Stock Pick From The Engineering

HERE IS WHY

• Hefty order book of Rs 6000 crore provides revenue visibility.
• Niche player with a strong execution track record.
• Enjoys RoCE of more than 20 per cent with negative net debt and cash rich balance sheet.

With prominent presence in the water and waste water treatment space in India and abroad Va Tech Wabag (VTW) is
 all set to reap in the benefits going forward as water treatment has started getting priority among the corporates worldwide, in a big manner. The company provides complete lifecycle solution in water and waste water treatment space, including EPC and O&M services. It also has presence in continents across the Middle East, North Africa, Central & Eastern Europe, China and South East Asia.

What attracts us to the company is the asset light business model whereby it focuses on design and engineering work while capital intensive construction work is outsourced. The order book of around Rs.6000 crore, which is 3.7x of FY13 revenue is worth mentioning. In the last three years, the order inflows have grown at a CAGR of 25 per cent driven by a 22 per cent CAGR in EPC and 47 per cent CAGR in O&M. The order inflows are likely to be strong going forward as the capex plans for water and sewage projects in India and international markets are on the rise. This can be substantiated by the fact that the present order book of the company has already crossed Rs.3000 crore as of December 2013 as against a guidance of Rs.2700 crore provided by the management at the start of FY14.

In the last five years the company has reported consistent growth in both its topline and bottomline. In the past five years ending FY13, the revenues grew at a CAGR of 22 per cent while the net profit jumped by 62 per cent.
 Going forward we expect the revenues to grow in the range of 23 per cent to 25 per cent in the next two fiscals backed by the strong order book of around Rs.6000 crore.

What has helped the company is maintaining an asset light model. The company specialises in design and engineering job while the capital intensive construction work is outsourced. Apart from this the company has a cash rich balance sheet, with negative net debt and low working capital of less than 70 days is also a positive point for the company. VTW also enjoys RoCE of more than 20 per cent.

The company has also taken some cost savings steps in its subsidiaries in Austria and Switzerland by reducing high
cost employees. As a result, the employee cost as a percentage of sales has reduced from an average of 24 per cent to 14-15 per cent in the international operations. It has also adopted a strategy of multi domestic units with operating cost structure and margins similar to India. The international operations have witnessed a revival in the past two quarters after incurring losses in FY13.

On the valuation front, the stock discounts its trailing twelve month earnings by 18.41x. Going forward we expect the company to catch up with the valuations. We recommend a buy on the scrip for one year with an expected gain of 20 per cent from CMP.