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Weakness persists on execution front

Our view

VA Tech Wabag’s (VATW) revenue declined 28% YoY to Rs6.5bn while EBITDA margins grew 319bps to 11.5% on account of easing of raw material cost. Order intake was strong at Rs18.9bn during 9MFY23 leading to a robust orderbook of Rs100.4bn (3.4x TTM sales), 63% of which is for EPC contracts. Biding for Chennai 400MLD desalination project is expected to be completed by FY23end. Working capital days has been 90 days driven by business operation efficiency. Management has been focusing on bidding for more engineering and equipment supply orders and for multilaterally funded international projects, to support margin and cashflow growth.

Given the growing attention of the government and multi-lateral funding agencies towards an escalating water shortage crisis, the water treatment sector is well poised for a secular, long-term growth. In our view, VATW’s robust order book thriving on strong market leadership, execution ramp up, operational efficiencies would help it capitalize on the forthcoming opportunities. At CMP, the stock trades at a P/E of 14.5x/ 12.0x on FY23E/24E earnings estimates. We have revised our rating from BUY to ADD with an unchanged TP of Rs391 valuing the company at 14x its FY24E thereby implying an upside potential of 17% from the current levels.

Result Highlights

* For 3QFY23, VATW’s revenues came in at Rs6.5bn, down 12.6% YoY (below our estimates of Rs9.1bn) with slowdown in execution.

* EBITDA de-grew by 1.8% YoY to Rs749mn (in line our estimates of Rs753mn) with EBITDAM expanding 126bps YoY to 11.5% (above our estimates of 8.3%). Margin were supported by lower raw material cost.

* The company has bagged order worth Rs2.6bn during the quarter.

* On the bottom-line front, adj PAT in 3QFY23 came in at Rs452mn (above our estimates of Rs391mn) mainly due to better operating performance ? At the CMP, the stock trades at a PE of 14.3x FY23E and 11.8x FY24E EPS.

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