Target: ₹1,900
CMP: ₹1,588
We initiate coverage on VA Tech Wabag (VATW) with a BUY rating and a target price of ₹1,900, based on 26x FY27E P/E (premium to historical average of 18x on improved outlook). We believe that VATW has a robust growth outlook ahead on the back of a strong order-book, improving margins and return ratios, and healthy FCF generation, making VATW a cash-rich company. Moreover, any large order inflows and a significant expansion in margins could drive valuation rerating in the medium term.
Despite being eligible to execute large critical projects globally, it is selective in bidding (focus is on margins and cash flows) and has a win ratio of 25-30 per cent.
The focus is clearly visible in its FY21-25 revenue/EBITDA/PAT CAGR of 4 per cent/ 18 per cent/28 per cent. We estimate a CAGR of 17 per cent/22 per cent/23 per cent over FY25-28E.
The current order book of about ₹13,700 crore (4.2x FY25 revenue) and a strong-bid pipeline of up to ₹20,000 crore provide 15-20 per cent revenue growth visibility for the next three-four years, as guided by the management.
Its focus on executing large-scale projects in high-margin segments such as EP (aims one-third mix in EPC) and O&M (18 per cent/39 per cent mix in revenue/order-book, 5-20 years execution cycle) augurs well for margins. A significant improvement in EBITDA margins (about 2x), tightening of the working capital cycle and an asset-light business model have been key drivers.
We expect VATW to sustain strong FCF generation with an average of ₹350 crore annually over FY25-28E, given its robust operating performance and scope for further improvement in the working capital cycle.
Over FY25-28E, we expect further expansion in RoCE (from about 20 per cent to about 24 per cent), RoE (from about 14 per cent to about 16 per cent), and RoIC (about 28 per cent to about 39 per cent), above its guided range.
Published on July 23, 2025
