Buy ZF Commercial Vehicle Control, Target Price Rs 12,160 - ICICI Direct
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New tech offerings to ensure industry leading growth
About the stock: ZF Commercial Vehicle Control Systems India (ZFCV) (erstwhile Wabco India), now part of the ZF Group, is the market leader in the CV braking space and a technology-focused complete solutions provider.
* FY22 sales channel mix – OEM ~45%, aftermarket ~14%, exports ~41%
* FY22 product mix: Sale of products ~91%, Services ~9%
Key Highlights:
* The company is a key beneficiary of the ongoing CV cyclical upswing amid greater infra spends by the government with annual YTD wholesales at market leader Tata Motors up ~60% YoY in FY23E and August 2022 wholesales witnessing MoM recovery especially in the M&HCV truck space
* With FY22 being the first year of the upcycle, considerable double digit M&HCV volume growth is expected over FY23E, FY24E with industry volumes seen surpassing their FY19 peak some time in FY25E
* In Q1FY23 conference call, ZFCV spelt out its prowess in technologically advanced products for M&HCV space like ADAS, fleet management service, EV parts for E-Bus, ESC, T-EBS among others. Recent offerings from some OEMs depict the same. We believe this bodes well for the company in maintaining its leadership position and gradually increasing content/vehicle
What should investors do? ZFCV share price has grown at ~12% CAGR from ~| 5,640 in September 2017 thereby outperforming Nifty Auto index in that time.
* We retain BUY on ZFCV amid cyclical upswing in CV space with ZFCV a key beneficiary, solutions in EV domain and advance technologies supporting its quest for content/vehicle increase
Target Price and Valuation: Upgrading our estimates, we now value the company at | 12,160 i.e. 54x P/E on FY24E EPS (earlier target price | 10,530).
Key triggers for future price performance:
* Amid cyclical recovery, we build ~29.8% sales CAGR over FY22-24E
* With potential kit value pegged at ~3x from current levels of ~| 45,000- 48,000/unit along with input cost cooling off and premium product offering, margins are seen inching up to the 15% mark by FY24E
Alternate Stock Idea: Besides ZFCV, in our ancillary coverage we like Apollo Tyres
* India CV revival beneficiary, focused on debt reduction, higher return ratios
* BUY with a target price of | 290
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