Wabco India - Q3FY13 Result Update - EDEL

Wabco India Ltd. (WIL) PAT for Q3FY13 stood at INR 28 cr Vs our expectation of INR 23 cr. Sales for Q3FY13 at INR 221 cr de-grew by 13% YoY. However, the WIL sales de-growth has been lower when compared to MHCV industry volume decline of 29% YoY during the same period. WIL has been able to defy the negative trend in MHCV sales due to rising exports and traction in replacement sales. EBITDA margin for the quarter stood at 18% Vs 20.3% QoQ.

WIL is well positioned to leverage the rising content per vehicle in the domestic MHCV market (growing faster than MHCV industry growth) due to its strong parentage (technology). The company will also be able to capitalize on the global outsourcing opportunity to Wabco Holding (parent company) due to cost-efficient India operations. Due to its market dominant position, WIL is able to maintain its gross margins on the one hand and grow faster than industry on the other hand due to rising content per vehicle, ably supported by strong product portfolio. We also believe that the market is not fully factoring in the potential opportunity from Wabco's global products, which will lead to earnings surprise going forward for WIL and hence gives us comfort on valuation front. In the medium term, bottoming out of MHCV downturn and cut in policy interest rates by RBI will lead to multiple and earnings expansion for WIL. We have BUY rating and a target price of INR 2100.

Sales de-grew by 13% YoY Vs MHCV industry volume decline of 29%

Sales for Q3FY13 at INR 221 cr, de-grew by 13% YoY. However, the WIL sales de-growth has been much better when compared to the MHCV industry volume decline of 29% YoY during the same period. WIL has been able to defy the MHCV growth due to rising exports and traction in replacement sales. Replacement and exports sales grew by 28% YoY during Q3FY13. As per our interaction with the management, capacity utilization of export facility (commenced in Q2FY13) stood at ~15%; this will be ramped up further. Inventory at the OEM level is not high; hence, OEM sales from conventional products will grow at the same pace as MHCV industry growth rate.

EBITDA margins at 18% led by volume de-growth and lower gross margins

EBITDA margin for Q3 FY13 stood at 18% Vs 20.3% QoQ. Gross margins were down by 140 bps, as steel prices rose by 6% QoQ and Aluminum prices went up by 2% QoQ during the quarter. Employee cost-to-sales ratio went up by 140 bps to 12.2% Vs 10.8% QoQ, led by de-growth in volumes. WIL will be able to pass on the higher raw material prices with a quarter's lag, which will see improvement in gross margins. At the same time, revival in volumes will lead to operating leverage kicking in, pushing overall EBITDA margins higher. We expect EBITDA margin at 20.3%/21.7% in FY13E/FY14E.

PAT at INR 28 cr down by 26% YoY led by lower sales and margins

PAT for the quarter stood at INR 28cr, down by 26% YoY due to 13% de-growth in sales and 360bps fall in EBITDA margins on YoY basis. The sharp fall in EBITDA margins was led by higher employee to sales ratio as volumes saw significant de-growth during the quarter. PAT for 9MFY13 is at INR 102 cr Vs our FY13 estimate of INR 137 cr.

Valuations

We expect sales and PAT to grow at a CAGR of 25%/30% over FY13E-FY15E as against MHCV industry growth of 17% CAGR over the same period. This growth in top-line and bottom-line will be led by MHCV industry (lower base of FY13), higher content per vehicle and exports growth. We believe that content per vehicle will be significantly driven by adoption of Opti-drive and implementation of ABS in MHCV, which we see happening post FY14-15. There exists good opportunity for earnings surprise over the coming years due to parents' wide product portfolio and under penetration of existing products. The stock is currently trading at 22x /16x FY13E/ FY14E.

Source : Equity Bulls

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