Healthy performance; turning CV cycle boosts outlook

Wabco India (WIL) reported a relatively healthy Q2FY21 performance. Net sales were at | 419 crore, down 6% YoY (domestic down 19%, exports up 8%, aftermarket performance flattish YoY). EBITDA in Q2FY21 was at | 63 crore with corresponding EBITDA margins at 15.1%, up 330 bps YoY. PAT was up 3.5% YoY to | 35.1 crore. The management sounded confident of industry leading growth over FY21-23E amid near bottoming out of CV cycle with increase in content per vehicle under BS-6 regime as well as cost competitive nature of exports & technology support by the wider ZF group.

CV improvement underway in key markets

WIL has a dominant presence in the domestic CV braking solutions segment with a presence across OEM, replacement, export channels. The company also serves the M&HCV space in Europe and the US Class 8 truck market. The Indian M&HCV space has been suffering from an elongated slowdown beginning from FY20 courtesy a variety of demand and supply side issues such as slow economic growth, lower fleet utilisation, overcapacity (revised axle load norms), tighter financing availability and cost escalation under BSVI. Covid disruption further added to the industry’s woes, with wholesale offtake for major OEMs down ~60-90% YoY in H1FY21. However, sequential improvement (in trucks space in particular) in recent months is encouraging. Firmer freight rates and goods movement along with improvement in industrial and economic activity post lifting of Covid related restrictions is leading to improvement in outlook for the M&HCV industry (ex-buses, which could continue being laggards for some more time). A ~30% YoY rise in cumulative new US Class 8 truck orders for April - August 2020 further adds to optimism around CV dependent ancillaries like WIL.

Increasing content per vehicle remains focus area

WIL has over the years outperformed user industries courtesy a clear focus on increasing kit value while transforming itself into a complete solutions provider. BS-VI switchover along with implementation of revised axle load norms have provided further such opportunities to the company while it is also working on introduction of offerings not yet mandated by law such as electronic stability control and air disc brakes. Additionally, WIL is also important as a sourcing hub for global parents Wabco and ZF given its frugal engineering capabilities, providing it an exports growth lever.

Valuation & Outlook

We build 11%, 15.9% sales, PAT CAGR, respectively, for WIL in FY20-23E, with margins seen improving to erstwhile ~15% trajectory by that time. We value WIL at | 5,220 i.e. 40x P/E on FY23E EPS of ₹ 130.5/share, upgrading it from SELL to HOLD. Key risk to our call is the impending stake sale by the new promoter (~18%) to comply with minimum public shareholding norms.

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