Va Tech Wabag

Stock Opportunities Not-so-Hidden Gems
287

Hey, I attached a screenshot about the WACC assumptions with all my working.

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288

Both the cost of debt and the equity risk premium look on the higher side.

Especially, how you reached the cost of debt at 16% ?

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289

  1. Equity risk premium was derived as trailing 5 year average growth of NIFTY 50 - treasury bond yield.

  2. Cost of debt was proxied as interest paid (p&l)/borrowings (balance sheet). The 5-year average is actually 24% (pre-tax).

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290

May not make a difference as the debt is low.

But for the sake of clarity the cost of debt is less than 10%. Last FY the maximum interest rate I could find was below 11%.They are also availing loans at 6-6.5%. May be you have included the bank fees while calculating the interest costs. These could be fees for bank guarantees etc.

ERP based on historical five year bull run could be misleading but guess again that wouldn’t makemuch of a difference on the final figure on cost of capital. I am more curious about where the precise terminal growth rate of 5.4% is coming from.

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291

Some questions here:

  1. Even if the interest rate isolated is around 6% as you say, why should you not include the costs of bank fees etc. if they have caused total interest to be consistently > 20%? Nonetheless capital structure uses nearly no debt, so it is of little significance.

  2. The terminal growth rate is long-term projection of India’s economic growth.

  3. ERP will make a small impact on WACC, but large impact on terminal value.

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292

Cost of debt could be around 10% pre-tax not 6%. The bank charges, as it is large, could be for guarantees etc not shown in balance sheet.

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293

VA Tech Wabag Share price now hovering near 1,435 after nearly a 7% decline in one week. There have been no changes to fundamentals, no negative news, and all the macroeconomic trade woes do not affect WABAG as their business has nothing to do with the United States but rather depends on MENA, Asia, and Europe with secure contract terms through bilateral agreements.

Good time to buy as it inches close to intrinsic value?

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294

What is the intrinsic value as per your calculations?

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295

My estimate was 1,342 and this was slightly conservative. So I’d say between 1,340 to 1,400 per share is reasonable.

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296

Market is not only about fundamentals or technicals. Look at transformer companies or any companies despite huge tailwind and govt policies in favor none is favouring then. Sometimes sentiments also play a huge role. Use this dip as opportunity to buy and hold. As simple as that

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297

I understand what you’re talking about, but VA tech wabag has 5 year visibility on its revenues due to 12,000 crore order book. Hence, the fundamentals are more stable.

My idea is the same, this is time to buy and hold.

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298

cost of debt calc is interest cost / total debt100 and post tax cost of debt will be interest cost(1-tax rate) / total debt*100