Analysis | What led to the downfall of VA Tech Wabag?

It was only in 2014 that the Centre flagged concerns over the looming water crisis in the country and, among other initiatives, launched its flagship Namami Gange programme. VA Tech Wabag, a company with years of expertise in water treatment, sewage and effluent treatment, suddenly was in the limelight, catching investor fancy at the time.

With clients across more than 20 countries — encompassing West Asia, Africa, Europe and Latin America — the company provides EPC (engineering-procuremet-construction) and operation and maintenance (O&M) services for water reuse, sludge treatment and desalination for municipal and industrial clients.

The stock peaked in March 2015 at ₹919. The company had a high order-backlog of ₹ 6,844 crore (end of March 2015), thanks to the first order win under the Ganga Action plan — design and construction of sewage treatment plant in Varanasi worth ₹220 crore — and the order for O&M of the entire waste-water treatment of Istanbul Mega City, Turkey, for the next 10 years.

But the exuberance has since fizzled out and the stock is now trading at ₹173 — a value erosion of more than 81 per cent since its peak in FY15. We take stock of what went wrong with the once-fancied stock.

Where it all started

In FY15, the company took over the lead position in the projects of municipalities in Andhra Pradesh and Telangana — from the other two companies in the consortium, Gammon India and Tecpro Systems (the then leader of the consortium).

What appeared a key positive and earnings driver then, turned out to be a bane later, given the long-pending receivables and retention money from the two States.

In FY19, the receivables (net of expected credit loss) outstanding from the said consortium project is ₹485 crore — about 31 per cent of the overall net outstanding receivables of ₹ 1,556 crore.

The prolonged delay in these receivables has also led to several disputes in claim amounts, resulting in a provision for impairment (under the ECL (expected credit loss) model) of ₹139 crore up till March 2019.

That apart, an amount of ₹70 crore is pending from Tecpro Systems under litigation with the National Company Law Tribunal (NCLT).

All these delayed payments weighed heavy on the working capital requirements of VA Tech, and it resorted to heavy borrowings in the short term.

The company’s short-term borrowings ballooned from ₹104.8 crore in FY15 to ₹ 514 crore in FY19. Consequently, finance costs spiked — the company recorded a 36.6 per cent y-o-y rise in its net finance costs (consolidated) in FY19 alone.

A delay in realisation of older projects also took a toll on the order execution of new projects.

A delay in project execution and completion of large international orders (resulting in very low billing of projects), led to a de-growth of 19.6 per cent in FY19’s revenue (consolidated) to ₹ 2,781 crore.

With the completion of major projects in Bahrain and Malaysia, the revenues further dropped to ₹1,092 crore in H1FY20, down 24.1 per cent y-o-y. Thanks to a pick-up in domestic execution of projects in the September quarter, the fall in revenues was arrested to a large extent. In the first half of FY20, the company saw an up-tick of 220 bps in EBITDA margins (now at 9.4 per cent), on account of an improvement in margins from projects in the engineering and procurement phases.

This, however, was offset by a sharp rise in finance costs — up 61.4 per cent y-o-y in H1FY20. Consequently, profits plummeted to ₹29.7 crore, down 39 per cent y-o-y.

With a healthy order intake of ₹3,054 crore in H1FY20, the order book of the company is now at ₹11,500 crore.

Outlook

Prominent orders received during the first half include O&M of sewage treatment plants and the network infrastructure in Agra and Ghaziabad for a period of 10 years. These orders from the State mission of Uttar Pradesh are worth ₹1,477 crore. This follows the ‘one-city, one-operator’ model in the State.

The company is eyeing several other cities under this model. Even in the existing order book, about 30 per cent comprises O&M contracts, which provide visibility and sustainability of revenues.

That said, the near- term overhangs — on slower execution and recovery of long- pending receivables — still continue.

The company’s increasing dependence on municipal orders (about 83 per cent of the outstanding order book in the September quarter) also adds to working capital risk. The net working capital days are now at 134 days (up from 122 days in the September quarter last year).

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