Hey, I attached a screenshot about the WACC assumptions with all my working.
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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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Equity risk premium was derived as trailing 5 year average growth of NIFTY 50 - treasury bond yield.
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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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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 wouldnât 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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Some questions here:
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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.
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The terminal growth rate is long-term projection of Indiaâs economic growth.
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ERP will make a small impact on WACC, but large impact on terminal value.
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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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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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What is the intrinsic value as per your calculations?
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My estimate was 1,342 and this was slightly conservative. So Iâd say between 1,340 to 1,400 per share is reasonable.
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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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I understand what youâre 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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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
Recalculated my WACC, and turns out cost of debt (pre-tax) is actually 9.8%. A large portion of Wabagâs interest expense was banking fees. Come to think of it, the banking fees was exceptionally high.
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Wabag secured an order in Nepal. Not sure of the order value though.
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$30-$75MM order value. Thatâs a large range :)
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Iâm sure someone else noticed this, but WABAGâs order book has been growing much faster than its execution of projects. This may be due to O&M contracts piling on since they take much longer to service, but it seems like revenue recognition has grown very slow.
This can be because of the focus on margins and not top line growth, but at some point when margins are optimised the only way to improve EPS would be faster digestion of orders from the order book. This would require capacity expansion, or improvement in EP turnarounds. Does anybody have a thesis, or come across management guidance that addresses this?
Jal Jeevan Mission Funding Hiccups & the Water Infra Sector
The recent news about the PM directing states to fix Jal Jeevan Mission (JJM) complaints before releasing more funds definitely adds a layer of risk and has an impact on the broader water infrastructure sector.
Hereâs my take based on recent reports:
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The Funding Holdup is Real: The Centre has imposed significant penalties (over Rs 129 crore) on seven states for irregularities and is linking future fund releases to âdemonstrable corrective actionâ and transparency. This means delays are a very real possibility.
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Working Capital Woes: For companies dealing with government projects, cash flow and working capital can become a big issue if payments are delayed. Even if a company isnât directly in a problematic JJM project, the overall uncertainty can make investors nervous and hit the entire sector.
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Wabagâs Diversification Helps: VA Tech Wabagâs situation might be slightly different from pure JJM plays. Reports highlight the companyâs focus on securing higher-margin international orders (like recent large desalination plants in Saudi Arabia) and projects funded by multinational agencies (World Bank, ADB) to reduce domestic cash flow risk. Their order book is also diversified between domestic and international projects.
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Long Term vs. Short Term: While the short term might see volatility due to these government payment issues, the long term outlook for the Indian water sector remains strong, with the JJM extended until 2028 with an enhanced outlay. Water management is a multi-decade theme.
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The Bottom Line: The market is reacting to the immediate risk of delayed payments and increased scrutiny. For an investor, itâs a classic case of balancing the huge long-term potential of the sector with the very real, short-term operational and financial risks that come with government-dependent contracts. This might be a time to be cautious or to look at companies with strong international order books and healthy cash positions.
Ultimately, the market is pricing in the uncertainty, which explains the stock corrections weâve seen.
Source:
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