The company, which was founded a century ago, has established itself as the world’s third-largest private water operator and desalination plant supplier. It has executed more than 1,500 water treatment plants globally since 1995.
VA Tech Wabag is no stranger to steep spikes in its share price. It has been grabbing increasing investor attention since it made its way into the portfolios of a few well-known investors, including Rekha Jhunjhunwala. Propped up by order-wins, the stock quickly emerged as a multi-bagger, almost quadrupling investor wealth in a little more than a year—from October 2023 to December 2024.
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Even over a longer period, since the lows of the pandemic, the stock has delivered a 95% compound annual growth rate—from about ₹80 per share to reach a lifetime high of ₹1,905 in December 2024.
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But in December, a tender worth more than ₹2,700 crore from Saudi Arabia got cancelled. Although it was a tender cancellation as the client recalibrated the project’s specifications, rather than being an order cancellation, this abruptly disillusioned investors. The stock has corrected by 30% since then.
Even the announcement of the retendering of the cancelled project and the latest order of more than ₹3,000 crore could not hold investor interest. By the time the markets closed on Monday, concerns around Wabag’s limited share in the new order (about ₹1,700 crore), its steep valuation, and worrisome business fundamentals almost wiped out the stock’s entire intraday gains of about 14%. The stock closed with modest 1.6% returns for the day.
Stagnant revenues raise concerns
The last few years have raised concerns around the pace of order-inflows at Wabag. But as of December, its order book stood at more than ₹14,250 crore after the company secured net orders (excluding cancellations) worth ₹2,820 crore in FY25 so far. This provides revenue visibility of around 5 years on FY24 revenues, and is an improvement over the order-book-to-revenue ratio of 3-4x as of FY24.
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Notwithstanding the recent improvement in order inflows, Wabag’s nine-month revenues have largely been stagnant at about ₹2,100 crore since FY22. Even in FY25 so far, which has seen relatively faster revenue-growth, the company’s revenue rose by only 11.2% year-on-year. This has fallen short of the management’s guidance of 15-20% over the next 3-5 years. This can be attributed to the slow order-inflows until recently, as well as Wabag’s high working-capital-to-sales ratio (75-80%), which places funds-based limits on potential growth.
Order-book mix can affect margins going forward
In the nine months that ended in December, engineering, procurement and construction (EPC) contracts constituted about 81% of Wabag’s revenues, with the rest of the revenues coming from operations and maintenance (O&M) contracts. This makes sense, considering that EPC contracts tend to be of higher value compared to O&M contracts.
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However, when it comes to Wabag’s order book, as much as 42% is made up of O&M contracts. In line with this, Wabag’s revenue growth in the first nine months of FY25 was driven by its O&M business, which grew 20% year-on-year, while EPC revenues grew by a mellower 9%.
This growing mix of typically lower-margin O&M contracts in Wabag’s order book can affect the company’s overall business margins.
Client profile can make cash management tricky
The client distribution of Wabag’s revenues is tilted towards municipal clients such as Uttar Pradesh Jal Nigam and Delhi Jal Board in India, and Singapore’s National Water Agency and Saudi Water Authority abroad. As much as 69% of Wabag’s revenues in the first nine months of FY25 were derived from municipal clients. This segment grew 24% year-on-year, faster than the industrial clients’ revenue growth of 10% during the period.
Wabag’s order book is also tilted towards municipal orders, with 84% of its closing backlog as of December composed of municipal orders, even as its industrial order book doubled from ₹1,093 crore at the end of FY24 to ₹2,139 Crore as of December. Based on the current state of the company’s order book, municipal revenues are expected to continue to drive Wabag’s growth.
Considering that municipal clients and even some of Wabag’s industrial clients (such as ONGC, Indian Oil, and NMDC) are government-owned, time to realize cash from revenues can run very high. This is reflected in the company’s steep working-capital needs, which have been as high as 75-80% of revenues. It can also be seen in the intermittent negative cash-flow accruals for the business over the years.
Strengths do exist
Despite these challenges, Wabag’s financial position has been improving, thanks primarily to the shedding of long-term debt from its books. In fact, the company’s net debt (long-term debt adjusted for cash balance) has been flat or negative for eight consecutive quarters.
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The resulting savings in interest-costs have helped improve Wabag’s profitability. EBITDA and profit after tax have grew at a CAGR of 18% and 32%, respectively, between the first nine months of FY22 and the first nine months of FY25 in spite of stagnant revenues over the period. EBITDA margin for the December quarter came in at 13.5%, at the lower end of the management’s guidance of 13-15%. Also, thanks to its asset-light model, Wabag has delivered robust returns on capital employed at 17.7%.
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Wabag has achieved significant geographical diversification with India and the rest of the world contributing nearly equally to its revenue. Moreover, following a 54% growth in its order book from exports in FY25 so far, the segment’s contribution to the order book has bulked up from 33% at the end of FY24 to 40% as of December. This is in line with the management’s earlier guidance of building up the order-book with a focus on exports. This geographical diversification should help insulate Wabag’s business from potential localized conflicts, geopolitical or otherwise.
But the stock outlook is not encouraging
Despite the strengths in its business, the outlook for Wabag’s stock is not particularly encouraging. The stock’s small market capitalization ( ₹8,600 crore total and ₹7,000 crore float-adjusted), combined with low delivery-to-trade percentage (21%), make it particularly vulnerable to speculative operator activity and consequent high volatility.
Moreover, the stock trades at 32.3x its earnings, which is overvalued compared to its competitors, Ion Exchange and EMS, which trade at earnings multiples of 28.4x and 20.16x, respectively. The overvaluation is particularly steep, considering that the company has been reporting flat revenues. Earnings upgrades from the stock here on can be expected from consistent order wins, improvement in revenue visibility, accelerated execution, and sustained pickup in revenues.
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Ananya Roy (@ananyaroycfa on X) is the founder of Credibull Capital, a Sebi-registered investment adviser.
Views are personal and do not represent the stand of this publication.
