Buy VA Tech Wabag Ltd For Target Rs.2,529 by Motilal Oswal Financial Services Ltd
Robust outlook on strong order book, margins and cash-flows Healthy in-line operating performance; PAT beat on forex gains
* VA Tech Wabag (VATW) reported a healthy and in-line operating performance in 2QFY27. However, continued high forex gains led to a beat in PAT.
* Consolidated revenue/adjusted EBITDA/APAT grew by a healthy 20%/20%/23% YoY. Adj. EBITDA margin stood high at 14.4%.
* ROW markets drove revenue growth of 26% YoY and 31.6% EBIT margin.
* 1H order intake stood at INR52b.
* Robust order book of over INR202b provides strong revenue visibility.
* Strong cash flow generation led to gross-cash level of INR12.2b and netcash level of INR10b
Key highlights from the management commentary
* 2Q revenue mix: International 54%, India 46%, EPC 82%, O&M 18%.
* VATW will stay selective, focusing on securing more "Large" and "Mega", technology-led projects; preference remains on margins and cash-flows.
* In 1H, VATW secured two landmark “Mega” orders, an SWRO project in Kuwait, and Reliance for one of the largest desalination plants at Jamnagar.
* Also, entered UAE through Ajman, expanded in Europe with Donauinsel Water Works, and key municipal orders from BWSSB and DJB.
* War in ME has slowed down the awarding process; however, it is opening up more opportunities for VATW.
* Activity in Europe is returning; bagged two contracts after a decade
* Commodity inflation and shipment delays have not impacted VATW’s growth or margins so far.
* Contracts have pass-through escalation clause; machinery orders are placed soon so as to protect margins.
* Political delays in Bangladesh have caused a six month delay; however, margins and payment timelines are intact.
* Sunrise industrial segments like semiconductors, PV solar, data centers, and hydrogen are expected to open huge potential.
* VATW only take projects that have full payment security.
Valuation and view: Reiterate BUY
* We raise our FY27 earnings estimate by 6%, following continued forex gains. However, we maintain FY28 earnings estimate as we remain conservative on estimating forex gains.
* After delivering a CAGR of 7%/17%/28% in revenue/EBITDA/APAT over FY21-26, we estimate a CAGR of 19%/26%/23% over FY26-28.
* A greater focus on executing large-scale projects and high-margin segments such as EP, Industrial, and O&M augurs well for margins.
* The outlook for strong FCF generation, INR11b+ net cash, and improving return ratios (16%/23%/36% RoE/RoCE/RoIC in FY28E) make VATW attractive at 22x FY28E P/E. Reiterate BUY with a TP of INR2,529 (based on 28x FY28E P/E).
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