VA Tech Wabag, a water treatment solutions provider continues to be on sound footing, thanks to its strong order inflow last year. However, its revenue and profit growth in 2015-16 was lacklustre.

The company is a market leader in India and has a global presence in the construction, operation and maintenance of treatment solutions in industrial water, desalination and waste and drinking water.

From our last buy call in March 2016, the stock price increased from ₹440 to ₹635 in June 2016 before dropping to the current price of ₹507. The stock trades at a price to earning (trailing 12 months) multiple of around 32 times, a tad higher than its three-year average of 30 times.

As of June 2016, the order book stands at ₹7,451 crore, nearly three times the revenue of ₹2,542 crore in 2015-16.

While this gives the company good revenue visibility over the next few years, the pressure on margins, increased working capital requirements and some project-related hurdles seen last year warrant caution.

Despite improvement in the recent June quarter, shareholders can wait and watch. While staying invested, fresh exposures can be avoided for now.

Project hiccups

Order flows from West Asia, South-East Asia and some State government and industrial projects in India continue to be encouraging. The key projects won in the June 2016 quarter are the Asian Development Bank funded ₹141-crore waste water treatment plants in Guheshwori, Nepal; ₹125-crore water treatment plants in Long Phu, Vietnam and the ₹108-crore Reliance Industries desalination plant on India’s west coast.

But overall domestic order growth has been slow, due to delays in the bids for the Smart Cities and Clean Ganga projects. Also, the compensation to be paid by VA Tech for the delay in completion of the Al-Gubrah desalination project in Oman is expected to be decided by the end of this year.

This uncertainty continues to weigh on the company. Besides, low-margin projects, such as the water treatment and distribution for Kakatiya and Rayalaseema thermal power plants in Andhra Pradesh, could impact profitability at least until the end of this fiscal.

Finances to revive

VA Tech Wabag’s consolidated revenue and net profit have grown at a compounded annual growth rate of 14 and 6 per cent respectively, between 2011-12 and 2015-16.

This is despite a weak show in 2015-16, when revenue was nearly flat (₹2,542 crore) and profit dipped 16 per cent to ₹93 crore due to delays in revenue recognition and rise in interest and depreciation costs. The profit margin for the year dipped 80 basis points to 3.7 per cent.

The company’s strong order book position is however good and it should translate into revenue and profit revival.

Margins, though, may remain muted, since the share of low-margin pure construction (EPC) contracts increased from 73 per cent of the order book as of June 2015 to 83 per cent as of June 2016. Also, the net working capital days have increased from 77 days at the end of March 2015 to 96 at the end of March 2016. This rise due to delayed payables in government projects continues to be a cause for concern.

In the quarter ended June 2016, revenue grew from ₹455 crore in the year-ago period to ₹580 crore while the company posted profit of ₹5.2 crore as against loss of ₹9.8 crore in the prior period.

But the business being lumpy in nature, sustained revenue and profit growth over a longer period will be key.

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