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Quality franchise, recommend subscribe in OFS…

ZF International UK i.e. the principal shareholder (promoter group) of Wabco India (WIL) proposes to sell up to 34.34 lakh shares or 18.1% stake (including green-shoe option) in WIL to comply with minimum public shareholding norms. The promoter group intend is to reduce its stake in WIL from 93.1% to 75% post offer-for-sale (OFS). It has set a floor price of |5,450/share in the proposed OFS with allocation in OFS on price priority basis. The minimum issue size thus stands at |1,872 crore. The offer will open on 25th March, 2021 for non-retail category and on 26th March, 2021 for retail category -with a minimum of 10% of the shares being reserved for retail category.

Market leader with robust premiumisation, exports prospects

WIL is a leader in the Indian CV braking space with a diversified presence across clients and channels i.e., OEM, aftermarket and exports. The company’s status as a technology pioneer (over the years has been the first to introduce ABS, AMT, ESC, ADAS, etc, to the Indian CV market) and complete solutions provider has led to substantial outperformance vis-à-vis industry, translating into ever increasing content per vehicle. Nevertheless, present reading is below other large CV markets (~US$600 in China, ~US$1,000 in Brazil and ~US$1,500 in US), leaving further headroom for realisation led growth. WIL has traditionally been an important sourcing hub for Wabco Holdings (exports accounting for >30% of sales) on account of its cost advantage and proven engineering capabilities. The same is set to continue under the new regime, providing further exports impetus for WIL.

Worst of CV downcycle behind us, future outlook promising

Domestic CV industry has been in the cyclical downtrend amidst host of demand and supply side constraints such as slowing economic activity, overcapacity, financing crunch, BS-VI transition and the Covid-19 pandemic. However, improvement in offtake of M&HCV trucks at key OEMs over past few months is an encouraging sign amid pickup in demand from key sectors like mining, road building and construction. With a typical CV down cycle lasting about two years, we believe the cyclical bottom has been surpassed. However, buses remain an area of concern given the limited operations of schools, offices and travel activities. Recent policy interventions in the form of procurement of buses, voluntary scrappage policy are additional positives for CV industry to varying degrees and thereby for WIL too. Our estimates build 35% revenue CAGR at WIL over FY21E-23E to |3,156 crore in FY23E.

Valuation & Outlook

We hold a positive view on WIL amidst the cyclical upturn in its user segments i.e. Commercial Vehicles, promoter’s intent to increase global sourcing from its Indian arm and wider product basket post the global acquisition of its erstwhile parent by ZF group. Henceforth we recommend investors to subscribe in the upcoming OFS. With forward assumptions & financials remaining unchanged, we retain our BUY rating on the stock with unchanged target price at | 7,350 i.e., 45x P/E on FY23E EPS of | 164/share.

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