Should you add multibagger VA Tech Wabag shares to your investment portfolio? Axis Securities initiates coverage with buy rating; note down target price

Chennai-headquartered VA Tech Wabag, a provider of water treatment solutions, has rewarded investors handsomely in the recent past, and counting. The stock of VA Tech Wabag—traded with the symbol WABAG on exchanges—has more than doubled investors' money so far in 2024, having soared all the way to the Rs 1,400 mark from Rs 630-odd levels. Many analysts are upbeat about the growth prospects of the company with targets as high as Rs 1,700, which implies an upside of 29.5 per cent, as of September 6. 

Axis Securities on Monday initiated coverage on VA Tech Wabag with a 'buy' rating and a target price of Rs 1,700. VA Tech Wabag is "well-placed to serve the growing water security/conservation market" in the country, the brokerage's analysts wrote in a report dated September 9.

Here are key things to know about VA Tech Wabag: 

Investment Rationale

"Regulatory bodies worldwide are allocating additional resources towards the conservation of water sources and implementing stricter regulations to minimize the impact of industrial waste on water bodies. This has led to a significant increase in municipal and industrial expenditure on water-related infrastructure, creating substantial opportunities for companies with the necessary expertise," wrote Axis Securities analysts.

Margin Expansion Impressive

VA Tech Wabag's EBITDA margin—a key measure of a company's operating profitability—improved to the 13 per cent range in FY24 from 8-9 per cent until a few years ago, owing to its strategic decisions leading led to visible improvement in its business mix, higher profitability, and steady cash flow, according to Axis Securities. 

The improvement in the margin also indicates "a clear uptrend in profitability", the analysts wrote. Given its "extensive experience and strategic focus on key growth areas", VA Tech Wabag looks "well-positioned to capitalise on the rising investment in water security and resource conservation", they added.

Order Book Strong

According to the brokerage, the company has a clear visibility on the revenue front with a "robust" order book of Rs 10,676 crore, as of June 2024. 

Q1 FY25 Results

The company staged a decent financial performance for the final quarter of FY24, registering a 10 per cent year-on-year increase in its net profit to Rs 55 crore for the three-month period with revenue growth of 13.4 per cent, according to a regulatory filing.

Its margin improved by 120 basis points (bps) to 12.9 per cent while its EBITDA expanded 25 per cent to Rs 81 crore. 

Valuation

ICICI Direct, which has a 'buy' call on the stock with a target of Rs 1,550, values the company at an earnings per share multiple of 25 times its FY26 estimate.

Axis Securities values VA Tech Wabag at 23 times its EPS estimate for FY26.

How VA Tech Wabag shares have fared so far

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