VA Tech Wabag rating – Buy: Net cash status eases investor concerns

FY21 outcomes, in our view, show that previous concerns on execution and rising debt ranges are largely behind.

We view VATW as a mixture of worth (~8x FY23F EPS of Rs 36.1) and robust progress (EPS to doubtless double over FY21-23F, on our forecast). Further, we predict VATW, with its operations targeted on clear water expertise and having a powerful stability sheet and expertise credentials (governance constructive), matches nicely into the ESG theme. FY21 outcomes, in our view, show that previous concerns on execution and rising debt ranges are largely behind.

Orderbook of Rs 84 bn (excluding framework contracts) is totally executable: Mgmt commentary suggests the orderbook is funded both by multilateral companies or by sovereign entities representing low or restricted assortment/execution threat. This can result in additional enchancment in internet working capital from 97 days in finish-FY21. VATW has a powerful execution monitor document. Thus, we consider its orderbook ought to translate into income progress.

VATW has turned internet cash constructive and has developed robust expertise credentials: Investors’ persistent concern was its excessive debt build-up over FY16-19 regardless of an asset-mild business mannequin. This was completely resulting from stalled receivables at a state degree project (Rs 4.22 bn). While there’s restricted visibility of recovery from these debtors, mgmt has effected a powerful turnaround in cash flows which has led VATW to show from Rs 4.3 bn of internet debt in FY19 to internet cash in FY21.

TP as much as Rs 546, implying 83% upside: We increase FY22/23F EPS by 4%/8% to mirror VATW’s decrease monetary price (internet cash degree). We worth VATW at 15x (up from 13.2x) FY23F EPS of Rs 36.1 and add Rs 4/share of hybrid annuity mannequin tasks’ fairness worth to reach at our Rs 546 TP, and we reaffirm Buy. Our greater a number of displays decrease price of fairness at 10.3% (from 11.3%) on decrease debt price.

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