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Drift towards Engineering & Procurement… VA Tech Wabag Ltd. is a Chennai based multinational which provides water recycling & reuse solutions for municipal and corporate clients.

• Q3FY23 revenue was down 12.6% YoY to Rs.652cr. However, the margins improved by 130bps YoY to 11.5% and PAT stood at Rs.47cr in the current quarter. This is due to the decline in input costs.

• The order book remains strong at Rs.10,037cr (3.43x TTM revenue), which provides strong visibility for the next two to three years.

• The company focuses on engineering and procurement and international projects as they provide better margins and improve the working capital cycle.

• Given the healthy order book and increasing demand for water related projects domestically as well as internationally, we see potential growth in the business. Due to the shift in focus and expectation of pick up in execution, we assign Accumulate rating and value the stock at a P/E of 10x on FY25E earnings with a revised target price of Rs. 383.

Execution to pick up

The revenue during Q3FY23 fell by by 12.6% YoY to Rs. 652cr. This is due to the shift from an engineering, procurement and construction (EPC) business to an engineering and procurement (EP) business. However, EBITDA margins in Q3FY23 improved by 130bps YoY to 11.5% due to a decline in input costs. Further, a fall in depreciation and higher other income supported the earnings to grow by 79% YoY to Rs.465cr. With managements shift in focus to EP from EPC, improve the margins, bottom line, and cashflows as the management’s looks to outsource the construction work and focus on its strengths, such as technology and engineering services.

Healthy order book provides visibility…

The order backlog of the company stands at Rs.10,037cr as of Q3FY23, which is 3.43x TTM revenue, provides strong revenue visibility for the next two to three years. The company has received a total order inflow of Rs1,886cr. The EPC order contributes 37% to the current order book, whereas O&M contributes 63%. Both the domestic and international businesses are well poised. Out of the total orders in the orderbook, domestic orders accounts for 52% and orders from the rest of the world consist 48%. Management refrained from giving order inflow guidance for FY23. However, it expects to increase international Engineering and Procurement (EP) orders which are funded by multilateral entities or Letters of Credit (LC) to further increase the cash flows and margins. The company expects a ~Rs.5,500cr orders to be received from the domestic market in the coming quarters. Additionally, the management sees that, Russian market is still a promising one, and they would accept orders only if they were well funded.

Valuations

Various government initiatives such as Namami Gange, Jal Jeevan Mission, Swachh Bharat Mission, etc., would aid the growth of domestic business. Acceleration in execution and improving order pipeline, along with an increase in demand for water projects, will enhance the growth trajectory. Given the shift in focus to EP business and pick up in execution, we assign Accumulate rating and value the stock at 10x FY25E earnings with a target price of Rs.383.

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