Healthy Order Book Makes VA Tech a Buy
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.