Axis Securities initiates buy rating on Va Tech Wabag; ups target price by 30%

The brokerage supports the recommendation due to strong industry tailwinds, improving profitability, a robust order book, and expanding offerings

Brokerage Axis Securities has initiated coverage on Va Tech Wabag Ltd (VTW) with a buy rating and increased its target price to Rs 1,700 a share, up 30 percent from current market price. The brokerage supports the recommendation due to strong industry tailwinds, improving profitability, a robust order book, and expanding offerings.

VTW investment thesis: Positioned for growth in water security market

The brokerage said the firm is well-positioned to capitalize on the growing water security and conservation market as global regulatory bodies allocate more resources to water conservation and tighten regulations on industrial waste. This shift has led to increased municipal and industrial spending on water infrastructure, creating significant opportunities for experienced players like VTW, it said. In recent years, VTW has enhanced its business mix, leading to improved profitability and cash flow, with EBITDA margins exceeding 13 percent in FY24, up from 8 to 9 percent previously.

Focus on Profitable and Sustainable Growth

VTW is strategically selective in project choices, focusing on reducing the construction component in EPC contracts, increasing O&M revenues to 20 percent, boosting industrial contract share, adopting advanced technologies, expanding in key international markets, and choosing projects with higher payment security. The divestment of lower-margin entities in Europe has contributed to a steady rise in EBITDA margins, which reached 13.2 percent in FY24. The company aims for margins in the 13-15 percent range and improved revenue predictability while lowering default risks, Axis report said.

Strong Revenue Visibility

As of June 2024, VTW's order book stands at approximately Rs 10,676 crore, with significant projects in the pipeline, including a Rs 2,700 crore contract for a desalination plant in Saudi Arabia. With a target order book of Rs 16,000 crore by FY25, VTW expects strong growth, particularly in the Middle East, which offers larger project sizes and better margins. The current order book ensures revenue visibility for the next 3-4 years, supporting a stable inflow in the medium term, the report added.

VTW Expands Offerings for Future Growth

VTW is diversifying beyond its core water solutions by leveraging its expertise to explore new growth areas. The company has partnered with Peak Sustainability Ventures to set up 100 Bio-CNG plants across India, GCC, Africa, and Europe, transitioning from biogas electricity generation to compressed natural gas (CNG) production. VTW is also pursuing collaborations in the semiconductor and green hydrogen sectors to address water requirements. Axis expects these initiatives, aimed at tapping into cleaner energy and emerging markets, are expected to gain traction in 3-4 years.

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