Institutional Equitiesbsmedia.business-standard.com/_media/bs/data/... · play on MHCV (medium and heavy commercial vehicle) demand recovery expected in FY15 as the demand cycle,

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Institutional Equities

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Reuters: WABC.BO; Bloomberg: WIL IN

Wabco India

‘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.

BUY

Sector: Automobile Ancillary

CMP: Rs1,763

Target Price: Rs2,187

Upside: 24%

Gaurant Dadwal [email protected] +91-22-3926 8145

Key Data

Current Shares O/S (mn) 19.0

Mkt Cap (Rsbn/US$mn) 33.4/562.9

52 Wk H / L (Rs) 1,848/1,250

Daily Vol. (3M NSE Avg.) 4,554

Share holding (%) 3QFY13 4QFY13 1QFY14

Promoter 75.0 75.0 75.0

FII 2.6 2.6 2.5

DII 9.1 8.7 8.8

Corporate 3.1 3.6 3.5

General Public 10.3 10.2 10.2

One Year Indexed Stock Performance

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130

Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13

WABCO INDIA LTD NSE CNX NIFTY INDEX

Price Performance (%)

1 M 6 M 1 Yr

Wabco India 3.4 11.7 14.5

Nifty Index (0.2) (3.7) 12.2

Source: Bloomberg

Y/E March (Rsmn) FY11 FY12 FY13 FY14E FY15E

Net sales 8,950 10,456 9,659 10,880 14,178 EBITDA 2,017 2,199 1,941 2,014 2,915 Net profit 1,274 1,534 1,308 1,437 2,074 EPS (Rs) 67 81 69 76 109 EPS growth (%) 62.2 20.4 (14.7) 9.8 44.4 EBITDA margin (%) 22.5 21.0 20.1 18.5 20.6 PER (x) 26.2 21.8 25.6 23.3 16.1 P/BV (x) 8.6 6.3 5.2 4.3 3.5 EV/EBITDA (x) 16.5 14.8 16.7 15.7 10.6 RoCE (%) 37.7 32.8 21.8 19.8 23.6 RoE (%) 38.8 33.5 22.2 20.2 23.9

Source: Company, Nirmal Bang Institutional Equities Research

30 July 2013


Wabco India 2

Investment Arguments

Despite steep run-up in stock price, its valuation is attractive

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 expected to come in FY15 on the back of likely recovery in CV demand. Further, the government is expected to issue a notification on compulsory use of ABS in CVs 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 20x FY15E EPS of Rs109 to arrive at a target price of Rs2,187 (20x FY15E EPS), up 24% from the current market price.

Exhibit 1: WIL stock trades a premium on the back of strong financials (three-year average P/E)

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Exhibit 2: P/E band

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Wabco India 3

Best play on recovery theme, ample scope for growth

WIL is a key beneficiary of CV demand cycle recovery, which is expected from FY15. WIL has historically outperformed the MHCV segment’s growth rate over the past several years due to the increase in content per vehicle. Further, continued growth in after-market and exports coupled with likely MHCV demand cycle recovery in FY15 makes WIL a strong play in FY15. We expect sales to post a CAGR of 21% over FY13-FY15E backed by improvement in CV demand and the increase in content per vehicle likely over FY14-FY15.

The MHCV industry in India has posted a CAGR of 6% over the past 10 years and still offers room for growth given the low penetration level. The government is likely to issue a notification making ABS compulsory for all MHCVs, which will give the content per vehicle the much needed boost, as average ABS costs nearly about Rs15,000-Rs18,000 per vehicle. We believe the long-term story of WIL is very lucrative with strong growth drivers in place in the form of: 1) CV demand cycle recovery, 2) Rising content per vehicle, and 3) Robust exports.

Exhibit 3: Multiple growth drivers for WIL

Growth Drivers

CV cycle recovery

Increasing content per

vehicle

Exports to remain robust

Source: Nirmal Bang Institutional Equities Research

Rising content per vehicle

WIL’s parent, Wabco Holdings Inc, has been a leading global supplier of technology and control systems for the safety and efficiency of CVs. With the backing of its parent, WIL has been focusing on increasing content per vehicle by introducing new products like automated manual transmission (AMT), series of brake chambers, exhaust brake assembly, and adjusting valve and variants in compressors. A few of these products have recently been introduced and are in their early stage, which will be accepted by customers in due course. With global players like Volvo, Daimler etc setting up vehicle manufacturing plants in India, the outlook on content per vehicle remains strong as these companies use high-end technology in their products which are expensive when compared to traditional trucks and buses. Although the new entrants have a very small market share in India, they will encourage competitors to move towards better technology.


Wabco India 4

India has one of the lowest content per vehicle

Given the low ticket size of trucks and buses in India and the use of traditional vehicles, the content per vehicle in India is one of the lowest in the world. In India, the content remains at US$240/vehicle, while the same in western Europe, North America and eastern Europe stand at US$3,000, US$1,000 and US$500 per vehicle, respectively. Although, it does not make sense to compare the content per vehicle in India compared with developed countries, the country lags behind eastern Europe and South East Asia in this regard. As there is a big technology gap between MHCVs from India and other developed countries, there is ample scope to introduce new products in India, thereby resulting in a steady increase in content per vehicle.

Exhibit 4: Global content/vehicle in MHCVs – Under-penetration in India due to use of traditional technology

Source: Wabco Holdings

CV demand cycle close to bottom

MHCV sales in FY13 fell 23% YoY, under pressure since the past 16 months. The CV industry is cyclical in nature and its growth has been highly volatile, mirroring the growth in the macro economy. With 16 months of consecutive YoY fall in MHCV sales, we believe the MHCV demand, in our view, is close to bottoming out and will stage a recovery from FY14-end, as the demand cycle typically lasts for around three-four years. We expect CV industry’s sales to gradually improve from FY14-end and post double-digit growth in FY15E. Our estimate indicates India’s Index of Industrial Production (IIP) growth of 2.7% and gross domestic product (GDP) growth of 5.5% in FY14E. Given the expected uptick in economic activity, we believe there could be a sharp reversal in CV demand in FY15. As WIL is predominantly into the MHCV segment, the uptick in this segment is of utmost importance for the company and given our estimate, we believe the top-line would be able to post a CAGR of 21% over FY13-FY15E.


Wabco India 5

Exhibit 5: India’s MHCV sales down sharply in 16 months, expect the downcycle to bottom out by FY14-end

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Source: Society of Indian Automobile Manufacturers (SIAM)

Exhibit 6: CV industry’s growth mirrors IIP growth, which has been weak

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Exhibit 7: MHCV sales to stage a recovery from FY14-end - WIL to be key beneficiary

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Source: SIAM, Nirmal Bang Institutional Equities Research


Wabco India 6

Low penetration level of CVs in India

India remains one of lowest-penetrated countries in the world with reference to CV to population growth. In developed countries like Japan, the penetration level is 131 per 1,000 people, while in emerging countries like Thailand and South Korea it stands at 90 per 1,000 people and 88 per 1,000 people, respectively, and as a result India lags behind by a big margin with a penetration ratio of 4 per 1,000 people. India is highly under-penetrated market and offers big headroom for the CV industry to grow. As WIL has an 85% market share in the MHCV industry in terms of content, the company tends to be one of the key beneficiaries of rising CV penetration level.

Exhibit 8: CV penetration level in India – vehicle/1,000 people

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High-tonnage vehicles to drive MHCV industry’s growth in India

Of late, there has been a strong shift towards high-tonnage vehicles as the road infrastructure in India has considerably improved with the establishment of the Golden Quadrilateral, a 6,000km roadway that links the four corners of India. In the past, due to lack of high quality road network, low-tonnage vehicles were extensively used, but now there is a shift towards high-tonnage vehicles which carry higher payload and are much more cost-effective. High-tonnage vehicles have high content per vehicle due to the high tonnage capacity and size of the vehicle. Rating agency Crisil estimates double-digit CAGR in high-tonnage vehicle sales over 2017-18E

Exhibit 9: High-tonnage vehicles to grow at a faster pace compared to others over 2017-18E

Segments GVW 2012-13 CAGR

MHCV goods segment Tonnage Volume 2012-13 over 2007-08 2017-18 over 2012-13P

ICV 7.5-12.0 57,416 7% 8%-10%

MCV 12.0-16.2 28,835 -2% (1%)-1%

MAV >16.2 67,060 -4% 13%-16%

Tipper >12.5 48,694 -2.6% 11%-13%

Tractor trailer >16.2 19,700 -4.5% 12%-15%

ICV: Intermediate commercial vehicle; MCV: Medium commercial vehicle; MAV: Multi-axle vehicle; GVW: Gross vehicle weight

Source: Crisil


Wabco India 7

Global CV players focusing on India

Looking at the vast opportunity in the Indian CV market, many global players like Volvo, Daimler, and Navistar have forayed into the market. As they are relatively new entrants in the Indian market, the market share of these companies are small, but the outlook for them looks strong as they have priced their products aggressively and are looking at launching new products in the coming years. WIL remains a key beneficiary of the industry shifting from traditional Indian players to global players, as the latter use high-end technology in their products where the content per vehicle is much higher when compared to traditional vehicles

To cite an instance, Germany’s Diamler, under the name Bharat Benz, has set up new capacity of 36,000 vehicles per year, which will be ramped up to 72,000 vehicles in the second phase. Globally, Wabco is a preferred vendor for Diamler and so Diamler India sources key components from WIL. Other global CV manufacturers like Scania, Volvo, Hino Motors etc are either planning to enter India or have entered India. It is noteworthy that globally Wabco is a preferred vendor for these original equipment manufacturers (OEMs) and hence WIL tends to benefit from the entry of these OEMs.

Exhibit 10: Rising presence of global CV players in India

Diamler

Has a brand named Bharat Benz in India

Initial capacity of 36,000 units per annum, which will be scaled up to 72,000 units per annum

Plans investment of Rs44bn

Scania

Plans to set up assembly unit in Bangalore for heavy-duty truck and bus segments

The company will employ up to 800 personnel over the next five years

Sania plans to invest Rs1.5bn over the next few years, and its first truck is likely to roll out in 2013.

Volvo

Manufacturing vehicles in India since 1998

In May 2008, the company entered into a JV with Eicher Motors and formed VECV (Volvo Eicher Commercial Vehicles).

Hino Motors

Plans to set up a manufacturing base in India by 2015

Currently, imports completely-built units into India from Hino Thailand.

Source: Crisil

Exhibit 11: Global players have low volume in Indian CV market, while Tata Motors and Ashok Leyland dominate the industry

Segment Player 2008-09 2009-10 2010-11 2011-12 2012-13

M&HCV Tata Motors 114,432 154,680 192,127 207,014 143,381

Ashok Leyland 47,093 57,135 83,098 81,263 70,552

Mahindra & Mahindra - - 139 - -

Swaraj Mazda 3,936 5,727 7,697 8,276 7,719

Tatra Udyog 6 - - - -

Volvo India 1,397 1,006 1,000 595 616

Asia Motor Works 3,623 3,808 6,792 10,021 6,533

JCBL - 179 - - -

Mahindra Navistar Automotives - - 1,126 3,885 3,806

Daimler India Commercial Vehicles 219 215 103 85 -

Volvo Buses India - 607 568 677 601

VECV - Eicher 13,547 21,146 30,223 37,400 35,051

Total 184,253 244,503 322,873 349,216 268,259

Source: Crisil


Wabco India 8

WIL’s exports to witness robust growth

Exports currently account for 19% of WIL’s sales. The company mainly exports to its parent in North America and to Europe. Exports have witnessed a 54% CAGR over FY09-FY13, as the parent has decided to make WIL its export hub. WIL has set up an EOU (export-oriented unit) at Mahindra World City, specifically dedicated to cater to the needs of the parent company. Exports witnessed a strong growth of 34% in FY13 at Rs2.0bn, which we expect to touch Rs2.7bn by the end of FY14E. In 1QFY14, the exports grew robustly by 63% YoY.

The parent company has been increasing its focus on China and India for low-cost production, which gives comfort on steady growth in exports. WIL currently has a capacity to cater to export sales of Rs3bn, which can be further increased by de-bottlenecking capacities at plants. We expect exports of WIL to post a CAGR of 25% over FY13-FY15E. Also, ACMA (Auto Component Manufacturers Association) expects exports to North America and Europe to grow robustly going forward, which are the key export markets for WIL.

Exhibit 12: Export outlook remains strong

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Exhibit 13: India’s auto component exports to North America and Europe likely to grow robustly

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Wabco Holdings increasing its focus on low-cost countries like India and China

Wabco Holdings is focusing on increasing its production from low-cost countries like India and China. In CY00 (2000), India and China accounted for around 10% of its production, which further increased to 41% in CY11. Clearly, the focus of the parent company is to increase sourcing from low-cost countries because of cost benefits. India, being one of the low-cost countries, offers comfort on exports.


Wabco India 9

Exhibit 14: Wabco Holdings increases its production in low-cost countries

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WIL has consistently outperformed MHCV industry’s growth

WIL has historically outperformed the MHCV industry’s growth; the variance is largely due to a steady rise in content per vehicle over the years. The MHCV industry, over FY09-FY13, reported a CAGR of 9% while WIL has posted a CAGR of 21% during the same period. Content per vehicle in India stood at US$240/vehicle. Apart from this, we believe the replacement market growth and export growth will continue to support top-line growth. As we expect MHCV segment demand to recover in FY15E, the outlook on WIL’s sales in FY15 remains strong.

Exhibit 15: WIL has outperformed MHCV industry’s growth – quarterly outperformance

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Wabco India 10

Exhibit 16: WIL has outperformed MHCV industry’s growth – yearly outperformance

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Exhibit 17: Margins strong despite sharp downturn in CV sales

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Limited competition gives comfort on pricing discipline and stability in margins

WIL has developed a niche for itself in the MHCV segment, with the company supplying air brakes, braking components and other components. There are not many players in this business and the immediate competitor for the company is Knorr Bremse and Haldex. In India, WIL enjoys a leader status with an 85% market share and the rest is controlled by Knorr Bremse and Haldex. Knorr Bremse has been present in India for a long period and has not witnessed any significant market share improvement over the years, while Haldex is present in India on a very small scale. Due to the dominant market leader position, WIL has been able to pass on price hikes to end users, which is visible in the company’s margins. Given the duopoly in the industry, we believe the pricing discipline will be maintained and hence, we expect the margins to remain stable.


Wabco India 11

Exhibit 18: Competitors of Wabco Holdings


Demand from After-market market holds promise

WIL derives close to 18% of its sales from the replacement and spares segment. The replacement segment, which has the highest margins, witnessed a growth of 16% in FY13 as the company focused on improving its reach and dealer network. Over FY11-FY13, close to 1mn MHCVs were sold in India and considering the fact that replacement of air brake in MHCVs is required after 2.0-2.5 years, there is ample scope for growth in the coming years. Apart from this, the company is exploring further potential in retro-fitment of ABS in tankers operated by major oil companies. We expect the replacement market to grow by a CAGR of 16% FY13-FY15E. Margins in this business are highest for the company and growth in this segment augurs well for its profitability.

Exhibit 19: Replacement segment expected to grow at a steady pace

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Wabco India 12

Exhibit 20: Revenue mix of WIL

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Strong technology back-up

WIL’s parent, Wabco Holdings, is a leading global supplier of technology and control systems for commercial vehicles’ safety and efficiency. The company has strong market shares across segments and is a leading supplier to OEMs globally. Due to the technological edge the company enjoys, WIL has been able to maintain its pricing premium over OEMs even during a sharp slowdown. In FY13, the company ended with a EBITDA margin of 20.1%, despite the MHCV industry reporting a fall in sales by 23% YoY and sales of WIL witnessing an 8% decline. WIL is a technology-driven product company and has been consistently introducing new value added products in the market, which helps it to grow its market share. In FY13, the company introduced new products like automated manual transmission (AMT), series of brake chambers, exhaust brake assembly, adjusting valve and variants in compressors, which will be accepted in due course by the market, given the technology gap.

Exhibit 21: Wabco Holdings’ key products

Actuator Converts energy stored in compressed air into mechanical force applied to foundation brake to slow or stop CVs

Air compressor and air processing/air management system Provides compressed. dried air for braking, suspension and other pneumatic systems on trucks. buses and trailers

Foundation brake Transmits braking force to a disc or drum (connected to the wheel) to slow. stop or hold vehicles

Anti-lock braking system (ABS) Prevents wheel locking during braking to ensure steer ability and stability

Conventional braking system Mechanical and pneumatic devices for control of braking systems in commercial vehicles

Electronic braking system (EBS) Electronic controls of braking systems for commercial vehicles

Electronic and conventional air suspension systems Level control of air springs in trucks. Buses, trailers and cars

Transmission automation Automates transmission gear shitting for trucks and buses

Electronic architecture Central electronic modules integrating multiple vehicle control functions

Electronic stability control (ESC) and RW stability support Enhances driving stability



Wabco India 13

Compulsory usage of ABS to boost earnings

As per a recent announcement, the government is expected to issue a notification to make ABS mandatory in MHCVs from FY15. The notification is likely in a few months, by which ABS will be made mandatory for all new MHCVs. As the notification has not been issued yet, we have not factored it in our estimates, but our estimates suggest that if all new vehicles are fitted with ABS in FY15, then it could potentially add ~18%-23% to the earnings of the company in FY15E. Issuing a notification and execution of the same remains key as main players have been lobbying against this order. We believe the notification has been delayed for long and has to be issued sooner or later. If the notification is issued, WIL’s stock could witness a strong re-rating, given the strong opportunity it provides for the company.

Exhibit 22: India is moving towards better safety standards for commercial vehicles

Source: Planning Commission

Key risks

Delay in revival of domestic MHCV demand

Greater-than-expected slowdown in export markets

Delay in ABS notification by the government.


Wabco India 14

1QFY14 performance outperforms the industry

WIL’s 1QFY14 earnings on YoY basis were down 15% YoY following a 16% YoY drop in MHCV volume for the quarter. However, due to strong growth in exports, the company reported a 5% YoY growth in sales.

Replacement segment sales for the quarter grew 4% YoY, while exports grew by a robust 63% YoY. Outlook on exports remains strong as the parent company is committed to higher outsourcing from low-cost countries.

Gross margins of WIL fell 128bps QoQ, which in our view was due to higher share of exports where margins are the lowest. EBITDA margin fell 194bps QoQ following lower gross margin, increase in employee costs and higher other expenditure. A revival in the OEM segment should aid margins of the company going forward, as it is the most profitable segment after the replacement market segment.

However, on the positive side, following a steep depreciation of the rupee against the US dollar, the company benefited from higher exports. Other income at Rs129mn was up 91% YoY due to forex gains of Rs55mn.

Due to lower EBITDA, the company reported PAT of Rs354mn, which was up 27% QoQ but down 15% YoY.

In our view, the MHCV demand cycle is close to bottoming out and should gradually stage a recovery by the end of FY14 on the back of improvement in the macro economy led by lower interest rates and uptick in economic activity, which remains key catalysts for MHCV demand recovery.

Exhibit 23: 1QFY14 financials

Y/E March (Rsmn) 1QFY13 4QFY13 1QFY14 YoY (%) QoQ (%)

Net sales 2,377 2,319 2,489 4.7 7.3

Other operating income 116 125 139 19.8 11.1

Net revenue 2,493 2,445 2,628 5.4 7.5

Raw material costs 1,318 1,328 1,461 10.9 10.0

Employee costs 266 263 296 11.5 12.6

Other expenditure 339 391 424 25.0 8.6

Total expenditure 1,922 1,981 2,181 13.5 10.1

EBITDA 571 463 447 (21.6) (3.5)

EBITDA % 22.9 19.0 17.0 (587)bps (194)bps

Other income 67 14 129 90.8 838.0

Interest 0 0 - (100.0) (100.0)

Depreciation 47 76 66 41.9 (12.6)

Profit before tax 591 401 509 (13.8) 27.0

Provision for taxation 173 121 155 (10.0) 28.0

Reported PAT 418 280 354 (15.4) 26.6

EPS (Rs) 22.1 14.7 18.7 (15.4) 26.6



Wabco India 15

Exhibit 24: Sales continue to outperform MHCV segment Exhibit 25: OEMs’ revenue negative due to lower volume

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Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 26: Exports up robustly by 63% YoY Exhibit 27: Replacement segment’s growth up gradually

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Exhibit 28: Raw material costs as a percentage of sales Exhibit 29: EBITDA margin drops QoQ

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Exhibit 30: EBITDA remains stable Exhibit 31: PAT rises on higher other income

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Wabco India 16

Financials

Sales to post a CAGR of 21% over FY13-FY15E

We expect WIL’s net sales to post a CAGR of 21% over FY13-FY15E backed by likely improvement in MHCV demand, steady increase in content per vehicle and robust exports over FY14/FY15.

Exhibit 32: Net sales to post a CAGR of 18% over FY13-FY15E

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Earnings to post a CAGR of 26% over FY14E/FY15E

WIL is one of the few companies which offer strong earnings growth visibility over the next two years. With the content per vehicle set to increase and volume recovery expected to begin from FY15, we expect the margins of the company to improve by 356bps to 20.6% in FY15E from 1QFY14. Due to healthy top-line growth and margin expansion, we expect the earnings to post a strong CAGR of 26% over the next two years i.e. FY14E/FY15E.

Exhibit 33: Earnings to show a CAGR of 26% over FY14E/FY15E

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Wabco India 17

Exhibit 34: Margins expected to stage a recovery in FY15

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Strong return ratios and robust cash flow generation

WIL’s financials speak about the strength of the company as it is debt free and generates strong cash flow from its operations every year. Further, the company’s working capital cycle is very lean and hence the balance sheet strength remains intact. The company has been reporting strong return ratios in excess of 20% over the past few years, which speaks about the quality of the company. We like the company because of its high free cash flow; lean working capital requirement and high return ratios.

Exhibit 35: Strong cash flow generation

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Wabco India 18

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 expected to come in FY15 on the back of likely recovery in CV demand. Further, the government is expected to issue a notification on compulsory use of ABS in CVs 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 20x FY15E EPS of Rs109 to arrive at a target price of Rs2,187 (20x FY15E EPS), up 24% from the current market price.

Exhibit 36: WIL stock trades a premium on the back of strong financials (three-year average P/E)

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Exhibit 37: P/E band

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Wabco India 19

Financials

Exhibit 38: Income statement


Net sales 8,950 10,456 9,659 10,880 14,178

% growth 47.3 16.8 (7.6) 12.6 30.3

Raw material costs 4,950 5,723 5,172 5,931 7,488

Staff costs 712 943 1,070 1,216 1,560

Other expenditure 1,271 1,591 1,477 1,719 2,216

Total expenditure 6,933 8,257 7,719 8,867 11,263

EBITDA 2,017 2,199 1,941 2,014 2,915

% growth 50.9 9.0 (11.8) 3.8 44.8

EBITDA margin (%) 22.5 21.0 20.1 18.5 20.6

Other income 42 121 126 259 270

Interest costs 1.7 1.2 0.2 - -

Gross profit 4,000 4,733 4,487 4,949 6,690

% growth 44.3 18.3 -5.2 10.3 35.2

Depreciation 144 156 217 251 282

Profit before tax 1,914 2,162 1,850 2,022 2,902

% growth 61.7 13.0 (14.5) 9.3 43.6

Tax 639 628 542 585 829

Effective tax rate (%) 33.4 29.1 29.3 28.9 28.5

Net profit 1,274 1,534 1,308 1,437 2,074

% growth 62.2 20.4 (14.7) 9.8 44.4

EPS (Rs) 67 81 69 76 109

% growth 62.2 20.4 (14.7) 9.8 44.4

DPS (Rs) 5 5 5 8 10

Payout (%) 7.4 6.2 7.3 9.9 9.1

Dividend on equity shares 95 95 95 142 190

Tax on dividend 15 15 16 24 32


Exhibit 40: Balance sheet


Equity 95 95 95 95 95

Reserves 3,772 5,196 6,393 7,663 9,515

Net worth 3,867 5,291 6,488 7,758 9,610

Net deferred tax liabilities 82 109 117 117 117

Short-term loans 6 - - - -

Long-term loans - - - - -

Total loans 6 - - - -

Liabilities 3,954 5,400 6,605 7,875 9,727

Gross block 2,789 3,440 3,982 4,734 5,448

Depreciation 985 1,138 1,347 1,598 1,880

Net block 1,804 2,302 2,635 3,136 3,569

Capital work-in-progress 99 128 254 92 113

Long-term investments 122 232 255 485 760

Inventories 799 1,158 1,356 1,523 1,870

Debtors 1,712 1,575 1,898 2,079 2,660

Cash 129 810 991 1,474 2,047

Loans and advances 421 564 541 568 598

Other current assets 0 1 1 1 1

Total current assets 3,060 4,108 4,787 5,645 7,175

Creditors 860 1,105 1,054 1,211 1,617

Other current liabilities 271 264 272 272 272

Total current liabilities 1,131 1,369 1,326 1,482 1,889

Net current assets 1,801 1,928 2,470 2,688 3,240

Misc. expenses - - - - -

Total assets 3,954 5,400 6,605 7,875 9,727


Exhibit 39: Cash flow


EBIT 1,873 2,043 1,723 1,763 2,633

(Inc.)/dec. in working capital (907) (128) (542) (218) (552)

Cash flow from operations 966 1,915 1,182 1,545 2,081

Other income 42 121 126 259 270

Depreciation 144 156 217 251 282

Interest paid (-) (2) (1) (0) - -

Tax paid (-) (639) (628) (542) (585) (829)

Dividends paid (-) - (110) (110) (111) (166)

Net cash from operations 512 1,453 873 1,359 1,638

Capital expenditure (-) (174) (680) (668) (590) (735)

Net cash after capex 338 773 205 769 903

Inc./(dec.) in short-term borrowing 6 (6) - - -

Inc./(dec.) in long-term borrowing (72) - - - -

Inc./(dec.) in preference capital - - - - -

Inc./(dec.) in borrowings (66) (6) - - -

(Inc.)/dec. in investments (100) (110) (23) (230) (275)

Equity issue/(buyback) - - - - -

Cash from financial activities (166) (116) (23) (230) (275)

Others (67) 24 - - -

Opening cash 24 129 810 991 1,474

Closing cash 129 810 991 1,474 2,047

Change in cash 105 681 183 539 628


Exhibit 41: Key ratios

Y/E March FY11 FY12 FY13 FY14E FY15E

Profitability & return ratios

EBITDA margin (%) 22.5 21.0 20.1 18.5 20.6

EBIT margin (%) 20.9 19.5 17.8 16.2 18.6

Net profit margin (%) 14.2 14.7 13.5 13.2 14.6

RoE (%) 38.8 33.5 22.2 20.2 23.9

RoCE (%) 37.7 32.8 21.8 19.8 23.6

Working capital & liquidity ratios

Receivables (days) 62 57 66 67 61

Inventory (days) 46 62 89 89 83

Payables (days) 63 63 76 70 69

Current ratio (x) 3.0 3.2 4.0 4.2 4.1

Quick ratio (x) 2.6 2.7 3.3 3.4 3.3

Valuation ratios

EV/sales (x) 3.7 3.1 3.3 2.9 2.2

EV/EBITDA (x) 16.5 14.8 16.7 15.7 10.6

P/E (x) 26.2 21.8 25.6 23.3 16.1

P/BV (x) 8.6 6.3 5.2 4.3 3.5



Wabco India 20

Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

HOLD 0-15%

SELL < 0%

This report is published by Nirmal Bang’s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication.

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Documents

Institutional Equitiesbsmedia.business-standard.com/_media/bs/data/... · play on MHCV (medium and heavy commercial vehicle) demand recovery expected in FY15 as the demand cycle,