VA Tech Wabag Shares Jump To 21-Month High As Nomura Ups Price Target
Wastewater treatment solutions by VA Tech Wabag Ltd. (Source: Company website)

VA Tech Wabag Shares Jump To 21-Month High As Nomura Ups Price Target

Shares of VA Tech Wabag Ltd. jumped to the highest in 21 months after Nomura raised its price target on the sewage and water treatment solutions provider.

The research firm maintained its ‘buy’ rating and increased its price target on the stock to Rs 546 from Rs 446 apiece, implying a potential upside of 82.6% from Monday’s closing level.

“We view VA Tech Wabag as a combination of value and strong growth. With its 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 (environmental, social and governance) theme,” Priyankar Biswas and Neelotpal Sahu, research analysts at Nomura, said in a note.

VA Tech’s “strong well-funded order book with low investment needs should allow it to maintain net cash over FY21-23”, Nomura said. “Order book of Rs 8,400 crore is well-funded and completely executable. Management commentary suggests that the order book is funded either by multilateral agencies or by sovereign entities representing low or limited collection/execution risk.”

This, it said, can lead to further improvement in net working capital from 97 days in end-FY21 to lower levels over a sustainable basis.

Nomura also highlighted VA Tech’s strong execution track record, reflected by its relatively low (0.2% of sales) liquidated damages over FY16-20. The management has secured financial closure of hybrid annuity model assets — Kolkata and Patna — at favorable terms, it said. This makes the entire order book executable. “Thus, its order book should translate into revenue growth.”

Besides, Va Tech’s FY21 results, the research firm said, demonstrate that past concerns on execution and rising debt levels are largely behind. The company has turned net cash positive.

“Investors’ persistent concern was its high debt build over FY16-19 despite an asset-light business model. This was entirely due to stalled receivables at a state level project (Rs 422 crore),” Nomura said. “While there is limited visibility of recovery from these debtors, management has effected a strong turnaround in cash flows which has led VA Tech to turn from Rs 430 crore of net debt in FY19 to net cash in FY21.”

Investment risks cited by Nomura:

  • Slowdown in domestic capex and a sharp rise in commodity costs for overseas contracts.

  • Rising working capital could pose risks to cash flows, especially if weaker subcontractors and suppliers require further financial support.

  • Execution delays could delay earnings growth, especially risks related to project completion and commissioning in international markets.

Shares of Va Tech rose as much as 4.2% to Rs 311.9 apiece, the highest since September 2019. Of the three analysts tracking the company, two recommend a ‘buy’ and one suggests a ‘hold’, according to Bloomberg data. The average of 12-month consensus price targets implies an upside of 34.6%.

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