Va Tech Wabag - Appositely Placed; Visit Note :: Edelweiss

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We recently met the VA TECH WABAG (VATW) management to get an update on the company’s businesses. Management indicated strong traction in international geographies led by Saudi Arabia, Turkey, Northern & Eastern Europe and Philippines. However, the domestic market is plagued by lukewarm ordering and delayed project awards due to absence of firm decision making. VATW, to spur international margins from current 5% over the next 2-3 years, has chalked out a comprehensive strategy-it will incentivise subsidiaries to take on big-ticket orders so that fixed cost are absorbed more effectively and also encourage them to vie for O&M contracts as they entail rich margins versus EPC contracts.

International market on a roll, but domestic market frail

VATW is riding high in international markets spurred by Saudi Arabia, Turkey, Northern & Eastern Europe, Philippines, among others. However, the Latin American market continues to struggle-order score zero. In the domestic market, currently the ordering activity is weak, but we anticipate order intake to pick up meaningfully in the next 3-4 quarters-Tamil Nadu is expected to float 2 desalination plant tenders worth INR20-30bn over the next 2 quarters; Maharashtra and Delhi are also likely to place orders for sewage treatment plants (STP) once the new government stabilises.

Readying arsenal to score rich international margins

The company has chalked out a firm strategy to improve international margins which are currently at ~5%. VATW aims to achieve the same via incentivising its subsidiaries to: (1) take on big-ticket orders so that fixed costs get absorbed more effectively; and (2) vie for O&M contracts, wherein margins are rich versus EPC contracts.