Why VA Tech Wabag’s Stock Doubled Despite Covid-19 Lockdown

The rally was aided by improved business and cash flows. The recent spike came after three high net-worth investors, including the wife of billionaire investor Rakesh Jhunjhunwala, invested in the water treatment solutions provider that has bagged projects to clean the Ganga.

To be sure, India's benchmark indices have recovered from the worst selloff in more than a decade triggered by the pandemic. For VA Tech Wabag, a turn in sentiment is not the only reason.

Here’s a closer look at the reasons aiding the stock surge:

Positive Cash Flows

Progress in execution of projects and improved operating margin led a turnaround in operational cash flows and working capital of VA Tech Wabag for the year ended March.

Working capital requirement fell on account of higher advances and lower unbilled revenue. This turnaround came after two consecutive years of negative cash flows.

Nomura expects the company to remain free cash flow positive till FY22 even after excluding the possibility of recoveries from Andhra Pradesh Power Generation Corp. and Telangana State Power Generation Corp. The company expects to recover Rs 550 crore from the two power utilities by FY22, and almost half of it in FY21.

Opportunities

The company has bagged a project under the NDA government’s Namami Gange mission—which aims to rejuvenate the river Ganga— under the hybrid annuity model, giving it revenue visibility and higher margins. Until now, the company has bagged projects worth Rs 5,000 crore under this mission, but hasn’t recognised revenue from it. That may come in FY21 if execution happens in timely manner.

Order Book Quality

VA Tech Wabag has an order book worth nearly Rs 10,350 crore—of which nearly 76% is domestic segment, central government in particular.

The company’s share from operation and maintenance agreements segment has risen from 18% as of March 2017 to around 30% in March quarter this year.

O&M agreements are typically short-term contracts, ranging from 2-5 years, establishing a contractual agreement between the project company and a professional operator to provide operation and maintenance services.

The company plans to realise at least a quarter of its revenues from this segment, it said on a call with investors for the quarter ended March. The segment, as of the year ended March, contributed to around 16.4% of its revenue.

O&M contracts have higher Ebitda margins and lesser working capital needs, according to Nomura. A significant share of domestic orders from the central government with better payment terms combined with growing O&M segment share should lead to Ebitda margin improvement and better cash inflow, it said.

Revenue Growth Outloook

According to the company, its highest-ever order book of nearly Rs 11,000 crore provides three times revenue visibility—this includes projects with multi-lateral funding, marquee customers and innovative solutions.

To be sure, revenue as a percent of opening order book dipped in FY20 following the pandemic and lack of execution of projects under National Mission for Clean Ganga worth Rs 1,762 crore. During its investor call in March, the company said it plans to execute certain HAM projects by May-June, which will help increase visibility from execution and its earnings for the quarter ended June.

The company declined to comment on BloombergQuint's queries citing silent period ahead of first-quarter results.

The company is keen to enter the MSCI ESG index and is hopeful of being considered if it meets those parameters.