Q4FY22 sales were at Rs 8.91 bn (down 11% y-o-y, missed our estimate by 9%) highlighting a slowdown in execution in overseas order. The weaker execution also led to a miss on EBITDA margin by 110bp at 8% despite stable gross margins.
Weak order inflows at Rs 36.5 bn was disappointing; policy of selective bidding, while appreciated, leading to weak growth: Management has guided for double-digit sales and order inflow growth in the near term. However, a policy of selective bidding focused on technologically complex tenders in the international market may lead to order inflows remaining in the Rs 30-35 bn range over FY23-25F. However, if VATW secures the large `60-bn Chennai desalination tender, then we would expect significant upside to our sales estimates.
Sales momentum may be weak in H1FY23F due to lack of contribution from Russian order: Russia accounted for Rs 11 bn of the Rs 89.8-bn orderbook and since the start of Russia-Ukraine conflict progress has stopped due to payment mechanism issues (NB: no cash collection is pending). The prevailing US and EU sanctions may make progress on this order challenging, which could impact near-term sales growth. Management expects sales to pick up in the Middle East and compensate in FY23.
Cash collections robust in FY22, gross margins strong despite commodity increase; remained net cash: Gross margin was stable at 23% for H2FY22 despite a sharp rise in commodity prices, which is a key positive. We estimate that with a revival in execution EBITDA margin for FY23-25F could be sustained in the 8-9% range. The orderbook is 95% funded by central government or multi-lateral agencies, and this is reflected in robust cash collections in Q4FY22. Current receivables remained flattish in absolute terms despite sales growth of 7% in FY22.
Trading at 8.2x FY24F EPS of Rs 29.8; maintain Buy with TP of Rs 448
We cut FY23/24F EPS by 31%/29% to factor in impact of stalled execution in Russia and slow pace of order wins in FY22. We value VATW at 14x (based on sustainable ROE of 11%) FY24F EPS of Rs 29.8 rolled forward to Jun-23 to arrive at our TP of Rs 448, implying >80% upside, and reiterate Buy rating. Key risks include slowing domestic capex for water.