Management Meet Note Rating matrix Rating : Buy Target : 6750 Target Period : 12 months Potential Upside : 14% What s Changed? Target Changed from 6400 to 6750 EPS FY17E Unchanged EPS FY18E Unchanged Rating Changed from Hold to Buy Key Financials FY15 FY16 FY17E FY18E Net Sales 1,272 1,740 2,170 2,557 EBITDA 203.4 293.0 384.8 462.6 Net Profit 120.7 204.7 273.5 346.1 EPS ( ) 63.6 107.9 144.2 182.4 Valuation summary FY15 FY16 FY17E FY18E P/E (x) 92.7 54.7 40.9 32.3 Target P/E (x) 106.1 62.6 46.8 37.0 EV/EBITDA (x) 53.8 36.7 27.6 22.5 P/BV (x) 13.0 10.6 8.6 6.9 RoNW (%) 14.0 19.4 20.9 21.3 RoCE (%) 18.2 22.5 24.4 23.8 Stock data Particular Amount Market Capitalization () 11190.9 Crore Total Debt (FY16) () 0 Crore Cash & Investments (FY16) () 431 Crore EV () 10759.9 Crore 52 week H/L ( ) 7399/5166 Equity capital ( crore) 9.5 Crore Face value ( ) 5 DII Holding (%) 8.7 FII Holding (%) 2.3 Price performance (%) 1M 3M 6M 12M Wabco India Ltd -0.8 4.3 2.8-10.3 Bosch Ltd -5.0 1.2 15.1 12.6 Motherson Sumi Systems Ltd 4.0 16.9 32.7 40.0 Price Chart 10,000 8,000 6,000 4,000 2,000 0 Nov-13 Apr-14 Research Analyst Oct-14 Price (R.H.S) Apr-15 Nishit Zota nishit.zota@icicisecurities.com Vidrum Mehta vidrum.mehta@icicisecurities.com Oct-15 Apr-16 Nifty (L.H.S) Oct-16 10,000 8,000 6,000 4,000 2,000 0 Having a safe and brake free ride! October 19, 2016 Wabco India (WABTVS) 5900 We recently met the management of Wabco India (WIL) to deepen our understanding of its business. According to the management, there could be a sizeable (~ 3000 crore) growth opportunity if the government mandates the implementation of anti-lock braking systems (ABS) on the existing 2.5 million vehicles, which are plying on Indian roads. The company expects to gradually benefit from increasing its content per vehicle (CPV) partly driven by safety legislations. On the export front, its parent will continue to focus on increasing its sourcing from low cost countries. WIL enjoys the status of preferred supplier to its parent and has ~50% chance of being awarded new orders from its MNC parentage. The management expects export revenues to register 12-16% CAGR in the next three to four years. Further, the recent slowdown in the M&HCV space is likely to lower its pace of growth in the near term though long term outlook remains intact. We believe government s focus on safety norms is likely to benefit WIL, thus providing a robust growth opportunity, going ahead. Sizeable opportunity from ABS = Drives its performance WIL has benefited from the compulsory implementation of anti-lock brake systems (ABS) on new vehicles with effect from October 2015. The ABS legislation for M3 (buses with GVW >5 tonnes and carrying capacity of nine passengers) & N3 (trucks with GVW >12 tonnes) vehicles has been implemented and has the potential to generate annual revenue of 300-400 crore for the company. However, if ABS gets mandated by the government for all on-road vehicles (~25 lakh plying vehicles) WIL has an incremental revenue potential of ~ 3,000 crore. Preferred source for its parent = to drive exports Of the total export revenues, US, Europe & China account for 30% / 50% / 20% respectively. Over the years, WIL s parent has had the strategy to source from the low cost country (includes India, China, Brazil & Poland). The contribution from these low cost countries has improved from ~10% in 2000 to 44% in 2015, thus benefiting WIL. Of the total 21 plants of its parents, the low cost countries have 12 plants of which the Indian operation itself has five plants. Also, ~71% of its manufacturing workforce is from the best cost countries vs. 45% in 2007. Thus, according to the management, WIL is among the preferred sourcing countries for its parent, with ~50% probability of awarding new orders. Thus, its exports could touch 1,000 crore in the next three or four years. Increase in content per vehicle to supplement growth in India! The content per vehicle in India is at ~$500/vehicle and is lowest compared to Europe, US & Brazil, which are at $3200, $1500 & US$1000, respectively. WIL is focusing more on increasing its content per vehicle, by introducing new systems like AMT, air disc brake, higher capacity compressors, vacuum brake systems (for LCVs). Although WIL has the capability to produce content up to $2,800/vehicles, the price sensitivity of fleet owners impedes the adoption of the same. Long term story intact = Upgrade to BUY WIL s business has been largely stable even when the CV industry in the past had gone through its downturns. The increase in royalty outgo from >1% to 4% and the recent slowdown in the M&HCV space is likely to lower its pace of growth. However, with the government focusing more on safety norms, we believe WIL, being the market leader, is well placed to capture this growth opportunity, going forward. Thus, we upgrade our recommendation from HOLD to BUY valuing the stock at 37x FY18E EPS, revising our target to 6750 per share. ICICI Securities Ltd Retail Equity Research
Exhibit 1: Product mix of Wabco India & Wabco MNC (parent) in 2015 Source: Company, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 2
Financial summary Profit and loss statement Total operating Income 1,348.0 1,838.2 2,295.6 2,713.4 Growth (%) 21.4 36.4 24.9 18.2 Raw Material Expenses 792.9 1,099.7 1,385.0 1,635.0 Employee Expenses 143.4 173.8 199.3 235.3 Other Expenses 208.2 246.3 264.3 306.9 Total Operating Expenditure 1,144.6 1,545.3 1,910.8 2,250.7 EBITDA 203.4 293.0 384.8 462.6 Growth (%) 22.4 44.1 31.3 20.2 Depreciation 46.7 56.2 66.0 76.0 Interest 0.4 0.2 0.0 0.0 Other Income 20.3 34.6 49.5 87.4 PBT 176.6 271.2 368.3 474.1 Exceptional items 0.0 0.0 0.0 0.0 Total Tax 56.0 66.5 94.8 128.0 PAT 120.7 204.7 273.5 346.1 Growth (%) 2.7 69.6. 33.6 26.5 EPS ( ) 63.6 107.9 144.2 182.4 Cash flow statement Profit after Tax 120.7 204.7 273.5 346.1 Add: Depreciation 46.7 56.2 66.0 76.0 (Inc)/dec in Current Assets -86.0-196.4-131.8-110.4 Inc/(dec) in CL and Provisions 55.9 225.0 29.8 47.1 CF from operating activities 137.2 289.4 237.4 358.7 (Inc)/dec in Investments 11.0-181.0-60.0-170.0 (Inc)/dec in Fixed Assets -70.6-87.8-90.0-90.0 Others 0.0 0.0 0.0 0.0 CF from investing activities -59.6-268.8-150.0-260.0 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0 Inc/(dec) in loan funds 0.0 0.0 0.0 0.0 Dividend paid & dividend tax -11.5-13.7-20.5-25.1 Others 0.0 0.0 0.0 0.0 CF from financing activities -11.5-13.7-20.5-25.1 Net Cash flow 67.6-9.9 63.3 71.0 Opening Cash 155.3 222.9 213.0 276.3 Closing Cash 222.9 213.0 276.3 347.3 Balance sheet Liabilities Equity Capital 9.5 9.5 9.5 9.5 Reserve and Surplus 853.4 1,044.5 1,297.3 1,618.3 Total Shareholders funds 862.9 1,054.0 1,306.8 1,627.8 Total Debt 0.0 0.0 0.0 0.0 Deferred Tax Liability 16.5 9.9 9.9 9.9 Total Liabilities 897.4 1,083.1 1,341.0 1,666.9 Assets Gross Block 538.0 606.1 696.1 786.1 Less: Acc Depreciation 213.9 270.2 336.2 412.2 Net Block 324.1 335.8 359.9 373.9 Capital WIP 17.6 37.5 37.5 37.5 Total Fixed Assets 341.7 373.3 397.3 411.4 Investments 39.2 220.2 280.2 450.2 Inventory 118.0 175.6 220.0 259.2 Debtors 299.2 435.7 505.4 560.5 Loans and Advances 68.1 70.6 88.0 103.7 Other current assets 1.7 1.4 1.7 2.1 Cash 222.9 213.0 276.3 347.3 Total Current Assets 709.8 896.3 1,091.5 1,272.8 Creditors 193.6 346.4 356.7 385.4 Provisions 14.7 18.5 19.0 20.5 Other Current Liabilities 7.6 76.1 94.9 111.8 Total Current Liabilities 215.9 440.9 470.6 517.7 Net Current Assets 493.9 455.5 620.8 755.1 Other non-current Assets 0 0 0 0 Application of Funds 897.4 1,083.1 1,341.0 1,666.9 Key ratios Per share data ( ) EPS 63.6 107.9 144.2 182.4 Cash EPS 88.2 137.5 179.0 222.5 BV 454.9 555.7 689.0 858.2 DPS 5.0 6.0 9.0 11.0 Cash Per Share 117.5 112.3 145.7 183.1 Operating Ratios (%) EBITDA Margin 15.1 15.9 16.8 17.1 PBT / Net sales 13.9 15.6 17.0 18.5 PAT Margin 9.0 11.1 11.9 12.8 Inventory days 33.9 36.8 37.0 37.0 Debtor days 55.6 72.7 60.0 55.0 Creditor days 85.9 91.4 85.0 80.0 Return Ratios (%) RoE 14.0 19.4 20.9 21.3 RoCE 18.2 22.5 24.4 23.8 RoIC 25.3 38.5 42.5 46.4 Valuation Ratios (x) P/E 92.7 54.7 40.9 32.3 EV / EBITDA 53.8 36.7 27.6 22.5 EV / Net Sales 8.6 6.2 4.9 4.1 Market Cap / Sales 8.8 6.4 5.2 4.4 Price to Book Value 13.0 10.6 8.6 6.9 Solvency Ratios Debt/Equity 0.0 0.0 0.0 0.0 Current Ratio 3.3 2.0 2.3 2.5 Quick Ratio 2.7 1.6 1.9 2.0 ICICI Securities Ltd Retail Equity Research Page 3
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 4
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