Madhuchanda Dey Moneycontrol Research
VA Tech Wabag (VATW) is one of the world’s leading companies in the water treatment field. Its key competencies lie in design, completion and operation of drinking water and waste water treatment plants for both municipal and industrial sectors. After FY18 was marred by misses both in topline and order intake, the start of the new fiscal has been uninspiring.
Result snapshot
In the quarter under review, the company reported modest revenue growth. While operating margin performance was healthy, especially in the overseas business, reported margin was supressed due to foreign exchange losses to the tune of Rs 23 crore (predominantly translation loss due to depreciation of the Turkish Lira).
Of the total revenue of Rs 681 crore, 49 percent accrued from India and the rest was contributed by overseas geographies. The top three projects that contributed to Q1 revenue were all overseas orders– Petronas, Malaysia; desalination and sewage treatment plant order from Saudi Arabia; and Dangote, Nigeria.
With no large India orders accruing last quarter, order inflow was modest at Rs 528 crore, dominated by overseas orders which were close to 59 percent of total inflows. Order backlog stood at Rs 7,358 crore, translating in a trailing book-to-bill ratio of 2.1 times.
Despite no progress seen on two key areas, namely recovery of receivables from Andhra Pradesh Power Generation Corporation (APGENCO) projects and few large ticket order wins from India, the management has not changed its guidance.
Genesis of the APGENCO problem APGENCO had placed orders for two 600 MW thermal power plants to a consortium in which VATW was a joint partner responsible for the water systems package. However, due to financial issues with the consortium leader, VATW had to assume the role of consortium leader from mid‐2014 and took over overall responsibility of completing the project.
The first of the 600 MW Kakatiya Thermal Power project was completed successfully and the plant was commissioned in January 2016. The 600 MW Rayalaseema Thermal Power plant has achieved COD (Commercial Operation Date) recently and is generating power.
The APGENCO project had a 20 percent retention norm as per the original agreement. The retention money pertaining to Kakatiya project (Rs 100 crore) is now collectible once the performance guarantee test run (PGTR) is complete. Of the Rs 600 crore due from APGENCO, the management expects to recover close to 60 percent in FY19. It said discussions are on and expects Rs 150-200 crore by first half of FY19 and another Rs 150-200 crore by fiscal end. This should lead to significant improvement in receivables.
No change in order inflow guidance After its FY18 result, the management guided at order inflow of Rs 5,300-5,700 crore for FY19. This came after a huge miss on order inflow in FY18: Rs 3,191 crore versus its guidance of Rs 4,300-4,500 crore. The management has repeatedly maintained that few large orders have been postponed and it hasn’t lost orders to competition.
Despite a lacklustre Q1 in terms of order inflows, the senior leadership reiterated its FY19 order inflow guidance of close to Rs 5,500 crore. It sees huge opportunity in desalination projects and treatment of waste water and sewage. Demand for recycling of water and sludge management for industrial and sewage water is increasing, given limited availability of fresh water. On the industrial side, it sees large opportunities from the oil and gas industry as well as power, where recycling of water will be made mandatory.
Opportunity from Namami Gange and AMRUT The Namami Gange project envisages investments to the tune of Rs 20,000 crore and the management expects almost 75 percent of the order awarding over the next one year before general elections in May 2019. It sees large (Rs 5,000 crore) project opportunities in cities like Kanpur, Allahabad, Patna and Kolkata, where the project for an entire city may be awarded to one company. VATW is eyeing at least two such projects in FY19. Some of these projects may be awarded on a hybrid annuity model (HAM), which can increase some leverage on the balance sheet or require fresh equity investments.
Under the Atal Mission for Rejuvenation of Urban Transformation (AMRUT) scheme, order inflow is expected from state governments and public utilities for waste water treatment. The Mumbai project of six sewage treatment plants and upgradation of existing treatment facilities worth Rs 11,000 crore has been delayed and is expected to be awarded in FY19. Similarly, the management sees opportunities emerging from other cities as well.
Desalination too is a big opportunity and the company has a successful track record of building one such project at Chennai.
Near term trigger Recovery from APGENCO remains a key near term trigger as also some large order wins. Should the company successfully manage the receivable issue in FY19, we see a decent uptick in FY20 earnings.
Earnings estimates
The stock has corrected significantly and is close to its 52-week low. While we see limited downside, the upside depends entirely on the positive resolution of APGENCO receivable and large order wins.
We therefore find the current valuation of 9.7 times estimated FY20 earnings attractive for long term investors.
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