Target: ₹634

CMP: ₹319.45

VA Tech Wabag on track for ₹3,100-3,200 crore sales for FY22F; moderation of net debt level a key positive: VATW requires ₹1,000-1,100 crore of sales in Q4-FY22 to achieve ₹3,100-3,200 crore sales for FY22F, which represents 0-10 per cent y-o-y growth.

While execution has been robust, cash collection appears to be in focus, as working capital levels remains stable and net debt declined 35 per cent q-o-q to ₹145 crore.

Focus on technology focused orders leading to rise in EBITDA margin to >10 per cent in Q3-FY22: Despite commodity inflation, a focus on securing orders with higher engineering and design components against construction appears to have led to the rise in EBITDA margin.

Management believes that the EBITDA margin level of 10 per cent+ can be sustained into FY23 (we have not incorporated this into our estimate yet, and will monitor the sustainability of this trend over the next few quarters ), and if this is realised it could lead to meaningful upside to our estimates.

The Management has further stated that focus will be on securing tech-focused orders with low civil component . This philosophy, if implemented, could improve both margins and cash flows, in our view.

Water-related capex remains strong; management estimates a 10-15 per cent win rate in tenders will be adequate to support its growth plans: Management expects strong budget allocations by the Ministry of Jal Shakti with a thrust on river-cleaning projects extended to other major rivers besides the Ganges under Namame Gange 2.

VATW is also pre-qualified for the ₹6,100 crore Chennai desalination tender as well.

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