Today we're going to talk about a company which Rakesh Jhunjhunwala bought into in March of 2020, or rather FY21. He bought an 8% stake, and he's made a cool 13 bagger on this one. That's the kind of returns we've seen, and we'll be discussing later what continues to hold the stake. So VA Tech Wabag is what we're talking about. It's always a company of interest when you have someone of that stature, one of the best investors globally, who's bought into it and made really good wealth from it. It's been a bit of a turnaround. Let's first talk about what I want to know when it comes to VA Tech Wabag. The first thing is growth. They've suggested they're not focused on topline growth. The interesting commentary I read from management is that the topline can grow to infinity but profits can still be zero, so they're focusing on profitability rather than topline growth. But they still have an order book four times the size of their topline. So I'll be curious to know whether there is some internal target, whether FY26 or FY27, when they hope there is a kicker from the topline as well, because once margins go through, you want that topline growth. If you look at the timeline, they've maintained this 3x to 4x book-to-bill ratio, so considering that, what kind of kicker can we expect for revenue is important to keep a hold of.
Yeah, absolutely. So this is the one key piece. The other one is cash flow. Will your FY25 number in terms of cash flow sustained? We've seen a very strong growth in cash flow in FY25, and that is because some amount of receivables have gotten cleaned up. So that is providing good tailwind to that number. Can that really continue, or is that something which is part of regular business and will it be cyclical? Will cash flows have that cyclicality? Of course, an upward trending cyclicality, but a cyclicality nonetheless where there will be years in which cash flow will not come through. How should we expect that to play out? Because there is another moving part here: the working capital to cash conversion. When I'm looking at the total assets, it's a very light business on assets, but your working capital requirement is extremely large. Therefore, can that working capital (excluding cash) shift towards cash, and how much of that can shift? If a meaningful component of that working capital, whether inventory or receivables, shifts to cash even gradually over the next two years, that can mean substantial cash flow for a company. We did see a reduction this year in receivables and improvement in working capital. How sustainable is it going forward, and will there be further improvement? Then of course, the fifth component is margin levers. They've guided for 13 to 15% margin. They're currently at 13%, the lower end of the band. How quickly does it go to 15? The other is O&M (operations and management) as well as EPC (engineering, procurement, construction) contracts. Which is more favorable from a margin perspective, and how does that mix play out over the next few years? Lastly, I want to understand the margins in Southeast Asia versus Africa versus India versus Europe. My understanding is Southeast Asia and Africa margins are much better, thereafter India margins, and the least lucrative is Europe. We'll also understand the Middle East component to this since the company is bidding for larger projects in Saudi Arabia and other regions.
Thank you for that, Anushi. But you want to start off about the company. Absolutely.
So what we are looking at is VA Tech Wabag. It is an industry leader in total water management. Currently, if you take a perspective in terms of projects, 6,500 plus projects. That's the kind of size we have seen. This pertains to various fields: conservation, optimizations, recycling as well as reuse of resources, all focused on water. So it's a pure water play company, and management did say it does not want to deviate from this and wants to remain a pure play water business. Let's also understand execution. They do execution and operation of water and wastewater treatment plants. They typically provide their services to two broad clientele: municipalities (governments) and industrial. Those are the two pockets of customers. Let's talk about presence. They have presence in four continents and 25 plus countries. The larger focus is going to be Africa, Middle East, India, and Southeast Asia. Those are the larger opportunities they see at this point. In terms of contracts, they undertake water treatment, desalination, wastewater treatment, water reclamation, sludge treatment, and effluent treatment. Effluent treatment is more focused towards industry than municipality. Then they have lifecycle partnerships: EPC contracts, O&M contracts, design-build-operate, and build-own-operate-transfer. They do all of that. Now let me take you through some numbers. Currently, O&M is around 43%, EPC is around 57%. Geographically, municipal is around 80%, industrial is around 20%. India versus rest of the world: India 38%, rest of the world 62%. Their goal is to eventually make it 50/50 for India and rest of the world, and also 50/50 for municipal and industrial. It would be interesting even in international business; they're eyeing a higher mix. We can talk to management about where in key geographies they're seeing demand coming from.
Right, absolutely. The other interesting piece is also the O&M piece because it's recurring revenue and higher margins. It's a long period, 15 to 20 years contract. So how they benefit from this is sustainability. Perfect. Now let's quickly zoom into the metrics. We're keen to talk to management, but we'll try and break down the metrics as quickly as we can. We'll start off with income statement, balance sheet, cash flow, return ratios, shareholding, street valuations, and street coverage. Anushi, income statement.
Firstly, when we look at the income statement, revenue is the first component. We're looking at an overall 3% CAGR growth between FY22 and FY25. Growth in FY24 to FY25 was better, but overall, given the order book size, revenue CAGR is low. Management does expect about 20% plus growth from next year onwards, but so far this has been the trend. Margins have shifted from 8% to 13% range, and management is focused on bringing it to 15%. Net profit CAGR is 22%, reflecting a 31% CAGR. In FY23, there were some write-offs, so that year's net profit was smaller. Now, let's contextualize this with the order book. FY25 ended with an order book of 13,667 crore, almost 4x book-to-bill ratio, which has been the trend for the past few years. It's interesting because at 4x, how growth for revenue in terms of execution will happen is something to watch.
Right, absolutely. Now that we've got a hang of how the income statement has gone, let's look at the balance sheet. Equity is fairly healthy. Borrowing is extremely low, around 350 crore. Cash and bank balance is sitting at a very healthy number, though some will go into dividend distribution. On a 10,000 crore market cap, the balance sheet is 5,000 crore. Fixed assets are just 67 crore. It's an extremely asset-light balance sheet. Where is the balance sheet balancing? The largest component is other assets: inventory of 30 crore, trade receivables of 2,000 crore, cash of 1,000 crore, loans and advances of 800 crore, and other working capital items of around 1,400 crore. So there are large chunky items in working capital. I want to understand whether this can unwind quickly and make the balance sheet even lighter. This will also add color to cash flow. Cash flows have shaped up positively. From FY23 to FY25, cash flow from operations grew from 85 crore to 355 crore. Cash flow from operations to EBITDA went from 27% to 84%. Net cash flow from a negative figure in FY23 moved to 268 crore.
Yeah, so cash flow from operations: more work required. How much of that balance sheet can convert to cash flow from operations is the question. Then, how much of the profits get converted to CFO? Let's quickly talk about return ratios. A healthy trend in the last 3 years. Before that, it was 12-17%, now it's 19-18%. It's sustaining at late teens. Can this continue given the guidance? The ROCE might shrink because working capital requirements might shrink. Return ratios likely sustainable. The ROC and ROE numbers are on your screen. In the medium-term outlook, they want ROE to be greater than 15%. Interesting to ask about return ratios. Now, shareholding: promoter stake has remained at 19% in the last 3 years. FII stake is in the range of 17-19%. DII is muted at 3%. Public has shown the highest interest with 59% stake. Rakesh Jhunjhunwala holds about 8% stake since FY21. So it's been a multibagger for the investor.
That brings us perfectly to street cred. The 5-year street cred is a 13 bagger in the last 5 years. Excellent for those holding the stock, including the Jhunjhunwalas. One month: 6% up. 6 months: down around 10%. Year-to-date similar. One year: 34% return. Thumbs up for 1-year and 5-year. Whether that can sustain is something we'll ask management. Valuations: current multiple around 32x, two-year forward around 21x. Competitors trade at 25x. Our stance is neutral. Let's pull up analyst expectations and street coverage. 7 buy calls, no holds, no sells. 27% upside from here. Difficult to catch anything incorrect except limited coverage, but it's a 10,000 crore market cap company. 27% upside looks good. Let's sum up the ratings. Income statement: neutral. Balance sheet: thumbs up. Cash flow: neutral. Return ratios: thumbs up. Overall, 6 out of 8, quite healthy with no thumbs down. So VA Tech Wabag gets that rating. Let's bring in Rajiv Mittal, Chairman and Managing Director at VA Tech Wabag, to talk about what to expect going forward.
Good morning Mr. Mittal. It's good having you here. I want to start off by asking you the most pertinent question. Does cash flow sustain in terms of cash flow to EBITDA? Is there a number you're targeting going forward? And is this only because of government contracts, and with the shift in preference towards private or industrial contracts, does that mean this will come down?
Good morning Hush, and good morning to all your viewers. Good morning sir, and thanks for having us on your show. See, cash has been our priority since we adopted a new strategy called RIDDI. Our focus has been on cash, no more on the topline. Yes, profits are important, but profits as you rightly said converted to cash is most important. That's the trend we are seeing for the last 3 years. Even if you see last year, our cash generation was far higher than the profits we made. So your question of how much we want to convert from profit to cash: we would say we want to convert everything we earn into cash. That shows it's real earning, not only a book profit.
So that's the outlook you're giving in terms of cash. I just want to understand the working capital picture. From FY24 to FY25, we have seen a reduction in working capital days. Just want clarity on the sustainable range you're expecting. Also, with the shift from municipal to industrials, would that further aid working capital management?
See, generally your question, Anushi, is right, and that is where we are working on. We want to reduce working capital. One big reason you have seen in the last 3 years: we have been saying we will take less of C as an EPC contractor. We want to do more E and P, being a technology company. We want to focus on technology and engineering, not so much on construction – that's not our domain expertise. We used to always subcontract and let it out, and it was a pass-through for us. If you want a big topline, yes, C is important, but we said C is not important for us. As we said, cash flow and profits are important. Hence, our working capital will come down for two reasons. One, you said industrial. I would add along with industrial, operation and maintenance contracts: cash flows are generally better. Also, international contracts where we have multilateral and LCD-driven contracts – these payments are generally not delayed compared to some Indian government payments. So we expect going forward this working capital to further come down.
So by how much? Give us that visibility. When I'm looking at your current trade receivables, it's sitting at around 2,000 crore. Any amount of unwind here in big fashion could materially impact your stock price. Trying to understand the visibility on it.
