“Quality and opportunity combo” • Wabco India :: ICICI Securities, report

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“Quality and opportunity combo” • Wabco India’s (WIL) Q3FY15 results were in line on the revenue front but a miss on the margins and profitability fronts • WIL reported revenues of | 318.2 crore (YoY growth of ~23%). The sales jump has been driven by strong OEM sales (a mix of volume growth and pricing mix improvement). • EBITDA margins came in at 15.0% (~110 bps YoY higher), lower than our estimate of 17.0%, owing to lower gross margins. Consequently, PAT came in at ~| 29 crore (up ~42% YoY) Clean no-brainer proxy to M&HCV industry revival play Recent election results seem to have reinvigorated positive sentiments towards macro improvements in the domestic market. We feel a strong government may provide a facilitating environment. Thus, we expect the M&HCV OEM segment to grow at a CAGR of ~20% over FY14-17E to ~3.8-4 lakh units. WIL is a market leader in the CV air braking systems in the Indian HCV space. It is dominant with >85% market share. Thus, WIL provides a unique proxy to the recovery, which would receive earnings fillip ahead armed with a clean balance sheet & operating performance. As India looks to catch up with global peers, Wabco to gain on content! The content per vehicle in India is one of the lowest in the world with relatively low sensitivity towards consumer safety. However, with a new government, we believe the long due focus on both emissions and safety will be at the fore. The first of the same has been notified in the form of mandatory implementation of ABS from FY16E. We believe this could have a revenue potential of ~| 250 crore in full year terms. Currently, the estimated content remains at ~$300/vehicle, much lower than that in western/eastern Europe and North America, which are at $3,000/$500 and US$1,000, respectively. Thus, there is a significant opportunity to fill the big technology gap between India and other developed markets. Strong MNC parentage big differentiator as it increases exports from WIL! Wabco India enjoys the benefits of its global parent’s strong technology dominance among OEMs globally. This has helped WIL establish an exclusive relationship with its large customers in India with easier product penetration. On top of this, India is turning into a low cost manufacturing hub aided by a depreciated currency. WIL currently exports to the US, Europe and South America through its parent. FY14 saw strong contribution rise (sales ~| 410 crore, share up to ~40% vis-à-vis ~22% YoY). We expect exports growth to moderate as domestic demand is expected to grow faster however potential to do annual ~|750 crore of exports remains feasible. This is also aiding in early localisation of products such as ABS. Even as ABS has very low revenues of ~| 35 crore (FY14), it still has localisation of ~20% however this could rise ahead Stable business across cycles; strong parentage make strong case The CV industry had gone through one of its worst downturns with the slowdown in industrial activity levels, especially in HCV segment, but WIL’s business has been largely stable. We expect this trend to continue and expect CAGR of ~26%, ~39% in revenues, earnings, respectively, over FY14-17E. Return ratios are expected to move upwards (>27%). On the valuations front, business stability across cycles is likely to keep multiples at a premium to domestic peers, at levels similar to global peers like Bosch Ltd. We value the stock at 36x FY17E EPS (10% discount to Bosch) and upgrade our target price of | 6000, maintain BUY.

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http://content.icicidirect.com/mailimages/IDirect_WabcoIndia_Q3FY15.pdf