Demand revival, higher realisations and export growth to help Wabco India

One of the key reasons that Wabco India would rank higher compared to other auto component firms is the lower impact from new technology disruption

The Wabco India stock gained 11 per cent after the promoters received strong response to the offer for sale. The promoter, ZF International UK, is looking to reduce its stake from 93 per cent to 75 per cent and has priced the issue at Rs 5,450 apiece — the stock is currently trading at Rs 6,438.15 per share. 

While strong investor interest has been a near-term trigger, there are multiple fundamental factors that should aid its prospects. Demand revival is one such factor for the company, which supplies safety solutions to medium and heavy commercial vehicle (M&HCV) makers. The introduction of BS-VI norms led to an increase in content per vehicle and there is further scope for improvement in realisations. 

In addition to this, analysts at ICICI Securities believe the government’s steps to improve procurement of buses and the scrappage policy will help Wabco India. Given the ongoing cyclical recovery and low base, part makers such as Wabco India will be key beneficiaries over the FY21 to FY23 period, says Elara Capital. 

Higher exports, led by sourcing from the parent group, is another trigger. Exports account for 30 per cent of the company’s revenues. After the acquisition of US-based Wabco Holdings by ZF Group of Germany last year, the new promoter is looking to increase sourcing of products from the Indian arm. The acquisition has expanded the export product portfolio for the Indian outfit.

One of the key reasons that Wabco India would rank higher than other auto component companies is the lower impact from new technology disruption. 

Wabco India is at the least risk of electric vehicle disruption as M&HCV will be the last to migrate to the new platform and its product portfolio (braking systems and suspension) is less impacted, according to analysts. 

While the prospects are sound, investors will need to keep an eye out for progress on volume growth trajectory in M&HCV segment as well as replacement demand. At the current price, the stock is trading at 52 times its FY22 earnings estimates. Investors can consider the stock on dips.