Waterloo Sunset is one of those songs that probably shouldn't be covered, it being some kind of high water mark for mid 60s songwriting. I'm not sure the original Kinks version can be improved on, and there's maybe not much you can do with it other than do it straight (a jazz-metal deconstruction anyone? Sixteen minute techno epic?). I suppose bands do it to pay homage or just because it's fun to play.
Cornershop's version, a bonus track from 2009's Judy Sucks A Lemon For Breakfast, works pretty well though- recognisably Cornershop with Tjinder Singh's vocals and some sitar near the start without destroying the original's charm. Funny band Cornershop. Their breakthrough album When I Was Born For The Second Time was full of great little songs, a mish-mash of styles, and a real wonky charm. It also had that Norman Cook remix of Brimful Of Asha. I love the original, not am too fond of the remix. They seem to have spent the last fourteen years running away from it and success. I bought 2002's Handcream For A Generation but can't really remember much about it other than it had the dreaded Noel Gallagher collaboration and was glam rock in parts. Still, they don't repeat themselves, clearly have wide-ranging record collections and influences, and bring an Asian identity to parts of the music scene not known for cross cultural pollination, so good on 'em.