Will VA Tech Wabag’s margins go up from here? Rajneesh Chopra answers

“Whatever cash we are generating, we are deploying in our HAM projects which is going to give us a very good revenue going forward, a predictability of an annuity for 15 years,” says Rajneesh Chopra, Global Head, Wabag.

I will begin with the order pipeline because that is what the markets were excited about, especially last week, when we saw a big jump up in the stock price. What is the future order pipeline looking like?

There was a small dip in growth as far as Q4 year-on-year is concerned, but if you look at FY22 as a whole, we have exhibited 6% growth in spite of all challenges and at the same time, our PAT has grown by over 20%. This is profitable growth where our margins grow much better than the top line.

Now coming back to order wins, we have a strong order pipeline. In recent times, in this fiscal year, we got one order of 18 million euros from Russia which is an EP (engineering and procurement) order. Now there have been a lot of queries from the stakeholders about picking up orders from Russia.

One of the reasons why we have done it is that we have secured our payments. The major contractor is from Korea and we have taken the order from him and all our payments are through first class banks through DL E&C from Korea. The other order is the Senegal order, which is a desalination order. Again, it is a high technology order and it opens a new geography for us which is the western part of Africa, especially the Francophonie countries.

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I look at it as a JICA funded project. We have very strong partners with us, a Japanese conglomerate Toyota and French construction partner Eiffage. So these are strategic partners and we look forward to more growth in especially the western part of Africa where in the past we have not been very successful.
If I look at the future order pipeline, we have seen that in the Middle East, a lot of traction is happening and because of strong oil prices, the governments have again increased their focus on infrastructure spending. There are a lot of new desalination, recycle, reuse contracts which are likely to come up and that will be one growth area. Apart from that, we find that in India, there is huge spending. We already have the Jal Jeevan Mission which is providing water on tap to every household. So wherever the technology component is high, VA Tech will be one of the strong contenders, especially where there is a challenge in treating the water and resource augmentation.

The second is on AMRUT. As far as utilities are concerned, that is a huge outplay for five years of around Rs 2.7 lakh crore. There are 500 AMRUT cities. Even in the past, we have been successful in that and going forward we see that this will be in other areas where we will contribute to our order book.

The third thing which we would have recently witnessed is that we have signed a contract with Ghaziabad Nagar Nigam for a 40 million litres per day TTRO. It is a retreatment where treated water from waste water treatment plants will be treated to portable standards and it is a hybrid annuity model. The hybrid annuity model in the water sector was only limited to the Namami Gange project. Now it is expanding and is going to be another focus area for us.

On margins, there has been strong outperformance over the past two quarters. Can we expect the margins to be on the upper side from these levels or do you expect the margins cooling off because of the inflationary concerns?

That has been a concern for investors also but in recent times, in international markets, we are not doing any EPC contracts. So we are not taking on the construction component in our contracts. These are all in design engineering procurement and in some cases, operation and maintenance, where there are design build operate jobs. That is the core strength for Wabag Design Engineering Process Optimisation. We are focussed on it.

The key thing is that in these contracts, the turnaround time is less and so we can convert them into revenue in less time. Second, our margins are better and third, we do not carry the construction and risk here. We are quite hopeful that going forward, we will exhibit profitable growth. What I intend to say by profitable growth is that our bottom line, the margins will grow better than the top line. The change in the international and domestic order book in the engineering procurement orders is something which is resulting in better margins for us. At the same time, we resorted to a lot of cost control measures and we are continuing with that.

You have given us some idea as far as the order pipeline goes. There is Chennai desalination tender. We all know what is also happening at the banks of Ganga. Can you talk to us a little more because your shareholders and analysts want more visibility on this?

I will start with Ganga because it is one of the most pious and holy rivers we have. Wabag here has a pretty good success track record as far as the Namami Gange Project is concerned. We have completed one project in Haridwar. We are doing projects in Delhi, we are doing projects in Kanpur, Varanasi, Bihar, Kolkata – all across the Ganga belt. We have been successful and it also has two hybrid annuity model projects.

So whatever cash we are generating, we are deploying in our HAM projects which is going to give us a very good revenue going forward, a predictability of an annuity for 15 years. Now after the success of Namami Gange, the government also shifted its focus and identified 30 more rivers for rejuvenation of similar models. We will be a strong contender in all the projects which will be coming on these particular rivers.

As far as the Chennai desalination is concerned, it is a global tender and there are four qualified bidders. We are amongst them and we are likely to submit that bid very soon. Now once you know technically only four people are qualified, it all depends upon the price and how it moves. But as far as desalination in the market is concerned, India is seeing a lot of traction and there are a lot of other contracts which are happening in industrial segment for captive use.

Some other states also on the coastal belt are contemplating to put up other desalination capacities. So these are the few markets, few settlements. Apart from this, we see recycle and reuse what we recently did in Ghaziabad Nagar Nigam. There are five states which have a firm policy of recycling and reuse of drinking water and the target is to treat 70% of the treated wastewater over the next five years. So, that is another segment where being a technology player,

will be a very very strong contender.

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