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Centrum Wealth
Va Tech Wabag (Neutral)
CMP: ₹696.05
Target: ₹805
Va Tech Wabag Ltd is a leading Indian player in the water treatment industry. The company is technologically efficient and owns over 100 patents. Its current order book stands at ₹5,439 crore. Given its asset light business model (focus on design, operation and maintenance and outsourcing civil construction), VA Tech has been able to maintain high asset turnover ratio (about 10x). However, due to its spread out business (presence in more than 22 countries) and dealing with government organisations, the working capital requirement is higher (debtor days >200) leading to pressure on return ratios (12-14 per cent). We forecast revenue CAGR of 13.4 per cent over FY2015-17E compared with 22.6 per cent during FY2013-15 mainly on the back of 11 per cent decline in its order inflows during FY2015. Key upside triggers: Sharp increase in order inflows (particularly from government projects such as Ganga Cleaning), improvement in margins and increased market interest in the stock as there are a very few listed players with the same nature of business.
Risk factors: 1) Delay in execution; 2) Currency risk; 3) Decline in investments for water treatment; and 4) Stretched working capital cycle.
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