Va Tech Wabag - Spark Capital Advisors

CMP - Rs.377
Target - Rs.405

Absolute - Add
Relative - Outperform

Execution to bounce back, order inflow to pick up, Maintain Add / Outperform

VA Tech Wabag's (VATW) 3QFY12 sales de-grew by 6.8% yoy to Rs. 2.9bn with an EBITDA margin of 6.5% resulting in a PAT of Rs. 109mn. Revenue de-growth was on the back of delays in revenue recognition from the Sri Lankan project and a high base yoy (execution of Libya project in 3QFY11). Also, EBITDA margin was below expectation due to forex losses due to rupee depreciation combined with lower pace of execution in a few projects. The management expects execution to pick up going forward as work is expected to be restored soon in both the Libyan and Sri Lanka projects. Order book stood at Rs. 35.3bn and order inflow during the quarter was healthy at Rs. 5.3bn. With ~Rs. 10bn worth of framework orders at hand we expect VATW to maintain order inflow growth of >10% going forward. While there has been a slight delay in orders being awarded by the municipal sector, orders from the industrial segment, especially Oil & Gas, are expected to sufficiently compensated with large orders in the near term.

With execution expected to revive in the international projects, we expect VATW to grow at 16% and 19% in FY12E and FY13E respectively and register ~30% PAT growth. Considering the healthy growth, we value VATW at 12x FY13E earnings to arrive at a TP of Rs. 405 and maintain our Add / Outperform rating on the stock.

Highlights of the quarter's performance and outlook

- Execution to bounce bank – Though execution during the quarter was weak on the back of delays faced in a few international projects, the management expects execution to bounce back from 4QFY12 with Sri Lankan project expected to pick up steam after the clearance delays and Libyan project resuming work soon. The management is confident that VATW is on track to achieve ~Rs.14bn revenue that they had guided for FY12E earlier. Furthermore, execution momentum is expected to result in ~20% revenue growth in FY13E.

- Order inflows to remain strong – Order book remained strong at Rs. 35.5bn with an order inflow of Rs. 5.3bn of which international orders were ~Rs. 2bn. While order inflow in past 9M has remained subdued from the municipal sector, it is expected to pick up as a new JNNURM scheme is being planned by the government and other state / central projects are in pipeline. In the international arena, VATW has secured sizeable orders from Turkey, Saudi Arabia and Philippines and is confident of securing more projects from these regions.

- Due diligence for M&A in progress – The management has indicated that it is in advanced stages of due-diligence for a possible M&A opportunity abroad.

Source : Equity Bulls

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