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Execution nearing normalcy; Valuation attractive

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

* Current order backlog stands at Rs.10,712Cr with order intake of Rs.971Cr during the quarter.

* Company registered better than expected revenue of Rs.796Cr registering a growth of 17.2%YoY and 30.8% QoQ. We expect revenue to grow at a CAGR of 11.7% over FY20-23.

* Increased government focus on water recycling and higher budgetary spend will boost the order intake going forward.

* Debt level has shown significant reduction and stands at Rs.383Cr against Rs.482Cr in FY20 and Rs.392Cr in Q2FY21. We expect further decline in debt level due to improved revenue generation.

* Considering the positive outlook of the water treatment industry and expected revenue rebound along with improving cash position, we value the stock at 1 year forward PE of 10.5x its FY23E earnings with a target price of Rs.288, and upgrade our rating to BUY.

Better than expected quarterly numbers

On a consolidated basis revenue for the quarter stood at Rs.796Cr as against Rs.697Cr in Q3FY20 and Rs.608Cr during Q2FY21 registering a YoY growth of 17.2% and sequential growth of 30.8%. Revenue improvement is on acoount of improvement in EPC business to near pre-covid levels and O&M continuing to operate at full capacity. EPC segment contributed 84% of 9MFY21 revenue where as O&M contributed 16%. Management aims to increase the O&M contribution to 25% in the coming years, which will help in improving the margins. Municipal orders contributed 75% to the total revenue whereas industrial orders contributed 25%. On a sequential basis, EBITDA margin improved 171bps to 8.4% due to lower cost of operation, however, declined 108bps due to increase in cost of sales. We expect a revamp in revenue generation going forward and expect revenue to grow at CAGR of 11.7% over FY20-23.

Increasing focus on water recycling to boost order intake

Order backlog of the company stands at Rs.10,712Cr as on Q3FY21 with order intake during 9MFY21 at Rs.971Cr. EPC contributes 67% to current order book, whereas, O&M contributes 33%. Municipal order mix stands at 87% and Industrial order mix at 13%. Major order intake during 9MFY21 are STP-Jeddah Airport, Saudi Arabia of Rs.361.4Cr and WTP-Ipsach Biel SWW of Rs.226Cr. 87% of order intake are municipal orders and 13% industrial orders. With Order book of more than 3 times of annual revenue, company has the leverage to be more choosy in selecting orders. Increased government focus and higher budgetary spends on water related projects like Jal Jeevan Mission, Namami Gange etc will help in boosting the order intake going forward.

Gradual improvement in debt level

As on Q3FY21, gross debt on consolidated basis stands at Rs.383Cr against Rs.482Cr in FY20 and Rs.392Cr in Q2FY20. Company had also released the promoter pledge during Q2FY21. Finance cost has come down to Rs.22.8Cr against Rs.23.7Cr as of Q2FY21. We expect further reduction in debt level and finance cost due to improved cash position and rebound in revenue generation.

Valuations

Improvement seen in revenue generation and debt level are expected to continue as execution is picking up with major projects have reached revenue generation stage. Even though receivable levels remained elevated due to GENCO receivables, performance parameters of core business (excluding exceptions like GENCO) looks promising. Considering the positive outlook of the water treatment industry and expected revenue rebound along with improving cash position, we value the stock at 1 year forward PE of 10.5x, its FY23E earnings with a target price of Rs.288, and upgrade our rating to BUY.

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