Wabco & Bosch: Stock up for the long term

The automobile segment has been buoyant over the last 1 year despite various regulatory challenges. The commercial vehicle (CV) segment, in particular, has witnessed strong growth during the same period. It would continue to grow on the back of the government’s focus towards infrastructure, increased mining activity, normal monsoon leading to rising rural sentiments and ban on overloading.

Against this backdrop, we revisited the financial performance of two large ancillary players - Wabco India (Wabco) and Bosch - whose fortunes are closely intertwined with that of the CV segment.

Quarterly performance snapshot

Wabco is a leading supplier of braking and advanced safety components and caters to CV manufacturers.

The company posted a 36.1 percent year-on-year (YoY) growth in sales, led by 42 percent and 36 percent growth in domestic original equipment manufacturers (OEM) and export market, respectively. Growth in aftermarket, however, remained subdued at 6 percent.

Despite the rise in raw material (RM) prices, the company posted a 44.6 percent YoY growth in earnings before interest, tax, depreciation and amortisation (EBITDA). This was mainly driven by leverage and cost reduction efforts undertaken by the management, which led to an EBITDA margin expansion of 85 basis points. Profit after tax (PAT) grew 55.7 percent (YoY). PAT margin expanded 125 bps.

Bosch manufactures automotive and non-automotive products. Within the automotive segment, it provides diesel and gasoline fuel injection systems, car multimedia systems, electricals and accessories, starters and generators, energy and body systems. Non-automotive segment consists of industrial technology, consumer goods and building technology.

In the quarter gone by, net revenue from operations grew 22.7 percent YoY on the back of strong growth in both auto and non-auto segments. Its domestic business grew 24.2 percent YoY in Q4 FY18. On the profitability front, it posted a 544 bps YoY contraction in EBITDA margin due to a huge spike in RM prices and adverse product mix. PAT declined 1.5 percent YoY, with margin contracting 337 bps YoY.

Growth drivers

The fortunes of Wabco and Bosch are linked to the CV cycle. Domestic CV volume growth outperformed industry growth in FY18, up 19.9 percent YoY versus overall industry growth of 14.2 percent.

Growth has been fuelled by the government’s focus on infrastructure, increase in mining activity, bountiful monsoon leading to rising rural sentiments and stricter adherence to the overloading ban. Wabco’s management has pegged growth in the medium and heavy CV segment at 12-13 percent CAGR (compounded annual growth rate) over FY18-20 on the back of impetus to the rural economy in an election year and continued focus on infrastructure in select pockets. Additional demand would come from the scrappage policy, if implemented.

Wabco is one of the companies benefitting from strong CV demand. The company has a leadership position in the air braking system of M&HCVs, with a market share of around 85 percent. On the export front also, the company remains the preferred supplier to its parent as is evident from growth in its export revenue.

Bosch also has technological leadership among auto component manufacturers, with a 75 percent market share. Owing to its technological prowess, it is one of the few companies which has a bargaining power with OEMs.

Bosch is aggressively focusing on acquiring the technology for change in emission norms to BS-VI from BS-IV. The company receives huge technology support from its parent. Moreover, the management has undertaken acquisitions to transition to BS-VI. The latter is expected to open new avenues for the company in the 2W space as carburettors would be replaced by an injection system. BS-VI may also lead to pre-buying of vehicles, giving a boost to the financials of both companies.

Bosch is trading at 31.7 times and 28.3 times while Wabco trades at 40.8 times and 34.9 times FY19e and FY20e earnings, respectively. Given the underperformance, especially for Bosch, in the past one year, the current market weakness may provide an opportunity to buy into these best-in-class businesses with an eye on the long term.