Smallcap stock to buy: Multibagger VA Tech Wabag has 18% upside potential, says ICICI Securities

VA Tech Wabag is reinventing itself to drive growth and profitability, ICICI Securities said on Thursday while suggesting a share price target of Rs 611 on the multibagger stock. The target price suggests 18 per cent upside potential ahead.

VA Tech Wabag’s orderbook increased to Rs 12,500 crore as of June 30, on account of strong order inflow in the last 5 quarters. Out of the total, EPC orders account for Rs 6,500 crore, with a book to bill ratio) of 2.6 times.

ICICI Securities said VA Tech Wabag is favourably placed to improve execution going forward. Also, the company is in transition process to focus more on E&P projects (higher margins compared to EPC projects). Since 31 per cent of the orderbook is from overseas projects, the brokerage expects margins to improve, supported by the recent reduction in commodity prices.

"Note that the O&M orderbook at Rs 4,800 crore provides strong revenue visibility. VA Tech Wabag is increasingly focusing on engineering and procurement (E&P) projects over EPC orders to improve profitability (a third of the EPC orderbook is for E&P). As a result, the company’s margins have now moved to double digits. Also, over the years, it has developed a significant moat around water recycling, reuse, zero liquid discharge and desalination," ICICI Securities said.

Shares of VA Tech Wabag are up 107.88 per cent in the last one year. The scrip is up 56 per cent year-to-date.

ICICI Securities said the stock is currently trading at 10 times FY25 earnings. "We maintain our FY24E and FY25E EPS estimates. We value the stock at 12 times FY25E EPS and maintain the target price at Rs 611/share," it said

The brokerage said VA Tech Wabag's trade receivables remain elevated at Rs 1,500 crore (flat QoQ). But most of the receivables are funded by multilateral agencies, private players and Central government, it added.

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"Most of these large orders are still in pre-construction stage and will start contributing in revenue terms only in H2FY24. A third of the EPC orderbook is now comprised of the high- margin E&P projects, hence Wabag is likely to benefit on the margin front (by 200-300 bps) going ahead," it said.

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