Healthy Or­der Book Makes VA Tech a Buy

The Economic Times - - Smart -

ades, it has ex­e­cuted over 2,300 wa­ter treat­ment projects and has close to 14% mar­ket share of In­dia’s wa­ter treat­ment in­dus­try.

There are three crit­i­cal ad­van­tages of VA Tech which shows how well it is placed in grab­bing a large share of In­dia’s wa­ter and waste wa­ter treat­ment op­por­tu­ni­ties. First, its busi­ness model is as­set light. It out­sources the con­struc­tion of wa­ter projects that re­quire high cap­i­tal. Due to this, it is debt-free. Sec­ond, the com­pany has a ro­bust or­der book of ₹ 7,952 crore. A large part of this is do­mes­tic busi­ness where the com­pany earns high op­er­at­ing mar­gin (OPM) — 11% on En­gi­neer­ing Pro­cure­ment Con­struc­tion (EPC) or­ders and 20% on op­er­a­tions and main­te­nance or­ders.

The third im­por­tant fac­tor is the op­por­tu­ni­ties in In­dia’s wa­ter and wa­ter treat­ment in­dus­try. The po­ten­tial is large given that the per capita wa­ter sup­ply in In­dia is 146 litres per day com­pared with 500 litres per day in de­vel­oped na­tions, ac­cord­ing to one es­ti­mate. With norms for wa­ter treat­ment get­ting stricter, VA Tech, which has the distinc­tion of ex­e­cut­ing long wa­ter treat­ment projects, is placed well.

Be­sides, the gov­ern­ment’s ini­tia­tives such as the Ganga Re­ju­ve­na­tion plan (worth ₹ 51,000 crore), Swachh Bharat Mis­sion (sewage and solid waste man­age­ment worth ₹ 50,000 crore) and the project of 100 smart cities, which would en­tail ₹ 48,000 crore, present good or­der book op­por­tu­ni­ties for VA Tech Wabag. In the nine months to De­cem­ber 2015, con­sol­i­dated net profit fell 39.5% to ₹ 23.7 crore, while op­er­at­ing ma r g i n b e f o r e d e p r e c i a t i o n (EBITDA mar­gin) fell 20 ba­sis points to 6.1%. The de­pre­ci­a­tion of euro dur­ing the pe­riod and de­lay in a few overseas projects af­fected the per­for­mance. Rev­enue rose 10.7% to ₹ 1,686 crore.

Co’s In­dia busi­ness con­trib­utes 56% to to­tal rev­enues, while the rest come from over 22 coun­tries

The com­pany’s stock com­mands price earn­ings mul­ti­ple (P/E) of 25.6 com­pared with the five-year av­er­age of 29.6. The fi­nan­cial year 2017 es­ti­mated P/E is 16.8. The com­pany’s debt-free busi­ness model, widereach and grow­ing op­por­tu­ni­ties in the waste wa­ter man­age­ment in­dus­try make the stock at­trac­tive.

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