Should You Invest in VA Tech Wabag Ltd? Finology’s Take

World’s 3rd Largest Private Water Operator, VA Tech Wabag Ltd., has generated over 73% CAGR returns in the last 5 years! With more than 80% of world’s wastewater being untreated, it presents a huge growth opportunity.

Finology Research Desk has analysed the company for you, along with a verdict on whether it is a good stock to invest in or not. Learn more in this article.

What Makes the Water Treatment Industry Special?

Although 71% of the Earth is covered with water, only 3% of it is drinkable. Water supply and demand gap is expected to increase to 40% by 2030. Thus, it is crucial for society to utilise effectively what's in our hands.

Water quality over time has deteriorated with a 50% increase in river pollution and ~80% of the wastewater worldwide flows back into the ecosystem without being treated or reused. The water treatment industry, thus, plays an important role in sustaining the future of our society. Global water and wastewater treatment industry is expected to grow by 7.5% CAGR from USD 323.32 billion in 2023 to USD 536.41 billion by 2030.

In India as well, a large population faces water scarcity. ~97% of the population experiences severe water scarcity for at least one month annually due to improper water management. India is among one of the most water stressed countries in the world. It accounts for 18% of the world’s population but only 4% of the water resources. 2/3^rd of the sewage water in Urban areas everyday go untreated.

Studying this industry led us to a popular company— VA Tech Wabag Ltd.

VA Tech Wabag Business Model

VA Tech Wabag designs, supplies, installs, constructs, operates and maintains plants that treat drinking water, wastewater, industrial water treatment and desalination plants. It is world’s 3rd largest private water operator and 5th largest desalination player.

The company derives sales from 2 sources- EPC (Engineering Procurement and Construction) and O&M services (Operational and Maintenance).

Revenue Mix FY24 by Customer Segment

 
 

Source: Company Investor Presentation Q4FY24
 

EPC Segment

The company has been a lumpsum turnkey contractor and offers customised water and wastewater treatment solutions across engineering, procurement and construction phases. For FY24, the segment accounted for the majority of 83% of the total sales of the company. This is a low-margin segment for the company compared to the O&M segment. This is mainly due to very thin margins in the construction contracts business. The company is focusing on shifting its business focus in the EPC segment more towards engineering and procurement (E&P) contracts to improve the margin profile in this segment.

For H1FY25, the company had an order backlog of ₹7,954 Cr. for the EPC segment, which accounted for 59% of the company's total closing backlog. Order books are a key aspect for tracking the company's business as they show future projects in the pipeline, which could help sales grow.

 

 

Source: Investor Presentation Q4FY24, Finology Research Desk
 

O&M Segment

This segment includes operational and maintenance services for water treatment plants, desalination plants, and other similar facilities. For FY24, the segment accounted for 17% of the total sales of the company. The segment has a better profit margin profile as compared to the EPC segment. The company is looking to increase revenue contribution from this segment. O&M business's contribution to sales has increased over the last 5 years from 14% in FY20 to 17% in FY24.

 

Source: Company, Finology Research Desk

For H1FY25, the company has an order backlog of ₹5,459 Cr. for the O&M segment, which accounted for 41% of the company's total closing backlog.

 

 

Source: Investor Presentation Q4FY24, Finology Research Desk

Why We Took Interest in VA Tech Wabag?

What made us interested in this business was its future prospects over the next 3-5 years, where it has guided:

1. To grow its sales by 15-20% CAGR.
2. To be asset-light while maintaining ROE & ROCE above 15% and 20%.
3. To bring 20% of sales from O&M.
4. To be net cash positive.
5. To have an order book 3x that of sales.

 

 

Source: Investor Presentation Q2FY25

Although the growth prospects look strong for the company, we chose not to include the stock as a part of Finology 30 for now.

Why We Decided Not to Recommend VA Tech Wabag Ltd.?

While growth prospects seem good, we feel there are multiple issues in the business:

1. Revenue Delays: VA Tech Wabag does business on a contract basis. The majority of the business takes place on credit; that is, payment for the contracts is received at a later date. As of FY24, trade receivables accounted for 43% of the total sales. Trade receivable as a % of sales and receivable days has increased as a % of sales over the last 3 years.

Particulars	31 March 2024	31 March 2023	31 March 2022
Trade Recievables (in Cr.)	₹1,991 Cr.	₹1,506 Cr.	₹1,325 Cr.
Trade Receivables  as % of Sales	43%	37%	33%
Receivables Days	311	296	306

 

Source: Annual Reports, Finology Research Desk

High receivable days impact the company's cash flows and make working capital management difficult. Moreover, the company’s majority of contracts come from Municipal orders. In FY24, 64% of the sales came from Municipal customers, and 36% came from industrial customers.

Revenue Mix FY24 by Customer Segment

 

Source: Investor Presentation Q4FY24

High dependence of sales from municipal customers is risky as the government often delays payments. For instance, in 2015, VA Tech Wabag did a project for Andhra Pradesh and Telangana government. The company faced payment delays in that project despite meeting the commitments in the project. This happened only because of the change of government in Andhra Pradesh. The new government decided to review all old deals and hit a pause on payments. This led to working capital management issues. To fulfill the high working capital requirement, the company increased its short-term borrowings from ₹104.8 Cr. in FY15 to ₹484.1 Cr. in FY19.

 

Source: Company Annual Reports, Finology Research Desk

2. Order Book Cancellation Risk: The company's future business prospects are dependent on its order book pipeline. The order book is often built from large orders. The company has an order book pipeline of ₹14,500 Cr.+ as of Q2FY25.

Cancellation of order books is a big risk for its business and stock price performance. For instance, recently, VA Tech Wabag's stock price fell as low as ~14% on December 18, 2024. This was a reaction to the company's announcement of the cancellation of ₹2,700 Cr. order with Saudi government for a 300 MLD Mega Sea Water Desalination Plant in Saudi Arabia. Not only does this type of event make stock prices highly volatile, but it also impacts the business growth prospects as well. For us, it is very difficult to predict the viability and certainty of order book execution for the company. Hence, we decided not to take such a risk.

3. Low Promoter Holding: The company has a very low promoter shareholding of 19.13%. A low promoter holding in any business indicates a lack of confidence in the business model. Moreover, the promoter holding for the company has reduced over the years. It has reduced from ~25% in 2020 to ~19% in 2024. We prefer to invest in businesses where the promoters also have significant skin in the game.

 

 

Source: Finology Ticker

The Bottom Line

Companies like these are working for a great cause. However, from an investment point of view, such stocks for long-term wealth creation do not make much sense to us.

Being a market leader is a strong point, but the company’s business being highly dependent on government contracts is a big risk for maintaining consistency of profits and cash flows.

For Finology 30, our ideology has been to focus on strong business models with robust financials. So, we decided not to go ahead with VA Tech Wabag Ltd.

However, there are very few stocks that made it to Finology 30. Check them out here.