VA Tech Wabag - High receivables, low margins to impact earnings - ICICI Securities

VA Tech Wabag has reported 15.6% YoY revenue growth at Rs7.9bn in Q4FY20; however, standalone EBITDA margins declined 440bps YoY impacting operating profit. The company managed to show positive cash from operations due to reduction in other current assets and increase in liabilities; however, receivables continue to be high. In addition to Rs4.1bn pending from TSGenco/APGenco and Rs695mn from Tecpro, certain large overseas projects were outstanding. Strong orderbook of Rs110bn (4.3x TTM sales) lends visibility; however, 47% of FY20 order intake is O&M which restricts near- to medium-term growth. Factoring the delay in project recovery and working capital stress, we cut earnings by 44% and 25% for FY21E and FY22E, respectively. We maintain HOLD with a revised target price of Rs121 (previously: Rs82).

- Higher mix of O&M orders in orderbook do not aid near-term growth: O&M orders' proportion in overall book has grown from 10% in FY19 to 47% and currently, 35% of the overall orderbook of Rs110bn is O&M. The Ghaziabad and Agra O&M projects are expected to contribute Rs1.4bn to revenues from FY21 onwards. Given their richer margin profile, the company is targeting 25% of overall revenues from the segment in near future. However, this doesn't aid in near-term growth.

- Delay in APGenco/TSGenco collection continues: Cashflow from operations in FY20 improved to Rs2.4bn partly supported by contribution from sale of 58% stake in an overseas subsidiary for Rs310mn (Rs190mn included in other income). Debtors continued to be high, impacted by certain large overseas project in addition to Rs4.1bn from APGenco/TSGenco and Rs695mn from Tecpro.

- Debt levels can act as impediment to growth: Although the company reduced net debt by Rs1.5bn to Rs1.6bn, working capital days continue to be high at 125 days due to slow moving receivables. Hence, we believe, the company may need to either raise more debt or reduce working capital days to support revenue growth. Given the current scenario, working capital can be reduced as slow-moving receivables are taking time to a limit. Hence, high debt levels can act as impediment to revenue growth.

- Maintain HOLD due to balance sheet stress: Working capital stretch is impacting near-term cashflow and delay in collections from APGenco / TSGenco continue to hurt the overall earnings of VA Tech. Covid-19 related lockdown is likely to impact the execution and order intake in the near term. Factoring the same, we cut earnings by 44% and 25% for FY21E and FY22E, respectively, and maintain HOLD rating with a revised target price of Rs121 (previously: Rs82).

Outlook and valuation

VA Tech Wabag currently trades at 7.9x FY22E earnings of Rs15.2 per share. High receivable days impacting overall cashflow continues and is expected to keep RoEs at lower levels despite the company being asset-light. Likely financial closure of HAM projects under Namami Ganga with a financial partner who will fund majority stake will provide relief to the reduction in impact on balance sheet. The tight liquidity scenario will remain an impediment to growth given the EPC nature of execution. Hence, we assign a multiple of -1 S.D. of 1-year forward mean.

Covid-19 related issues are likely to hamper the execution and order intake prospects in the near term. Hence, we assign valuation at 1-year forward -1 S.D. mean with a revised target price of Rs121 (8x FY22E earnings), previously Rs82.

Shares of VA TECH WABAG LTD. was last trading in BSE at Rs.121.55 as compared to the previous close of Rs. 120.2. The total number of shares traded during the day was 108905 in over 1560 trades.

The stock hit an intraday high of Rs. 126.2 and intraday low of 118.45. The net turnover during the day was Rs. 13579343.

Source : Equity Bulls

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