Water solutions company Va Tech Wabag was in the news last week after it announced securing an order worth ₹4,400 crore, for sea water desalination project, from Chennai Metropolitan Water Supply and Sewerage Board (CMWSSB) on March 31. The stock of the company gained about 4.57 per cent by the end of the trading session on Friday after going up as high as around 8.5 per cent intra-day.

The project will be based on Design, Build and Operate (DBO) model for 400 million litres per day Sea Water Reverse Osmosis desalination. As per the management, it will be the largest desalination plant in the South-East Asian region. 

Va Tech Wabag Ltd, along with its subsidiaries, is involved in the business of designing, supplying, installation, construction and operation of waste and industrial water treatment, drinking water and desalination plants in India and globally. The company has a track record of executing water treatment plants since 1995.

As on December 31, 2022, the company’s order book stands at about ₹10,000 crore, which is about 3.42 times its TTM revenue from operations. Based on the order inflows this quarter, the company is expected to clock an all-time high order book, providing it good revenue visibility.

Does all this bode better times for the company? Since listing in December 2010, the stock of Va Tech Wabag has been a huge under-performer. It has returned only about 20 per cent since its listing in absolute terms. While there was initially a lot of enthusiasm in the stock in initial years, post listing, shares have come under pressure since 2015.

 In FY15, the company took over the lead position in the projects of municipalities in Andhra Pradesh and Telangana — from the other two companies in the consortium, Gammon India and Tecpro Systems (the then leader of the consortium). The delays in the receivables from the project took a toll on the company’s working capital requirements and it had to resort to borrowings, which led to its short-term borrowings increasing to ₹514 crore in FY2019, from the ₹104.8 crore level in FY2015.

However, things look better for the company now. From net working capital of 130 days in FY19, the company has reduced it to about 90 days as of December ending quarter FY23. Further, from having net debt of ₹437 crore, Wabag has reduced it to around ₹90 crore along with improved profitability. Thus, if past problems do not repeat, with increased focus on addressing water-related problems, the stock may be interesting to watch.

The stock currently trades at about 11.4 times its one-year forward earnings (Bloomberg estimates), which is in line with its historical five-year average P/E of 11 times.

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