Wabco India: New technologies to boost fortunes

Higher exports and content per vehicle coupled with adoption of new technologies should drive up realisations and revenue growth

Wabco, automobile component maker, could see strong revenue growth and higher margins on the back of an expected revival in commercial vehicles, increasing content per vehicle and exports to its MNC parent (Wabco Holdings), which holds 75 per cent stake in the India-listed unit.

The immediate trigger for the stock, which has gained about two and a half times over the past year, is the mandatory anti-brake locking system (ABS) in new commercial vehicles (above five tonnes) from April 1, 2015 and October 1, 2015 for existing commercial vehicles.

Kotak Institutional Equities estimates an annual revenue opportunity of Rs 400 crore for the sector, with Wabco India expected to capture 85 per cent share as it has been working with OEMs on this since 2006, when ABS was made mandatory for tractor trailers.

Prospects for the company could improve if fleet operators also incorporate other technologies such as automated manual transmission, which is reported to improve fuel efficiency by five-seven per cent. Even if it is a 20 per cent adoption by OEMs and five per cent by the replacement segment, the company, according to Kotak analysts, could look at a revenue opportunity of nearly Rs 6,000 crore by 2030.

The other area of growth would come from increase in content per vehicle. Analysts expect Wabco India's content per vehicle to improve from the current $400 to $1,500 by 2035,  a compounded growth rate of a little under seven per cent. The parent’s current realisation on this account is $3,000 per vehicle in Western Europe, $1,500 in South America and $1,000 in North America.

Given the technology upgrades needed, as well as new products/technologies expected to be incorporated, the parent company believes the potential to increase content per vehicle is significant. Technologies include lane departure warning, collision mitigation and electronic stability control systems.

Further, the decision of Wabco Holding to increase sourcing from best cost countries from 44 per cent currently to 58 per cent by FY17 should help Wabco India achieve higher export growth, pegged at 30 per cent in the FY15-17 period, by analysts at Spark Capital. Exports constitute 35 per cent of the company’s sales. Better utilisation, segment mix and stable raw material prices are expected to improve margins to 17.5 per cent in FY16 from the estimated 15 per cent in FY15.

While prospects are good and the stock has seen a re-rating due to these mentioned reasons, at the current price it is trading at premium valuations of 35 times its FY17 estimates. The consensus Bloomberg target price for ratings since March 1, is Rs 5,562, while the stock is trading at Rs 5,565.

While research firms such as Kotak Institutional Equities justify the premium valuations on the premise that revenues will increase by a factor of three over the next five years and have given higher target price (Rs 6,400), the scrip, on the back of a sharp and continuous uptrend, has priced in quite a bit of the gains. Investors can, thus, consider the stock on corrections.