Va Tech Wabag Ltd Q4 FY2022 Concall Summary

Key Takeaways

• H2 slowdown, but full-year margin promise kept: Overseas revenue fell in H2 as Russia and Gulf projects slowed, yet core EBITDA still reached 10.4%, hitting the double-digit target despite material cost headwinds.
• Net cash turnaround sustained: The company held its net cash position at ₹10 crores at year-end, while net working capital days improved from 97 to 88, driven by faster project execution and collections.
• Strategy shift to asset-light, technology-led work: Management is deliberately pivoting from pass-through EPC construction toward higher-margin international, industrial, and EP (engineering & procurement) orders, aiming to better reflect value in reported margins.
• Order book confidence, no growth number given: FY22 order inflow was ~₹3,600 crores and the target is a 3x revenue cover; management expects double-digit growth but declined to quantify, calling it "not a guidance."
• What to watch next quarter: Whether the APGENCO restart and H1 client catch-up actually convert the promised growth year, the pace of Russia project resolution, and any margin lift from the EP/international mix shift.

Revenue Slowdown & Project Execution

• H2 overseas drag: Sales declined YoY in the second half because Russia work slowed from February on geopolitical issues and some Gulf projects decelerated on the client side, not WABAG's own execution.
• Russia project on hold since April: The AGCC project for a Sibur-SINOPEC JV was suspended by the customer in April 2022; all billing done before suspension was 100% collected with no outstanding, and Russian clients have been "excellent paymasters."
• APGENCO restart underway: A limited notice to restart came late in H2; ₹25-30 crores already invoiced and ₹15-20 crores received, with first-part clearance expected in the next three months and regular payments thereafter.
• Key project completions in Q4: A 30 MLD desalination plant for MRPL in Mangalore, the Cuttack STP for OWSSB, and the Raw Water/RODM plant for HMEL at Bathinda were all commissioned.
• International projects progressing: MARAFIQ in Saudi Arabia is in pre-commissioning with completion expected by end of H1 FY23; the new Jeddah airport STP has equipment delivery underway and pre-commissioning targeted toward end-FY23; Zarat in Tunisia should start pre-commissioning by end of Q3 FY23.
• Sri Lanka project insulated: The Polgahawela project is under buyers credit from EXIM Bank of India, with payments received in US dollars directly from EXIM Bank, so there is no financial risk from Sri Lanka's situation.

Mittal: "Water is a precious resource, let's understand especially countries like us which are developing countries, we have not given enough importance to water, we still do not consider this as an economic resource. Once we start considering this as an economic resource, where the things have started, and people have started using this, you will see a tremendous investment going into the water sector. So, short answer is, that prime time is yet to come."

Margins & Working Capital

• Core EBITDA at 10.4%: The double-digit margin was delivered despite rising raw material prices, aided by a favorable rupee exchange rate and a conscious reduction in the construction portion of contracts.
• Raw material pass-through mechanics: Most Indian contracts carry escalation clauses covering 60-70% of cost; international contracts do not, but WABAG's specialized procurement means a 30% steel price rise only impacts material cost by 5-7%, because steel in components is a small fraction of the total technology, fabrication and labor content.
• Working capital tightened: Net working capital fell from ₹742 crores to ₹713 crores, with days reduced from 97 to 88. Trade receivables declined YoY even as the top line grew, reflecting better invoicing and collection turnover.
• Trade payables days fell: The reduction came from deploying resources to expedite project execution, which simultaneously supported margins and top-line improvement amid cost headwinds.
• The EPC margin illusion: Overall EBITDA margin appears lower because EPC construction is a pass-through with no margin built on that portion; the core water business EBITDA is closer to double digit, and the strategy shift to technology-focused, international, industrial and EP orders aims to better reflect true margins and cash flows.
• TSGENCO and Tecpro receivables: The TSGENCO project is complete and under single-person arbitration appointed by the Supreme Court, with conclusion expected in 6 months to 1 year and ₹138 crores at stake. The Tecpro ₹69 crores receivable is statutory dues where tax was deducted but not remitted; the NCLAT matter is under hearing with a favorable judgment expected in the next couple of hearings.

Order Pipeline & Strategy Shift

• FY22 order inflow ~₹3,600 crores: Management expects to achieve at least that level going forward and is confident of maintaining or surpassing a 3x revenue order book cover.
• Deliberate pivot to EP and technology: The strategy, approved by the Board in November 2020, is to pursue technology-based jobs rather than run-of-the-mill EPC: more industrial, service/O&M, international, and EP projects where margins and cash flows are better reflected.
• Payment security non-negotiable: The Board has been clear that it is acceptable to miss out on projects but not to compromise on payment security; the focus is on multilaterally funded projects, central government funded projects in India, and international projects backed by letters of credit.
• Chennai Desal and JICA bids imminent: Bids for the Chennai Desal project will be submitted within a couple of weeks, with a decision expected in FY23. The JICA-funded 400 MLD project bids go in next month, with evaluation taking 3-6 months and an award expected in H2 FY23.
• CIS opportunity from sanctions: Management sees a big opportunity to increase market share in CIS countries as US and European companies will not go there due to sanctions; water is not a sanctioned sector, and WABAG has a technology edge in recycle and desal.
• Ghaziabad TTRO concession signed: A 40 MLD recycle and reuse plant using UF plus RO membrane technology, under a 15-year O&M concession via a wholly owned subsidiary; once commissioned, it will be the largest TTRO plant under the HAM scheme in India.
• Libya framework contracts not yet effective: Two contracts (Bomba and Libya STP) are signed but not yet effective because letters of credit have not been opened; neither has started execution and there are no receivables on these projects.

Mittal: "Board was very clear that it's okay if we miss out on a few projects, but we will not compromise on payment security..."

Russia, Geopolitics & Risk Management

• Russia project fully paid to date: All billing done before the April suspension was 100% received; there is no outstanding from Russian clients, whom management described as "excellent paymasters."
• Water sector not under sanction: Management explicitly stated that only some sectors are under sanction in Russia and the water sector is not one of them; some European and US companies have chosen not to work in Russia, but that is a voluntary view, not a sanctions requirement.
• Sri Lanka zero financial risk: The project operates under buyers credit from EXIM Bank of India; work is certified by local authorities, bills are sent to EXIM Bank in Mumbai, and payments are received in US dollars directly from EXIM Bank, completely bypassing Sri Lankan counterparty risk.
• No capital raise intent: The company has not gone to market to raise capital since inception in 1996-97 and listing in 2010; the only raise was ~₹120 crores from Rakesh Jhunjhunwala and team, and the IPO raised only the SEBI-mandated minimum of ₹120-125 crores. Management does not intend to raise capital unless it benefits shareholders and does not want to dilute.

People, Leadership & Dividend

• Shailesh Kumar appointed CEO India cluster (designate): He will gradually take over Indian cluster leadership from Pankaj Sachdeva by end of September 2022, with a stated priority to build greater operational excellence in project delivery: on time, within cost, and at optimal quality.
• Dividend suspension tied to HAM investments: The company stopped dividends from 2018 because it began participating in HAM projects under the Namami Gange programme; money invested in these projects will generate annuity income for 15 years once operational, and management requests a two-year wait for dividend resumption.
• Asset-light commitment: WABAG will remain asset light and will always scout for equity partners who invest the majority equity; the company will remain a minority equity partner.

Kumar: "My priorities for Indian cluster would be to take forward the successes already achieved and build greater operational excellence into our processes to deliver projects on time, within cost and at optimal quality."

Pricing Environment & Competitive Positioning

• Pricing as bad as ever: Management stated the pricing environment is not improving and is "getting only worse," which is precisely why WABAG does not compete in run-of-the-mill projects and instead competes in higher-end technology where competition is limited.
• Growth without chasing volume: Management does not mind 10-12% top-line growth; the focus is on growing bottom line and cash flows much more, with profits growing faster than the top line.
• Green hydrogen exploratory: The company has started some work on green hydrogen opportunities, but it will take "maybe a few years" to mature to the point where there is information to share.

Mittal: "Is bad as it was always. I don't see it improving, it's getting only worse. That is the reason we don't compete in projects, which are run of the mill projects."

Guidance & Commitments

Key Metrics