Sept. 12 (Bloomberg) -- VA Tech Wabag Ltd., India's biggest builder of water-treatment plants, expects sales to beat forecasts by rising as much as 20 percent annually as growing cities overwhelmed by sewage drive government contracts.
The Chennai-based company, a former unit of Siemens AG, has surged 36 percent this year on orders to construct water- cleaning plants for French cities, a solar polysilicon factory in Qatar and a petrochemical plant owned by Reliance Industries Ltd. That tops gains of 16 percent by India's benchmark Sensitive Index and 13 percent by the 49-member S&P Global Water Index for the same period.
India is leading sector growth due to contracts from municipalities struggling with clean water shortages and an inundation of sewage, Managing Director Rajiv Mittal said in an interview this week. Domestic sales jumped 35 percent in the 12 months through March, a trend that may extend over the next few years, he said.
The second-most populous nation is set to embark on decades of investment in sewage infrastructure because of an "acute shortage of water and growing needs," Mittal said. India's demand for clean water by 2030 may exceed supply by 50 percent while pollution is making what's available unfit for human consumption, industrial or agricultural use, according to McKinsey & Co. forecasts and a government report.
"In India, infrastructure always follows the demand," Mittal said by phone. Analyst estimates compiled by Bloomberg forecast group revenue to rise 14 percent this financial year. Mittal puts it at 15 to 20 percent. "We're absolutely on target for that kind of growth."
VA Tech shares rose 0.5 percent to 457 rupees at the close in Mumbai. The Sensex gained 0.8 percent.
India's population of 1.2 billion is growing about 1.3 percent annually, according to U.S. Census Bureau data. It's set to overtake China as the most populous nation by 2025, according to United Nations forecasts.
"The top line will always be driven by municipal demand in India just because there's so much need," Mittal said.
Mumbai, the nation's financial hub, itself will require $1 billion of investment to build eight planned sewage plants, he said.
"In Mumbai, not a drop of sewage is getting treated," releasing pathogens and waste into coastal waters, he said. Most of India outside of the biggest cities doesn't even have a wastewater collection system. "We have to start right from the basics. That will take a couple decades."
The industry may get a boost after the government issued a draft National Water Policy in July that encourages industries to use recycled water though stops short of requiring that, Mittal said. In India, water is managed at the state level and the latest draft follows efforts to devise a nationwide legal framework for regulating the resource.
VA Tech's dependence on government contracts may pose a pitfall with India facing a record current account deficit and a history of state electricity utilities defaulting or delaying payments for lack of funds. India plans to restructure about $35 billion of loans held by utilities to boost their ability to pay.
"It is a risk definitely," said G.V. Giri, vice president at IIFL Capital Ltd. in Mumbai. "However, water supply is more than just an economic input, it's a social and physical necessity. We haven't seen too much of a slowdown because the government's priority is to keep these projects going."
The falling cost of desalination, which makes freshwater from the sea, is opening a market in urban areas plagued by shortages and contamination concerns, Mittal said.
Technology improvements have cut the cost of desalination by about 75 percent in the last 10 years to less than $1 for 1,000 liters, he said. Treated seawater now costs about 5 paise a liter (0.09 cents) compared with 15 paise for water delivered by private tankers, a practice common across Indian cities where the municipal system can't provide enough.
"You don't know where that tanker fellow fills his truck," Mittal said. "You don't know the quality and origin while desalinated water is all piped in completely sealed pipes."
Global desalination equipment orders are forecast to triple to a record $17 billion in 2016 driven by breakthroughs in energy savings and demand by cities and industry, according to Global Water Intelligence. Leaders in the industry include France's Veolia Environnement SA, the biggest water company, IDE Technologies Ltd. of Israel and Hyflux Ltd. of Singapore.
India has eight desalination plants operating, another partly in service and two on the way, according to Bloomberg New Energy Finance. In 2010, Spain's Abengoa SA started a 100,000- cubic-meter desalination plant in Chennai.
While agriculture accounts for at least 85 percent of India's water consumption according to Mittal and the government compared with 70 percent worldwide, industrial demand is growing at twice the pace of municipal or farm use, McKinsey said.
VA Tech's industrial customers include Reliance Industries, Essar Group, Adani Group and Indian Oil Corp., which require clean water to run steel, power and refining plants. VA Tech has also built about six projects for refineries and municipalities, allowing them to sell their wastewater to power plants needing water for cooling, he said.
Water shortages can cripple power generation by depriving plants of the cooling fluids they need when burning coal and natural gas or reducing output at hydropower utilities.
"The power sector cannot work without water, they're absolutely interlinked," Mittal said.
That could drive demand for more desalination plants as utilities including Tata Power Co. and NTPC Ltd. increasingly build coal plants on the coast for easy access to fuel imports.
"The moment you go to the coast, you have no choice but to put up a desalination plant," Mittal said.