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STOCK IDEA: Va Tech Wabag - Gallon of opportunity, take a sip of it ( Buy, CMP: Rs 1488 , Target Price: Rs 1900)
Increasing fresh water scarcity + niche expertise = Gallons of opportunity to flow: Globally fresh water supplies are relatively static and with rising population and urbanisation, intensity of fresh water scarcity is on rise. Therefore, investment in these areas like recycling and water treatment, water conditioning and desalination, is likely to flow in significantly in coming days. Global water market is estimated at around ~$425-500 billion and expected to grow at 6% CAGR till 2030, indicating annual incremental opportunity of $25-30 billion, where in large chunk is expected to be in developing world. We believe given the huge opportunity ahead of the sector, Va Tech Wabag (VTW) is well placed to gain from this opportunity, having niche technical expertise and impressive track record as its strength.
Domestic demand outlook to improve significantly over next two years: With rising Urbanisation and Industrialisation in India, demand for usable water, sewerage and solid waste management is going to look up; consequently, we expect significant spending in these spaces. In the last few years (2005-12), the government’s allocation to water supply and sanitation has been about Rs 45,000 crore cumulatively and under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) government plans to spend around Rs 7-8 lakh crore in next 20 years towards water and sewerage. Now, with the pro-reform BJP led government at the center; the water segment is expected to get substantial focus and budgetary allocation including the clean Ganga project; moreover, we expect acceleration in project ordering and execution in FY2016/17E.
Working capital intensive business, but well managed by VTW: Though the business model of VTW is asset light, it is highly working capital intensive. Majority of its revenue are EPC in nature and municipalities are the major client; hence traditionally receivables days are high (200-250 days). However, the company has also managed well high payable days in the range of 200-250 days. Hence, net working capital days should not be a matter of concern unless any specific receivable account turns sticky. Further, we expect share of industrial order book to rise, where receivables days are relatively lower compared to municipals.
Concern: Though VWT is managing judiciously its working capital, working capital intensive business model keeps it exposed to receivable risk. Further, its wide exposure to multiple currencies could bear some exchange rate volatility impacting its earnings.
View – buy niche growth story: Given the large opportunity ahead and inherent strengths of VTW like professional management, niche technical expertise and global presence, VTW will be one of the preferred investment opportunities in the water segment. We expect earnings to grow by 23% (CAGR) during FY14-17, backed by 18% revenue growth and inch up in margin with increasing share of O&M business and cost rationalization efforts by management in international operations (subsidiaries). The company is poised to generate RoCE/RoE in the range of 22-25%/16-17% respectively in coming few years and with healthy cash generation from operations, it is likely to remain net cash positive. We initiate our coverage with a Buy recommendation on VTW and set a target price of Rs 1900 (based on 20x FY17 earnings) for the stock.
STOCK IDEA: Va Tech Wabag - Gallon of opportunity, take a sip of it ( Buy, CMP: Rs 1488 , Target Price: Rs 1900)
Increasing fresh water scarcity + niche expertise = Gallons of opportunity to flow: Globally fresh water supplies are relatively static and with rising population and urbanisation, intensity of fresh water scarcity is on rise. Therefore, investment in these areas like recycling and water treatment, water conditioning and desalination, is likely to flow in significantly in coming days. Global water market is estimated at around ~$425-500 billion and expected to grow at 6% CAGR till 2030, indicating annual incremental opportunity of $25-30 billion, where in large chunk is expected to be in developing world. We believe given the huge opportunity ahead of the sector, Va Tech Wabag (VTW) is well placed to gain from this opportunity, having niche technical expertise and impressive track record as its strength.
Domestic demand outlook to improve significantly over next two years: With rising Urbanisation and Industrialisation in India, demand for usable water, sewerage and solid waste management is going to look up; consequently, we expect significant spending in these spaces. In the last few years (2005-12), the government’s allocation to water supply and sanitation has been about Rs 45,000 crore cumulatively and under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) government plans to spend around Rs 7-8 lakh crore in next 20 years towards water and sewerage. Now, with the pro-reform BJP led government at the center; the water segment is expected to get substantial focus and budgetary allocation including the clean Ganga project; moreover, we expect acceleration in project ordering and execution in FY2016/17E.
Working capital intensive business, but well managed by VTW: Though the business model of VTW is asset light, it is highly working capital intensive. Majority of its revenue are EPC in nature and municipalities are the major client; hence traditionally receivables days are high (200-250 days). However, the company has also managed well high payable days in the range of 200-250 days. Hence, net working capital days should not be a matter of concern unless any specific receivable account turns sticky. Further, we expect share of industrial order book to rise, where receivables days are relatively lower compared to municipals.
Concern: Though VWT is managing judiciously its working capital, working capital intensive business model keeps it exposed to receivable risk. Further, its wide exposure to multiple currencies could bear some exchange rate volatility impacting its earnings.
View – buy niche growth story: Given the large opportunity ahead and inherent strengths of VTW like professional management, niche technical expertise and global presence, VTW will be one of the preferred investment opportunities in the water segment. We expect earnings to grow by 23% (CAGR) during FY14-17, backed by 18% revenue growth and inch up in margin with increasing share of O&M business and cost rationalization efforts by management in international operations (subsidiaries). The company is poised to generate RoCE/RoE in the range of 22-25%/16-17% respectively in coming few years and with healthy cash generation from operations, it is likely to remain net cash positive. We initiate our coverage with a Buy recommendation on VTW and set a target price of Rs 1900 (based on 20x FY17 earnings) for the stock.
