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Order book provides visibility...

VA Tech Wabag Ltd is a Chennai based Multinational, providing solutions on water recycling and reuse for municipal and corporate clients.

* Q2FY22 revenue grew by 12% YoY aided by strong execution in domestic EPC and international O&M operations.

* Despite higher RM costs, EBITDA margin improved by 116bps YoY to 8.3% due to pick up in execution & project mix.

* The management maintained its FY22 EBITDA margin of 10% to 11% as most of the projects have a price escalation clause.

* Order book remain strong at Rs.10,040cr (3.2x TTM revenue) which provides strong visibility for the next two to three years.

* The company expects H2FY22 performance will be better with a pick up in order inflows and execution.

* Given the healthy order book and increasing demand for water related projects we maintain our Accumulate rating and value the stock at a PE of 13x on FY23E earnings with a target price of Rs.385.

Execution to pick up

The revenue during Q2FY22 increased by 12.4% YoY to Rs684cr supported by strong execution in domestic EPC business and international O&M operations. In FY22, the company expects two of its HAM projects namely KMDAKolkata and BUIDCO to pick up and start contributing to revenue. In H1FY22, the company has deployed more than Rs200cr additional working capital to counter the commodity price and increase the execution. EBITDA margins in Q2FY22 improved by 116bps YoY to 8.3%. Further, a fall in depreciation and higher other income supported the earnings to grow by 86% YoY to Rs259cr. The management highlighted that H2FY22 performance will be higher than H1FY22 due to better execution and order inflows. We expect a revamp in revenue generation going forward and expect revenue to grow at a CAGR of 16% over FY21-23 due to an increase in order pipeline.

Healthy order book provides visibility...

Order backlog of the company stands at Rs.10,040cr as on Q2FY2 which is 3.2x TTM revenue, provides strong revenue visibility for the next two to three years. The company has received a total order inflow of Rs1,867cr, which includes orders from Russia integrated industrial ETP of Rs1,213cr. The EPC order book currently contributes 65% to the current order book, whereas, O&M contributes 35%. Management refrained from giving order inflow guidance for FY22. However, it expects to increase international EPC orders to further increase the cash flows and margins (margins remain 1 to 2% better in the international orders).

Key highlights

* The company is one of the four technically qualified players for 400MLD Chennai Desalination project, which is likely to be awarded by Q4FY22.

* Targeting to increase export business to 50% (current 35%) in the next 3 to 5 years.

Valuations

Acceleration in execution and improving order pipeline will lead to earnings recovery. We therefore, maintain our Accumulate rating and value the stock at PE of 13x on FY23E earnings with a target price of Rs.385.

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