We view VATW as a combination of value (~8x FY23F EPS of Rs 36.1) and strong growth (EPS to likely double over FY21-23F, on our forecast). Further, we think VATW, with its operations focused on clean water technology and having a strong balance sheet and technology credentials (governance positive), fits well into the ESG theme. FY21 results, in our view, demonstrate that past concerns on execution and rising debt levels are largely behind.
Orderbook of Rs 84 bn (excluding framework contracts) is completely executable: Mgmt commentary suggests the orderbook is funded either by multilateral agencies or by sovereign entities representing low or limited collection/execution risk. This can lead to further improvement in net working capital from 97 days in end-FY21. VATW has a strong execution track record. Thus, we believe its orderbook should translate into revenue growth.
VATW has turned net cash positive and has developed strong technology credentials: Investors’ persistent concern was its high debt build-up over FY16-19 despite an asset-light business model. This was entirely due to stalled receivables at a state level project (Rs 4.22 bn). While there is limited visibility of recovery from these debtors, mgmt has effected a strong turnaround in cash flows which has led VATW to turn from Rs 4.3 bn of net debt in FY19 to net cash in FY21.
TP up to Rs 546, implying 83% upside: We raise FY22/23F EPS by 4%/8% to reflect VATW’s lower financial cost (net cash level). We value VATW at 15x (up from 13.2x) FY23F EPS of Rs 36.1 and add Rs 4/share of hybrid annuity model projects’ equity value to arrive at our Rs 546 TP, and we reaffirm Buy. Our higher multiple reflects lower cost of equity at 10.3% (from 11.3%) on lower debt cost.