VaTech Wabag (Wabag) reported a 26.6% yoy increase in sales to Rs371cr in 3QFY2016, reflecting strong execution across its AP Genco project. The EBITDA for the quarter grew 11.7% yoy to Rs37cr. The EBITDA margin declined 132bp yoy to 9.9%, owing to a sharp increase in other expenses to Rs22cr (vs Rs5cr in 3QFY2015). In-line with the EBITDA margin, the PAT margin declined from 6.0% in the corresponding quarter of the previous year to 5.6% in 3QFY2016.
International revenues declined 20.8% yoy to Rs258cr, on account of (1) Euro depreciation, (2) some of the projects being at early stages of execution and not contributing to revenues (inclusive of Nepal based projects), and (3) lower revenue from Al Gubrah project (nearing completion). A poor operating performance coupled with higher interest expenses (at Rs5.5cr) led to international business losses.
The order book as of 3QFY2016-end stood at Rs7,952cr, reflecting Order book / last twelve month (LTM) sales ratio of 3.1x.
Valuation: The stock trades at FY2017E/2018E P/E multiple of 26.1x/20.7x, which continues to be at the higher end of the historical band. On considering the 25% correction in the stock price in the last 3 months period, valuations in our view still do not factor in the muted order inflow environment, modest earnings growth, and stretched working capital cycle. We assign a 20.0x P/E multiple to our FY2017E EPS of Rs25 to arrive at a price target of Rs492. Given the limited upside potential, we recommend a Neutral rating on the stock.

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