IGI Logo

High quality CV cycle play

Wabco India’s (WIL) Q2FY22 operating earnings were in line with consensus estimates as EBITDA margin came in at 10.2% (down 491bps YoY). Revenues grew ~47% YoY; however, gross margin came in at 36.7% (down 630bps) amidst steep RM inflation. We like WIL’s underlying business on i) dominant market share (>85%) in domestic M&HCV industry, and thus, see it as a clear beneficiary of the impending multi-year growth cycle, ii) strong export opportunities from both existing customers and ZF group and iii) best-in-class technology leadership (from parent ZF Group) is likely to accelerate new product introduction (e.g. ESC, air disc brakes, services) for customers. The stock remains one of the best M&HCV proxy plays to play the M&HCV upcycle. Upgrade to BUY.

* Key highlights of the quarter: Net sales grew ~47% YoY to ~Rs6.2bn, driven by ~104% jump in domestic OEM revenue to Rs2.2bn (share of revenue rose 10.1% YoY to 40.6%). The rise in OEM revenue was largely to cope up the lost production in Q1 and channel filling for the festive season. Exports held steady, up 27.6% YoY to Rs2.5bn (share of revenue declined 8.6% YoY at ~44%), driven by recovery in both European and US truck markets. The most profitable aftermarket division too grew ~39% YoY to Rs846mn (share of revenue down 1.5% YoY at 15.1%). PAT came in at Rs323mn (down 8% YoY).

* Strong demand growth expectations as both domestic, exports pace: WIL is a leader in key safety, efficiency and connectivity solution supplier to M&HCV customers. We expect domestic M&HCV demand to witness >30% CAGR volume growth cycle between FY22E-24E; Wabco is likely to be a key beneficiary. Both public and private capex spends coupled with reasonable monsoons are likely to aid fleet utilisation improvement with higher freight rates. WIL’s integration with ZF is expected to further propel incremental value enhancement in content per vehicle globally (EU / US / India: US$3.2k / US$1.5k / US$600 per vehicle respectively). It is also likely to witness further export traction (in FY23) with ZF potentially exploring India as an important sourcing hub.

* Upgrade to BUY: Valuations are likely to remain industry leading for WIL considering its dominant India market share, strong export opportunities, and bestin-class technology support from parent (ZF group). We introduce FY24E and rollover to Sep’23E. We cut our earnings for FY22E / FY23E by 6.4%/ 2.6%, and maintain our target multiple at 40x Sep’23E EPS of Rs228. We upgrade the stock to BUY from ADD with revised target price of Rs9,135 (earlier: Rs7,629).

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer