Kotak Securities
VA Tech Wabag (Buy)
CMP: ₹217.2
Target: ₹260
WA Tech Wabag’s (VATW) consolidated PAT (₹30.8 crore, +154 per cent y-o-y) was 17 per cent/11 per cent above our/consensus estimates on higher than expected margins.
We believe VATW’s execution to bottom in FY20 and expect to pick-up led by execution of its strong order book (₹10,800 crore) - 4.4x TTM sales. Margins should be stable at 9 per cent on operating leverage benefits and cost rationalisation in overseas subsidiaries. Consequently, we built in 18 per cent/16 per cent/25 per cent CAGR in its revenues/EBITDA/PAT over FY20-22. Further, its focus on cash flows resulted in ₹140 crore of FCF (free cash flow) in 9MFY20 (after five years) despite delay in collections from legacy projects.
We expect VATW to continue generating FCF over next two years aided by collections from legacy projects, which will help in further reduction of debt. We have made sharp cuts to our FY20/21 estimates. However, we maintain our ‘Buy’ rating with a revised target price of ₹260 (₹375 earlier) on 10x PE June 2021 (versus 12x PE of June 2020 earlier). The stock is currently trading at 9x/7x FY21 earnings, which is below -1SD of its long-term average PE (11x).
Key risks: Lower than expected execution and high working capital intensity.