The corporate, which was based a century in the past, has established itself because the world’s third-largest non-public water operator and desalination plant provider. It has executed greater than 1,500 water remedy crops globally since 1995.
VA Tech Wabag is not any stranger to steep spikes in its share worth. It has been grabbing growing investor consideration because it made its manner into the portfolios of some well-known buyers, together with Rekha Jhunjhunwala. Propped up by order-wins, the inventory shortly emerged as a multi-bagger, virtually quadrupling investor wealth in somewhat greater than a 12 months—from October 2023 to December 2024.
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Even over an extended interval, because the lows of the pandemic, the inventory has delivered a 95% compound annual development charge—from about ₹80 per share to achieve a lifetime excessive of ₹1,905 in December 2024.
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However in December, a young value greater than ₹2,700 crore from Saudi Arabia obtained cancelled. Though it was a young cancellation because the consumer recalibrated the undertaking’s specs, somewhat than being an order cancellation, this abruptly disillusioned buyers. The inventory has corrected by 30% since then.
Even the announcement of the retendering of the cancelled undertaking and the most recent order of greater than ₹3,000 crore couldn’t maintain investor curiosity. By the point the markets closed on Monday, issues round Wabag’s restricted share within the new order (about ₹1,700 crore), its steep valuation, and worrisome enterprise fundamentals virtually worn out the inventory’s total intraday positive factors of about 14%. The inventory closed with modest 1.6% returns for the day.
Stagnant revenues increase issues
The previous couple of years have raised issues across the tempo of order-inflows at Wabag. However as of December, its order e-book stood at greater than ₹14,250 crore after the corporate secured web orders (excluding cancellations) value ₹2,820 crore in FY25 up to now. This supplies income visibility of round 5 years on FY24 revenues, and is an enchancment over the order-book-to-revenue ratio of 3-4x as of FY24.
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However the latest enchancment so as inflows, Wabag’s nine-month revenues have largely been stagnant at about ₹2,100 crore since FY22. Even in FY25 up to now, which has seen comparatively sooner revenue-growth, the corporate’s income rose by solely 11.2% year-on-year. This has fallen wanting the administration’s steering of 15-20% over the following 3-5 years. This may be attributed to the sluggish order-inflows till lately, in addition to Wabag’s excessive working-capital-to-sales ratio (75-80%), which locations funds-based limits on potential development.
Order-book combine can have an effect on margins going ahead
Within the 9 months that led to December, engineering, procurement and development (EPC) contracts constituted about 81% of Wabag’s revenues, with the remainder of the revenues coming from operations and upkeep (O&M) contracts. This is smart, contemplating that EPC contracts are usually of upper worth in comparison with O&M contracts.
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Nonetheless, in relation to Wabag’s order e-book, as a lot as 42% is made up of O&M contracts. According to this, Wabag’s income development within the first 9 months of FY25 was pushed by its O&M enterprise, which grew 20% year-on-year, whereas EPC revenues grew by a mellower 9%.
This rising mixture of sometimes lower-margin O&M contracts in Wabag’s order e-book can have an effect on the corporate’s total enterprise margins.
Shopper profile could make money administration tough
The consumer distribution of Wabag’s revenues is tilted in the direction of municipal purchasers resembling Uttar Pradesh Jal Nigam and Delhi Jal Board in India, and Singapore’s Nationwide Water Company and Saudi Water Authority overseas. As a lot as 69% of Wabag’s revenues within the first 9 months of FY25 have been derived from municipal purchasers. This phase grew 24% year-on-year, sooner than the commercial purchasers’ income development of 10% in the course of the interval.
Wabag’s order e-book can be tilted in the direction of municipal orders, with 84% of its closing backlog as of December composed of municipal orders, whilst its industrial order e-book doubled from ₹1,093 crore on the finish of FY24 to ₹2,139 Crore as of December. Primarily based on the present state of the corporate’s order e-book, municipal revenues are anticipated to proceed to drive Wabag’s development.
Contemplating that municipal purchasers and even a few of Wabag’s industrial purchasers (resembling ONGC, Indian Oil, and NMDC) are government-owned, time to comprehend money from revenues can run very excessive. That is mirrored within the firm’s steep working-capital wants, which have been as excessive as 75-80% of revenues. It will also be seen within the intermittent damaging cash-flow accruals for the enterprise over time.
Strengths do exist
Regardless of these challenges, Wabag’s monetary place has been bettering, thanks primarily to the shedding of long-term debt from its books. The truth is, the corporate’s web debt (long-term debt adjusted for money steadiness) has been flat or damaging for eight consecutive quarters.
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The ensuing financial savings in interest-costs have helped enhance Wabag’s profitability. EBITDA and revenue after tax have grew at a CAGR of 18% and 32%, respectively, between the primary 9 months of FY22 and the primary 9 months of FY25 despite stagnant revenues over the interval. EBITDA margin for the December quarter got here in at 13.5%, on the decrease finish of the administration’s steering of 13-15%. Additionally, because of its asset-light mannequin, Wabag has delivered strong returns on capital employed at 17.7%.
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Wabag has achieved important geographical diversification with India and the remainder of the world contributing practically equally to its income. Furthermore, following a 54% development in its order e-book from exports in FY25 up to now, the phase’s contribution to the order e-book has bulked up from 33% on the finish of FY24 to 40% as of December. That is in keeping with the administration’s earlier steering of increase the order-book with a deal with exports. This geographical diversification ought to assist insulate Wabag’s enterprise from potential localized conflicts, geopolitical or in any other case.
However the inventory outlook isn’t encouraging
Regardless of the strengths in its enterprise, the outlook for Wabag’s inventory isn’t notably encouraging. The inventory’s small market capitalization ( ₹8,600 crore complete and ₹7,000 crore float-adjusted), mixed with low delivery-to-trade proportion (21%), make it notably weak to speculative operator exercise and consequent excessive volatility.
Furthermore, the inventory trades at 32.3x its earnings, which is overvalued in comparison with its rivals, Ion Change and EMS, which commerce at earnings multiples of 28.4x and 20.16x, respectively. The overvaluation is especially steep, contemplating that the corporate has been reporting flat revenues. Earnings upgrades from the inventory right here on may be anticipated from constant order wins, enchancment in income visibility, accelerated execution, and sustained pickup in revenues.
For extra such evaluation, learn Revenue Pulse.
Ananya Roy (@ananyaroycfa on X) is the founding father of Credibull Capital, a Sebi-registered funding adviser.
Views are private and don’t characterize the stand of this publication.
