Global brokerage house Nomura retained a 'buy' call and raised its target price for the smallcap stock VA Tech Wabag indicating a 100 percent upside on the back of reduction in debt, improvement in operating margin as well as new orders.
The brokerage raised the target of the water treatment firm to ₹634 per share from ₹581 earlier, implying an upside of 100 percent from its current market price of ₹317 per share. In comparison, the brokerage only forecasts a 5 percent upside in Nifty50 in 2022.
As per Nomura, the firm posted robust results with EBITDA margin improving. Further, strong debt reduction, greater than 10 percent margin and focus on securing tech-focussed were the key positives, it added.
"Despite commodity inflation, a focus on securing orders with higher engineering and design components against construction appears to have led to the rise in Ebitda margin. Also, the company’s focus on securing tech-focused orders with the low civil component, if implemented, could improve both margins and cash flows," explained the brokerage house.
For the December 2020 quarter, the company posted an EBITDA of ₹81.68 crore, up 10 percent from ₹73.80 crore in the year-ago quarter. Its profit rose 5.7 percent to ₹44.16 crore in December 2021 from ₹41.78 crore in December 2020.
The company's current order book stands at ₹2,800 crore. As per Nomura, the execution work of international projects in Russia and Malaysia is to be started in the second half of the fiscal year. This is another major positive for the firm.
"Industrial orders could improve the EBIDTA margin. The order inflow is robust for H1FY22, and the execution work to achieve ₹3,100-3,300 crore through sales for the ongoing FY, is on track," the brokerage noted.
It also stated that the order prospects look robust. Additionally, industrial water CAPEX is increasingly focused on self-sufficiency and to meet increased regulatory scrutiny, which must lead to 15 percent growth p.a. in higher-margin industrial water CAPEX for the upcoming 5-7 years, noted Nomura.
The firm in an exchange filing last month announced getting a $100-million order in the United Arab Emirates, its first such work in the Gulf nation pushing the stock price higher.
"WABAG has secured an order worth about $100 million towards engineering and procurement activities in relation to 120 million gallons per day (MiGD) Hassyan Sea Water Reverse Osmosis (SWRO) in the United Arab Emirates (UAE)," the pure-play water technology group said in a BSE filing.
Nomura further noted that a 400 million liters per day desalination plant in Chennai is on the cards since the company is among the four pre-qualified bidders for it.
"The company is a strong contender given its track record in successfully implementing a desalination plant in Nemmeli near Chennai. The tender win could be a key rerating event since the tender size is significant," it added.
In the last 1 year, the stock has surged 30 percent as compared to a 13 percent rise in benchmark indices.