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Va Tech Wabag : To Buy or Sell - A Technical Perspective

We will be updating all aspects about Va Tech Wabag here and do see comments below this post where we will be updating the latest data about this company.

Weak result with cost overrun and provision in overseas subsidiaries: For Q1FY2016, Va Tech Wabag (VTW) reported very weak consolidated earnings, despite a strong growth recorded by its stand-alone entity, due to losses incurred by its overseas subsidiaries. The stand-alone earnings doubled YoY to Rs17 crore in Q1FY2016, backed by 98% revenue growth and 241BPS of OPM expansion. However, the overseas subsidiaries surprised negatively with a net loss of Rs17 crore, as revenues declined by 26% YoY and it turned negative at operating level with substantially higher employee cost due to extended stay of employees at Oman-based desalination project (worth Rs5 crore). Further, VTW has provided Rs5 crore towards liquidity damage as a conservative and prudent accounting practice. These two are exceptional costs of Rs10 crore which pressurised the subsidiaries’ result. Consequently, the consolidated entity reported a net loss of Rs10 crore in Q1FY2016, as against a profit of Rs6 crore in Q1FY2015.

Healthy order inflow; domestic pie to expand: The order inflow has been healthy in this quarter at Rs1,106 crore, taking the order backlog to Rs7,631 crore (including framework contracts worth Rs1,542 crore). This is above 3x its FY2015 revenues which gives a healthy revenue visibility. The management has retained its order inflow guidance of Rs3,500-3,700 and revenues of Rs2,800-3,000 crore for the year 2016. However, there are challenges like weakness in euro and execution risk in certain projects could remain for some time in near term. The cost overrun in Oman and Istanbul projects related to overstay of employees are likely to remain high for the next one-two quarters; hence, we expect subsidiaries’ performance should improve in Q3FY2016. On the positive side, the domestic opportunities remain strong and the management expects improvement in ordering activities in H2FY2016.

Valuation-Fine-tune estimates but retain Buy with a revised PT of Rs850: We believe, while the opportunities in the water related business is huge globally, the company is in a phase of re-organising the structure with bringing the operations in four clusters geographically and is constantly looking for opportunities in emerging economies. To establish its brand and entry into some of the new regions, it could face some challenges but the long-term growth opportunities are intact. Based on the above mentioned cost overrun and provision, we have fine-tuned our FY2016 and FY2017 earnings estimates; consequently, we have revised down our price target to Rs850 (25x its FY2017 EPS). However, we retain our Buy rating on VTW, given a quality engineering stock with its niche expertise, professional management, structural growth story of water industry, strong balance sheet (net cash positive) and RoIC of above 30% in its favour.

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