Va Tech maintains the niche space

With little competition from listed entities, it stands out in water & waste management segments

With bulls returning to the stock market, the stock of Va Tech Wabag has benefitted the most. The steep bounceback from its 52-week low (41 per cent since March) has caught the eye of many. The uptick comes when the company’s March quarter (Q4) performance, with consolidated income down five per cent at Rs 856 crore and net profit down three per cent to Rs 69 crore, was below estimates. So, what’s driving investors to this counter?

Va Tech is a niche entity in the water & waste management space, across West Asia, North Africa, Europe, China and Southeast Asia. It operates on an asset-light business model and thus, maintains a lean balance sheet.

While issues such as weak order inflow, rapid swing in operating margins and execution delays have been weighing for at least three quarters (even as Q4 results were subdued), a positive management commentary addressed these effectively, supporting the recent run-up in the stock price.

The order book is at an all-time high of Rs 8,315 crore, giving it earnings visibility for the next three years. Contracts from Petronas (Malaysia), Sri Lanka, Bahrain and Nigeria account for 37 per cent of the order book and have an execution period of three years. They are also high-margin contracts. These minimise the risk of execution and ensure adequate working capital flows, both important. The net working capital in FY16 rose to 96 days, from 77 days in FY15 due to delays in receivables and stretched execution time-frames. With a dedicated recovery team, the working capital cycle is expected to reduce to 70-80 days.

What holds key for further re-rating of the stock is sustainability of order inflow. While the management has forecast orders worth Rs 4,000-4,200 crore being awarded in FY17, it keeps pace with this. Va Tech expects projects on desalination plants and Mumbai sewage treatment plants to aid domestic orders in FY17. Opportunities from the Smart City and Namami Ganga projects of Rs 20,000-25,000 crore offer potential.

The Street is taking this forecast positively. Analysts at Phillip Capital, while raising their target price to Rs 585 (earlier at Rs 570), say Va Tech is strongly placed in the domestic water treatment market and remains a strong beneficiary of an expected uptick in water treatment projects, driven by government spending.

Fourteen of 16 analysts polled on Bloomberg after the Q4 results recommend a ‘buy’ on Va Tech’s stock, with average target price of Rs 682. Given the recent run-up, investors might want to use corrections to buy.