VA Tech Wabag Shares Rally As Nomura Sees Over Twofold Upside This Year
The brokerage raised its target on the stock to Rs 634 apiece from Rs 581.
Shares of VA Tech Wabag Ltd. jumped the most in eight months after Nomura hiked price target for the sewage and water treatment solutions provider on debt reduction, securing technology-focused orders and improved operating margin.
The brokerage raised its target on the stock to Rs 634 apiece from Rs 581, according to its research report. That implies a 115.6% upside from the current level. In comparison, Nomura sees only a 5% upside for the Nifty 50 this year.
Rajneesh Chopra, group business head at VA Tech, said the Ebitda margin at a multi-quarter high of 10.2% is “sustainable”. “We consciously worked on getting our total cost of ownership down. That has worked in our favour. Second, our interest costs are much lower when compared year-on-year. Finally, we are more focused on securing orders with higher technology, engineering and design components as against construction, which is aiding margin. Change in order mix has helped us,” Chopra told BloombergQuint’s Niraj Shah in an interview.
Nomura agreed. Despite commodity inflation, a focus on securing orders with higher engineering and design components against construction appears to have led to the rise in Ebitda margin, the brokerage said. Also, the company’s focus on securing tech-focused orders with low civil component, if implemented, could improve both margins and cash flows.
Of the company’s current order book of about Rs 2,800 crore, new-age, higher margin business constitutes about Rs 2,000 crore, including three major orders from Russia, Malaysia and the UAE.
For the year ahead, Chopra said that order prospects “look healthy” with increased government capital allocation for water treatment announced in the budget. Projects such as Amrut 2.0, Swacch Bharat, Namami Gange and India being a signatory to the United Nations’ Sustainable Development Goal 6, referring to clean water and sanitation for all, will work out in the company’s favour.
Desalination, Chopra said, is another major runner for VA Tech. “There’s a lot of buzz around green hydrogen plants and we’re getting inquiries for desalination technology to be installed there. Water is the raw material there and clients require non-saline water for it.”
According to Nomura, a large tender win of a 400 million litres per day desalination plant in Chennai is on the cards, since the company is among the four pre-qualified bidders for it. The company is a strong contender given its track record in successfully implementing a desalination plant in Nemmeli near Chennai. “The tender win could be a key rerating event since the tender size is significant at Rs 6,100 crore.”
Shares of VA Tech surged as much as 15.6% intraday to Rs 342 apiece on Wednesday, before ending the day 8.1% higher.
Of the four analysts tracking the company, two each recommend a ‘buy’ and a ‘hold’, according to Bloomberg data. The average of 12-month consensus price targets implies an upside of 53%.
Nomura also listed a few key risks to its 115% upside call:
A diverse geographical spread could constrict management bandwidth and lead to unforeseen risks.
Rising working capital could pose risks to cash flows.
Execution delays could delay earnings growth.
Frail financial health of municipalities in India could delay opportunities.
Larger players such as Larsen & Toubro Ltd. could pursue the sector opportunities more aggressively and thus further skew the competitive intensity.
Watch the full interview here: