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Technological advantage to reap benefit

WABCO India ltd (WIL) is a leading supplier of technologies and services that improve safety, efficiency and connectivity of commercial vehicles (CV) in India.

* Q4FY21 revenue came with a mixed result of 76%YoY. The company outperformed the CV industry growth by 25%. Export grew by 70%YoY due to Strong global market.

* We expect the export momentum is likely to continue due to providing global export hub and local engineering footprint.

* EBITDA margin contracted by 110bps due to commodity inflation, Increase in freight cost and supply side constraints.

* Wabco ZF technological advantage in the CV segment will provide significant growth in product intelligence and will result in higher value enhancing offer for the domestic and global customers.

* After the merger, promoter’s diluted its stake from 93.1% to 80.4% through OFS. As per the SEBI guidelines the decision to limit at 75% is awaited.

* WIL is a direct beneficiary given the strong fundamentals and early sign of recovery in the truck sales. We vale WIL at 50xFY23E EPS.

Mixed performance across channels

Q4FY21 revenue came with a mixed result of 76%YoY. The company outperformed the CV industry growth by 25%. Export grew by 70%YoY due to Strong global market, Domestic OEM and aftermarket sales witnessed a robust growth of 114%YoY and 40%YoY respectively. EBITDA margin contracted by 110bps due to commodity price increase (especially steel and Aluminium price), Increase in freight cost owing to delay in order completion and non availability of semi conductors.

The content per vehicle is expected to increase by 20% from the current level due to the new emission and regulatory changes. The company holds 85% market share in the air braking and safety products. Today, OEMs use the opportunity to launch the BS VI vehicles, not only to address the emission aspects, but to improve and advance the braking system to meet the new requirement of safety and efficiency guidelines.

WABCO and ZF Merger to redraw new heights.

ZF announced the successful conclusion of the process to acquire WABCO. The acquisition will bring together two global leaders with highly complementary and innovative technology offering to serve future serving OEMs Likes Autonomous, connectivity and electric in the trucks industry. including technologies in air suspension system, Automatic transmission, fleet management systems (FMS) and also ZF’s leading position in driveline and Chasis technologies for cars and CVs.

Dominant position in product segment

WABCO enjoys leadership position in their product segment. Its technological leadership among auto ancillary companies and its technological prowess make it one of the few companies that have bargaining power with original equipment manufactures (OEM). Kit value per vehicle comparing to its European CV market is 3200$ vs 600$ which is far lower for India and provides significant room for incremental growth. Other advanced active safety features will become mandatory in the near future like Electronic Stability Control (ESC) Advanced Driver Assistance Systems (ADAS) & Autonomous emergency braking .

Valuations

Given the strong fundamentals and potential merger we believe WIL will be a direct beneficiary in the long run owing to economic growth, wider portfolio and governments thrust on infrastructure development. However, considering the near term margin pressure due to higher material and logistics cost, we recommend Accumulate rating for long term earning visibility. We value WIL at 50x (3yr historical avg)FY23E EPS and arrive at a target price of Rs7909

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