Published on 23/09/2019 8:53:27 AM | Source: Motilal Oswal Services Ltd

Neutral Va Tech Wabag Ltd For Target Rs.260 - Motilal Oswal

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A significant miss; cutting estimates by 20%+

* Op. performance below expectations: Consol. sales declined 34% YoY to INR4.6b (our estimate: INR7.9b) in 1QFY20. Standalone sales were down 5% YoY to INR3.2b, while subsidiary sales dropped by 62% YoY to INR1.3b. The sales disappointment can be attributed to multiple projects nearing the completion stage and the lack of meaningful pick-up in new projects. Consol. EBITDA was down 42% YoY to INR375m, with the margin of 8.2% (-120bp YoY) below our estimate of 9.0% due to operating deleverage. Recurring profit of INR26m (-93% YoY) was below our estimate of INR353m.

* Order backlog provides robust revenue visibility: Order backlog as on date stands at INR110b (+65% YoY), with order inflow of INR27.9b (+428% YoY). VATW has also signed framework contracts worth INR6.9b, which will be converted into firm orders after receiving advance from customers. The current order backlog provides strong revenue visibility of 4.3x its TTM revenue. VATW won one large order under the Namami Gange scheme worth INR11.9b, and O&M order from UPJN worth INR14.8b.

* FY20 revenue/order inflow guidance maintained: Despite a sharp decline in 1QFY20 revenue, management maintained its FY20 revenue guidance of INR34- 37b (upper end of the guidance implies 32% growth from the FY19 level) and order inflow guidance of INR50-54b (upper end of the guidance implies a 10% increase from the FY19 level).

* Valuation view: We cut our estimates for FY20/21 by 29%/21% to factor in lower-than-expected execution and margins. We maintain Neutral with a TP of INR260 (10x FY21E EPS, below its 10-year average P/E multiple of 15x), given the deteriorating working capital cycle (163 days v/s 70-80 days historically) and the sticky receivables from APGenco and TSGenco worth INR4.2b.


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