Water
Ride the capex wave
Priyanko Panja
Research Analyst
(91) 22 6658 4055
priyanko.panja@db.com
Billions of rupees and counting; initiating with four Buys and one Hold
India, with a billion-plus population, is on the verge of a water crisis; significant
investment is vital. Investments likely to be multi-layered, leading to growth rate of
20%+ in investments over next five years, implying capex of INR2,320bn (USD
58bn). The best way to follow this theme seems via the pick-n-shovel stocks as
utilities (of local government bodies) cannot be bought into. Initiate with Buy on
four stocks likely to be among the beneficiaries - IVRC, NJCC, PEC and TMX-and
Hold on Jain.

The troika of demand-supply-pricing
Three key drivers of demand make a strong case for rapid investment ramp-up in
the water sector: 1) an increase in population and urbanization, 2) pressing supply
constraints including depleting water tables, inefficient and inadequate
transmission and distribution infrastructure, deteriorating water quality, and 3) an
inadequately low pricing scenario. We see increased awareness of the impending
water crisis scenario across central and state governments. This has led to higher
investment allocation by the central government and the scope of investment
under the state governments’ domain is also expected to grow at a faster rate
over the next five years.
360 degrees of investments’ ramp-up seen
Driven by situational and geographical requirements, dynamics of demand-supply
and investment focus, we do see variance in investment across respective
segments but structurally we see increased focus towards investments in water
infrastructure. Key growth areas in the water segment are irrigation and related
areas, water supply and distribution and sanitation with emerging areas like waste
water and water treatment. We see additional traction in operation and
maintenance and augmentation of supply. With emerging supply methodologies
of desalination likely to take time for commercial familiarity, we see increased
investments in commercially established methods for private participation under
the BOOT model. However, we believe governmental allocations will continue to
be the key driver for players in the segment.
Water politics and awareness risks for engineering/contracting space
We initiate coverage across the engineering and contracting plays. We believe that
continuation of strong growth and robust cash flows is likely to drive valuations for
the engineering companies (TMX, Buy; JI, Hold) while order flow-induced visibility
and value-unlocking opportunities across diversified business models should aid
the stock performance of the contracting players (NJCC, Buy; IVRC, Buy; PEC,
Buy). We have used both PEG implied PER methodology to value TMX and JI and
SOTP methodology for NJCC, IVRC and PEC. Key risks: politics of water; regional
disparity in awareness; unevenness in scope of investment across different
segments and dilution risk arising out of business model moving towards balance
sheet heavy investments.

Table of Contents
Why buy into the sector now? ......................................................... 5
How to play the sector...................................................................... 7
Key risks ........................................................................................... 10
Water, water everywhere…............................................................ 11
Scenario in India .............................................................................. 12
Drivers of the widening gap ........................................................... 14
Entire spectrum of water ................................................................ 19
Waste water treatment................................................................... 21
Water supply and sanitation .......................................................... 23
Operations & maintenance............................................................. 26
Irrigation........................................................................................... 29
Desalination ..................................................................................... 31
The road ahead ................................................................................ 32
Nagarjuna Construction.................................................................. 34
IVRCL Infra ....................................................................................... 44
Patel Engg ........................................................................................ 54
Thermax Limited.............................................................................. 62
Jain Irrigation................................................................................... 70