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Exports cushion domestic demand drop

Wabco India’s (WIL) Q1FY22 operating earnings were in line with consensus estimates as EBITDA margin came in at 8.6% (down 316bps QoQ). Negative operating leverage was the drag on margins led by employee costs (up 414bps QoQ).

We like WIL’s business on: i) dominant market share (>85%) in domestic M&HCV industry, ii) turnaround of the CV cycle as the domestic industry is likely to remain on growth path well into FY24E, and iii) strong technology leadership and support (from parent ZF Group) is likely to aid new product / content introduction (e.g. ESC, air disc brakes, services) for both domestic and export markets. The stock remains one of the best M&HCV proxy plays, however, valuations remain elevated (~38x PE/1.6% FCF yield FY23E). Maintain ADD.

* Key highlights of the quarter: Net sales declined ~31% QoQ to ~Rs4.9bn, impacted by ~50% QoQ decline in domestic OEM revenues to Rs1.6bn (share of revenues fell 1,189bps to 36.8%). The drop in OEM revenues was largely due to shutdown of plants by various OEMs on covid surge / annual maintenance. Exports declined marginally at ~11% QoQ to ~Rs2.2bn (share of revenues rose 1,231bps at 49.5%) driven by global truck production upcycle. The most profitable aftermarket division declined by ~35% QoQ to Rs608mn (share of revenues down 42bps at 13.7%). PAT came in at Rs214mn (down ~55% QoQ). WIL has also announced new capex for an export-oriented facility in Chennai, is establishing a wholly owned subsidiary for the same.

* Demand growth likely to be driven by both domestic, exports: WIL is a good proxy (>85% market share in key products) of the upcycle in domestic M&HCV demand rise from H2FY22 as fleet utilisation improves with higher freight rates. WIL’s integration with ZF is expected to further propel incremental growth in content per vehicle globally (EU / US / India: US$3k / US$1.5k / US$600 per vehicle respectively). It is also likely to witness further export traction (in FY22) with ZF potentially looking at India as an important sourcing hub for its global requirements.

* Maintain ADD: We like Wabco’s business model (dominant market share, improving content/vehicle, multi-year potential M&HCV upcycle, low leverage, strong RoCE’s). New capex plans indicate confidence of parent (ZF) in capabilities of Wabco India. We raise earnings for FY22E / FY23E by 1.1% / 4.1% on the back of better export growth potential. Though we like the business we would need lower valuations to turn further constructive. We maintain our target multiple at 40x FY23E EPS of Rs191. We maintain our ADD rating on the stock with a revised target price of Rs7,629 (earlier: Rs7,350).

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