Va Tech Wabag profitability should measure up to order inflows

Order wins and backlog haven’t yielded much benefit to investors in recent times


Wabag’s overseas business, beset by project delays and adverse currency movement, is weighing on its performance.
Wabag’s overseas business, beset by project delays and adverse currency movement, is weighing on its performance.

Shares of Va Tech Wabag Ltd gained 5.72% on Tuesday after the company won a Rs.594-crore contract as part of a consortium. The contract involves construction and maintenance of a water treatment plant for 15 years in Chennai.

The deal win brings certainty to Wabag’s guided order intake of Rs.3,500-3,700 crore for the current fiscal year. At the end of December, it had won Rs.3,356 crore worth of contracts. Even if the company derives half of the contract revenue (the contract is won by a consortium), its guidance will be met. Inflows for the current fiscal year will rise 24%. Note that at the end of December, it had an order backlog worth Rs.7,952 crore, or three times revenues of the previous fiscal year.

That said, order wins and backlog haven’t yielded much benefit to investors in recent times. The company’s shares have lost two-fifths of their value so far this fiscal year. Why?

Wabag’s overseas business, beset by project delays and adverse currency movement, is weighing on its performance. Last quarter, consolidated revenue increased just 1.7% year-on-year as a sharp depreciation of the euro, delays in execution of a project in Nepal and slow ramp-up of order wins hit overseas performance. Overseas units generate two-fifths of Wabag’s revenue.

Of course, the latest order win is in India and local revenue increased 27% in the December quarter from the year-ago period.

But remember, only half the current order book is from India. Also, profitability at the stand-alone business is under pressure due to stretched working capital; operating margin narrowed 1.6 percentage points from a year ago.

Margins are lower because of “liquidated damages/cost overruns in Oman desalination (and) two projects at low margins that the company took on for strategic reasons”, IIFL Institutional Equities said in a note.

So even though the order inflows are growing at a good pace, Wabag has not seen its earnings benefit; net profit dropped 40% in the first nine months of the current fiscal year.

Analysts expect profitability to recover in the next fiscal year, helped by a ramp-up of delayed projects, delivery of low-margin orders and increasing local orders.

While no signs of that emerged in the recent quarter, valuations at 17 times one-year forward earnings are not cheap.

“Improving profitability of overseas operations remains as a key challenge ahead of Va Tech Wabag, apart from managing its working capital days well,” Sharekhan Ltd said in a note.

The writer does not own shares in the above-mentioned companies.

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