Buy VA Tech Wabag; target of Rs 640: ICICI Direct

ICICI Direct's research report on VA Tech Wabag

Execution in the overseas segment witnessed a healthy pick-up. The same contributed 69% to the topline in Q2FY17. In the overseas business, execution was aided by projects that earlier saw a delay in engineering approvals. The management has indicated that all overseas projects are now progressing as per schedule. In the overseas market, the management is seeing good traction from South East Asia and the Middle-East regions. The company made its first breakthrough in the Latin America market in this quarter. Lower margins orders like the AP Genco witnessed strong execution to the tune of Rs 100 crore. Faster execution of such orders augurs well for the company as these orders not only dented EBITDA margins but also strained working capital for the company.

We have pencilled new order wins of Rs 4,100 crore and Rs 4,500 crore for FY17E and FY18E, respectively. We expect the company’s order backlog and revenue to increase at a CAGR of 17.9% and 22.1%, respectively, in FY16-18E driven by the robust opportunity, especially in domestic markets. Recently, the stock price had witnessed a significant correction on concerns over working capital. We believe timely execution of overseas order and higher contribution from domestic orders is not only likely ease working capital concerns but also improve margins, going forward (10.2% in FY18E from 8.8% in FY16). We believe Wabag’s asset light business model would continue to provide positive FCF of Rs 200 crore & Rs 100 crore in FY17E and FY18E, respectively. We slightly revise our earnings and valuation estimates downwards to account for slower than expected improvement in EBITDA margins. We value the company at 17x FY18E earnings to arrive at a target price of Rs 640.