Margins set to improve amidst better mix and op. leverage; significant opportunities arising in new- age sectors; no impact from JJM issues
We think recent underperformance in Wabag’s share price is unwarranted and the company is well on track to take its EBITDA Margins at the upper end of guided range. We believe Q2 Gross Margins were temporarily depressed due to a higher share of construction-related revenues. Our analysis indicates a meaningful margin uptick over the coming quarters as revenue recognition accelerates from the high-margin EP phase of large projects. In addition, we see significant growth potential from emerging sectors such as solar cell manufacturing, data centers, semiconductor fabrication, and green hydrogen in the medium-term. We also note that the company has no exposure to the Jal Jeevan Mission.
Q2 temporarily impacted by mix-change: Gross and EBITDA margins tend to be volatile on a quarterly basis due to shifts in the revenue mix, and management has consistently recommended evaluating margins on a trend basis rather than quarter to quarter. In Q2, gross margins were lower because of a higher proportion of construction-related revenues, which are largely pass-through. This also weighed on EBITDA margins, although FX gains provided some support.
Margins set to improve amidst better mix: WABAG has secured several large projects in recent quarters—including Yanbu al-Bahr, Al Haer, Lusaka, and Indosol—where high- margin EP-related revenue recognition is yet to commence or meaningfully ramp up. We firmly believe margins will improve significantly from current levels, and the company remains on track to achieve ~14% EBITDA margins (excluding FX impact) over the next few quarters.
Raise margin forecast for FY26; slightly lower sales forecast for FY26: We raised FY26 margin forecast by 20bps owing to increase in high-margin EP-related revenues from various projects. We lower our revenue estimates for FY26 by 2% to Rs. 38bn – mainly due to 3% cut to EPC estimate as we believe that substantial part of Yanbu, Al-Haer, Indosol and Lusaka WTP projects will now come into FY27 – once the procurement/construction part starts.
Material opportunities in ultra-pure water market: semiconductors, green hydrogen, data centers: India is on the verge of seeing significant growth in new age sectors including data centers, semiconductor manufacturing, green hydrogen, solar cell manufacturing. All these sectors are water-thirsty and need very high purity water to operate. Management highlighted opportunities for Rs. 3,500 crores just from solar cell manufacturing over the next 3-5 years. India is set to add data center capacity of about 4-5GW by 2030 which is expected to require incremental water treatment capacity of about 600-700 MLD considering 1MW data center can typically consume c70k liters of water per day.
No exposure to JJM: Wabag is primarily operating into water and wastewater treatment space and is not engaged in laying down water supply lines under the Jal Jeevan Mission. Thus, we do not see any impact of recent funding freeze by the Central Government under the JJM program, on WABAG.
Preferred bidder in orders of over Rs. 30bn: Wabag has secured orders of about Rs. 35bn during H1 and is on track to exceed last year’s order intake of Rs. 57bn; the company is preferred bidder in projects worth over Rs. 30bn and we believe the company will be able to get total orders of Rs. 70bn in FY26.
Valuation and View – We roll-forward our valuation year and now value the company at FY28 PE multiple of 22x to arrive at a target price of Rs. 2,100 (vs Rs. 1,900 previously). We maintain our “Buy” rating on the stock.
