CMP - Rs939 | TP - Rs1,114 | Upside - 18%
VA Tech Wabag Ltd (VATW) reported mixed performance in Q4FY24, meeting expectations in terms of revenue, however margins were missed on account of higher share of EPC. With a strong bid pipeline of $1bn bided mainly in gulf countries and having a bid win ratio of 30%, robust order inflow is expected in FY25E. This will result in higher share of international business (increasing to 50% vs 33% in FY24) along with strong revenue visibility for next 2 years.
Our thesis of VATW focusing on EP, industrial and international business will not only boost the revenue but will also lead to margin improvement is witnessed in their guidance of revenue growth of 15-20% with EBITDA margins of 13-15%. However, for FY25E/26E, we have marginally lowered our revenue and earnings estimates by 7%/5% respectively as there was decline in order inflow in FY24 and new orders will start contributing to earnings majorly from 2HFY25E. We continue to value the company at 17x FY26E EPS at a revised target price of Rs1,114 thereby maintaining BUY.
Strong FY24 performance: With VATW share of EPC business declining and more focus on EP segment, revenue growth was marginal of 2% (excl nos of divested European subsidiaries in FY23). However margins witnessed a strong growth of 123bps on account of higher share of EP, O&M and industrial.
Healthy OB and solid order pipeline: VATW has a strong orderbook of Rs114bn being 4.0x FY24 revenue, providing visibility for the next 2-3 years. The current composition of 56% EPC orders and 44% O&M provides a balanced orderbook, but we expect the O&M segment to grow further due to conscious efforts to remain asset-light and management's vision to increase O&M share of revenue to 20% in next few years.
Strong financial position: VATW has been net debt free and has free cash flow for consecutive 4 years vindicating strong financial position. The same is also witnessed in uptick in return ratios i.e. ROE and ROCE from 8%/10% in FY20 to 14%/16% in FY24.
Stretched working capital: Receivable days has increased to 322days in FY24 vs 270days in FY23 mainly on account of new & large international / MDB funded projects with significant revenues in Q4. However the same is expected to reduce progressively through H1 and normalize by FY25 end. Also non-current receivables have reduced YoY on account of collection of project retention and further to the extent of Rs750mn w.r.t to delayed projects is expected to be received in FY25E.
Future outlook: Management is optimistic for the future growth and has guided revenue CAGR of 15-20% for next 2-3years with EBITDA margins in the range of 13-15%. This resurgence in growth and margins will be mainly from higher share of O&M, EP, industrial and international projects.
Shares of VA Tech Wabag Limited was last trading in BSE at Rs. 939.35 as compared to the previous close of Rs. 969.10. The total number of shares traded during the day was 28762 in over 1515 trades.
The stock hit an intraday high of Rs. 974.85 and intraday low of 935.35. The net turnover during the day was Rs. 27276939.00. |
