Target: ₹1,700
CMP: ₹1,368.90
We are initiating coverage on VA Tech Wabag Ltd. (VTW) with a Buy recommendation and a target price of ₹1,700/share.
Regulatory bodies worldwide are allocating additional resources towards the conservation of water sources and implementing stricter regulations to minimize the impact of industrial waste on water bodies. This has led to a significant increase in municipal and industrial expenditure on water-related infrastructure, creating substantial opportunities for companies with the necessary expertise.
VTW, with its nearly century-long presence in the industry, was primarily focused on revenue growth until a\ few years ago, with EBITDA margins hovering around the 8-9 per cent range. However, in recent years, the company has made strategic decisions that have led to a visible improvement in its business mix, higher profitability, and steady cash flow generation.
VTW has adopted a strategy to be very selective about the project selection where it wants to focus. This includes reducing the construction component in EPC contracts, increasing the share of O&M revenues to at least 20 per cent over the medium term, increasing the share of industrial contracts, adopting advanced technologies, expanding in key international geographies, and choosing projects where the payment security is higher.
Our recommendation is supported by strong industry tailwinds, improving profitability, robust order book, and expanding offerings.