VA Tech Wabag’s diversified order book supports multi-year growth and cash generation

Investment View and 1QFY27 Performance

Motilal Oswal Financial Services Ltd. reiterated its Buy recommendation on VA Tech Wabag following a strong and in-line operating performance in 1QFY27. The broker’s core thesis is supported by a large, diversified and quality order book, overseas growth, financial discipline, improving working capital and prospects for profitable growth.

VA Tech Wabag reported 21 per cent year-on-year revenue growth in 1QFY27, led by 27 per cent growth in EPC and 53 per cent growth in Rest of World markets. Adjusted EBITDA and adjusted PAT increased 22 per cent and 37 per cent year-on-year, respectively.

VA Tech Wabag treats forex gains and losses as part of core operations. Motilal Oswal therefore considers the adjusted EBITDA margin of 13.1 per cent more meaningful. Overall, the reported operating performance was in line with the broker’s expectations.

Order Book and Project Pipeline

The order book increased to approximately Rs 19,400 crore after additions of Rs 3,430 crore in 1QFY27. This was equivalent to 4.9 times FY26 revenue, while the trailing-twelve-month book-to-bill ratio stood at 4.8 times. Around 40 per cent of the order book was from the Middle East.

Important projects include the 272 MLD SWRO project in Kuwait, the 400 MLD Perur Chennai desalination project, the 300 MLD Yanbu Al-Bahr desalination project in Saudi Arabia, the 200 MLD Al Haer project in Saudi Arabia, the Ajman STP project in the UAE, and projects in Austria, Delhi and Bengaluru.

Management Commentary and Strategic Priorities

Management highlighted strong execution, order inflows and financial discipline during the quarter. Gross margin was affected by a higher EPC revenue mix. Other expenses included provisions for certain debtors required under accounting standards; management stated that these provisions would reverse upon receipt of payment.

• Management said that Middle East projects had not faced execution disruptions amid the West Asia crisis.
• VA Tech Wabag entered Kuwait through a mega SWRO award and the UAE through the Ajman order.
• The company strengthened relationships with BWSSB and DJB in India.
• It won a project from Donauinsel Water Works in Austria and identified the Middle East and Africa as strategic focus markets.
• The JICA-funded Chennai desalination project was progressing steadily towards completion.

Management’s strategy remains focused on profitable growth and overseas markets, where projects are considered better placed than Indian projects in terms of working-capital cycles and cash flows. The current EPC-heavy order book provides high volumes but carries relatively lower margins. VA Tech Wabag intends to protect profitability through selective bidding for high-margin EPC and O&M work.

The company had net cash of Rs 965 crore in 1QFY27, while its working-capital cycle continued to tighten.

Growth Outlook and Financial Estimates

Motilal Oswal believes that the order book and bid pipeline support 15–20 per cent revenue growth for the next three to four years. After revenue, EBITDA and adjusted PAT CAGRs of 7 per cent, 17 per cent and 28 per cent, respectively, over FY21–FY26, the broker estimates CAGRs of 19 per cent, 26 per cent and 23 per cent over FY26–FY28.

Motilal Oswal maintained its estimates after the in-line quarter. Its FY27E and FY28E estimates imply revenue CAGRs of 19 per cent, EBITDA CAGRs of 26 per cent and adjusted PAT CAGRs of 23 per cent over FY26–FY28.

Valuation and Target Price

Motilal Oswal values VA Tech Wabag at 28 times FY28E earnings per share to derive a target price of Rs 2,529. The broker’s valuation view is supported by projected strong free-cash-flow generation, net cash above Rs 1,000 crore and improving FY28E pre-tax RoCE and RoIC of 23 per cent and 36 per cent, respectively.

The broker has retained its Buy view on VA Tech Wabag, with the diversified order book, overseas growth opportunities, improving cash flows and financial discipline supporting the multi-year growth outlook.