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Healthy execution, cashflow concern persists

VA Tech Wabag’s Q4FY21 performance was better than expectations, supported by pick-up in domestic execution leading to healthy operating margins. 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 completed with new state government in charge. Strong orderbook of Rs95.8bn (3.4x TTM sales) lends visibility; however, 34% of the orderbook is O&M, which restricts near-term growth.

Supported by proceeds from preferential allotment and increase in payables, the company turned around to net cash position of Rs436mn. Factoring-in near-term growth and margin impact we cut FY22E earnings by 17% while we assume strong revival in FY22E order intake leading to 11% raise in FY23E earnings. Given the Rs1.1bn provision on doubtful debtors in FY21 and continuation of this due to TS-Genco/AP-Genco issue and rich valuation, we maintain HOLD with a revised target price of Rs307 (previously: Rs225).

* 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.

* Cashflow from operations supported by higher payables:

There is an overall increase of Rs1.3bn in other assets impacting the cash from operations. This is expected to fall by Rs400mn as it pertains to funding of partner stake in the HAM projects and Rs600mn is due on GST (impacted by project delay) and ~Rs300mn pertains to advance given to suppliers. This has been offset by Rs600mn increase in payables majorly due to forex, hence the quality of cashflow from operations remains a concern.

* High raw material prices and provision towards doubtful debt to limit upside:

Although most projects have price variation clause, we believe, the overall gross margins are likely to be impacted by high commodity prices. Q4FY21 gross margin was reduced by 260bps YoY due to commodity price increase. Additionally, the company has taken Rs1,1bn provision due to doubtful debt, which is 3.8% of sales. In normal course of business, the doubtful debt provision is in the range of 1-1.5% of sales; assuming 1.5% as normal provision, this implies Rs646mn provision towards the slow-moving receivables from TS-Genco and AP-Genco. Hence, the overall margin stress is likely to continue until resolution of the slow-moving receivables issue.

* 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 is likely to limit margin upside. Order prospects are promising, which is likely to support FY23E earnings; hence we maintain HOLD with a revised target price of Rs307 (previously: Rs225). We have rolled forward our target valuation to FY23E from Sept’22 earnings and increased our target multiple to 12x from 10x factoring in improved growth visibility and healthy cash flows.

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