With the economy still showing mixed signals and revival taking its own time, uncertainty on the earnings front remains for many capital goods players.

The VA Tech Wabag stock is, however, a good bet in these tough times. The company executes engineering and maintenance projects, especially in the areas of desalination and drinking /industrial / sewage water treatment.

It has seen strong order flows and healthy sales and profit growth in recent times.

That the company receives bulk of its orders from the municipal segment works to its advantage, shielding it from slower order flows in the industrial segment. Besides, its international parentage gives a strong foothold in the global markets.

At ₹1,457, the stock trades at 21 times its estimated consolidated earnings for 2015-16. Considering its unique play, there are no direct peers. But this valuation is at a discount to Thermax (25 times) which has a smaller presence in the water space through industrial water treatment solutions.

Promising performance

Between 2012 and 2014, the company’s net sales and net profits grew at a compounded rate of 24.5 per cent each, to ₹2,230 crore and ₹113.6 crore respectively (for the year ended March 2014).

The latest order book (as at the end of the June 2014 quarter) stands at ₹6,351 crore, up from ₹6,237 crore at the end of March 2014. While 80 per cent of these orders are from the municipal segment, about two-fifths of the book constitutes overseas orders.

Key projects that contribute to the revenues currently include the Al-Ghubrah desalination project in Oman, Ujams water treatment project in Namibia and the Nemmeli desalination plant in Chennai (operations and maintenance).

Robust outlook

In the months to come, the company is not too optimistic about a recovery in orders from the domestic industrial segment. But it expects Phase II of the Nemmeli project to be tendered in the second half of this year, along with other desalination projects in Tuticorin and Ramanathapuram.

This apart, VA Tech is in various stages of bidding for municipal projects from States such as Orissa, Maharashtra and Delhi.

Besides, thanks to the Government’s thrust on the water sector in the Budget, order inflows from various initiatives, such as the Namami Ganga Project, the rural drinking water programme and the creation of smart cities, are expected from the fourth quarter of this year.

The international picture too is fairly strong, with the company having won a ₹365-crore contract in Istanbul for O&M of a waste water treatment plant and pumping stations in the first quarter.

Besides, it has also won a water treatment contract worth ₹84 crore in Uzbekistan and is expecting healthy order flows from Qatar and Bharain, among others.

Order inflows for 2014-15 are expected to be 60:40 in favour of international orders.

In all, with the company focusing more on desalination and O&M projects, both at home and abroad, margins can be expected to get a boost as the profitability is better in these areas.

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