LKP BYTES :WABCO (Buy @ 1570 with a price target of 2300)

The story so far ………..

WABCO INDIA LTD – WIL is the 75% Indian subsidiary of Westinghouse Air Brake Company – Wabco Holdings who are world leaders in Braking & Transmission systems for Commercial Vehicles & Trailers. The parent Wabco is the first to innovate most of the technologies like Anti-Lock Braking Systems – ABS, Automated Manual Transmission – AMT and Autonomous Emergency Braking Systems – AEBS in the world. In 2009 the parent increased its equity stake in WIL to 75% by buying out the stake of the JV partner – TVS.

WIL is a technology leader and a Tier – 1 global supplier to the CV industry and derives 65% of its Rs10bn revenues from the MHCV segment and has 4 manufacturing facilities in India – two in Chennai and one each in Jharkhand & Uttarakhand. It has strong relationships with OEMs and has a wide distribution network of 7000 outlets and its technological capabilities are superior in most of its product segments. Exports formed 15% of its revenues in FY’12.

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The story ahead ………..

After a dream run over the last 4 years, WIL has entered a period of consolidation this fiscal as the MHCV segment in India has contracted ~ 14%YTD this fiscal against a growth of 8% in FY’12. The parent company is witnessing a decline globally due to decline in Truck & Bus production across markets and India is no exception. We expect gross margins to contract to 18% this fiscal and its net profits to drop 10% as a result of this slowdown. We expect WIL to drive business this fiscal from exports and after market in a bid to de-risk its dependence on the cyclical MHCV segment.

We expect the 100% EOU at Mahindra City – Chennai EPZ to generate revenues of Rs2.5bn at optimum capacity and would enable WIL to return back to the 20% EBIDTA range next year when they could notch up net profits of ~Rs2bn which would translate into an EPS of Rs105 in FY’13-14.

WIL is a 25% ROE business with high entry barriers due to technology and we recommend investors to Accumulate the debt-free WABCO now at a time when there is a slowdown in the MHCV segment for an 18 month price target of Rs2300.

 Thanks and Regards

LKP Advisory