging the membrane (filters used in both desalination and sewerage plants),’’ says Mittal.

Because new technologies also mean more business. A company in Switzerland (where WABAG has already executed over 100 water and wastewater projects) recently gave WABAGa contract for the removal of micro-organisms like bacteria and viruses that have become antibiotic-resistant, and other effluents coming from the pharmaceutical industry. “While these kinds of demands come from developed countries, the same standards could become mandatory for the developing world too,’’ adds Chopra.

A little history here: WABAG’s first water treatment plant was started in Germany in 1924 by the Deutsche Babcock Group. In 1999, Austrian group VA Tech acquired the German company's water business, which operated under the WABAG name, and subsequently, the company was called VA Tech WABAG. In 2005, Siemens acquired the Austrian group, while Mittal and three other promoters(Amit Sengupta, Shiv Narayan Saraf, and Varadarajan)—along with ICICIVentures—did a management buyout of the Indian business. At nearly ₹80crore, this was the biggest such deal in India at the time, and has been pivotal to the company’s success. The promoters still hold 24.68%. (Foreign institutional investors hold 24.6%, mutual funds 6.26%, and the balance43.47% is with the public.)

Two years later, they conducted a reverse merger to buy out the company's global operations for around€700 million.

It was important to acquire the parent company, says Mittal, because“we wanted to silence our competitors who said that the Indian subsidiary had been orphaned because it had lost the brand value, technological edge, and financial muscle that comes from being part of a big company”.The buyout was smooth because it was positioned as a reunification of the WABAG family, says Mittal. “They also trusted me because I had worked with them as a colleague in the U.K.office,’’ he points out.

Today, the ₹3,000-crore company is ranked as the sixth-largest water solutions company in the world, according to the U.K.-based GlobalWater Intelligence 2019, the leading publisher and event organiser serving the international water industry. It is present across four continents and 20 countries; its 1,800 employees are spread across Latin America, Europe, West Asia, and South and Southeast Asia. Till date, it has executed 434sewage treatment plants purifying nearly 22,238 million litres of sewage per day; its 64 desalination plants produce 1,206 million of desalinated water every day. Its order book stands at ₹11,500 crore, the highest in its 24-year history in India.

The company targets touching the €1-billion (₹8,000-crore) mark around the world in the next three years to become the third-largest player in the water business glob-ally. The route seems simple enough: Completion of its order book and a few new ones in the next two-and-a-half to three years (the average duration for the completion of a project).

But analysts like Ishpreet Kaur, assistant portfolio manager at KarmaCapital, contend that the target is somewhat optimistic given the company’s guidance of 20% growth in FY21. “Even if we assume the company grows at 20% in the next three years, it is unlikely to touch the€1-billion mark. It will need to grow at a compounded annual growth rate of 30% to 40%, which seems a little difficult in the current slowdown,’’ adds Kaur. (The company says that it is difficult to comment on the impact of Covid-19 at this point of time.)

But she also notes that the past three quarters have shown improvements in revenues and profitability. Kaur expects revenues to grow by20%, profits after tax by 30% to 40%, and EPC contracts 3.9 times in the next 12 months. “The ₹550 crore stuck in the APGENCO [Andhra Pradesh Power Generation Corp.]case too is likely to be released in the next 12 to 18 months easing its working capital needs,’’ adds Kaur.WABAG’s money was blocked, despite completing the project, for two reasons. One, the Jagan Mohan Reddy(the current chief minister) government of Andhra Pradesh decided to review all the projects of the previous regime (under Chandrababu Naidu). Two, the problem was compounded because consortium partners, Tech-pro and Gammon, went bankrupt.

The company is also looking in-wards to meet its ambitious goals. For instance, till 2015, it was divided into business-led units: Municipal Busi-ness Group, Industrial Water BusinessGroup, Operations Business Group, and International Business Group. Then it changed its organisational structure, dividing the company into four clusters with Pankaj Sachdeva heading the India cluster (India and Southeast Asia business), Deep Raj Saxena (Middle East and Africa), and a three-member team of Erwin Moetz, Arnold Gmuender, and Mahmut Gedak heading the European business; the company has yet to appoint a head for its Latin American cluster. Mittal heads overall operations.

At the same time, WABAG is aware that it cannot match the revenues of the two top global players, Veolia and Suez, both from France. “They are asset-heavy companies that are into mergers and acquisitions, buying and selling entire utility facilities while VATech WABAG follows an asset-light strategy,” says Chopra. Its goal is to be No. 3 in terms of technology, the number of people served, and plants set up across the world.

In keeping with its asset-light strategy, even though water is a local business and run by municipalities, the company only bids for projects which are either funded by central governments or multilateral funding agencies (like World Bank or JICA) which have sovereign guarantees from the central government. Explains Mittal: “If you look at the top 10 to 20 projects in our order book, we have taken risks on multilateral funding agencies or on central governments and not on states.’’ Even in the countries of Africa, the “company prefers orders backed by renowned funding agencies to ensure that our receivables are secure’,’ says Chopra.

For instance, the ₹244.6-crore water supply system project in Bhagalpur, Bihar, being executed by WABAG, is funded by the Asian Development Bank. Similarly, all Delhi Jal Board projects are financed by JICA, and the Namami Gange projects by theWorld Bank.

Again, most of the initial funding is in the form of bank guarantees and not actual cash transfers. Even for bidding, every company has to provide a “bid guarantee” from the bank—1% to 2% of the total bid value—to prevent them from walking out after a win. Similarly, winners have to provide a “performance guarantee” from the bank, agreeing to meet the quality, quantity, and timeline set by the clients, says Mittal, whose focus is the emerging markets of Asia, Africa, and Latin America—they do not bid for European projects.“We can build both desalination and waste water plants at one-fifth the cost of any European player at similar levels of technology because of lower overhead and operational costs.’’

Though the world is its stage, India and its perennial water crisis is a priority for WABAG. After all, desalination plants are an obvious solution given the country has a 7,600km-long coastline which provides a reliable, sustainable, and continuous supply of water. Here, Varadarajan points to the importance of the government working in tandem with the private sector for greater effectiveness. “While it makes sense to set up low-cost desalination plants in states suffering from acute water shortage, the government too needs to plug the leakages in the pipelines, set up a national water grid, and an all-India network of pipes so that water can be distributed to other states as well,” says Varadarajan.

The right pricing of water through proper metering is essential, so that the valuable resource is not wasted, says Chopra. As important, says the government's think tank, NITI Aayog, is for any such plant to get all the environmental clearances needed to prevent the concentration of salt in one place, thus threatening marine life.

The fact, however, is that the water crisis will only aggravate as urbanisation picks up speed. Also, according to World Bank statistics, by 2050,70% to 80% of the population will be living in cities, thereby compounding the civic crisis around the world.

WABAG has its head in the game.

Take Chennai as a case study where, apart from the Nemmeli desalination plant, around 25 km from the city centre is the company’s tertiary treatment water plant in Koyambedu, which converts 56 MLD of treated municipal effluents into 30 MLD of industrial water. Treated water from a sewage treatment plant, located one km away, passes through a multistage filtration process using high-end technologies like ultrafiltration and reverse osmosis to achieve potable quality water. This is supplied to the industrial cluster at Irungattukottai, Sriperumbudur, and Oragadamthrough a 68-km long pipe.

Varadarajan contends that the water from this plant is of higher quality than the benchmark set for drinking water by the World Health Organization. “Their norm is 150 ppm of TDS (total dissolved solids) and our upward limit is only 70 ppm. But we are producing water with 35 to 40ppm,’’ says Varadarajan. Similar water is used for drinking even in developed countries like Singapore.

The opportunities are evident since India has barely scratched the surface in terms of treatment of waste water. According to a study by NITI Aayog, India produces nearly 62,000 MLD of waste water and only 37% is getting treated. However, the business faces many challenges too. “Working capital can always become an issue if a company does not get money on time because one is dealing with governments and multilateral agencies,’’ says Sumit Chandwani, managing partner at Arth Equity Advisors, a private equity firm, and a former WABAG employee.

Secondly, since projects are granted on lowest-cost basis, it is crucial to complete them within budgets and in the stipulated timeline. “So execution is key, not just because companies work on thin margins. But every treatment plant has to be unique because effluents are different from state to state and industry to industry,’’ says Chandwani. The margins on engineering, procurement and construction of plants are barely 8%-9%, and around 20% on operation and maintenance.

That level of efficiency, then, works for a player for whom the mantra is“execution, execution and execution”.WABAG clearly has the necessary skill sets, track record, and technology: At this point, it is on Mittal to decide how fast he wants his company to grow and to what extent it wants to become involved in mitigating the country's water crisis.

(This story was originally published in the April 2020 issue of the magazine.)