The Centre’s increasing thrust to set up better water management facilities in the country will benefit companies that operate in this field. VA Tech Wabag, the market leader in the water management sector in India with 15 per cent market share, is set to gain from this drive.

 VA Tech has a set of patented technologies across the water management value chain for industrial water treatment, desalination and waste and drinking water treatment, lending it a competitive advantage. The company has a diversified clientele including both domestic and international companies as well as a healthy mix of government and private orders. It recorded a robust growth in its order book this fiscal year; the order inflow of ₹3,356 crore from domestic and international projects received in the first three quarters of FY16 is the highest ever recorded in a full fiscal year.     

 Investors with a long-term perspective can, therefore, accumulate the stock of VA Tech Wabag. The stock price has almost halved from the peak price of ₹970 recorded in March 2015. After this fall, it trades at a multiple of 22.5 times its trailing 12-month earnings. This is closer to the lower end of the three-year PE band, leaving some room for price appreciation over the next two years.

Strong domestic outlook  The Centre’s focus on various projects related to water treatment such as the Clean Ganga, Amrut, Smart Cities and Swachh Bharat schemes will translate into higher order flow for companies in the water management sector. The total budgeted allocation to these schemes for 2016-17 is ₹23,100 crore. The spending on the Smart City program is expected to be ₹50,000 crore over the next five years.

VA Tech earned around 47 per cent of its domestic revenue from government projects. The company is, therefore, likely to capture a significant portion of these allocations.

 Towards end-December 2015, the order book stood at ₹6,410 crore; this was 2.6 times the revenue recorded in FY15. The order inflow grew 130 per cent (domestic orders grew 183 per cent and international orders 105 per cent) in the nine months ending December 2015 compared to the same period last year.  

 Sixty per cent of incremental orders were from international projects.  Of the current order book, 62 per cent comprises government projects and 38 per cent private sector. The company’s presence spans across India, West Asia, Europe, South America, Africa and South-East Asia.

The key projects under operation contributing to revenue include the waste water management plant in Istanbul, Turkey, Petronas Industrial water treatment plant in Malaysia, water treatment and distribution for Kakatiya and Rayalaseema thermal power plants in Andhra Pradesh and Nemmeli desalination plant in Chennai. The top 10 projects contributed ₹842 crore — 50 per cent of the total revenue — for the nine months ending December 2015. The second desalination plant in Nemmeli in Chennai is being planned by the government.

Reviving finances The consolidated revenue and profits of VA Tech Wabag grew at a compounded average growth rate of 23 and 10 per cent between 2012-13 and 2014-15. However, revenue in the first nine months of FY 16 grew 10.7 per cent. This is explained by delay in recognition of revenue from some international projects; these are likely to be booked in the upcoming quarters. The profits also took a hit this fiscal due to the mismatch in accounting for revenue and costs related to a project.

The delay in completion of a project in Oman also resulted in a penalty of ₹10 crore, further impacting the bottom line this fiscal. The profit for the first nine months is down 40 per cent over the same period last year.

 The standalone operations, however, continued to show good traction this fiscal with revenue growth of 45 per cent and profit growth of 60 per cent in the nine months ending December 2015.

While the stricter schedules for completion in international projects and the penalty clauses could be tricky, the diversity in the company’s project portfolio helps mitigate this risk. 

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