wabco india ltd (wabtvs) -...

February 27, 2014

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Gripping business amid “snaking” CV cycle! Wabco India (Wabco), a subsidiary of Wabco Holdings Inc (WHI) is the leader in conventional braking products and advanced braking systems and the pioneer of air brake systems for commercial vehicles in India. With strong product integration and early mover advantage, Wabco commands ~85% market share in the air-brake systems for the CV segment. Wabco’s dominant business profile in the braking systems lends it strong bargaining power with original equipment manufacturers (OEMs). Globally, WHI remains the market leader in anti-lock braking systems for medium and heavy commercial vehicles (M&HCV). With strong technology parentage, Wabco India is a good play on a recovery in the CV cycle in India and also mandatory adoption of anti-lock braking systems (ABS) for M&HCV segment. Strong export potential from Indian operations also lends stability to earnings and ensures capacity utilisation levels stay firm. With a stable margin profile across cycles, healthy return ratios, robust cash flows, strong balance sheet and strong product leadership, Wabco enjoys a unique positioning in the Indian automotive component industry. We initiate coverage with a HOLD rating.

Industry revival to pave growth opportunity; ABS adoption – the major trigger We expect the M&CV OEM segment to grow at a CAGR of 8-10% over FY14E-16E, on the back of an improvement in industrial activity levels. However, the major trigger for Wabco could be the implementation of safety regulations in the M&HCV space leading to mandatory adoption of ABS. If this were to be implemented by FY16E, it itself could prop up revenues incrementally by ~| 360 crore (bull case) for Wabco in FY16E.

India’s export attractiveness for parent increases; aids early localisation Another important leg of growth for Wabco has started to emerge from exports (sales up ~100% YoY to ~|400 crore FY14E). India is turning into a low cost manufacturing hub aided by a depreciated currency. Wabco currently exports to US, Europe, South America through its parent. We expect the exports growth momentum to continue, feel this also aids early localisation of technologies which would get implemented in India ahead.

Stable business across cycles; strong parentage; gets premium multiples Wabco’s business has been largely stable despite the large swings in CV volumes. We expect this trend to continue and expect CAGR of 22.2%, 33.0% in revenues, earnings, respectively, over FY14E-16E. Return ratios are likely to remain on an upward trajectory. On valuations front, stability of business across cycle is likely to keep multiples at elevated levels. We value the stock at 20x FY16E EPS to arrive at a target price of | 2012.

Exhibit 1: Key financials | crore FY11 FY12 FY13 FY14E FY15E FY16E

Net Sales 867.8 1,005.0 917.4 1,028.5 1,216.4 1,536.1 EBITDA 200.6 219.9 194.1 158.6 196.2 261.5 Net Profit 127.5 153.4 130.8 108.0 140.4 190.8 EPS (|) 67.2 80.9 69.0 57.0 74.0 100.6 P/E (x) 27.4 22.7 26.7 32.3 24.9 18.3 EV / EBITDA (x) 17.3 15.4 17.4 21.0 16.6 12.1 P/BV (x) 9.0 6.6 5.4 4.7 4.0 3.4 RoNW (%) 33.0 29.0 20.2 14.5 16.1 18.3 RoCE (%) 48.1 38.6 26.6 17.2 18.9 21.6

Source: Company, ICICIdirect.com Research

Wabco India Ltd (WABTVS)| 1840

Rating Matrix Rating : Hold

Target : | 2012

Target Period : 12 months

Potential Upside : 9%

YoY Growth (%) (YoY Growth) FY13 FY14E FY15E FY16ENet Sales (8.7) 12.1 18.3 26.3 EBITDA (11.8) (18.3) 23.7 33.3 Net Profit (14.7) (17.4) 29.9 35.9 EPS (Rs) (14.7) (17.4) 29.9 35.9

Valuation Matrix FY13 FY14E FY15E FY16E

P/E (x) 26.7 32.3 24.9 18.3 Target P/E (x) 29.2 35.3 27.2 20.0 EV / EBITDA (x) 17.4 21.0 16.6 12.1 P/BV (x) 5.4 4.7 4.0 3.4 RoNW (%) 20.2 14.5 16.1 18.3 RoCE (%) 26.6 17.2 18.9 21.6

Stock Data Bloomberg/Reuters Code WIL IN / WABC.NSSensex 20,987.0 Average volumes 3,974 Market Cap (Rs crore) 3,489.5

52 week H/L 2045 / 1251Equity Capital (Rs crore) 9.5 Promoter's Stake (%) 75.0 FII Holding (%) 2.0 DII Holding (%) 9.4

Comparative return matrix (%) Return % 1M 3M 6M 12M

Wabco India Ltd (3.5) 11.5 13.7 31.4 Bosch Limited 1.7 11.7 16.5 7.1 Motherson Sumi Systems Ltd 15.8 23.7 61.5 75.7 Bharat Forge Limited 9.3 28.8 64.5 75.0

Price movement

5007009001,1001,3001,5001,7001,9002,1002,300

Feb-14Dec-13Sep-13Jun-13Mar-13

5,000

6,000

7,000

Price (R.H.S) Nifty (L.H.S)

Analyst’s name

Nishant Vass [email protected] Venil Shah [email protected]


Company background Wabco Holdings Inc (WHI) is a leading global supplier of technologies and control systems for the safety and efficiency of commercial vehicles. Founded over 140 years ago, WHI continues to pioneer breakthrough mechanical, mechatronic and electronic technologies for braking, stability and transmission automation systems supplied to the world’s leading commercial truck, bus and trailer manufacturers. Wabco India (WIL) is the 75% subsidiary of WHI and is the market leader in the CV air braking systems in India with a market share of ~85% in the MHCV OEM space.

With ~$2.8 billion in sales in CY13, ~10,000 employees in 31 countries and 20 manufacturing locations in four continents, WHI is truly a formidable technology player with products and systems catering to top OEMs like CNHTC, Daimler, Volvo, Scania, etc. in the truck segment and Audi, BMW, GM, Chrysler, etc. to the car segment.

Wabco Holdings Inc was spun-off from Westinghouse Air Brake Company (founded in 1869) in 2007, which designs and manufactures control systems for commercial road vehicles, including air brakes, and is headquartered in Brussels, Belgium. WHI’s major market is the European markets (60%) while North American markets (~11%) and India-China together contribute ~11%.

Exhibit 2: Wabco India timeline

1962

Established as a joint venture with Clayton Devandre

1982

Commenced production of dual brake systems

1987

Manufacture of vacuum products

2000

Launch of ABS

2004

Commenced production in the new plant in Ambattur, Chennai

2005

inauguration of Software Design Centre, Chennai

2008

Commenced production at new plant in Mahindra World City, Chennai

2008

SCL Brakes division de-merged into Wabco-TVS (India) Ltd

2009

Wabco takes majority ownership. Wabco-TVS (India) Ltd, becomes Wabco India Ltd

2012

Launches its new manufacturing facility at Pantnagar, Uttarakhand

2012

Inaugurates its Plant 2 at SEZ, Mahindra World City, Chennai

2007

Commenced production at new plant in Jamshedpur, Jharkhand


In March 2008, the company entered into an agreement with Sundaram Clayton Ltd in which the company took over the brakes business of Sundaram Clayton. In June 2009, Wabco Holdings Inc, US raised their ownership position through indirectly owned subsidiary Clayton Dewandre Holdings Ltd, Rotterdam to 75%, from the TVS group.

Shareholding pattern (Q3FY14)

Holdings (%)

Promoters 75.0

Foreign Institutional Investors 2.0

Domestic Institutional Investors 9.4

Others 13.6

Institutional holding trend

2.4

2.4

2.4

2.3

2.0

2.0

9.3

9.1

8.7

8.8 9.4

9.4

0.0

2.0

4.0

6.0

8.0

10.0

Q2FY

13

Q3FY

13

Q4FY

13

Q1FY

14

Q2FY

14

Q3FY

14

FII DII


Investment Rationale Wabco’s performance since the demerger with Sundaram Clayton has been strong even during the downturn in the CV segment. This was primarily as the replacement segment and exports cushioned the weakness in the OEM segment. With the topline growing at 12.5% CAGR in FY08-13, Wabco’s performance has shown resilience to the cyclicality seen in the CV ancillary business. Profits have also grown with PAT increasing at 13.3% CAGR in FY08-13. Going forward, as the CV cycle recovers on a pick-up in industrial activity levels and adoption of ABS happens, we estimate topline growth at ~22% CAGR in FY14E-16E to | 1632 crore. Sustained weakness in currency is also likely to lead to exports momentum continuing. With an increase in utilisation levels and newer product line introductions, we expect EBIDTA to rise at ~28% CAGR in FY14E-16E to ~| 260 crore. Subsequently, PAT is likely to grow at ~34% CAGR in FY14E-16E to ~| 190 crore. Exhibit 3: Wabco India: Financial performance at a glance!

444.

3 607.

4

893.

9

1,04

5.6

965.

9

1,09

3.8

1,29

2.4 1,

632.

1

35.6 78.2 127.5 153.4 130.8 108.0 140.4 190.8

16.2

22.0 22.4

21.020.1

14.515.2

16.0

0

300

600

900

1200

1500

1800

FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

(| c

rore

)

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0(%

)

Total Operating Income PAT EBITDA Margins


Exhibit 4: Revenue Mix has shifted in favour of exports in the past few years

70 71 69 70

59

44 44

50

22

17 15

19

16 16

15

8 9

13 15

22

40 40 35

20

30

40

50

60

70

80

90

100


(%)

OEM Replacement Exports


Share of exports has jumped from ~9% in FY10 to ~40%

in FY14E. This has been led by a strong growth in export

revenues from |55 crore to ~|400 crore in FY14E, even

as the OEM segment has seen flat 2% CAGR FY10-14E

growth owing to slowdown in the domestic M&HCV segment


CV industry revival to help volume growth; prolonged weakness unsustainable The CV industry is going through one of its worst downturns with the slowdown in industrial activity levels not showing any signs of revival. We believe the M&HCV segment, which has seen the industry size shrinking by ~50% in the last two years, is unlikely to continue its decline. Also, a rebound in volumes is expected to happen sooner rather than later. With ~85% market share in the OEM segment, the revival in OE demand is expected to translate to increased volumes for Wabco. As such, Wabco is a great proxy for playing on the revival in the domestic CV industry and, in turn, for the Indian economic growth story.

Exhibit 5: Wabco outperforming CV industry

15 11 13

19

-21 -1

5

-40

-6

24 23 24

36

-4 -5

-14

-17

0

21 17 16 15

2

-5

-13

-14

5 9

17

-31

-35

-33

-22

-21

-50

-40

-30

-20

-10

0

10

20

30

40

Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14

(%)

M&HCV production growth CV production growth Wabco sales growth


High quality cyclical play in recovery scenario The Indian ancillary industry, as per the Automotive Component Manufacturers Association (ACMA) estimates, stands at ~$40 billion. Suspension and braking systems constitute ~12% of the auto ancillary segment in value terms. Wabco enjoys a substantial technology moat and undisputed leadership in braking systems in the M&HCV segment. Consequently, with the revival in economic activity levels in the country, replacement as well as OE demand is likely to pick up, thereby making Wabco a high quality play in such a situation.

Exhibit 6: Key auto ancillary business verticals

Engine parts (31%) Suspension & braking parts (12%)

Drive transmission & steering parts (19%)

Electrical parts (31%)

Other equipments (10%)

Others, including body & chassis (19%)

Piston & piston parts Suspension parts Steering systems Starter motors Switches Sheet metal parts

Fuel injection equipment Braking parts Axle & clutch assembly Generators Horns Mirrors Power train components (cylinder related) Wheels and wheel rims

Flywheel magnetos Lights

Plastic moulded components

Engine cooling systems Distributors Wiring harness Rubber components

Other power train components Dashboards Locks

Engine bearings Ball bearings

Exhaust systems

Gaskets

Other engine parts Source: Crisil, ICICIdirect.com Research


Generally, except the battery and engine component businesses, most of the ancillary businesses are low margin/return ratio business. However, given Wabco’s strong OEM penetration and significant technology dominance, it enjoys high margins/return ratios compared to peers.

Exhibit 7: Brakes business not generally attractive in auto ancillary

-10000

0

10000

20000

30000

40000

50000

0 5 10 15 20 25

Average RoCE(%)

Sale

s (|

cro

re)

Gears

ElectricalBattery

Engine parts

Sheet metal

Axles

Brakes

Clutch

Lamps

Friction materials

Tyres

Source: Capitaline, Company, ICICIdirect.com Research

Exhibit 8: …but Wabco’s strong dominance ensures strong return ratios

20

40

60

80

0 2 4 6 8 10 12 14

No. of players

Mar

ket s

hare

of l

arge

st p

laye

r (%

)

Gears

Electrical

Battery

Engine parts

Sheet metalAxles

Brakes

ClutchLamps

Friction materials

Tyres


WIL to continue to benefit from parent’s strong technology footing Wabco India enjoys the benefits of its global parent’s strong technology dominance among OEMs globally. This has helped WIL to establish an exclusive relationship with its large customers in India with easier product penetration. Wabco Holdings enjoys strong technological leadership in braking systems and is the leader in advanced safety systems to the global CV industry. Especially in emerging markets, WHI is the dominant player in the heavy truck & bus segment. With a strong focus on R&D inevitable for maintaining the technology leadership position, we believe WIL will also continue to reap the benefits of WHI’s continued investment in R&D. Market/technology leader in CV air brakes systems led by strong parentage WIL, a 75% subsidiary of WHI, is the market leader in the CV air braking systems in India. The company enjoys a market share of >85% in the MHCV OEM space. Its market leadership position could be viewed as a natural extension of its parent company WHI’s dominant market presence globally. Wabco Holdings manufactures and supplies products such as brake and stability control, diagnostic systems and advanced driver assistance systems as well as vehicle accessories unavailable in India. Exhibit 10: Wabco Holdings Financial Summary

(US $ million) FY07 FY08 FY09 FY10 FY11 FY12 FY13Sales 2415.9 2588 1491.5 2175.7 2794.1 2477.4 2720.5Growth(%) 19.884 7.124 -42.369 45.873 28.423 -11.335 9.813Operating Income 267.7 246.5 -14.9 217.6 369.9 324.5 331.9Net Income 125.4 213.3 18.8 -226.1 357 302 653.2R&D expense 84.2 92.9 75.2 85.9 105.1 104.3 119.4Net Capex 69.8 78 59.3 65.7 98.3 91.7 108.1


Exhibit 9: Wabco Global Geographical Split 2012 2013 2013

MarketsGlobal truck & bus production share (%)

Europe 60 61 20Americas 11 11 15China 6 7 40India 6 4 8ROW 7 6 10Brazil 6 7 7

WABCO global regional share (%)


Wabco Global’s revenue is driven by Europe, with ~60%

revenues coming from Europe. However, China leads the

globe in terms of share of global truck/bus production

with nearly 40% market share


Enviable range of products with strong technology moat Most of the products that can be introduced in India would be related to safety and fuel efficiency. It can be safely assumed that if over the next six or seven years, the content per vehicle increases, it would likely be driven by: 1) Anti-lock braking system: Anti-Lock Braking Systems (ABS) are used to prevent locking of a vehicle’s wheels as a result of excessive actuation of service braking system, especially on slippery roads. 2) Opti-Drive: By optimizing the gear shifting process, OptiDrive improves vehicle control and enhances comfort. It also significantly contributes to lower average fuel consumption by shifting at the most effective speed, a major cost saving over the vehicle’s lifetime. 3) Lift axle control valve: It is used for lifting and lowering the axle depending upon the vehicle’s load condition. It operates through the pneumatic load sensed by the load detection valve. It automatically lowers the axle during ignition ‘off’ condition to prevent theft of the wheels. Driver can also manually override the function to lift the axle. 4) Clutch Servo: It enables the driver to disengage and engage the clutch with minimum clutch pedal effort. It is a pneumatically assisted hydraulic clutch actuating device. It also features mechanical wear indicator which shows the wear of the clutch. Clutch servo is self-adjusted to accommodate clutch wear and perform even under extreme temperature conditions

Exhibit 11: Wabco India product portfolio

Automatic slack adjuster

Actuators

Brake chambers

Valves

Drying & distribution unit

Air compressorsAnti-lock braking system

Lift axle control valve

Electronic controlled air suspension

Electronic braking systemOpti-drive

Clutch control

Integrated pedal unit

Advanced braking system

Conventional products

Driveline controls



Exhibit 12: Some of Wabco Global’s products….

Product Description Criticality Cost

ActuatorConverts energy stored in compressed air into mechanical force applied to foundation brake to slow or stop CVs

Anti-lock braking systems (ABS)

Prevents wheel locking during braking to ensure steerability and stability

Air compressor & air processing/air management system

Provides compressed, dried air for braking, suspension and other pneumatic systems on trucks, buses and trailers

Brake Chambers Converts the air pressure into mechanical output force.

Relay Emergency Valves

Provides safety to trailers in breakaway condition by application and release of trailer brakes and the emergency application of the brakes in the event of accidental decoupling of the trailer

Lift Axle Control Valves

Used for lifting and lowering the axle depending upon the vehicle’s load condition. It operates through the pneumatic load sensed by the load detection valve and automatically lowers the axle during ignition ‘off’ condition to prevent theft of the wheel

OptiDrive

A modular automated transmission system which consists of a cabin mounted shift lever unit, including the system’s electronic control unit; a shift actuator mounted on the gearbox, and a clutch actuator. It optimizes gear shifting and improves vehicle control, thereby, reducing fuel consumption by up to 5%

~$1000

$350-$700

$600 onwards

$250 onwards

$950-$3000

$60-$200

$75-$100

Source: Company, ICICIdirect.com Research, Retail Prices mentioned are from SA subsidiary of Wabco Holdings,• indicates degree of necessity


Pricing power due to limited competition Wabco Holdings is a leading global supplier of technology and control systems for commercial vehicles’ safety and efficiency. The company has strong market shares across segments and is a leading supplier to OEMs globally. Due to the technological edge the company enjoys, WIL has been able to maintain its pricing premium over OEMs even during a sharp slowdown. In FY13, the company ended with an EBITDA margin of 20.1%, despite the MHCV industry reporting a fall in sales by 23% YoY and sales of WIL witnessing an 8% decline. WIL is a technology-driven product company and has been consistently introducing new value-added products in the market, which helps it to grow its market share. In FY13, the company introduced new products like automated manual transmission (AMT), series of brake chambers, exhaust brake assembly, adjusting valve and variants in compressors. This is expected to be accepted in due course by the market, given the technology gap. WHI globally faces competition from Knorr, Haldex and also a few smaller competitors but has managed to establish strong tie-ups with Daimler and Volvo globally. However, in India, Wabco enjoys a near monopoly with Knorr getting a fifth of Tata Motors’ business via the Knorr-Tata Autocomp JV. Exhibit 13: How Wabco stacks up against competition??

Global product offerings Wabco Knorr-Bremse Haldex Others

Anti-lock Braking Systems

Electronic Braking Systems

Conventional Products

Transmission Automation

Air Compressors

Air Processing

Actuators

Suspension Control

Foundation Brakes

Source: Company, ICICIdirect.com Research • indicates degree of competence


Increasing product lines as content per vehicle still low in India The content per vehicle in India is one of the lowest in the world with the relatively lower priced commercial vehicles and a lack of awareness about safety. Currently, the estimated content remains at US$240/vehicle, which is much lower than that in western Europe and North America, which stands at US$3,000 and US$1,000, respectively. Even in Eastern Europe, the content per vehicle is at US$500. Thus, there is a significant opportunity to fill the big technology gap between MHCVs from India and other developed countries, which may slightly bridge the gap in increase in content per vehicle. Exhibit 14: Wabco's R&D spend likely to remain on uptrend as new products are introduced

7080

95 90100

110

110

1.3

1.2

1.3 1.3

1.2

1.4

1.3

0

20

40

60

80

100

120

FY10 FY11 FY12 FY13 FY14E FY15E FY16E

(| c

rore

)

1

1.1

1.2

1.3

1.4

1.5

(%)

R&D expenses* Share of net sales


The commercial vehicle braking system in India has come a long way from the single line air brake system in the 1960s to electronic stability control (ESC) brake systems expected in the near future (2015-16) with ABS implementation in 2014-15 expected to spur the content per vehicle. Wabco Holdings has increased market penetration with new game changing products like MAXX air disc brake technology. It is ushering in a generation of high performance, single-piston air disc brakes that further improve vehicle safety and efficiency. These breakthrough products are available for a range of truck, trailer and bus applications. Thus, the future of product enrichment in a country like India, which is lagging in norms significantly vis-à-vis global peers, is considerable.

Exhibit 15: Details of research and development initiatives by Wabco India in FY13 Area in which R&D was carried out Our Comments/ Views

Lift axle control systemProduct validated and ready for launch. The company has patented the lift axle control valve to be used in the system. Advantages for Wabco's systems over existing systems of competition are i) lower costs ii) lower maintenance iii) consistency in pressure sensing iv) more reliable

Automatic slack adjusterAutomatic slack adjuster was one of the products the company has been planning to launch in the domestic market in order to increase the content per vehicle

Integral pedal unitThe integrated pedal unit provides power assistance whenever the driver depresses the clutch pedal. It also reduces the driver fatigue

New range of brake chambers and actuators for Volvo Given Wabco's global relationship with MNCs such as Volvo and Daimler, expect increased introduction of components specifically for these two OEMs in India. These are still in the validation stage

Adjusting valveWabco has in the past mentioned that the introduction of adjusting valve would help in increasing supplies to aftermarket segment

Conversion of aluminum to plastic in magnetic valves Primarily for material cost optimisation Source: Company, ICICIdirect.com Research

Rectangle


ABS – Regulatory implementation to create big opportunity… Anti-lock braking systems (ABS) help maintain control and directional stability of an automobile in case of extreme braking circumstances. It is essentially used to prevent locking of a vehicle’s wheels as a result of excessive actuation of the service braking system. It prevents wheel locking during sudden braking to ensure steerability and stability (prevents skidding). We believe ABS could provide an additional | 360 crore in sales for WIL (assumed at 80% penetration on FY16E MHCV sales).

Exhibit 16: ABS - How it works

Source: Company, www.carinnovation.com

According to industry estimates, ABS penetration for the M&HCV segment in India at present is not more than ~10%. The Government of India has introduced mandatory fitment of ABS for commercial vehicles carrying hazardous goods since October 2006 and for tractor-trailers and buses with national permits since October 2007 for road safety.

Exhibit 17: Global comparison on safety regulations Countries Emission Regulation 2013 2014 2015 2016 2017

EU Euro V 100% ABS

USA USA 100% ABS

Korea / Japan Korea / Japan 100% ABS

China China ABS For tractors >16t

India India ABS mandatory for Hazardous goods, tourist

Brazil Brazil No ABS

Russia Russia 100% ABS

ESC AEBS & LDW

ESC Class7/8AEBS, ESC Class

3,4,5,6

EURO 5/ ESC AEBS & LDW

ABS

ABS all ESC Class7/8



Moreover, with ABS being compulsory in all major developed economies, and also in many developing countries for higher tonnage M&HCV, we believe there would not be too much delay in its implementation in India. Otherwise we run the risk of loss of both safety/ environmental issues and lack of R&D in domestic market.

Exhibit 18: Loss of control - major reason for road accidents

% contribution in accidents

Loss of control75%

Bad weather/road

condition3%

Vehicle condition

2%

Fault of Pedestrian

3%

Others17%


Exhibit 19: Advantages of ABS for fleet operators Major factors Advantages

Running CostReducing accidents reduces costs significantlyHigher driving speeds during rains/wet conditions as control improves aids improving transit times

Safety

Allows driver to steer while braking, reduces stopping distance on most terrains. Significantly reduces accidents caused by loss of control


Exhibit 20: Scenario analysis for Wabco in case of mandatory ABS implementation Scenario analysis for ABS impactParticulars (in | crore) FY13 FY14E FY15E FY16E FY13 FY14E FY15E FY16E FY13 FY14E FY15E FY16E

Assumptions

No of vehicles (incrementally) in mandatory category 0 0 50000 100000 0 0 150000 250000 0 0 0 0Wabco's market share (%) 0 0 80 80 0 0 80 80 0 0 0 0Incremental ABS volumes for WABCO - - 40000 80000 - - 120000 200000 - - - 0Average incremental realisation (|) - - 15,000 15,000 - - 18000 18,000 - - - 0Incremental revenue from ABS 0 0 60 120 0 0 216 360 0 0 0 0EBITDA margin assumption (%) 0 0 16 17 0 0 16 18 0.00 0.00 0.00 0.00Incremental EBITDA 0 0 10 20 0 0 35 65 0 0 0 0Incremental PBT 0 0 10 20 0 0 35 65 0 0 0 0Incremental PAT 0 0 7 15 0 0 25 47 0 0 0 0Incremental EPS 0.0 0.0 3.7 7.9 0.0 0.0 13.3 25.0 0.0 0.0 0.0 0.0Revenue 966 1094 1352 1752 966 1094 1508 1992 966 1094 1292 1632EBITDA 194 159 206 282 194 159 231 326 194 159 196 261EBITDA Margin % 20.1 14.5 15.2 16.1 20.1 14.5 15.3 16.4 20.1 14.5 15.2 16.0PBT 185 157 213 301 185 157 238 345 185 157 203 281PAT 131 108 147 206 131 108 166 238 131 108 140 191EPS (|) 69.0 57.0 77.7 108.5 69.0 57.0 87.4 125.6 69.0 57.0 74.0 100.6Multiple (x)TP (|)Original TP (|)Upside/Downside from Target (%) 8 31 -10

2170 2638 18112012 2012 2012

ABS is not mandatory

20.0 21.0 18.0

Base case Bull Case Bear Case

Only trailers asked to convert to ABS by FY16E

All CV's asked to convert to ABS by FY16E



While the final notification is awaited, our discussions with industry participants suggest no further delays are expected in this regulation. The only stumbling block towards timeline of execution would be the capital investments required from oil and gas refineries for this transition. Some reports suggest investments to the tune of ~$13 billion for complete migration of refineries.

However, on an overall basis, even a relatively slower migration into newer regulation norms is better than the current uncertainty on lack of road map.

Wabco would be one of the key beneficiaries of new regulation changes as it currently has in excess of two-thirds of the market in CV braking system supplies. Based on our bull assumptions, ABS supplies could potentially add ~| 50 crore to the PAT of FY16E. Similarly, this could potentially cause a target price change by ~30% as we have taken only a minor part of the ABS sales in our overall estimates. MNC OEMs/ Incumbent new product overhaul to also aid early adoption! MNC OEMs like Volvo and Daimler are likely to be the early adopters of new technologies or in bringing higher safety measures for Indian markets as is the case in developed markets. Often, dominant Indian players also follow suit, thus helping the product gain wider acceptance. We expect MNC OEMs to continue adopting better features like ABS, automated manual transmission, etc, which would help increase the product penetration for Wabco. Exhibit 21: Foreign MNCs setting up shop in India

DaimlerHas a brand named Bharat Benz in India.An initial capacity of 36,000 units per annum, which will be scaled up to 72,000 units per annum Planned investment of | 4400 crore

Scania

Plans to set up assembly unit in Bangalore for heavy-duty truck and bus segments

The company will employ up to 800 personnel over the next five years

Sania plans to invest | 150 crore over the next few years; its first truck is likely to roll out in 2014

Volvo

Manufacturing vehicles in India since 1998.In May 2008, the company entered into a JV with Eicher

Motors and formed Volvo Eicher Commercial Vehicles (VECV). Next phase of growth now starts with the

kick start of sourcing of engines from India for European parent

Hino MotorsPlans to set up a manufacturing base in India by 2015Currently, imports completely-built units into India from Hino Thailand


Also, recently in the Auto Expo ’14, incumbents like Tata Motors and Eicher Motors have showcased world class products in the form of the “Prima range” - Tata Motors, “Pro Series” - Eicher Motors, which have ABS adoption in largely the whole fleet. These initiatives are also going to help in seamless migration towards a truck and bus (T&B) segment, which is completely ABS enabled.

Media Buzz The draft notification on ABS regulation for CVs suggests that all passenger carriers above 5 MT GVW and all goods carriers above 7.5 MT GVW are mandated to have ABS. This would be effective from October 1, 2014 and would be applicable to all new vehicles sold by OEMs. -Economic Times India may introduce intermediate vehicle emission norms before taking on Bharat Stage (BS) V, standards that are based on European regulations, to allow oil marketing companies and vehicle manufacturers to prepare for the transition. An expert committee has been formed to recommend the introduction of BS IV +. The committee is expected to submit its report in March. - Times of India


Replacement sales growth at ~15% CAGR FY09-13; Likely to continue ahead WIL derives close to 18% of its sales from the replacement and spares segment. Replacement sales for Wabco have grown at a CAGR of ~15% over the last four years. Margins in the replacement segment are significantly higher than OEM margins. Given the awareness of safety and better control of their vehicle, fleet operators are also replacing the air braking system in their trucks (which follow a replacement cycle of two to three years). Over FY10-13, the cumulative M&HCVs volumes stood at 1.3 million units. Thus, we feel ~14-16% growth in the replacement market is likely in FY15E-16E. Wabco enjoys 85% market share in the OEM segment and 75% market share in the organised replacement market for air braking systems. The sales distribution network is also pretty extensive: ~7000 outlets and 250 service centres. Also, the company has 145 certified workshops in rural areas to cater to the aftermarket for air brakes.

Exhibit 22: Replacement demand holding steady despite overall slowdown !

116.

7

150.

0

153.

5

176.

5

169.

4

195.

5

227.

1

26.528.6

16.215.4

-4.0

15.0

2.3

0

50

100

150

200

250

FY10 FY11 FY12 FY13 FY14E FY15E FY16E

(| c

rore

)

-10

-5

0

5

10

15

20

25

30

35

(%)

Replacement Revenues Growth(%)


Exhibit 23: Domestic MHCV sales trend over cycles

169,

626

211,

980

221,

551

294,

579

296,

317

183,

495

245,

058

323,

059

348,

701

268,

263.

0

40.3

25.0

4.5

33.0 33.6 31.8

0.6

(38.1)

7.9

(23.1)

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

(50)

(40)

(30)

(20)

(10)-

10

20

30

40

50

(%)

M&HCV Domestic Sales Growth (%)

Source: Siam, Company, ICICIdirect.com Research

Strong volumes seen in FY11 and FY12 are likely to lead to

strong replacement demand in FY15E, FY16E, which is

likely to lead to a sharp jump in replacement revenues

The industry cyclicality is evident as the drop in FY09 saw

two strong years for the industry. After the slump in FY13,

FY14E has also been a disappointment with the M&HCV

segment seeing ~25% YoY decline


Exports set to witness strong growth as Wabco focuses on LCC producers Currently, exports account for ~19% of WIL’s sales. The company mainly exports to its parent in North America and also Europe. Exports have witnessed 54% CAGR over FY09-13, as the parent has decided to make WIL its export hub. WIL has set up an export oriented unit (EOU) at Mahindra World City, dedicated to cater to the needs of WHI. Currently, WIL has a capacity to cater to export sales of ~| 400 crore, which can be further increased by de-bottlenecking capacities at plants. We expect exports of WIL to register a CAGR of ~30% over FY13-16E. Exports witnessed strong growth of 34% in FY13 at | 200 crore. Till Q3FY14, exports have grown ~114% YoY to | 300 crore. We expect exports to cross | 500 crore by the end of FY16E. Exhibit 24: Export trend

115.

7

148.

1

198.

9

407.

7

481.

1

534.

1

55.3

35.3

8.3 9.3

21.7

39.5 39.6

34.8

14.713.4

-

100

200

300

400

500

600


(| c

rore

)

58111417202326293235384144

(%)

Exports Exports as a % to sales


The parent company has been increasing its focus on China and India for low cost production, which gives us comfort on steady exports growth. In CY00 (2000), India and China accounted for around 10% of its production, which further increased to 41% in CY11. Clearly, the focus of the parent company is on increasing sourcing from low-cost countries on account of cost benefits. With the INR depreciating significantly over the past 18 months against the US$, cost competitiveness of WIL has increased further.

Exhibit 25: Steadily increasing sourcing from EMs

0 20 40 60 80 100

CY11

CY10

CY08

CY04

CY00

DM sourcing (%) EM sourcing (%)


Exhibit 26: INR depreciation vs. Chinese Renminbi appreciation

80

90

100

110

120

130

140

150

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

US$INR US$CNY EURINR EURCNY

The Indian rupee been struggling against major currencies while the Chinese Renminbi has mildly appreciated against US$/EUR


WABCO India is a sourcing hub for WHI’s global operations

by purchasing raw materials locally at best cost and

providing precision machining capabilities to process

metals, castings and electrical motors that are used in

WHI’s other factories in Europe, North America, Brazil and

China to make products. Also in 2013, WABCO India

further enhanced its center of software development which

provides high quality skills at competitive costs in support

of WABCO globally.


Key financials: Stable business model to provide steady revenues

Monopoly braking systems business to drive sales growth Wabco is an attractive ancillary company due to the near monopoly positioning in the braking and advanced safety components, which we believe will remain critical for all OEMs. We believe we would witness a better demand scenario in the automotive space in the coming years considering we have had about two years of weak demand conditions and are entering the third year of weak demand in FY15E. With exports growth to moderate from current levels in terms of financials, we expect revenue growth to be ~18% and ~26% for FY15E and FY16E, respectively.

Exhibit 27: Revenues to grow at ~22% CAGR in FY14E-16E

1,00

5.0

917.

4

1,02

8.5

1,21

6.4

1,53

6.1

867.

8

46.8

15.8 18.3

(8.7)

12.1

26.3

-

300

600

900

1,200

1,500

1,800

FY11 FY12 FY13 FY14E FY15E FY16E

(| c

rore

)

-20

-10

-

10

20

30

40

50

(%)

Net Sales Growth (%)


EBITDA margins to remain on uptrend as industry rides out tough times! Wabco’s margins had remained largely stable in FY13 despite the slowdown in the CV industry. However, in FY14E, with the industry witnessing worsening conditions, Wabco’s margins have seen a minor downturn falling to ~15% as the second year of the downturn has hit fleet operators hard. However, we believe Wabco’s margin profile is likely to improve in FY15E, FY16E as utilisation levels improve, driven by market/product mix improvement. For FY15E and FY16E, we have built in EBITDA margins of 15.2% and 16.0%, respectively. Exhibit 28: EBITDA margin to remain steady over FY14E-16E

219.

9

194.

1

158.

6 196.

2 261.

5200.

6

22.421.0

15.2

20.1

14.5 16.0

-

50

100

150

200

250

300


(| c

rore

)

-

5

10

15

20

25(%

)

EBIDTA EBIDTA Margin (%)


FY12, FY13 was marked by overall auto industry demand

growth of ~14%, 2%, respectively. However, during this

period, the M&CV segment grew 7.9%, -23.2%,

respectively, on weak macros in the segment


Net profit likely to grow sharply in FY14E-16E as demand scenario improves PAT margins would continue to improve as the demand scenario improves leading to an increase in the utilisation levels. We expect ~100 bps improvement YoY to ~11%/12% for FY15E and FY16E, after the decline in margins to ~10% in FY14E, as the EBITDA margins improve. We expect PAT to rise ~34% CAGR FY14E-16E to |194 crore. Exhibit 29: Consistency of strong profitability

153.

4

130.

8

108.

0 140.

4 190.

8

127.

5

14.314.7

10.9

13.5

9.9

11.7

-

50

100

150

200

250


(| c

rore

)

8

9

10

11

12

13

14

15

16

(%)

PAT PAT Margin (%)



Strong CFOs; Robust return ratios; “zero-debt” ancillary WIL’s financials speak volumes about the strength of the company as it is debt-free and generates strong cash flow from its operations every year. With a lean working capital cycle, WIL’s balance sheet strength remains unfettered. The company has been reporting strong return ratios in excess of 20% over the past few years. The weakness in the domestic M&HCV industry has led to a mild reduction in these return ratios in FY13, FY14E. However, we believe after two weak years, the demand scenario is likely to improve, leading to an improvement in the return ratio profile for Wabco. Exhibit 30: Return ratios profile to improve as demand growth returns

29.3

18.021.5

17.2

26.6

38.6

48.1

18.9

44.0

18.6

28.933.0

29.0

20.214.5 16.110

20

30

40

50

60


(%)

RoCE RoE


Exhibit 31: Barring sudden years of demand shocks CFO/EBIDTA has been steady

160.

4

93.1 11

2.6 15

1.7 18

8.7

52.1

26.0

73.077.3

48.0

71.072.2

-

20

40

60

80

100

120

140

160

180

200


(| c

rore

)

8

18

28

38

48

58

68

78

88

(%)

CFO CFO/EBIDTA


Wabco has an efficient revenue recognition policy which

has been on an average basis as per the metric

CFO/EBITDA been above ~50%. However in years of

either sudden norms or demand shocks the same has

been affected in recent times. Also increasing share of export would have some impact on the same


Risk & concerns Continued slowdown in domestic demand from OEMs

Wabco has continued to outperform in terms of sales even as the overall M&HCV industry has been under severe duress. Still, like all other ancillary players, its performance will be impacted if there is a continued slowdown in the overall demand impacting OEMs. With unrelenting macro headwinds, a demand slowdown in the CV segment is unlikely to get reversed quickly. However, Wabco’s product offering coupled with the regulatory requirement will definitely aid it to weather the slowdown. Revision to low royalty rates may impact margins

A lot of MNCs (like Unilever, Holcim) have gradually raised their rates of royalties over a period of time. As such, a similar move from Wabco Holdings cannot be ruled out completely. Currently, royalty payment stands at 1% of domestic sales. WHL has levied minor expenses called fees for technical services from FY12 onwards. An increase in royalty rates can impact the margins for WIL as passing off the increase completely may not be possible. However, given the strong bargaining power that Wabco enjoys, this does not appear to be a major problem. Delay in ABS implementation

Another risk to our estimates would be the delay in implementation of the safety norms, i.e. introduction of ABS in India. We expect the changes, i.e. pan-India norms to come into effect from FY16E onwards. India is already behind on international safety norms. As such, we do not envisage any major delays. However, any delay in the same will impact our earnings estimates for FY16E. Export attractiveness to reduce if | benefit erodes

At present, the profitability of the export segment has improved due to the depreciation of the rupee against global currencies, prompting WHI to increase sourcing from India. However, the export attractiveness could reduce if the rupee appreciates against global currencies. Margins to adversely impact in case of sharp rise in raw material prices

In a weak demand scenario, passing of raw material price increases to the customers becomes difficult, even for a strong supplier like Wabco. A sharp increase in RM prices would impact gross margins adversely and may impact our estimates Exhibit 32: Margins to get impacted by steep increase in RM prices

27

34

26

39

46 4749

46

5145

44

43 4344

38

40

41

20

25

30

35

40

45

50

55

Q1FY

10Q2

FY10

Q3FY

10Q4

FY10

FY10

Q1FY

11Q2

FY11

Q3FY

11Q4

FY11

FY11

Q1FY

12Q2

FY12

Q3FY

12Q4

FY12

FY12

Q1FY

13Q2

FY13

Q3FY

13Q4

FY13

FY13

Q1FY

14Q2

FY14

Q3FY

14

(|/K

g)

34

36

38

40

42

44

46

(%)

CRC prices Gross margins


Gross margins have remained stable with mild

fluctuations on an overall basis. The major shocks in

margins have come either from sudden demand slump or

steep rise in prices of commodities/FX


Balance sheet strength and FCFs to lend valuation comfort With profitability likely to grow at ~34% CAGR in FY14E-16E and the company in low capex mode over the next two or three years, FCFs are likely to remain strong. With Wabco managing strong return ratios even as the truck industry has been under severe duress, we believe the strength of the balance sheet and the fantastic return ratio profile will lend strong comfort to valuations. Wabco’s strong monopoly position in braking components is likely to sustain in both the OEM and after-market segments. Thus, Wabco’s valuations are likely to trade at a premium to peers. Exhibit 33: PE band two-year forward

0

500

1000

1500

2000

2500

3000

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-

11

Apr-1

1

Jul-1

1

Oct-1

1

Jan-

12

Apr-1

2

Jul-1

2

Oct-1

2

Jan-

13

Apr-1

3

Jul-1

3

Oct-1

3

Jan-

14

(|)

Price 30x 26x 23x 19x 15x 11x 7x


We feel that with government and road transport authorities finally waking up to much needed regulation changes in BSIII/BSIV across India this would aid stronger than usual revenue, margin growth for Wabco. This coupled with a debt-free balance sheet, strong MNC parent, exports growth and strong market dominant position in domestic market makes a perfect case for improvement of valuation. We forecast ~22% and ~33% CAGR in revenues and earnings, respectively, over FY14E-16E and value the stock at 20x PE FY16E EPS (| 100.6) to arrive at a target price of | 2012. We have a HOLD recommendation on the stock. We have valued Wabco on a PE basis, considering it is completely debt-free and has significant free cash flow generation. On a market capitalisation of ~| 3500 crore, it has ~6% free cash flow yield on FY16E basis. Wabco’s valuation on a PEG basis (FY14E-16E) also seems reasonable at 0.5x with PE at 20x and EPS CAGR of ~33%. Consequently, we value Wabco at 21x PE on FY16E EPS of | 102 to arrive at a fair value of | 2012/share. The rationale for 20x stems from the fact that last three-year’s average has been ~ 20-21x, which has witnessed moderate growth in the CV space. At the CMP of | 1840, the stock is trading at ~18x PE FY16E, at a premium to its domestic peers like Exide Industries, Bharat Forge and Motherson Sumi on account of its strong balance sheet, robust cash flows and near monopoly position. The only peer with a similar profile is Bosch Ltd to which the valuation is similar. Wabco’s valuations have seen an increase since FY09 owing to increasing business growth and a change in regulations making it one of the strongest beneficiaries of the same. We expect it to continue to gain from the potential in coming years. Thus, the valuation premium to domestic peers is expected to continue. Similar to peers like Bosch Ltd, it is expected to maintain multiples, considering it remains a larger beneficiary of the changes with better return ratio profiles.

We have valued Wabco on a price earnings basis,

considering it is completely debt free and has significant

free cash flow generation. On a market capitalisation of

~| 3500 crore it has ~6% free cash flow yield on FY16E

basis

Wabco’s valuation on PEG basis (FY14E-16E) also seems

reasonable at 0.6x with PE at 20x, EPS CAGR of ~33%

Consequently, we value Wabco at 20x PE on FY16E EPS

of | 100.6 to arrive at a fair value of | 2012/share. The

rationale for 20x stems from the fact that last three-years

average has been ~ 20-21x, which has witnessed

moderate growth in the CV space

We feel with government and road transport authorities

finally waking up to much needed regulation changes in

BSIII/BSIV across India, this would aid stronger than

usual revenue/margin growth for Wabco. This coupled

with debt-free balance sheet, a strong MNC parent,

exports growth and strong market dominant position in

the domestic market makes a perfect case for an

improvement of valuation


Exhibit 34: Peer valuation

Sales CAGR (%) PAT CAGR (%)AY14E-16E AY14E-16E AY14E AY15E AY16E AY14E AY15E AY16E AY14E AY15E AY16E EV/EBIDTA (x)` P/E (x)` P/B (x)` PEG (x)

Wabco India 22 34 14 15 16 17 19 22 14 16 19 12 18 3 0.5

Haldex* 3 22 10 12 11 8 9 9 15 19 18 6 12 2 0.5Delphi Automotive* 5 13 15 15 15 13 14 15 43 40 35 7 10 3 0.8Wabco Global* 9 17 18 18 18 18 17 17 36 34 34 10 13 3 0.8

Exide Industries 10 19 13 13 14 17 16 19 12 12 14 9 14 2 0.7Bharat Forge* 10 25 16 17 17 13 15 16 16 17 18 8 15 3 0.6Motherson Sumi 13 37 9 9 10 22 26 30 26 32 32 5 14 5 0.4Bosch Ltd 12 18 16 16 17 16 15 17 16 15 17 13 21 3 1.2

Global Peers

Domestic Peers

EBIDTA Margins (%) RoCE (%) RoE (%)

Source: Company, ICICIdirect.com Research, *Bloomberg Consensus Estimates *RoA instead of RoCE for Global Peers, AY~ Accounting year ` Valuation is on AY16E basis

Exhibit 35: How do we stack up against consensus???

FY15E FY16E FY15E FY16E FY15E FY16ESales (| crore) 1216.4 1536.1 1259.3 1515.5 -3% 1%EBIDTA Margin (%) 15.2 16.0 17.3 18.5 -209 bps -246 bpsPAT (| crore) 140.4 190.8 160.3 204.2 -12% -7%

Variance from consensusI-Direct Consensus


Exhibit 36: Historical stock price analysis – Annual price movements break up “EPS vis-à-vis trailing PE multiple” change

0

500

1000

1500

2000

2500

Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13

(|)

Stocks sufferes asearings contract

Stock rallies asboth P/E,EPSexpands thoughEPS expands muchahead of earnings

EPS growth drivesstock up as multiplesdon’t catch up

Again EPS movesahead of multiplesgrowth. Stock rallyprimarily earingsdriven

Stock remainsearnings driven as PE multiples have not rerated in line withhistorical earningsgrowth

Market finally re-ratesmultiples to compensate forhistorical EPS growth.Though earnings remainweak without domestic CVcycle improvement.Broader market multiplesalso move up

FY09Stock-(60%) YoYPE - (22%) YoYEPS - (49)% YoY

FY10Stock- 440% YoYPE - 146% YoYEPS - 120% YoY

FY11Stock- 47% YoYPE - (10%) YoYEPS - 63% YoY

FY12Stock- 29% YoYPE - 7%YoYEPS - 20% YoY

FY13Stock- (14)% YoYPE - 0% YoYEPS - (14%) YoY

FY14EStock-37% YoYPE - 69% YoYEPS - (19%) YoY

Source: Company, ICICIdirect.com Research All PE is based on reported earnings of previous year thus on a trailing basis

Ex-post analysis on stock price performance!

We are trying to analyse the returns of the stock in a given year and how much of that came via trailing PE multiples downgrade and how much was via EPS change that happened actually through the year

• Over FY09, Wabco’s stock price decline was mainly due to a sharp dip in the CV cycle owing to the global recession leading to earnings declines

• During FY10/11, most of the stock price appreciation(~5x) was led by earnings rise of ~1.8x while valuation multiples rose relatively modestly (1.4x) aided by broader market recovery

• During FY12-13, the stock price appreciation/fall has been mainly driving earnings. The stock witnessed multiples playing catch up in FY14E with the strong earnings growth from FY10 onwards

We have been conservative in our estimates and lag the

consensus topline, bottomline by 5%, 7%, respectively in

FY16E.

In our view, the stock price since FY09 has moved up

13.5x, of which earnings have risen ~3x while PE has

expanded ~2.6x only. Thus, the stock appreciation has

been more predominant on the basis of earnings than market multiples expansion only


Sensitivity analysis Base Case In our base case scenario, we have arrived at a company valuation of ~| 2012, based on 20x FY16E PE, an EPS of | 100.6 FY16E. The current multiple of ~18x is lower than last three-year average of ~20-21x.

Bull Case In our bull case scenario, we are building in a 15% increase in our base case EPS FY16E to | 115.6. We are also increasing the target PE multiple by 15% from our base case to ~23x. Thus, we arrive at a per share value of ~| 2660/share.

Exhibit 37: Multiples unlikely to dip as earnings visibility remains strong

| crore-15% -10% -5% 0% 5% 10% 15%

17.0 1454 1539 1625 1710 1796 1881 196718.0 1539 1630 1720 1811 1901 1992 208219.0 1625 1720 1816 1911 2007 2103 219820.0 1710 1811 1911 2012 2113 2213 2314

21.0 1796 1901 2007 2113 2218 2324 242922.0 1881 1992 2103 2213 2324 2435 254523.0 1967 2082 2198 2314 2429 2545 2661

EPS scenario

PE(x

)


Exhibit 38: Possibility of upsides remain much more than vice-versa

13.3 -15% -10% -5% 0% 5% 10% 15%

17.0 -21 -16 -12 -7 -2 2 7

18.0 -16 -11 -7 -2 3 8 13

19.0 -12 -7 -1 4 9 14 19

20.0 -7 -2 4 9 15 20 26

21.0 -2 3 9 15 21 26 32

22.0 2 8 14 20 26 32 38

23.0 7 13 19 26 32 38 45

PE(x

)

Impact on stock price (%)


Bear Case In our bear case scenario, we are building in a 15% decline in our base case EPS FY16E to | 85.6. We are also reducing the target PE multiple by 15% from our base case to ~18x. Thus, we arrive at a per share value of ~| 1460/share.


Exhibit 39: Income statement (Year-end March) FY12 FY13 FY14E FY15E FY16ENet Sales 1,005.0 917.4 1,028.5 1,216.4 1,536.1 Other Operating Income 40.7 48.6 65.3 76.0 96.0 Total Operating Income 1,045.6 965.9 1,093.8 1,292.4 1,632.1 Growth (%) 17.0 (7.6) 13.2 18.2 26.3 Raw Material Expenses 572.4 517.2 619.7 723.8 904.5 Employee Expenses 94.3 107.0 129.3 154.9 197.7 Other Expenses 159.1 147.7 186.1 217.5 268.5 Total Operating Expenditure 825.7 771.9 935.2 1,096.2 1,370.6 Other Expenses 159.1 147.7 186.1 217.5 268.5 Total Operating Expenditure 825.7 771.9 935.2 1,096.2 1,370.6 EBITDA 219.9 194.1 158.6 196.2 261.5 Other Income 12.1 12.6 28.2 39.3 55.9 Interest 0.1 0.0 0.1 0.0 0.0PBDT 231.9 206.7 186.7 235.4 317.4 Depreciation 15.6 21.7 30.0 32.0 36.8 PBT 216.2 185.0 156.6 203.4 280.6 Total Tax 62.8 54.2 48.6 63.1 89.8 PAT 153.4 130.8 108.0 140.4 190.8 EPS 80.9 69.0 57.0 74.0 100.6


Exhibit 40: Balance sheet

(| Crore)

(Year-end March) FY12 FY13 FY14E FY15E FY16EEquity Capital 9.5 9.5 9.5 9.5 9.5 Reserve and Surplus 519.7 639.4 736.3 861.2 1,032.0 Total Shareholders funds 529.2 648.9 745.8 870.7 1,041.5 Long term borrowings 0.0 0.0 0.0 0.0 0.0Short term borrowings 0.0 0.0 0.0 0.0 0.0Other Long term Liabilities 0.1 0.0 0.0 0.0 0.0 Long term provisions 11.6 14.3 17.3 20.3 25.3 Deferred Tax Liability 10.9 11.7 11.7 11.7 11.7 Liability side total 552 675 775 903 1,079 AssetsTotal Gross Block 344.2 398.4 460.4 532.4 604.4 Less Total Accumulated Depreciation 113.7 134.7 164.7 196.7 233.5 Net Block 230.5 263.7 295.7 335.7 370.9 Total CWIP 12.8 25.4 25.4 25.4 25.4 Total Fixed Assets 243.2 289.1 321.1 361.1 396.3 Liquid Investments 21.0 23.3 28.3 31.3 36.3 Other Investments 2.2 2.2 2.2 2.2 2.2 Loans and Advances 38.1 38.4 43.1 51.0 64.4 Cash 80.9 99.0 134.5 195.4 286.7 Debtors 157.5 189.8 212.8 233.3 277.8 Inventory 115.8 135.6 155.0 176.6 202.0 Total Current Assets 392.3 463.0 545.5 656.4 831.0 Net Current Assets 267.1 344.7 405.8 487.4 617.6 Long term loans and advances 18.3 15.7 17.5 20.8 26.2 Assets side total 552 675 775 903 1,079



Exhibit 41: Cash flow statement (| Crore)

(Year-end March) FY12 FY13 FY14E FY15E FY16EProfit after Tax 153.4 130.8 108.0 140.4 190.8 Depreciation 15.6 21.7 30.0 32.0 36.8 Cash Flow before working capital changes 169.1 152.5 138.2 172.4 227.6

Net Increase in Current Assets (34.1) (52.5) (47.0) (50.0) (83.3) Net Increase in Current Liabilities 25.4 (6.9) 21.4 29.3 44.4 Net cash flow from operating activities 160.4 93.1 112.6 151.7 188.7

Long term loans and advances (2.4) 2.6 (1.9) (3.2) (5.5) Other Investments 0.0 0.0 0.0 0.0 0.0Liquid Investments (11.0) (2.3) (5.0) (3.0) (5.0) Deferred Tax Liability 2.8 0.8 0.0 0.0 0.0(Purchase)/Sale of Fixed Assets (68.9) (67.6) (62.0) (72.0) (72.0) Other Long term Liabilities 0.0 (0.0) 0.0 0.0 0.0Net Cash flow from Investing Activities (81.2) (63.9) (65.9) (75.2) (77.5)

Inc/ (Dec) in Equity Capital 0.0 0.0 0.0 0.0 0.0Inc/ (Dec) in Long term borrowings 0.0 0.0 0.0 0.0 0.0Inc/ (Dec) in Short term borrowings 0.0 0.0 0.0 0.0 0.0Total Outflow on account of dividend (11.0) (11.1) (11.1) (15.5) (20.0) Net Cash flow from Financing Activities (11.1) (11.1) (11.2) (15.5) (20.0)

Net Cash flow 68.1 18.2 35.5 60.9 91.3 Cash and Cash Equivalent at the beginning 12.8 80.9 99.0 134.5 195.4 Closing Cash 80.9 99.0 134.5 195.4 286.7


Exhibit 42: Ratio analysis (Year-end March) FY12 FY13 FY14E FY15E FY16EPer Share Data (|)EPS 80.9 69.0 57.0 74.0 100.6 Cash EPS 89.1 80.4 72.8 90.9 120.0 BV 279.0 342.1 393.2 459.0 549.1 Operating profit per share 115.9 102.3 83.6 103.4 137.9 Operating Ratios (%)EBIDTA Margin 21.0 20.1 14.5 15.2 16.0 PAT Margin 14.7 13.5 9.9 10.9 11.7 Return Ratios (%)RoE 29.0 20.2 14.5 16.1 18.3 RoCE 38.6 26.6 17.2 18.9 21.6 RoIC 45.1 30.8 20.6 23.9 29.3 Valuation Ratios (x)EV / EBITDA 15.4 17.4 21.0 16.6 12.1 P/E 22.7 26.7 32.3 24.9 18.3 EV / Net Sales 3.4 3.7 3.2 2.7 2.1 Sales / Equity 1.9 1.4 1.4 1.4 1.5 Market Cap / Sales 3.5 3.8 3.4 2.9 2.3 Price to Book Value 6.6 5.4 4.7 4.0 3.4 Turnover Ratios (x)Asset turnover 2.1 1.5 1.4 1.5 1.6 Debtors Turnover Ratio 6.4 4.8 4.8 5.2 5.5 Creditors Turnover Ratio 9.3 9.0 8.5 8.3 8.3 Solvency Ratios (x)Debt / Equity - - - - - Current Ratio 3.1 3.9 3.9 3.9 3.9

Quick Ratio 2.2 2.8 2.8 2.8 2.9



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 [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]

ANALYST CERTIFICATION We /I, Nishant Vass MBA (Finance), Venil Shah MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures: ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that, Nishant Vass MBA (Finance), Venil Shah MBA research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business.

ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.

It is confirmed that, Nishant Vass MBA (Finance), Venil Shah MBA research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board member of the companies mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use of information contained in the report prior to the publication thereof.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

wabco india ltd (wabtvs) -...

Documents