‘Brake’ Out
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.
