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Order book provides visibility...

VA Tech Wabag Ltd. is a Chennai-based multinational company specializing in water technology. With its expertise in the turnkey execution and operation of water and wastewater treatment plants, the company primarily serves both municipal and industrial sectors, focusing on providing comprehensive solutions for waterrelated challenges.

• In Q2FY24, the revenues declined by 11.4%YoY, owing to lower construction mix and strategic divestments in Europe.

• EBITDA margin expanded by 579bps and PAT margin grew at 43.7% YoY due to enhanced execution, EP projects in the mix and growth in revenues from O&M segments.

• Orderbook stands at a healthy Rs.12,097.4cr., which is 4.3x TTM revenues, thereby providing visibility.

• Strategic alliances with Pani Energy and Al Jomiah Energy & Water will enhance executions, O&M optimisations and attract opportunities from water stressed regions.

• We therefore revise our rating to Buy and value the stock at PE of 15x on FY25E earnings with a target price of Rs.684

Bottom line to outshine due to Wriddhi Strategy

Although Q2FY24 saw revenues decline by 11.4% YoY due to strategic divestments of two of its subsidiaries and a lower construction mix on account of higher EP projects, the company remained a beneficiary of low cost of materials. Enhanced execution efficiency, better mix of EP projects, and growing revenues from the O&M segment led to a 579bps improvement in EBITDA margins. PAT margin grew 43.7% in the first half of FY24, courtesy of the Wriddhi strategy and we expect this to continue going forward.

Healthy order book and solid order pipeline

At 12,097.4 cr., the orderbook is currently at 4.3x TTM revenue, providing visibility for the next two years. The current composition of 58% EPC orders and 42% O&M provides a balanced orderbook, but we expect the O&M segment to grow further due to conscious efforts to remain asset-light and the gaining prominence of one city and one model in India.

Better revenues ahead

We believe that the management's focus on emerging markets, especially in regions with pronounced water stress, is a shift in the right direction. With the receipt of contractual payments from two of its largest orders, namely, the 400 MLD Desalination Plant, Chennai, and the 200 MLD Pagla STP, Bangladesh, we expect executions to speed up, providing better revenues to start coming in from H2FY24 onwards.

Key highlights.

• Key orders received include Rs.419.5cr. 270 MLD DBO order from CIDCO, Maharashtra and Rs. 257.1cr. 345 MLD DBO order from SONEDE in Tunisia.

• Partnership with Pani Energy to leverage AI platforms in reducing downtime and improve operational efficiency. Alliance with Al Jomiah Energy & Water to tap into opportunities across the Kingdom of Saudi Arabia and broader Middle East region.

Valuations

A strong orderbook with a focus on water-stressed geographies, accelerating executions, O&M optimization, and ever-buoyant demand for water technologies will fuel earnings recovery. Hence, we revise our rating to Buy, valuing the stock at 15x on FY25E earnings with a target price of Rs.684.

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SEBI Registration Number: INH200000345