Value Pick: Strong order book for Va Tech Wabag gives confidence to brokerages; 100% upside seen in this Rekha Jhunjhunwala stock

Potential growth of over 100 per cent is estimated by several brokerages in this drinking water treatment company – Va Tech Wabag on the back of strong deal momentum and order book. The company expects order momentum to continue in the current fiscal, improving overall margins. 

Va Tech Wabag is a Rakesh Jhunjhunwala’s wife Rekha Jhunjhunwala’s portfolio stock. She holds 50,00,000 equity shares, which aggregates to over 8 per cent stake in the company, as per the December 20211 shareholding pattern on the BSE. 

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The stock on Monday closed almost 2 per cent higher to Rs 310 per share on the BSE as compared to a nearly 1 per cent fall in the S&P BSE Sensex.  

Nomura 

Nomura continued to value Va Tech Wabag at 15x based on sustainable Return on Equity of 14 per cent, FY24F EPS of Rs 41.8 and add book value of HAM (hybrid annuity model) assets to arrive at a target of Rs 634 apiece, implying over 100 per cent upside, and reiterate Buy rating.  

Va Tech Wabag’s management had stated that the focus will be on securing tech-focused orders with low civil components. This philosophy if implemented could improve both margins and cash flows, the brokerage said. 

The management also believes that the EBITDA margin of over 10 per cent can be sustained in FY23 and if this is realized it could lead to a meaningful upside to Nomura’s estimated. 

ShareKhan 

Va Tech Wabag is on a strong earnings growth trajectory going ahead with concerns of high leverage, led by increasing working capital now behind it. A well-funded strong order book provides comfort on execution and collections going ahead.  

Further, the government’s focus is expected to remain on water-related investments, providing healthy order intake tailwinds for the company going ahead. 

At the current market price, the stock trades at P/E of 9x its FY2024E earnings, which is attractive considering its strong net earnings growth outlook and strengthened balance sheet, and hence ShareKhan maintained a Buy rating with a target price of Rs 435 per share, 41 per cent upside. 

YES Securities 

The company’s management commands a rich and varied experience of over three decades in the water industry. The unique mix of talented professionals comprising engineers and water experts define the company’s technical competencies to keep pace with the evolving customer needs & market conditions, thereby fetching repeated orders from its existing clients. 

Given the growing attention of the government and multi-lateral funding agencies towards an escalating water shortage crisis, the water treatment sector is well poised for secular, long‐term growth.  

In our view, Va Tech Wabag’s robust order book thriving on strong market leadership, execution ramp up, and operational efficiencies would help it capitalize on the forthcoming opportunities. At the current market price, the stock trades at a P/E of 15.2x/ 13.2x/ 10.9x on FY22/23/24E estimates and maintained a Buy rating with a target price of Rs 391 per share, implying a 26 per cent upside.