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ZFCVCS (ZFI) has delivered a 10-quarter high gross margin, driven by improving mix and lagged price hikes, resulting in flat EBITDAM QoQ. ZFI’s revenue from domestic OEMs was up ~20% YoY, driven by new business generation from electronic stability control system sales to buses, electronic braking system applications, electronic compressors and driver assistance systems. Going ahead, ZFI is planning to ramp-up EBITDAM, led by improving mix of new complex products at the cost of lower margin commoditised products, improving productivity and tighter control on pricing. We are building in ~24% revenue CAGR for FY23-25E with mean EBITDAM of ~15.5%. We downgrade ZFI to HOLD from Add post 40% return in the past 6 months with a revised DCF-based target price of INR 12,810 (earlier INR 11,433), implying 40x FY25E earnings.

Conference call takeaways and our views

? OEM/export/after market segment revenue came in at INR 4.4bn/INR 3.9bn/INR 1.4bn, up ~20%/~18%/~15% YoY, respectively, driving overall revenue by 21% YoY, as new product segment continued to add to revenue growth beyond the traditional larger segments. OEM segment growth was driven by rising penetration of ESC, EBS, electronic compressors and rising trailer adoption. Aftermarket growth was driven by rising demand in mining segment (up 60% YoY), strong offtake from Southern India state STUs and rising demand for vacuum boosters/actuators etc. Exports were boosted by rising demand for air compressor units from BMW/DAF, air disc brake levers etc. from customers in EU/US. Nearly 50%/45% of exports came in from EU/NA. Shifting trend of sourcing from India from EU customers like Volvo, BMW, Daimler to help exports continue to grow ahead other than new product addition, in order to defy domestic CV cyclicality. As against value addition of ~Euro 600/CV in India vs 4x business/unit in Europe, ZFI is looking forward to a gradual transformation in domestic portfolio for driving sustainable growth ahead, in addition to rising exports. ZFI is looking forward to exceed its monthly offtake of ~2k units of ESC from H2FY24, driven by rising penetration in school buses and rising demand of electric buses, with value delta per vehicle being to the extent of Rs20k/unit for pneumatic ESC systems.

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