Buy VA Tech Wabag - BP Wealth Diwali Picks 2012

VA Tech Wabag Ltd is a multinational player in the water treatment industry. The company offers complete life cycle solutions including conceptualization, design, engineering, procurement, supply, installation, construction and O&M services. They provide a range of EPC and O&M solutions for sewage treatment, processed and drinking water treatment, effluents treatment, sludge treatment, desalination and reuse for institutional clients like municipal corporations and companies in the infrastructure sector such as power, steel and oil gas companies. The company is having their market presence in India, the Middle East, North Africa, Central and Eastern Europe, China and South East Asia. It is a technology focused company with R&D centers located in India, Austria and Switzerland and it owns 99 patents and applied for 24 patents.

Investment Rationale

Healthy Order Book of Rs. 49.7 bn which provides strong revenue visibility

The company has a healthy order book of Rs. 41.1 bn at the end of Q1FY13 which gives us the revenue visibility for next 20-24 months and it stands at ~2.8x FY12 sales. For the first quarter of FY13 the order intake has been excellent and it stood at Rs. 6,000 mn. The order book is divided into 67% from domestic markets and balance 33% from overseas markets. Of the total order book 65% comes from EPC segment and balance 35% comes from O&M segment. In addition to this it has a strong order book Rs. 8.6 bn from 'Framework Contracts' which further strengthens the revenue visibility.

Undertaken initiatives to improve operating margins

Undertaken strategic initiatives like Centralizing engineering assistance from India, low cost sourcing model via global procurement policy, emphasis on higher margin O&M Segment, adopting decentralized approach & Multi-Domestic Unit concept to increase local presence are being implemented to focus on improving margins.

Strengthening & consolidation of International Operations

The company wants to strengthen presence in the already present geographies by leveraging the brand name and execution capabilities to attract new clients and win new projects. Wants to deliver quality in a cost efficient manner by using indigenous labor and skills and enter into partnerships/alliances with local partners to understand local markets better and build on in-house capabilities. Empower International subsidiaries by decentralization and strengthen their execution capabilities and empowering local management teams to fully utilize their knowledge of the local markets in growing sales and improving profitability.

Outlook & Valuation

The management has maintained its FY13 guidance of Rs. 16.5 bn to 17.0 bn of topline with a growth target of 15% to 18% yoy. With the govertment focus on water infrastructure management we expect the company to benefit from the same going forward. The stock trades at 14.6x FY13E P/E, which seems to be at the lower end compared to peers. We recommend 'BUY' on the stock with a price target of Rs 580.

Technical Outlook

The stock has given breakout of flag a bullish continuation pattern after which it is expected to resume its previous upmove. It has immediate resistance around the previous peak of 525 which if surpassed will open the way for 600 in long term while support comes @460-440.

Source : Equity Bulls

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