Va Tech Wabag Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Muted Q1 revenue, H2 ramp-up expected: Revenue execution was soft because large international projects (Chennai desal, Bangladesh) booked late in March need ~6 months for condition precedents and LC opening before revenue generation; traction expected from Q2, major effect in H2.
• Margins held at double-digit despite low revenue: EBITDA margin came in at 11.9%, driven by a deliberate shift toward international geographies, industrial projects, advanced technology plants, and EP business, with execution excellence improving margins in line with expectations.
• Order book momentum intact: Won a ₹420 crores CIDCO DBO order, and management expects to meet or exceed last year's order intake, with ₹1,000-₹1,500 crores of preferred bidder orders in the pipeline, half already booked in Q1.
• Asset-light model delivering PAT growth: PAT grew faster than top line, reflecting the profitable growth strategy, while O&M business shows an upward trend as DBO orders move into the O&M phase.
• What to watch next quarter: Whether the H2 revenue ramp-up materializes on schedule, the pace of order intake against the full-year target, and whether the project mix allows margin improvement as top line expands.

Revenue Execution & Project Ramp-Up

• Late bookings delayed revenue: Large projects like the Chennai desalination plant (400 MLD, JICA-funded) and the Pagla STP in Bangladesh (200 MLD) came very late in March, and international jobs typically need 3-4 months for condition precedents plus foreign currency LC opening before revenue generation begins.
• Shift to technology jobs: Revenue execution was also muted because the company is shifting toward technology and engineering jobs with less construction pass-through, which changes the revenue profile.
• H2 ramp-up, FY25 full effect: The second half of FY24 will see the major effect of the ramp-up, while FY25 will see the full-year ramp-up from these large projects.
• Foundation stone for Chennai desal: The ceremony is scheduled for August 21, 2023; enabling work, engineering, and procurement activities have already commenced.
• Bangladesh and KMDA progressing: Engineering and procurement started for Pagla STP; KMDA STP projects (187 MLD) have begun commissioning activities, with all plants expected to be commissioned by Q3 FY24.
• Tunisia and Jeddah near completion: The Zarat SWRO plant in Tunisia and the Jeddah airport STP (300 MLD) are in final stages, progressing toward commissioning within FY24.

Mittal: "…any of these international jobs, for them to start generating revenues, will take at least 6 months because about 3 to 4 months goes in meeting the condition precedent and opening a foreign currency letter of credit."

Order Book & Pipeline

• CIDCO order won: A ₹420 crores order for design, build, and operate a water treatment plant (27 crore liters/day) at Raigad, to be executed in 42 months followed by 15-year O&M.
• Preferred bidder pipeline: ₹1,000-₹1,500 crores of preferred bidder orders are in the pipeline; half were booked in Q1, and the balance is expected to be booked in Q2.
• Full-year order intake target: Management expects to meet or exceed last year's order intake number if all goes well.
• Pipeline geography: The order pipeline is very robust in both domestic and international markets, with India, Southeast Asia, Middle East, and Africa all showing traction.
• CIS and ZLD opportunities: Management expects some good orders from CIS markets this fiscal year, and active inquiries in the ZLD space are likely to be concluded in this fiscal, driven by mining, refining, metals, and oil and gas sectors.
• Egypt desalination prequalification: WABAG has prequalified for the highest range of desalination plants in Egypt, a definite opportunity over the next 7-8 years, though funding will take time.
• Order book adjustment: The order book was reduced by ~Rs. 900 crores due to the divestment of two European subsidiaries (Czech and Swiss).

Margins & Profitability

• EBITDA margin at 11.9%: Driven by the strategy of focusing on international geographies, industrial projects, advanced technology plants, and EP business, with execution excellence improving margins in line with expectations.
• PAT growing faster than top line: Reflects the profitable growth strategy and the asset-light model.
• Fixed cost leverage: Fixed costs are fixed; if top line increases and the project mix remains the same, margins should improve. However, as new larger projects come in, the mix may not allow substantial margin increases in the second half.
• EP margin uplift potential: Management noted that civil work in EPC is typically 20-30% of the contract value and is a pass-through; without that construction margin, EP margins could improve by at least 20%.
• Other expenses to decline: Last year's other expenses of Rs. 42 crores included a major forex gain and a large ECL write-off; this year, other expenses will naturally be lower, with a good run-rate assumption of ~Rs. 10-11 crores per quarter going forward.
• Margin maintenance commitment: Management aims to maintain current margins (~12% EBITDA) for at least the next few quarters, with confidence drawn from the order backlog.
• Subsidiary divestment benefit: Fixed costs reduced by approximately EUR 5 million annually from the deconsolidation of the two European entities; resource rationalization is ongoing.

Mittal: "One would expect anything between 20% to 30% because civil in EPC would be generally in the range of 20% to 30%, which is like a pass-through in our books. If you don't have the construction margin, we'd like to see it improve at least by 20%."

Project Selection & Strategy

• Five-point selection criteria: Management articulated a clear hierarchy for project selection: first, technologically oriented orders; second, advanced technology orders if possible; third, EP is even better; fourth, substantial O&M is preferred; and fifth, payment security through multilaterally funded or central government-backed projects.
• O&M business expansion: DBO orders are moving into the O&M phase, showing an upward trend, with further expansion expected in the next few years.
• Europe exposure reduced: The divestment of two European entities (Switzerland and Czech Republic) last year was aimed at improving margins, and no further divestments are planned for the rest of the year.
• ZLD trend accelerating: A big trend is moving toward zero liquid discharge, and the coming years will move more in WABAG's favor, with inquiries from mining, refining, metals, and oil and gas sectors.
• Russia market caution: Management acknowledged Russia is a difficult market due to sanctions, with many suppliers not supporting it; they are keeping eyes glued but have no specific timeline for order wins.

Mittal: "First, it has to be a technologically oriented order. Second, if possible, advanced technology orders. Third, if it is EP, even better. Fourth, if it has a substantial O&M in it, even better. And the last but not least, it has to give us a payment security."

Balance Sheet & Financial Health

• Receivables stable: Despite ~Rs. 500-550 crores of revenues, receivables remain at a similar magnitude (~Rs. 1,500-1,550 crores) because supply was done in the last month.
• Associate loss is accounting treatment: The Rs. 5.8 crore loss from associates reflects a dividend of ~Rs. 9-9.1 crores declared, which reduced net worth with a contra effect in share of profit/loss from associates, not an actual loss from the entity.
• ROCE target: Management targets 18% to 20% for FY24 and will endeavor to improve further in FY25.
• ROE range: Management indicated a range of ~15%-16%, per an analyst's math, rather than a specific target.
• TSGENCO recovery stalled: No update; the Supreme Court has appointed a sole arbitrator, and there is no change in status.

Project Updates & Milestones

• Completed or near-completion projects: The MARAFIQ STP in KSA is completed and commissioned, currently in the DLP phase; the Nagarnar ZLD plant for NMDC was recently commissioned; the Barmer, Rajasthan PHED project is more or less complete and in the handover phase with a small O&M portion for critical items.
• SIBUR AGCC project: Goods delivery to site has started, and the majority of supplies are expected within this fiscal.
• Industry engagement: Two conferences were conducted, one in Chennai on manufactured water and one in New Delhi on circularity for sustainability, supported by Namami Gange, Arth Ganga, and Delhi Jal Board.
• Chennai project margin outlook: Too early to comment, but management expects margins to improve given WABAG's 10+ years of experience at the same location.

Guidance & Commitments

Key Metrics