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Va Tech Wabag
Delayed orders= lower
earnings; Maintain Buy
Deferred orders to drive FY12 inflow miss; Cut EPS 9%; Buy
We cut our FY12-14E earnings for Va Tech by 9-6-6% resp. and lower our PO to
Rs480 (Rs515) as our industry channel checks suggest that ~Rs45bn (20% of
market) of project awards in the water sector in 4QFY12 have been pushed back
to FY13. This is led by slow decision making, elections and order deferments in
Oil & Gas and metals. However, we expect most of the deferred orders to be
awarded in 2Q/3QFY13 a pushback of 6-9months. We cut our FY12E order inflow
by 12% to Rs17.5bn (Rs19.5bn) with composition change to higher O&M (15% of
9M inflows) and expect co. to miss its FY12 inflow guidance of Rs18-19bn. We
retain Buy as most catalysts to accrue in FY13-14E (1) increase in O&M revenues
(2) International and municipality inflows pick up pace FY13-14 (3) 33% earnings
CAGR FY12-14E, FCF yield of 7%.
FY12 inflows cut by 12% and FY12/13/14 earnings by 9-6%
We estimate Rs25-30bn projects from municipalities and Rs10-15bn orders from
industrial customers have been delayed and slipped to FY13. Slow decision
making (Raipur, Gurgaon), elections in major municipalities (Delhi, BMC) and
tough macro environment for industries-Oil&Gas (Essar) and metals (NMDC,Tata
Steel) led the delays. We revise downwards our FY12/13/14E earnings by 9/6/6%
respectively to factor in cut in FY12 order inflows. Margin est lowered modestly as
~15% of 9MFY12 (9% in FY11) order inflows (Rs9.1bn) are O&M which would
accrue after 18-24months thus revenues in the interim to be driven by EPC.
Retain Buy but lower PO to Rs480
We maintain our Buy rating but lower our PE based PO to Rs480 (14x PE
Sept’2013). We base our view on (1) an increase in annuity revenue from 15% in
FY11 to 21% in FY14E resulting in earnings linearity, O&M projects have 2x
company-wide margins and ROE’s, and lower working capital; (2) FY13-14E order
in flow should outpace industry growth with municipal and international segments
key drivers; and (3) FY12-14E earnings CAGR of 33%, a 100bp margin rise, ROE
up from 11% to 14% FY12-14, 30% market cap in cash and positive FCF. Risks-
Losses on Libya orders, a rise in competition and additional tax obligations.
Price objective basis & risk
Va Tech Wabag (XVWBF)
Our PO of Rs480 is based on a target P/E of 14x September 2013 earnings. Our
PO is also supported by DCF. However, we prefer PE over DCF as our primary
valuation methodology as we believe that current order book visibility does not
hold beyond 18-24 months. Our rationale for assigning 14x as target P/E is a)
VATW is not a vanilla construction company b) Clean earnings CAGR of 33%
FY12-14E c) Net cash Rs3bn 30% of mkt cap in cash, FCF positive
Loss on orders in Libya, increasing competitive intensity and additional tax outgo
of Rs380mn are key risks to our PO.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Va Tech Wabag
Delayed orders= lower
earnings; Maintain Buy
Deferred orders to drive FY12 inflow miss; Cut EPS 9%; Buy
We cut our FY12-14E earnings for Va Tech by 9-6-6% resp. and lower our PO to
Rs480 (Rs515) as our industry channel checks suggest that ~Rs45bn (20% of
market) of project awards in the water sector in 4QFY12 have been pushed back
to FY13. This is led by slow decision making, elections and order deferments in
Oil & Gas and metals. However, we expect most of the deferred orders to be
awarded in 2Q/3QFY13 a pushback of 6-9months. We cut our FY12E order inflow
by 12% to Rs17.5bn (Rs19.5bn) with composition change to higher O&M (15% of
9M inflows) and expect co. to miss its FY12 inflow guidance of Rs18-19bn. We
retain Buy as most catalysts to accrue in FY13-14E (1) increase in O&M revenues
(2) International and municipality inflows pick up pace FY13-14 (3) 33% earnings
CAGR FY12-14E, FCF yield of 7%.
FY12 inflows cut by 12% and FY12/13/14 earnings by 9-6%
We estimate Rs25-30bn projects from municipalities and Rs10-15bn orders from
industrial customers have been delayed and slipped to FY13. Slow decision
making (Raipur, Gurgaon), elections in major municipalities (Delhi, BMC) and
tough macro environment for industries-Oil&Gas (Essar) and metals (NMDC,Tata
Steel) led the delays. We revise downwards our FY12/13/14E earnings by 9/6/6%
respectively to factor in cut in FY12 order inflows. Margin est lowered modestly as
~15% of 9MFY12 (9% in FY11) order inflows (Rs9.1bn) are O&M which would
accrue after 18-24months thus revenues in the interim to be driven by EPC.
Retain Buy but lower PO to Rs480
We maintain our Buy rating but lower our PE based PO to Rs480 (14x PE
Sept’2013). We base our view on (1) an increase in annuity revenue from 15% in
FY11 to 21% in FY14E resulting in earnings linearity, O&M projects have 2x
company-wide margins and ROE’s, and lower working capital; (2) FY13-14E order
in flow should outpace industry growth with municipal and international segments
key drivers; and (3) FY12-14E earnings CAGR of 33%, a 100bp margin rise, ROE
up from 11% to 14% FY12-14, 30% market cap in cash and positive FCF. Risks-
Losses on Libya orders, a rise in competition and additional tax obligations.
Price objective basis & risk
Va Tech Wabag (XVWBF)
Our PO of Rs480 is based on a target P/E of 14x September 2013 earnings. Our
PO is also supported by DCF. However, we prefer PE over DCF as our primary
valuation methodology as we believe that current order book visibility does not
hold beyond 18-24 months. Our rationale for assigning 14x as target P/E is a)
VATW is not a vanilla construction company b) Clean earnings CAGR of 33%
FY12-14E c) Net cash Rs3bn 30% of mkt cap in cash, FCF positive
Loss on orders in Libya, increasing competitive intensity and additional tax outgo
of Rs380mn are key risks to our PO.
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