Stock Review: VA Wabag

 

While the fall in VA Tech Wabag's March '11 quarter profit came on the back of exceptional one-time expenses and weakness in Euro, it wasn't much of a surprise. Although trading below its IPO price, the scrip did not witness any sudden jolt following the announcement. With a strong order book and a war chest for possible acquisitions, the company is well placed to capitalise on growth prospects.

Wabag's consolidated net profit for the March '11 quarter fell 17.8% to . 46 crore, while revenue growth was muted at 6.4%. Its operating profits were down 4% year-on-year thanks to a 170 basis points weakness in operating profit margin. However, a steep reduction in depreciation and interest costs enabled it to report 4.3% higher pre-tax profit. It was the . 12.9 crore extraordinary expenditure towards settlement of arbitration in its subsidiaries that resulted in a net profit fall.

The company also has improved its consolidated balance sheet with a cash balance of nearly . 325 crore, which it plans to utilise for inorganic growth. After couple of quarters of negative operating cash flows, it earned around . 50 crore of cash flow from operations in FY11. In December '10 it formed an alliance with Japan's Sumitomo Corporation, which will enable it to bid for bigger projects. In January '11 it floated a subsidiary in Oman with a local partner Zawawi to bid for local operations and maintenance (O&M) jobs.

The company ended FY11 with consolidated firm order book at . 3,402 crore, which is up 20%, which is almost three times its annual turnover of FY11. In addition, there are . 1,367 crore worth of orders for which the company is awaiting receipt of advance or letter of credit to call them firm orders. Since all these projects are to be executed within 24 months on an average, the company has a strong revenue visibility. The scrip is trading at 25.8 times its consolidated earnings for FY11, has already outperformed the Sensex in the past one month, indicating a better future ahead.