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By: Benjamin Shepherd
With a population of almost 11 million in the city proper and
19.9 million in the metropolitan area, São Paulo is the largest
city in Brazil and one of the largest in the world.
With a history dating back to 1554, São Paulo has long served as
one of Brazil's most important commercial centers and has undergone
major shifts in its primary businesses.
In the 1700s and into the 1800s, the city served as a major
sugar cane and coffee bean trading center. Given its close
proximity to the coast, European merchants used the city as a
beachhead to establish commercial relationships with farmers in the
As agricultural commodity prices became increasingly volatile
with the opening of new markets late in that period, São Paulo
began a process of rapid industrialization that ran well into the
mid-20th century. Attracting a huge influx of immigrants from the
country's rural areas in search of higher incomes, between 1920 and
1970 the city's population grew by an average 10.3 percent
But that halcyon period came to an end. In the 1970s and 1980s,
other major Brazilian population centers began competing to attract
manufacturers. At the same time, labor markets around the world,
most notably China and Mexico, opened up to foreign trade. As a
result, São Paulo underwent another major transformation by
shifting its focus to become a base for the country's growing
services sector, attracting major banks, retailers, airlines and a
diverse mix of other businesses. A growing number of multinational
corporations have also come to call São Paulo home.
In its latest incarnation, São Paulo's population growth has
slowed, averaging just 3.5 percent annually over the past 40 years.
Growth is expected to slow to just 1 percent annually over the
coming decade as living conditions in the country's urban and rural
areas come to par, farm living becomes easier with continued
mechanization, and the government's programs to foster school
construction and attract doctors to rural regions reduce the
pressure to migrate to urban areas.
While slowing population growth might sound like a negative for
Companhia de Saneamento Basico
), the company still faces plenty of expansion opportunities.
Locally known as Sabesp, it is one of the largest water
utilities in the world, providing water services to 24 million
people and sewage services to 20.6 million in 362 of the 645
municipalities in the state of São Paulo in addition to the city
itself. In all, the company serves about 60 percent of the state's
urban population, with 100 percent water coverage across the state
and 82 percent sewage coverage.
The state of São Paulo is the most populous in Brazil, with 41.2
million inhabitants and the second wealthiest with per capita gross
domestic product (
) of BRL24,456 (USD12,032.18). About a third of the country's GDP
is generated in the state, which is widely considered the economic,
technical and financial hub of Brazil.
Despite the state's relative wealth and nearly universal
coverage by a water distribution system, São Paulo faces major
Poverty is still a major concern in the state, with about 16
percent of the population living below the poverty line. Most of
those poor dwell in massive urban slums with insufficient access to
either water or sewer services, so much of their waste finds its
way into surface water which supplies 100 percent of the water in
The quality of existing infrastructure is also a major issue;
leaky pipes cause the utility a physical water loss of nearly 26
percent of its volume annually.
Sabesp is investing heavily to address those issues, with
spending on track to reach BRL7.9 billion over the next three years
to expand its services and minimize losses in its system. As a part
of that program, the company recently closed a deal to borrow
BRL884.3 million from the Japan International Cooperation Agency to
continue to improve water efficiency-five years ago the loss rate
was just over 34 percent. The company's aim to have zero water loss
Sabesp's history of investing heavily in its distribution and
treatment systems has greatly paid off over the past decade, for
both the company and shareholders alike.
Revenues have risen from BRL3.7 billion in 2002 to BRL9.9
billion last year. By the same token, net income has shot up from a
BRL651 million loss a decade ago to BRL1.2 billion last year, while
net margin is currently averaging about 16 percent. Free cash flow
also averages about BRL440 million annually, even as the company
funds about half of its infrastructure investment from its own
For shareholders, the company's strong financial performance has
translated into a steadily rising dividend that has nearly doubled
since 2007. The stock's yield is 4.9 percent, up from 3.4 percent
in 2004. That solid growth should continue this year and
While organic population growth is slowing, its continued
expansion will drive the company's long-term prospects. With only
60 percent of the state of São Paulo's population connected to the
water system, potential growth opportunities abound. On that basis
alone, management expects to be able to maintain its current growth
rate in connections.
Additionally, São Paulo will also host soccer matches for both
the 2016 Olympics and the 2014 FIFA World Cup competition. The city
is eager to show its best face for the millions of people attending
those events and is investing heavily in its infrastructure. An
urban renewal project also is underway whereby slums are being
systematically torn down and replaced with state constructed
housing which has water and sewer connections. As the only water
in the region, that directly benefits Sabesp.