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Commodity price increase impact margins

VA Tech Wabag’s Q1FY22 revenue at Rs6.6bn was in-line with expectations. However, due to increase in commodity prices, EBIDTA margin was down 170bps YoY to 5%. The company has succeeded in financial closure of two HAM projects, which will commence execution going forward. Chennai 400MLD desalination project ordering activity has commenced and prequalification bids are complete with new state government in charge. Strong orderbook of Rs104bn (3.4x TTM sales) lends visibility; however, 30% orderbook is O&M, which restricts near-term growth.

Factoring in healthy order intake and growth outlook, we marginally raise FY22E and FY23E earnings by 3.2% and 1.8%, respectively. Given the Rs1.1bn provision on doubtful debtors in FY21 and Rs130mn in Q1FY22 due to TSGenco/AP-Genco issue and rich valuation, we maintain HOLD with revised target price of Rs365 (previously: Rs357).

* Delay in APGenco/TSGenco collection continues: Although current receivables have reduced slightly to Rs13.5bn in Mar’21 from Rs15.8bn in Mar'20, status on Rs4.1bn receivables from APGenco/TSGenco and Rs695mn from Tecpro remain unchanged. These account for 30% of overall receivables.

* Performance impacted by commodity prices: Raw material price to sales increased by 580 bps YoY to 81.4% impacting the overall EBIDTA margin to 5% in Q1FY22. We believe this will impact the overall earnings uptick in FY22E despite recovery in growth. Higher other income at Rs143mn supported in-line PAT at Rs189mn. The company had taken a provision of Rs130-140mn due to bad debts in Q1FY22.

* High raw material prices and provision towards doubtful debt to limit upside: Although most projects have price variation clause, we believe, overall gross margin may be impacted by high commodity prices. The overall margin stress is likely to continue until resolution of slow-moving receivables issue due to higher provisions.

* Maintain HOLD; rich valuation and working capital stress to cap upside: Financial closure of Namami Ganga project and pick-up in domestic execution provide growth visibility. The stress on working capital continues and provision towards doubtful debtors may limit margin upside. Order prospects are promising, which is likely to support FY23E earnings; hence, we maintain HOLD on the stock with revised target price of Rs365 (previously: Rs358).

Outlook and valuation

VA Tech Wabag currently trades at 13.7x FY23E earnings. High receivable days impacting overall cashflow continues and is expected to keep RoEs at lower levels despite the company being asset light. Financial closure of HAM projects under Namami Ganga project with a financial partner who will fund majority stake provides relief in terms of near-term growth prospects.

The provision towards doubtful debtors and high commodity prices is likely to cap margins. Factoring in near-term growth due to healthy order intake of Rs14.4bn in Q1FY22 and current orderbook of Rs104bn, we marginally raise FY22E and FY23E earnings by 3.2% and 1.8%, respectively.

We value the stock assigning 14x P/E multiple to FY23E earnings. Despite building-in optimistic earnings, we believe the stock is trading at rich valuation, and hence, we maintain HOLD. Any favourable judgement on AP-Genco, TS-Genco and Tecpro legal case can act as a re-rating catalyst for the stock.

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