Buy VA Tech Wabag Ltd for the Target Rs 2,529 by Motilal Oswal Financial Services Ltd
Strong and diversified quality order book drives robust outlook Strong in-line operating performance in 1QFY27
* VA Tech Wabag (VATW) reported a strong and in-line operating performance in 1QFY27. Its revenue grew 21% YoY, driven by 27% growth in EPC and 53% growth in the RoW markets. Adj. EBITDA/adj. PAT rose 22%/37% YoY.
* EBITDA margin adjusted to forex gain of INR368m stood healthy at 13.1%.
* The company treats forex gains/losses as part of its core operations; hence, analyzing adjusted margins is more meaningful.
* Order book stood at a high level of ~INR194b as it added INR34.3b in 1Q.
* Net cash position stood high at INR9.65b.
Key highlights from the management commentary
* Strong execution, order inflows, and financial discipline were the key highlights of 1Q. Gross margin was hit by a greater mix of EPC revenue. Other expenses were higher due to provisions made for certain debtors as per accounting standards. This will be reversed when money is received.
* The Middle East projects did not face execution-related disruptions amid the West Asia crisis.
* VATW forayed into Kuwait with the award of a mega SWRO project; it also entered the UAE market with an order win in Ajman.
* In India, the company improved its long-standing relationships with BWSSB and DJB through new order wins; in Europe, it secured a key project win in Austria from Donauinsel Water Works.
* The Middle East & Africa region remains a key strategic focus market for Wabag.
* The Chennai desal project, funded by JICA, is steadily moving towards completion.
* Working capital cycle continues to tighten, in line with VATW’s strategy.
* Focus remains on profitable growth and overseas markets. The Middle East and other overseas projects are better placed in terms of working capital cycle and cash flows compared to Indian projects.
* VATW's current order book of ~INR194b (4.9x FY26 revenue; ~40% from ME) and a strong bid pipeline provide strong 15-20% revenue growth visibility for the next 3-4 years.
* While the current order book is more tilted toward EPC projects having high volumes and relatively lower margins, VATW maintains its focus on profitable growth through selective bidding in high-margin EPC and O&M jobs.
Valuation and view: Reiterate BUY
* Following an in-line 1Q, we maintain our earnings estimates.
* 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, INR10b+ net cash, and improving return ratios (23%/36% pre-tax RoCE/RoIC in FY28E) makes VATW attractive at 21x FY28E P/E. Reiterate BUY with a TP of INR2,529 (based on 28x FY28E P/E).
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