Wabco India - 'Brake' Out - Nirmal Bang

Wabco India (WIL), a leader in the manufacture of conventional braking products, advanced braking systems and other related air-assisted products and systems, has one of the best margin profiles in the automobile component industry with a strong balance sheet, debt-free status and robust return ratios. The product profile of the company is technology-intensive as a result of which the competitive intensity is almost negligible, with WIL commanding an 85% market share. Further, low content per vehicle and the under-developed commercial vehicle (CV) industry in India leaves WIL with ample scope for growth. WIL is also one of the best companies to play on MHCV (medium and heavy commercial vehicle) demand recovery expected in FY15 as the demand cycle, in our view, is close to bottoming out and staging a recovery towards the end of FY14. We have assigned a Buy rating to WIL with a target price of Rs2,187 (20x FY15E EPS), up 24% from the current market price. Key downside risks to our estimates are weak macro-economic activity leading to a steep fall in CV sales. Upside risk to our estimates is successful implementation of compulsory ABS (anti-lock braking system) in India from FY15.

Best play on recovery theme: WIL is a key beneficiary of the CV demand cycle recovery expected from FY15. WIL has historically outperformed the MHCV segment's growth over the past several years due to increase in the content supplied per vehicle. Further, continued growth in replacement segment and exports makes WIL a strong play for FY15. Also, the government is likely to issue a notification making ABS compulsory for MHCVs from FY15, which augurs well for WIL. We expect sales to post a CAGR of 21% over FY13-FY15E backed by improvement in demand for CVs and increase in the content per vehicle likely over FY14-FY15.

Ample scope for growth: The content per vehicle in India is among the lowest in the world at ~US$240 per vehicle compared to US$500 per vehicle in eastern Europe, US$1000 in North America, and US$3,000 per vehicle in western Europe. We believe the current technology gap in India offers WIL a strong growth opportunity as new products launched by it gradually gain importance.

Earnings to witness double-digit growth: With the content per vehicle set to increase and volume recovery expected to begin by the end of FY14, we expect the margins of the company to improve by 356bps at 20.6% in FY15E from 17.0% in 1QFY14. Due to healthy top-line growth and expansion in margins, we expect the earnings of the company to witness a strong CAGR of 26% over next two years i.e. over FY14/FY15.

Valuation: We have valued WIL at a 10% premium to its past three years' average as we believe the CV demand cycle is close to its bottom and the best for WIL is likely in FY14/FY15. Further, the government is likely to issue a notification for compulsory use of ABS in MHCVs in India from FY15, which will give WIL's earnings a strong boost. Given the comfort on the earnings front i.e. a 26% CAGR likely over FY13-FY15E, lean cost structure and superior return ratios, we believe its premium valuation is justified. We have valued the stock at 20xFY15E EPS of Rs109 to arrive at a target price of Rs2,187 (20x FY15E EPS), up 24% from the current market price.

Source : Equity Bulls

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