Having tripled since the September 2013 lows of the Sensex, the VA Tech Wabag stock continued its winning streak last week, moving up more than 16 per cent. The company, which provides engineering and maintenance works across areas such as desalination, drinking/ waste water treatment, has been riding on the market preference for capital goods stocks in this rally. The immediate trigger for this week’s run-up could be the management’s plan to increasingly operate the company’s overseas businesses from out of India to take advantage of lower costs. The businesses in Egypt, Tanzania, the Philippines, Oman and some Latin American countries are currently supported from India. In all, overseas businesses contribute to about 60 per cent of revenues; so cost rationalisation efforts imply an expansion in operating margin for the company. It expects the margin in the verticals managed from India to be closer to 10-12 per cent compared with the 4-5 per cent which the international markets generally achieve.
This apart, the stock has also been favoured, thanks to the healthy order inflows it has been receiving during the slowdown.
The stock trades at 33 times its trailing 12-month consolidated earnings. This is still at a discount to Thermax which is a smaller player in the water space.