VA Tech Wabag Betting On Order Book, Execution To Boost Growth
While VA Tech Wabag Ltd.’s business fell within the list of essential services, the company said that easing of lockdowns as the second wave of the pandemic wanes will boost growth as it will reopen supply chains.
Supply chains were disrupted during the local restrictions and these will start moving quickly after the economic activity was resumed, Rajiv Mittal, managing director and group chief executive officer at the water treatment services provider, said in an interview with BloombergQuint’s Niraj Shah. And the company’s order book will aid growth, he said.
The company's debt build-up over FY16-19 in spite of an an asset-light business model had triggered concerns. And receivables from a state-level project were stuck. While there may be a limited chance of recovery from these debtors, cash flows helped it turn from a Rs 430 crore of net debt in FY19 to a net cash-generating business in FY21.
Mittal is optimistic that the company’s Rs 422 crore worth of receivables will also start flowing in soon. And the company now only bids for orders where it’s a partner with a 70-80% stake so that even if the smaller partners are not able to contribute, the project can be managed by Wabag itself, Mittal said. This reduces the chances of slow or no project execution, he said.
The company’s order book of Rs 8,400 crore is well-funded and completely executable, according to Mittal. It’s either backed by multilateral agencies or by sovereign entities, implying low or limited collection and execution risk.
While rising costs are a worry for most companies, Wabag has the option to pass through higher input prices for a majority of its orders, Mittal. He is optimistic that “a better pricing power and better efficiencies” will allow the company to raise its operating margin by more than 200 basis points from the current range of 11-12% in the next two years.
Brokerages expect VA Tech Wabag to clock in revenues of Rs 3300 crore rupees, with a profit after tax of more than Rs 150 crore in FY22 and FY23.
Mittal, however, refrained from giving any guidance. If the business momentum continues the way it is currently and with the order book size of more than Rs 8,000 crore, the company can match the estimates, he said.
Shares of the Chennai-based company have risen over 68% so far this year, compared to a nearly 11% advance in the S&P BSE Sensex Index.
Reiterated ‘Buy’ with a higher 12-month target price of Rs 546, implying an upside of more than 55% from the Wednesday’s levels.
The company offers a combination of value (about eight times FY23 estimated EPS of Rs 36.1) and a strong growth (EPS to likely double over FY21-23F).
With operations focused on clean water technology (environmentally and socially positive) and having a strong balance sheet and technology credentials (governance positive) fits well into the ESG theme.
FY21 results demonstrate that past concerns on execution and rising debt levels are largely behind.