For 4QFY2016, VA Tech Wabag (Wabag) reported a 2.6% yoy decline in sales to
Rs553cr, reflecting weak execution across the EPC-Municipal business. The EBITDA
grew 19.2% yoy to Rs93cr while the EBITDA margin expanded by 306bp yoy to
16.8%. In-line with the EBITDA margin, the PAT margin expanded to 10.2%
during the quarter vs 9.1% in 4QFY2015.
International revenues declined 10.4% yoy to Rs303cr, on account of Euro
depreciation and with some of the projects being at early stages of execution and
therefore not contributing to revenues. A poor operating performance coupled with
a higher tax rate led to losses in the international business during the quarter.
The order book as of 4QFY2016-end stood at Rs8,315cr, reflecting order book /
last twelve month (LTM) sales ratio of 3.3x.
Valuation: Wabag trades at FY2017E/2018E P/E multiple of 22.1x/16.0x.
Recently the company reported large ticket order wins from the Middle East and
Asian sub-continent (worth Rs2,862cr), which tend to enjoy higher margins than
orders from Europe. These order wins have now taken the order book to highs of
Rs8,315cr, reflecting OB/LTM ratio at 3.3x. With better revenue visibility, we now
expect Wabag to report 23.0% top-line and 45.6% bottom-line CAGR during
FY2016-18E, respectively. Accordingly, we expect RoEs to expand from 9.7% in
FY2016 to 15.9% in FY2018E. Given such earnings growth and RoE expansion
potential, we assign 19.0x P/E multiple to our FY2018E EPS of Rs35.9 to arrive at
a price target of Rs681. Given the 18.5% upside potential, we upgrade our
recommendation on the stock to BUY.

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