VA Tech Wabag Shares End 7% Higher On Nomura Target Hike, Better Margin
Nomura raised its price target on VA Tech Wabag to Rs 581, implying a 76% upside.
Shares of VA Tech Wabag jumped the most since June after Nomura hiked price target on the sewage and water treatment solutions provider and on improved operating margin.
Key highlights for September quarter (Consolidated, QoQ)
Revenue up 4% to Rs 683.9 crore.
Profit before exceptional items and tax up 73.8% at Rs 35.1 crore.
Profit after tax up 78% at Rs 25.9 crore.
Ebitda margin stood at 8.3% compared with 7.1% a year earlier.
The company also had an order book of more than Rs 10,040 crore, including framework contracts for the first half of the year.
Rajneesh Chopra, global head of business development for the company, said after a decent show in the second quarter, the second half of the year will be much better. That will be on the back of a potential improvement in overseas exports, increased government interest due to United Nations' sustainable development goals and a rise in corporate environmental, social and governance awareness.
"The goal for clean water and sanitation by 2030 by the UN will have a good impact. Historically, we haven't seen such spends ever in our industry. We also foresee a huge uptick in ESG by companies, where Wabag will have an impact because of its tech," Chopra said.
He also said a constant improvement in margin is sustainable. "Quarter-on-quarter, there's almost a 2% improvement in our Ebitda margin. There was immense pressure on commodity prices, which we have mitigated by tying up with vendors and fixing rates. We also renegotiated contracts with small vendors to improve cash flows."
Another lever, Chopra said, is the overseas industrial business. "We always get better margins there and even cash flow is comfortable compared to India."
Nomura View
The brokerage raised its price target on VA Tech Wabag to Rs 581, implying a 76% upside. It maintained its 'buy' rating on the stock. That's because:
Order inflows robust for first half of FY22; execution on track to achieve Rs 3,100-3,300 crore in sales for FY22.
Start of execution for international projects in Russia and Malaysia from second half add visibility on a rise in execution, besides the usual seasonal uptick.
Order prospects are robust. Focus on industrial orders could improve Ebitda margin. Industrial water capex is increasingly focused on self-sufficiency and to meet increased regulatory scrutiny. This should support 15% per annum growth in prospects for higher-margin industrial water capex for next five-seven years, according to management, which provides long-term order inflow visibility.
The company has pre-qualified for Chennai desalination tender. This project is scheduled to be awarded by first quarter of FY23 and is multilaterally funded.
Working capital increase in first half of FY22 is transient. Expect this working capital build to partly reverse in second half driven by increased execution and cash collections.
Key risks: Slowing domestic capex for water and a sharp rise in commodity costs.
Shares of VA Tech Wabag gained as much as 9.1% to Rs 361.5 apiece. The scrip ended at Rs 354.9 apiece, up 7.2%. 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 62.4%.
