VA Tech Wabag - Healthy execution, working capital concerns remain - ICICI Securities

VA Tech Wabag's Q3FY21 performance was better than expectations, supported by pick up in both domestic and overseas execution leading to healthy operating margins. Kolkata HAM project financial closure is in its final stages and is likely to commence by Mar'21. Chennai 400MLD desalination project ordering activity has commenced and pre-qualification bids are expected to get over by next month. Strong orderbook of Rs107bn (4.2x TTM sales) lends visibility and the company has announced EUR100mn worth of overseas orders; however, 33% of orderbook is O&M which restricts near- to medium-term growth. Gross debt has reduced to Rs3.83bn in Dec'20 from Rs4.32bn in Sep'20 and Rs5.2bn in Mar'20. Factoring better-than-expected earnings, increased capex outlay by government in water space and commencement of Namami Ganga, we raise earnings by 68.5% and 15.6% for FY21E and FY22E, respectively, and maintain HOLD with a revised target price of Rs225 (previously: Rs190).

- Financial closure of Namami Gange to support revenue growth: Kolkata HAM project is nearing financial closure and is likely shortly, while Bihar project has commenced execution. We believe this can boost the overall revenue growth in FY22E.

- Delay in APGenco/TSGenco collection continues: Although current receivables have come down slightly to Rs13.8bn in Sep'20 from Rs15.8bn in Mar'20, status on Rs4.1bn receivables from APGenco/TSGenco and Rs695mn from Tecpro remains unchanged. These attribute to 30% of overall receivables. Non-current receivable, other current assets have increased which is impacting the overall cashflow.

- Debt levels can act as impediment to growth: Although the company reduced its gross debt to Rs3.83bn from Rs5.2bn in Mar'20 supported by influx of cash from equity dilution, working capital days continue to be high 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 is unlikely to reduce given the litigation-related delays, hence, high debt levels can act as impediment to revenue growth.

- Fund raising provides liquidity; however, discount in valuation fails to cheer: The Rs1.2bn fund raising from marquee investor reduces the risk of further elevation in debt levels and thus, reducing the impact on growth from increased interest expense. However, the discount in valuation and risk of further fund raising will be an overhang on the stock.

- Maintain HOLD due to improved growth outlook and expensive valuation: Financial closure of Namami Ganga project and pick up in overseas orders provide growth visibility. Strong orderbook of Rs107bn (4.2X TTM sales) will support earnings growth. Factoring the same, we raise earnings by 68.5% and 15.6% for FY21E and FY22E, respectively. We have introduced FY23E estimates and value the stock assigning 10x P/E multiple to Sep'22E earnings. Given expensive valuation and healthy growth outlook, we maintain HOLD rating with a revised target price of Rs225 (previously: Rs190).

Shares of VA TECH WABAG LTD. was last trading in BSE at Rs.243.55 as compared to the previous close of Rs. 220. The total number of shares traded during the day was 202649 in over 4603 trades.

The stock hit an intraday high of Rs. 247 and intraday low of 215.6. The net turnover during the day was Rs. 47624224.

Source : Equity Bulls

Keywords