Va Tech Wabag Ltd Q4 FY2024 Concall Summary

Key Takeaways

• Profit transformation despite flat revenue: Deliberate reduction of low-margin construction pass-through and divestment of two European subsidiaries kept top line flat, yet PAT nearly doubled and EBITDA crossed 13%, proving the ‘Wriddhi’ strategy is working.
• Order book target of ₹16,000 crore by year-end: Management guided for a ~40% jump from the current ~₹11,400 crore, backed by a \$1 billion bid pipeline in the Gulf alone, with price bids expected to open in coming months.
• Asset-light model is now structural, not aspirational: HAM equity exposure is capped at ~3.75% with a contractual exit clause post-COD, and the company has been net cash for four consecutive years, freeing capital for high-return technology and O&M work.
• Margin guidance upgraded with conviction: Management committed to a 15%-20% EBITDA band, starting at 15%-16% in FY25 and climbing as the remaining ‘C’ component is eliminated, driven by EP, industrial, and international mix shifts.
• What to watch next quarter: Whether the ₹16,000 crore order book target firms up as India’s post-election decision-making restarts and Gulf price bids open, and whether working capital normalises by September as guided.

Strategy ‘Wriddhi’ & Business Model Reset

• Deliberate ‘C’ reduction: The construction portion was pass-through revenue that added no value and depressed margins. Stripping it out freed ~₹250 crore of cash and lifted EBITDA from 7%-8% to over 13%, with PAT moving from 4% to 9%.
• European subsidiary divestment: Two stagnant European entities were sold, removing ~₹170-₹180 crore of top line that contributed zero bottom line or cash. The steady state where both ‘C’ reduction and divestments are largely complete is now near.
• Asset-light by design: HAM projects are structured so Wabag invests only ~3.75% equity. After COD and 1-2 years of demonstrated plant performance, a contractual clause allows sale of even that stake. Net block to gross block will be the lowest in the sector.
• Payment security as criterion #1: 98%-99% of the order book carries payment security. The EPC book is 95%-97% multilaterally funded, sovereign funded, federal government funded, or backed by letters of credit.
• No state government contracts: After writing off ₹300 crore on a GENCO project last year, management will not take any contracts from state governments unless multilaterally funded. The ₹125 crore cumulative provision on the balance sheet is overwhelmingly delay provisions under Ind AS, not write-offs, and reverses on collection.
• No plant performance failures: Management stated emphatically that no plant built by Wabag has been rejected by a client or failed to meet contracted performance specifications across 6,500+ installations.

Rajiv Mittal: "The idea is you learn. And like I told you, we learned. We'll not take any contracts from state government, okay? But there is a price to the learning."

Order Book & Pipeline

• Current order book: Stands at ~₹11,400 crore including framework contracts, providing robust revenue visibility. The outstanding order book to trailing revenue ratio is slightly lower than desired, a gap the pipeline is meant to close.
• ₹16,000 crore target by FY25-end: Management expects to reach this level by the end of the current fiscal year, implying a significant step-up in order inflow from the current base.
• \$1 billion Gulf bid pipeline: Bids worth \$1 billion were submitted in the Gulf region alone over the last 4-5 months. These are mega projects upwards of \$100-\$200 million each, with only 3-4 companies on each bid. All are in technical evaluation, with price bid openings expected in the next couple of months.
• India restart expected: Decision-making stalled a couple of months before the Code of Conduct and roughly one month after elections. Management expects it to resume around July-August. Resources were shifted to the Middle East and Africa during the lull.
• Middle East as growth engine: Saudi Arabia is leading with mega projects and available funding; the UAE is not far behind. Wabag acts as a pure technology partner to developers who invest for 25 years, building the plant and supporting O&M if required.
• Africa and CIS emerging: In Egypt, Wabag is prequalified for the highest level of future projects including a 1,000-MLD desalination plant. CIS countries are opening up as Western firms exit the region, excluding Russia.
• Asia Pacific back in focus: Projects secured in Bangladesh and Nepal; Singapore, Philippines, Vietnam, Indonesia, and Thailand have announced large-scale wastewater and desalination projects in EPC and BOOT models.

Rajiv Mittal: "In the last 4 to 5 months, we have submitted bids worth \$1 billion in Gulf Region alone. That shows how solid is the pipeline. These are all real projects. These are mega projects."

Margin & Return Profile

• EBITDA drivers: The shift toward EP (no construction, more time control, better margin capture), industrial projects (faster turnaround, advanced technology, value over price), international work (richer specifications, better payment terms), and O&M (high-margin, cash-and-carry) are all structural triggers for the margin uptick.
• Ticket size effect: As plant sizes increase, overhead investment per project becomes more efficient, further supporting margins.
• 15%-20% EBITDA guidance: Management stated this with conviction, citing the current order backlog and pipeline. FY25 is expected at 15%-16%, moving toward 20% over three years as the remaining ‘C’ component is eliminated.
• ROCE and ROE transformation: ROCE moved from 12.3% to 19%, ROE from 8% to 15%, driven by the asset-light model and improving profitability.
• Net cash and free cash flow: The company has been net cash positive for four consecutive years, closing FY24 at ₹235.6 crore with free cash flow of ₹168.3 crore. Moving from net debt to net cash has sequentially reduced interest costs.
• Working capital aberration: Three to four large projects (Pagla in Bangladesh, Chennai major desal, Mumbai project) saw heavy execution in the last quarter, with cash collection expected to take 3-4 months. Liquidation is expected by the September balance sheet.

Rajiv Mittal: "We are saying that with a lot of conviction that we will achieve something in the range of 15% to 20%."

O&M, Industrial & New Growth Verticals

• O&M scaling toward 20%: O&M currently averages 15%-17% of revenue and is targeted to reach 20% in the medium term. It is high-margin, generates good cash flow, and carries low risk.
• Industrial revenue at ~30%: Over the last three years, industrial revenue has settled around 30% of the mix, with faster turnaround times and advanced technology commanding value-based pricing.
• Compressed biogas pivot: The company is moving from converting biogas to electricity (low value-add) to compressed natural gas. Government-fixed tariffs are described as very attractive. A strategic tie-up with Peak Sustainability Ventures targets 100 CBG plants with ~\$200 million business potential.
• Hydrogen: water partner only: Wabag has no ambition to produce hydrogen, electrodes, or green energy. Its role is to supply ultrapure water for electrolysis. Half a dozen developers are in discussion. Scale is expected when production costs come down, with pilots over the next couple of years.
• Semiconductor water: The company aims to be a water partner for semiconductor manufacturing, supplying ultra-pure water. It has already completed some plant work in this segment and is building relationships and inquiries.
• Circular economy monetisation: Management sees carbon and water credits converting into P&L numbers in 2-3 years, as every country has signed treaties to achieve greenhouse gas reduction.
• One City One Operator: An innovative concept pursued with government that has seen initial traction and is now operating, with continued canvassing underway.

Geographic Mix & Competitive Position

• International revenue at ~40%: The target is to move over 50% internationally, with the Middle East as the primary growth engine, Africa as a consistent driver, and CIS and Southeast Asia as emerging opportunities.
• Middle East structure: Wabag acts as a pure technology partner to developers who invest for 25 years. It builds the plant and supports O&M if required, without taking concession assets onto its balance sheet.
• Africa positioning: In Egypt, Wabag is prequalified for the highest category of future projects, including a 1,000-MLD desalination plant. World Bank approved \$1,395 million for water projects in Africa.
• India desalination outlook: The Chennai desal model is expected to be replicated by other states and cities. More 400-MLD type plants are expected for bidding in the next two years.
• Desalination cost defense: Management pushed back on the perception that desalinated water is expensive, arguing it is cheaper than tanker water at ₹7-₹9 per kilolitre versus tanker costs.
• Competitive positioning: Management does not see Veolia as a competitor because Veolia is asset-heavy while Wabag is asset-light. Suez has become very small after the majority was acquired by Veolia.
• Technology appreciation in India: Management pushed back on the suggestion that Indian clients do not value technology, citing advanced projects for Reliance, Essar, Indian Oil, MRPL, HPCL, Vizag, Ghaziabad, Chennai, and Surat, including Asia’s largest desalination plant.

Rajiv Mittal: "We don't see Veolia as competitor anymore. And this must be clearly understood. We are a technology EPC and O&M contractor and Veolia is asset-heavy. You can go Google it, go to their net. They like owning assets. We hate owning assets."

People, Digital & Innovation

• Workforce strategy: The company will add people but not double or triple the force. The need is for higher competency and skills, not necessarily more numbers. The policy is to hire young, train, and mould into the Wabag culture.
• Digitisation initiative: A specialist company has been engaged to digitise all knowledge and information for designing, executing, and operating plants. The system will capture expert knowledge and make it available to thousands of people. Central monitoring of plants via SCADA and internet is underway.
• AI partnership: A tie-up with Pani Energy aims to implement applied AI for water treatment plants, with a pilot already implemented at the Koyambedu TTRO plant in Chennai.
• Blue Seed initiative: Wabag launched a pre-seed and seed capital programme for young entrepreneurs in the water sector, funded from internal accruals. The company provides technology support, engineering experience, and global market access rather than large capital.
• Global delivery centres: Work is in progress to develop capability to deliver projects anywhere in the world, combining onshore local teams with offshore teams in Austria, India, and Turkey.
• International risk mitigation: Contracts are structured in two currencies (offshore supply in USD/EUR, local portion in local currency) and are multilaterally funded or LC-backed.

Rajiv Mittal: "Few experts will put it in the system, and that system will be available to thousands of people for them to use it."

Guidance & Commitments

Key Metrics