Fw: Company Report - VA Tech Wabag - Secular play - BUY

 

Company Report - VA Tech Wabag: Secular play - BUY CMP Rs560, Target Rs735, Upside 31.2% Investment into water management technology is the need of the hour. Globally, water is scarce and rising demand fueled by growing population and higher urbanization will make it even scarcer. The situation is aggravated with unequal distribution of water resources; India constitutes 17% of world population and a mere 4% of the total water resources. VA Tech Wabag (VA Tech), the largest player in water management space in India, could be a key beneficiary of any jump in investment in this segment. We believe VA Tech's leadership in the domestic market is backed by three vital factors: 1) its ability to provide comprehensive range of services across the life cycle of project, 2) use of advance technology, through its R&D centres and patents which it owns, (differentiates the company as water management projects are technically complex) and 3) strong execution track and brand recognition with established relationships with key clients. Healthy order book at Rs42bn (2.9x FY12 revenues) provides strong revenue growth visibility. Diversification of its order book, both on geographical and segmental basis, aids in reduction of the dependency risk. Further, increase in share of O&M orders provides steady cash flow visibility. We expect robust order book for the company to translate into 16% revenue CAGR over FY12-15E. OPM is expected to expand by 120bps over FY12-15E led by higher contribution from high margin O&M segment and cost reduction in global operations. The company has a strong balance sheet with a large cash balance of Rs2.9bn (~20% of market cap) and strategy of staying asset light has resulted into healthy return ratios (avg. ROIC of 46% over FY09-12). VA Tech plans to use the cash for an acquisition, which could be a key trigger for the stock in the medium term. Premium valuations for VA Tech against infra companies, we believe, is justified considering secular growth potential and sound fundamentals of the company. We assign a P/E of 14x to FY15E EPS to arrive at a 9-12-month target price of Rs735. Initiate with BUY.

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Warm Regards, Amar Ambani