Va Tech Wabag Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Strategy shift is working, revenue is not the metric: A deliberate move away from EPC pass-through toward EP and technology projects kept 9M revenue flat YoY, but core EBITDA margin hit 13.5% and core PAT reached 8.8%, while gross debt fell 41%.
• Order book poised for a step-change: Backlog already above INR 10,000 crores, and three preferential-bidder orders worth at least INR 5,000 crores are expected to close within weeks, potentially pushing the book toward INR 15,000 crores by year-end.
• Balance sheet transformation nearly complete: Net debt down to INR 30 crores, with the company on track to be net cash positive by fiscal year-end, supported by a credit rating upgrade to A1+.
• International and technology mix driving quality: 48% of revenue came from rest of world, and the focus on desalination, wastewater treatment, and ZLD is lifting margins while reducing dependence on lumpy EPC work.
• What to watch next quarter: Whether the INR 5,000+ crores of preferential-bidder orders actually convert by March, and how quickly those wins translate into Q4 revenue given the tight timeline.

Strategy Shift: Trading Top-Line for Bottom-Line

• EPC to EP pivot: Six to seven quarters ago, management began de-emphasizing EPC projects where the construction component is a pass-through that inflates revenue but dilutes margins. The focus is now on EP and technology-led orders, which improve profitability, debt levels, and cash flows even if reported revenue stagnates.
• Margin proof: Core EBITDA margin of 13.5% and core PAT of 8.8% for the period reflect the new mix, with margins expanding 40-50% versus the prior year and nine-month period. Management stressed that even if revenue is slightly lower, margins and cash flows remain intact.
• Order book quality: The backlog over INR 10,000 crores is dominated by multilateral and federal government-funded projects, industrial jobs with adequate payment security, and work concentrated in desalination and wastewater treatment.
• International balance: 48% of revenues came from rest of world, consistent with the target of roughly 50% international.

Rajiv Mittal: "Earlier, we used to focus also on EPC projects, where we had mentioned many times to you that the C part is almost like a pass-through because we don't do the construction. We always outsource and which, yes, it gives us a top line, but also reduces our bottom line."

Order Book & Pipeline: A Potential Inflection Point

• Preferential-bidder orders: Three extremely large orders worth at least INR 5,000 crores in aggregate are at the preferred-bidder stage, with closure expected within 6-7 weeks, inside this fiscal year. The Chennai desalination order is the largest of the three, described as "far more than" 40% of the total.
• Order book trajectory: With the current backlog above INR 10,000 crores and these wins, the order book could reach INR 15,000 crores by the end of FY23. Management expects the backlog to grow further before fiscal year-end.
• Pipeline depth: While orders comparable to Chennai will take time to materialize, the pipeline contains plenty of opportunities averaging around INR 1,000 crores. The company will continue targeting large, complex, advanced-technology orders.
• Conversion probability: As preferred bidder, the probability of winning is "very high," with March as the target for both the government and the funding agency.
• Revenue timing risk: If orders arrive in the first half of March, some revenue will flow in Q4; if they land in the second half, there will be little Q4 contribution. Q4 should still show good results from other projects.
• Geographic split: India will dominate the expected order inflow, predominantly because of the Chennai order, though a substantial portion will come from rest of world.

Balance Sheet & Working Capital: The Clean-Up Story

• Debt reduction: Gross debt fell 41% YoY to INR 297 crores, with net debt at just INR 30 crores. The company is on track to be net cash positive by fiscal year-end.
• Working capital: Continued its YoY reduction trend, supported by efficient management of banking lines and finance costs.
• Credit rating: Short-term rating upgraded one notch to A1+, the highest short-term rating level.
• ADB investment: The Asian Development Bank will invest INR 200 crores over a one-year period, marking ADB's first private-sector water investment in India.
• Receivables disclosure: Total receivables from TSGENCO, APGENCO, and TECPRO stood at INR 350 crores net of provisions, with provisions of INR 20-25 crores taken in the last nine months.

Project Execution: Progress Across the Portfolio

• AGCC (SIBUR) project: Progressing despite geopolitical restrictions. Q3 was engineering-heavy with vendor changes from sanctioned to non-sanctioned countries, so contribution was only ~10% of total revenue. Goods supply will occur in FY24, and contribution is expected to rise to 15-20% of Q4 revenue.
• Reliance desalination (Jamnagar): The 53 MLD project is in construction and procurement, with long-lead items completed.
• MARAFIQ STP (KSA): Under performance guarantee trial stage, expected to complete within this fiscal year.
• ASHGAL Doha (Qatar): In final stages.
• Zarat desalination (Tunisia): The 50 MLD plant is heading toward mechanical completion.
• Jeddah ISTP: The 300 MLD project using NEREDA technology has all suppliers completed, with testing and commissioning in progress.
• Senegal desalination: The 50 MLD plant is moving well on engineering and procurement.
• KMDA STP: The 187 MLD project is substantially complete, on track for testing and commissioning this fiscal year and full completion by H1 next fiscal year.
• BUIDCO STP HAM: Moving forward.
• Revenue lumpiness: Some projects planned for Q3 were postponed by a month or two, causing Q3 revenue to decline versus Q2. H2 is always stronger than H1.

Technology & Market Positioning

• GWI recognition: Wabag improved its global GWI ranking from fourth to third for safe and clean drinking water, and was recognized among the top 10 global desalination players.
• ZLD as a growth driver: Pollution control boards are tightening norms, pushing more demand toward Zero Liquid Discharge. Management sees ZLD as a technology of the future, becoming more affordable as capacities expand. It is not a patented technology but relies on engineering skill and know-how to combine membrane-based and thermal-based solutions.
• Manufactured water: Management coined the term to describe water produced through treatment rather than sourced from rain or surface water, positioning the company around a secular trend.
• Russia as a target market: Previously a spot market, Russia is now being considered more seriously because technology-led competitors have exited, leaving incomplete projects. The company bids only with confirmed irrevocable letters of credit and will not take financial risk. The Indian government is also opening doors for rupee-denominated trade with Russia.
• Austria technology development: The company develops technologies in advanced markets where client demands are ahead of emerging-world needs, then deploys them when those needs arise globally.

Rajiv Mittal: "We will not take any financial risk, and that is the reason most of our orders are, again, multilaterally funded or central government guarantee back up. So you can be rest assured, no financial risk will be taken by this company."

O&M & HAM: Building Annuity Revenue

• O&M growth objective: Management aims to increase the quantum of O&M business, seeing long-term O&M as the future as more DBO and HAM projects enter the pipeline.
• HAM investments: The company is investing in HAM projects using an asset-light model that generates annuity revenue and good margins. The dividend decision is a judgment call between paying shareholders and investing in HAM to increase valuation.
• Budget tailwinds: The INR 70,000 crore allocation to Jal Jeevan Mission is expected to increase demand for treated water, while the Green Hydrogen Mission's nearly INR 20,000 crore allocation indirectly expands the water sector's business landscape.

Leadership & Succession

• New Deputy MD and Group CEO: Pankaj Malhan joined as Deputy Managing Director and Group CEO as part of succession planning, and will take over Group CEO responsibilities from Rajiv Mittal after a transition period.
• Rationale: The move is designed to bring in people who can take over from existing management over time.

Guidance & Commitments

Key Metrics