Heading for glory
Continuing momentum in India and international orders (1QFY14: up
60% YoY, 40% of FY14 guidance) supports our 20% revenue growth
and higher for earnings (over FY13-15) as EBITDA margins expand
steadily. Investor worries about international business and cash
collection will fade in FY14, as higher inflows and cost realignments
improve international profits and recovery of `1.5bn from Chennai
project improves cash flow. Present valuations of 10X FY14 eps are
non-respectful of VA Tech’s growing business momentum centered on
well-built competitiveness, cash rich balance sheet (1/4th of mcap) and
quality management. Maintain BUY and TP of `703, 13.5X FY15 eps.
Competitive position: STRONG Change to this position: STABLE
Business momentum sustaining and set to surprise: VA Tech’s order
inflows have gained momentum in 1QFY14 (up 60% YoY, 40% of FY14
guidance) on an already high order inflow base of FY13 (up 25% YoY). The
average order size of the top-10 clients increased 52% YoY in FY13,
highlighting the improving quality of order inflows. The strong order inflow in
the last 15 months would lead to 20% revenue CAGR over FY13-15.
Moreover, VA Tech could positively surprise on our above-consensus revenue
growth estimates for FY14, owing to strong order inflow.
International business (subsidiaries and IBG) concerns overblown:
According to our analysis, the international business accounts for 47% of
overall revenues. Whilst subsidiaries’ EBITDA margins (~3%) have
disappointed in the last two years, the International Business Group (IBG) has
earned the highest margins within the company, leading to a respectable EBIT
margin of 7.7% for the international business in FY13. We expect strong order
inflow in IBG and emerging subsidiaries (Philippines and Turkey) to drive 17%
revenue CAGR over FY13-15 in the international business. Also, investor
concerns on restructuring costs will fade from FY14, as the benefits of
employee restructuring and treasury operations will bear fruit from FY14 whilst
revenues from new regions increase.
Cash generation to further improve in FY14: We believe FY13 marks a
turnaround in VA Tech’s CFO profile (positive `817mn), despite increase in
Chennai project’s receivables to `1.5bn. We expect cash flow generation to
further improve from FY14, as it will receive payments for the Chennai project.
Management highlights cash collections/earnings find more focus than orders.
Our top pick in Indian E&C space given well-entrenched strengths: VA
Tech is currently trading at 10.4x FY14 consolidated EPS of `42.2, which is not
relective of its: (a) excellent technical and project management skills, (b)
capital-light business model, and (c) cash-rich balance sheet. We retain our
BUY stance and target price of `703. Key risks: Deterioration in working
capital cycle and higher-than-expected restructuring costs.
��
Continuing momentum in India and international orders (1QFY14: up
60% YoY, 40% of FY14 guidance) supports our 20% revenue growth
and higher for earnings (over FY13-15) as EBITDA margins expand
steadily. Investor worries about international business and cash
collection will fade in FY14, as higher inflows and cost realignments
improve international profits and recovery of `1.5bn from Chennai
project improves cash flow. Present valuations of 10X FY14 eps are
non-respectful of VA Tech’s growing business momentum centered on
well-built competitiveness, cash rich balance sheet (1/4th of mcap) and
quality management. Maintain BUY and TP of `703, 13.5X FY15 eps.
Competitive position: STRONG Change to this position: STABLE
Business momentum sustaining and set to surprise: VA Tech’s order
inflows have gained momentum in 1QFY14 (up 60% YoY, 40% of FY14
guidance) on an already high order inflow base of FY13 (up 25% YoY). The
average order size of the top-10 clients increased 52% YoY in FY13,
highlighting the improving quality of order inflows. The strong order inflow in
the last 15 months would lead to 20% revenue CAGR over FY13-15.
Moreover, VA Tech could positively surprise on our above-consensus revenue
growth estimates for FY14, owing to strong order inflow.
International business (subsidiaries and IBG) concerns overblown:
According to our analysis, the international business accounts for 47% of
overall revenues. Whilst subsidiaries’ EBITDA margins (~3%) have
disappointed in the last two years, the International Business Group (IBG) has
earned the highest margins within the company, leading to a respectable EBIT
margin of 7.7% for the international business in FY13. We expect strong order
inflow in IBG and emerging subsidiaries (Philippines and Turkey) to drive 17%
revenue CAGR over FY13-15 in the international business. Also, investor
concerns on restructuring costs will fade from FY14, as the benefits of
employee restructuring and treasury operations will bear fruit from FY14 whilst
revenues from new regions increase.
Cash generation to further improve in FY14: We believe FY13 marks a
turnaround in VA Tech’s CFO profile (positive `817mn), despite increase in
Chennai project’s receivables to `1.5bn. We expect cash flow generation to
further improve from FY14, as it will receive payments for the Chennai project.
Management highlights cash collections/earnings find more focus than orders.
Our top pick in Indian E&C space given well-entrenched strengths: VA
Tech is currently trading at 10.4x FY14 consolidated EPS of `42.2, which is not
relective of its: (a) excellent technical and project management skills, (b)
capital-light business model, and (c) cash-rich balance sheet. We retain our
BUY stance and target price of `703. Key risks: Deterioration in working
capital cycle and higher-than-expected restructuring costs.
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