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Company Report Industry: Auto Ancillary

Surjit Arora ([email protected]) +91-22-66322235

Wabco India

The Technology Leader...with a huge growth opportunity

September 23, 2013 2

Wabco India

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Contents Page No.

Investment Arguments ............................................................................................... 5

Market/Technology leader in CV air brakes systems led by strong parentage ................................. 5

WIL’s domestic growth outpaces MHCV growth due to increase in content per vehicle ................. 8

New products to drive growth ........................................................................................................ 11

Optidrive a landmark product for Indian markets; payback of less than a year ........................ 11

Clutch Servo ............................................................................................................................... 13

ABS – Regulatory implementation to create big opportunity ................................................... 13

Exports from India to grow at ~15% CAGR ...................................................................................... 15

Replacement market to grow at 9-10% CAGR ................................................................................. 16

Strong balance sheet and free cash flow to support higher valuations .......................................... 18

Net sales to grow at 14.0% led by implementation of ABS in FY15E ............................................... 19

EBITDA to grow at 20.4% CAGR led by contribution of new products and recovery in M&HCV segment in FY15E ............................................................................................................................ 21

PAT to mirror EBITDA growth .......................................................................................................... 22

Wabco India

Company Report September 23, 2013

Rating Accumulate

Price Rs1,620

Target Price Rs1,900

Implied Upside 17.3%

Sensex 20,264

Nifty 6,012

(Prices as on September 23, 2013)

Trading data

Market Cap. (Rs m) 30,727.5

Shares o/s (m) 19.0

3M Avg. Daily value (Rs m) 14

Major shareholders

Promoters 75.00%

Foreign 2.39%

Domestic Inst. 8.65%

Public & Other 13.96%

Stock Performance

(%) 1M 6M 12M

Absolute (3.4) 14.7 3.5

Relative (14.5) 7.4 (6.9)

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2014 72.2 78.0 -7.5

2015 102.6 99.5 3.2

Price Performance (RIC: WABC.BO, BB: WIL IN)

Source: Bloomberg

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Market/Technology leader in CV air brakes systems on account of strong

parentage: WABCO India (WIL), a 75% subsidiary of WABCO Holdings, is the

market leader (~85% share) in CV air braking systems in India. Its market

leadership position could be viewed as a natural extension of its parent, WABCO

Holding’s, dominant market presence in the world – WABCO Holdings is a

technology leader in providing safety solutions to the global CV industry. The

company is well positioned to leverage the rising content per vehicle in the

domestic MHCV market (growing faster than MHCV industry growth) and is

likely to be the key beneficiary of recovery in M&HCV volumes, entry of global

players in the Indian markets and implementation of safety norms by the

Government for M&HCV.

WIL’s domestic growth outpaces MHCV growth due to increased

content/vehicle: WIL’s domestic revenues have grown by 15.5% CAGR v/s

MHCV volume growth of 10.0% CAGR over FY09-FY13 period. This is because

content per vehicle has increased from Rs10,700/vehicle in 2009 to Rs12,200

($240)/vehicle currently. WABCO Holdings estimates an average input of more

than US$3,000 in the average price of US$130,000 for a heavy truck sold in

Western Europe, whereas in US, the estimated input is at $1,000 i.e. 1.3-1.4% of

the truck cost of US$80,000 for a heavy truck sold in North America. Hence, the

scope for growth is huge over the next 4-5 years, thereby, making WIL a key

beneficiary of the same.

New products to drive growth: Given the strong parentage of WABCO Holdings,

we believe that a lot of new products could be added to WIL’s stable. WIL plans

to introduce two new products in its stable viz. Automated Manual Transmission

(OptiDrive™ Technology) and Lift Axle Control Valve. At the same time, in a

recent announcement, the Ministry of Road Transport & Highways has decided

to make anti-lock braking system or ABS mandatory for all new commercial

vehicles hitting the road from 2014. We see implementation of ABS (Anti-lock

Braking System) to give a market opportunity of Rs4-5bn (0.5x FY13 top-line).

Contd…4

Key financials (Y/e March) 2012 2013 2014E 2015E

Revenues (Rs m) 10,457 9,658 10,077 12,535

Growth (%) 16.5 (7.6) 4.3 24.4

EBITDA (Rs m) 2,200 1,941 1,944 2,814

PAT (Rs m) 1,535 1,308 1,369 1,947

EPS (Rs) 80.9 69.0 72.2 102.6

Growth (%) 20.4 (14.7) 4.6 42.2

Net DPS (Rs) 5.0 5.0 6.0 7.0

Profitability & Valuation 2012 2013 2014E 2015E

EBITDA margin (%) 21.0 20.1 19.3 22.4

RoE (%) 33.5 22.2 19.3 22.6

RoCE (%) 33.7 23.8 20.9 26.9

EV / sales (x) 2.9 3.1 2.9 2.3

EV / EBITDA (x) 13.6 15.3 15.0 10.2

PE (x) 20.0 23.5 22.4 15.8

P / BV (x) 5.8 4.7 4.0 3.2

Net dividend yield (%) 0.3 0.3 0.4 0.4

Source: Company Data; PL Research

Wabco India


Strong balance sheet and free cash flow to support higher valuations: Given

that the profitability is likely to grow at a CAGR of 23%+ with a moderate capex

for the next two years pegged at Rs600m/year, we expect free cash generation

of Rs836m in FY14E and Rs977m in FY15E. Even in the downturn, WIL was able

to maintain profitability with a robust ~22% ROE. The stock has traded at an

average P/E of 15-20x and average P/BV of 3-3.5x 1-year forward. At the current

market price, the stock is trading at 22.4x FY14E and 15.8x FY15E earnings. We

believe stock would trade at a higher multiple, given the strong parentage and

robust earnings growth trajectory. We initiate coverage on Wabco India with an

‘Accumulate’ rating and assign a target multiple of 18.5x FY15E EPS to arrive at

our Target Price of Rs1,900.

Wabco India


Investment Arguments

Market/Technology leader in CV air brakes systems led by strong parentage

WIL, a 75% subsidiary of WABCO Holdings, is the market leader in CV air braking

systems in India. The company enjoys a market share of >85% in MHCV OEM space.

Its market leadership position could be viewed as a natural extension of its parent

company WABCO Holding’s dominant market presence in the world.

Exhibit 1: Key Products of WABCO Holdings

WABCO Holdings key products and features Function

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

Air Compressor & Air Processing/Air Management System

Provides compressed, dried air for Braking, Suspension and other Pneumatic Systems on Trucks, Buses and Trailers

Foundation Brake Transmits braking force to a Disc or Drum (Connected to the Wheel) to slow, stop or hold vehicles

Anti-lock Braking System (ABS) Prevents wheel locking during braking to ensure steer-ability and stability

Conventional Braking System Mechanical and Pneumatic devices for control of Braking Systems in CVs

Electronic Braking System (EBS) Electronic controls of Braking Systems for CVs

Electronic and Conventional Air Suspension Systems Level control of Air Springs in Trucks, Buses, Trailers and Cars

Transmission Automation Automates Transmission Gear Shifting for Trucks and Buses

Electronic Architecture (VEA) Central Electronic Modules integrating multiple Vehicle Control functions

Electronic Stability Control (ESC) and Roll Stability Support (RSS)

Enhances driving stability

Source: Company Reports, PL Research

WABCO Holdings is a leading global supplier of technologies and control systems for

the safety and efficiency of commercial vehicles. Founded over 140 years ago,

WABCO 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 Holdings manufactures and supplies products such as brake and stability

control, diagnostic systems and advanced driver assistance systems as well as vehicle

accessories not available in India.

Wabco India


Key competitive advantages enjoyed by WABCO Holdings over its competitors include:

Market leader in providing advanced safety systems to the global CV Industry.

Leading in emerging markets compared to peers such as Knorr (even in India,

Knorr gets 20% business of Tata Motors attributable to Knorr-Tata Auto Comp

JV, and minuscule business from M&M-Navistar and Ashok Leyland).

Exhibit 2: Competitive Environment

Source: PL Research

WABCO Holdings has better electronic capabilities compared to Haldex and

Knorr.

While Haldex has a stronger presence in the replacement market, WABCO

Holdings has a dominant presence in the OEM market. A stronger presence in

the OEM market gives WABCO Holdings a better lever to tap the replacement

market through the OEM route.

KNORR HALDEX LCC COMPETITORS

Technical capabilities similar

to WABCO

No position in transmission

automation or cars

Strong position in North America

following BENDIX acquisition

Trailing in emerging markets

Challenger position

Lower electronics capabilities

compared to WABCO and KNORR

Strong automatic slack

adjuster business

Entering into special products for

diesel engines

WABCO KNORR HALDEX LCC competitors

(2011 Commercial Vehicle Sales) ($2.8B ) (~$2.9B ) (~$0.6B) (All Under ~$0.15B)

Anti-lock Braking Systems

Electronic Braking Systems

Conventional Products

Transmission Automation

Air Compressors

Air Processing

Actuators

Suspension Control

Foundation Brakes

Complete Offering Partial Offering Niche Offering

LCC COMPETITORS

Strong low cost / low tech solutions

Mainly mechanical capabilities

Targeting specific markets

with specific product ranges

Low price strategy in Aftermarket

Wabco India


Exhibit 3: Product Profile

Conventional Products

Automatic Slack Adjuster

Actuators

Brake Chambers

Valves

Air compressors

Advanced Braking System Anti-lock Braking System

Electronic controlled Air Suspension

Electronic Braking System

Driveline Controls

Optidrive

Clutch Control

Integrated Pedal Unit

Source: Company Data, PL Research

WIL’s focus on R&D, we believe, would help it to maintain leadership in the domestic

braking systems. The company designs, manufactures and markets conventional

braking products, advanced braking systems, and other related air-assisted products

and systems.

The company has four manufacturing sites located in Ambattur, Chennai,

Jamshedpur, Mahindra World City and at Pant Nagar in North India. It also has a

software development centre and a company-owned test track in Chennai.

WIL employs over 1,100 employees. It has a strong technological back-up in the form

of the R&D centre, which facilitates design, development, simulation and testing of

braking system.

WIL has a major market share in the Indian

OEM market (85% +) as well as the

domestic after-market, which it serves

through an extensive national distribution

network. The company has 162 authorised

service centres across India and 145

certified workshops in rural areas to cater

to the aftermarket for air-brakes

Currently under- penetrated; Scope

for growth huge

Wabco India


WIL’s domestic growth outpaces MHCV growth due to increase in content per vehicle

WIL’s domestic revenues have grown by 16.4% CAGR v/s MHCV volume growth of

10.0% CAGR over FY09-FY13 period. This is because content per vehicle has

increased from Rs10,000/vehicle in 2009 to Rs12,000 ($240)/vehicle currently. This is

expected to increase to more than US$500/vehicle over the next 3-4 years with new

products such as ABS and Optidrive being implemented in India. We see

implementation of ABS (Anti-lock Braking System) to give a market opportunity of

Rs5-6bn (0.65x FY13 top-line) estimated on FY13 MHCV sales.

Exhibit 4: Industry M&HCV volumes

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

FY09 FY10 FY11 FY12 FY13 FY14E FY15E

(Nos

)

MHCV YoY gr. (%) (RHS)

Source: SIAM Data, PL Research

Exhibit 5: WIL’s Realisation/unit (Rs)

6,000

8,000

10,000

12,000

14,000



Wabco India


Exhibit 6: WIL’s Volume & Profit growth

-50%

0%

50%

100%

150%

-30%

-20%

-10%

0%

10%

20%

30%

40%

FY10 FY11 FY12 FY13 FY14 FY15

Volume growth (YoY) Profit Growth (RHS)


Exhibit 7: Gross margin resilient

41.0%

42.0%

43.0%

44.0%

45.0%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

FY09 FY10 FY11 FY12 FY13 FY14 FY15

Volume growth (YoY) Gross Margins


Margins resilient on account of leadership as well as diversified revenue stream:

Despite a 24% de-growth in the M&HCV segment, WIL reported a de-growth of only

9.1% in its top-line in FY13.

This was mainly on account of increased content per vehicle as well as higher

replacement (growth of ~15%) as well as export revenues (growth of ~34%).

At the same time, given the technological leadership, gross margins were resilient/

intact at 43.6%.

Wabco India


Exhibit 8: Scope for penetration high


WABCO Holdings, which cater to these technological requirements, estimates an

average input of more than US$3,000 in the average price of US$130,000 for a heavy

truck sold in Western Europe. In US, the estimated input is at $1,000 i.e. 1.3-1.4% of

the truck cost of US$ 80,000 for a heavy truck sold in North America.

As CVs scale up technologically, there has been an increase in WABCO’s input as a

percentage of the price of CVs, to 2.3% in Western Europe and 1% in NA. CV

technology in India is still at the basic level, thus, providing large scope for

improvement which is likely to be triggered by the international players entering the

Indian market.

These OEMs could also introduce other products by WABCO in India, thereby,

compelling the company to widen its product offerings.

SOUTH AMERICA <$1,500 $65K

JAPAN & KOREA <$1,000 $80K

CHINA & INDIA <$300 $40K

NORTH AMERICA <$1,000 $80K

WESTERN EUROPE >$3,000 $130K

EASTERN EUROPE <$500 $70K

Typical heavy truck

price in market

Estimated content per vehicle

based on total applicable market$ $K

Less advanced technology vs.Western Europe

Large OEMs: Daimler, Volvo, PACCAR, ITE

Large fleets, able to influence OEM design

Less advanced technology – mostly from Brazil

Main OEMs: Daimler, VW, Volvo, Scania

Advanced technology, high electronics penetration

6 OEMs: Daimler, Volvo, MAN, Iveco,

PACCAR, Scania

Few large, pan European fleets

Expected to Return to Fast growing

production in the Future

Improving quality and safety

Global and local OEMs: KamAZ, MAZ,

Technology moving towards Western Europe

Main OEMs: Hyundai, Hino, Isuzu, Volvo

Targeting global market

Basic technology; advanced technology penetration

under 10% of total market

Large OEMs: FAW, DFM, CNHTC in China;

TATA Motors & Ashok Leyland in India

Currently in India, with an average price of

US$40,000 for a CV, WABCO’s input is less

than US$300, one-third of what it has in

North America. With the advent of the

Global OEMs, WABCO’s monopoly in the

market will continue as it already partners

these OEMs in the international markets –

an association which is likely to continue in

India too

Wabco India


New products to drive growth

WIL plans to introduce two new products in its stable viz. Automated Manual

Transmission (OptiDrive™ Technology) and Lift Axle Control Valve.

WIL has already introduced OptiDrive™ Technology for buses in India through Ashok

Leyland (second-largest manufacturer of CVs in India). Optidrive optimizes gear

shifting and improves vehicle control, thereby, reducing fuel consumption by up to

5%. We believe that the implementation of safety standards and the move towards

fuel efficiency will result in an increase in the Indian truck market content, going

forward.

The new products are likely to gain momentum due to increasing share of higher

tonnage vehicles, coupled with introduction of technologically superior M&HCVs by

the domestic OEMs such as World Truck (Tata Motors) and U Truck (Ashok Leyland)

and increasing market share of global players such as Volvo and Bharat Benz.

Optidrive a landmark product for Indian markets; payback of less than a year

The system combines high efficiency of a manual gearbox with the optimal shift

timing of an automatic one, continues to gain global acceptance among major

manufacturers of transmissions, trucks and buses. For example, AMT systems

account for more than 60% of transmissions in trucks and buses in Europe. In North

America, up to 40% of trucks sold in 2011 by one of the leading global original

equipment makers were equipped with WIL's advanced AMT systems.

Exhibit 9: Savings on account of Optidrive

Cost of M&HCV (Rs) 1,500,000

Average cost of AMT (Rs) 50,000

Cost of AMT (Rs) 3.3%

Avg. running (kms) 91,250

Avg. Mileage (km/ltr) 3

Avg. litres 30,417

Diesel price (Rs/ltr) 59

Total fuel cost 1,794,583

Improvement in efficiency 3.2

Avg. litres 28,516

Total Fuel cost (Rs) 1,682,422

Savings in Fuel Cost (Rs) 112,161

Payback (months) 5.4

Source: PL Research

Conventional products, which contribute

90% to the Indian operations, account for

45% of WABCO’s global sales despite

under-penetration of advanced braking

products in the emerging markets. We see

a huge opportunity for WIL to push sales of

the under-penetrated products besides

introducing new products

WIL believes Optidrive could be a landmark

product for the Indian MHCV market with

potential revenues projected at Rs25bn

alone from this product (based on current

MHCV OE sales)

Wabco India


Exhibit 10: Optidrive benefits


The Indian CV market is highly cost-conscious and price-elastic. The average cost of

this product is ~Rs50000/unit, which works out to ~3.3% of the total cost of a MHCV.

However, as per our calculations, the payback for this product is less than a year as

the benefits from improvement in energy efficiency by 5% more than offsets the

higher cost of the product.

AMT systems, which combine the high efficiency of a manual gearbox with the

optimal shift timing of an automatic one, continue to gain global acceptance among

major manufacturers of transmissions, trucks and buses. For instance, in North

America, up to 40% of trucks sold in 2011 by one of the leading global OEMs were

trucks equipped with advanced AMT systems developed by WABCO.

Ashok Leyland has been the first OEM in

India to adopt Optidrive systems for the

domestic market. It has launched the

innovative transmission automation

system under brand `Leymatic'

Wabco India


Clutch Servo

WABCO clutch servo 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. WABCO’s clutch servo is self-adjusted to accommodate clutch wear and

perform even under extreme temperature conditions. It has more life compared to

competitive boosters.

The Lift Axle Control Valve system

The Lift Axle Control Valve System (vide WABCO’s SmartLift) 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.

WABCO’s Smart Lift 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. It reduces fuel consumption due to less air

consumption. Lift axle valve is normally used in higher tonnage vehicles.

ABS – Regulatory implementation to create big opportunity

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. It prevents wheel locking

during sudden braking to ensure steer ability and stability (prevents skidding).

The Indian government 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. Typically, ABS

realizations are at least 2x regular air braking systems. However, the incremental

addition in terms of costing could be Rs15-18,000/unit. This translates into a

potential market size for ABS in India for MHCVs could be ~Rs5-6bn (based on

existing MHCV OE population).

Assuming 85% market share of WIL, the annual demand potential for WIL could be

Rs4-5bn. This translates to 80% of WIL’s FY13E revenues and is higher than revenues

from its air actuator systems.

The Government of India in 2011 formulated five separate Working Groups on 4 ‘E’s

of Road Safety, i.e. Engineering, Enforcement, Education and Emergency care.

We believe ABS could provide an additional

Rs5-6bn in sales for WIL (assumed at 80%

penetration on FY13 MHCV sales and

WABCO market share of 80% in ABS).

According to our estimate, ABS penetration

in India at present is ~5%

Wabco India


Exhibit 11: 4 ‘E’s of Road Safety

Source: GoI website, PL Research

One of the modules in the report of the working group comprised of safety

standards for buses and CVs. In this module, the working group has recommended

implementation of ABS in CVs by 2016. In an attempt to make highways safer, in a

recent announcement, the Ministry of Road Transport & Highways has decided to

make anti-lock braking system or ABS mandatory for all new commercial vehicles

hitting the road from 2014.

Exhibit 12: ABS Penetration

FY15E FY15E

M&HCV Volumes (FY13) 287,282

Realisation / Unit (Rs) 18,000 18,000

Potential Market Size (Rs m) 5,171

ABS penetration 20% 30%

Penetration 57,456 86,185

85% MS 48,838 73,257

Incremental Revenue (Rs m) 879 1319

FY14E ABS revenues 458 458

Total ABS Revenues 1,337 1,777

EPS (Rs) 102.6 109.0

Target Price (Rs) 1,900 2,017


4 W

hee

lers

‐B

use

s •Bus code

•School bus

•Sleeper coaches

•Protect i o

n

against unauthorized use

•Electromagnet i

c

compat i bili t

y

(EMC)

•Hybrid vehicles

•Fire protect i o

n

•Advanced Braking Systems

4 w

hee

lers

‐G

oo

ds

veh

icle

s •Truck code

•Automot i v

e

trailer code

•Rear marking plates

•Protect i o

n

against unauthorized use

•Electromagnet i

c

compat i bili t

y

(EMC)

•Close coupling and mechanical coupling devices

•Advancd Braking System

•Retrof i t men

t

of underrun protect i o

n

devices on in‐use vehicles

Agr

icu

ltu

re T

ract

ors •Agriculture Trailer

Code

•Rear vision

•Field of vision

•At t endant

/

passenger seat

•Ballast mass

•ROPS

•Mechanical coupling

•Tractor ident i f i c at

ion

number

•Symbols and color codes

Wabco India


Exports from India to grow at ~15% CAGR

WIL plans to mainly focus on India and China who have the lowest price content of

highest technology elements as compared to developed markets. WIL enjoys an

advantageous position relative to its group companies in other countries, since its

export products to countries such as USA, South America and Europe is through its

parent company.

The company’s exports grew at a 54% CAGR for FY09-FY13 period, with exports

increasing from a mere Rs353m in FY09 to Rs2.0bn in FY13. Due to the cost

advantage it enjoys, WIL will continue to report a higher growth in exports.

Exhibit 13: Export Revenues

-

500

1,000

1,500

2,000

2,500

3,000

FY10 FY11 FY12 FY13 FY14E FY15E

(Rs

m)


WABCO parent sees India as a strong base for sourcing and engineering activities.

Products like crankshaft, vacuum pumps and compressor are exported to WABCO

factories in Europe, North America and Brazil. We expect exports growth momentum

to continue, going forward.

Out of its total 18 manufacturing units across the globe, 8 are in India, China and

Brazil. WABCO holdings have increased its share of its workforce in low cost

countries to 68% of the total in 2011. This, in turn, means high growth for WIL in

terms of exports to parent company.

WIL’s new plant at Mahindra World City

Phase II supplies products to the CV

manufacturers in Germany, Japan, Poland

and the US. Assuming peak production

(Rs2.5bn) by FY15, exports will record 13%

CAGR over FY13-15

Wabco India


Exhibit 14: WABCO Holdings’ Global expansion plans

WABCO's Geographical expansion plans:

Key geographies to be developed are Eastern Europe, China, India and Brazil

China China is the key long-term growth market for WABCO

India

Access through WABCO - TVS India. Important market due to its technological adoption of advanced technology for CVS Four world class facilities in different areas of India Market leader in advanced technologies like ABS advanced braking

WABCO TVS is the sourcing hub for global operations by purchasing raw materials locally at best cost and provides machining capabilities in Mahindra city factory to process metals, castings & Electrical motors that is used in other factories at Europe, North America, Brazil and China to manufacture WABCO's products

WABCO-TVS is also a centre of mechanical and software engineering activity, that provides high skills at competitive cost to develop software and mechanical systems to support WABCO globally


Replacement market to grow at 9-10% CAGR

Given the awareness of safety and better control of their vehicle, the fleet operators

are also replacing the air braking system in their trucks (which follow a replacement

cycle of 2-3yrs). Over FY10-13 period, the cumulative M&HCVs volumes stood at

1.3m units which enthuses confidence of 9-10% growth in the replacement market.

WABCO enjoys 85% market share in the OEM segment and 75% market share in the

organized replacement market for air braking systems through its 7000+ outlets and

250 service centres. Majority of the WABCO’s aftermarket sales happen through

independent distributors. It grew at a 23% CAGR over FY09-FY12 period.

Wabco India


Exhibit 15: Wide Distribution Network


Wholesale Distributors (WSD): WIL has seven whole-sales distributors with more

than 205 branches spread across the country. They enable us to rapidly distribute

spare parts to more than 7000 retailers.

Authorized Service Centre (ASC): The ASC is an extended service arm of WIL. We

have more than 110 ASCs covering major trucking centres. Our extensive coverage

through the ASCs helps us to efficiently handle customer warranty claims and enable

fast service response.

Certified Workshops: WIL has identified 145 certified workshops in rural parts of the

country. They help us provide consistently high quality service facilities at more

remote locations.

With more than 7000 outlets and 250

service centres, 80% of WABCO’s

aftermarket business is channelled through

independent distribution partners

Wabco India


Strong balance sheet and free cash flow to support higher valuations

Given the strong parentage of WABCO Holdings, we believe lot of new products

could be added to WIL’s stable. At the same time, majority of the capex has been

done. Our interaction with the management suggests the capex for the next two

years is pegged at Rs600m/year. We expect capex to be funded through internal

accruals given the strong cash flow generation by the company. At the same time,

the company enjoys a debt free status.

Given that the profitability is likely to grow at earnings CAGR of 22%+, we expect free

cash generation of Rs836m in FY14 and Rs977m in FY15. Even in the downturn, WIL

was able to maintain profitability with a robust 22% ROE.

At the CMP, the stock is trading at 15.8x FY15E EPS in line with its average P/E of 15-

20x 1-year fwd. At the same time, the company is trading at its average P/BV of 3-

3.5x 1-year forward.

Any robust recovery in the M&HCV segment in FY15E would lead to a robust growth

in profitability of the company.

Exhibit 16: Free cash flow strong

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

FY11 FY12 FY13 FY14E FY15E

(Rs

m)

Operating Cash Flow Free Cash Flow


Wabco India


Exhibit 17: FCF yield at 3% attractive

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

FY10 FY11 FY12 FY13 FY14E FY15E


Net sales to grow at 14.0% led by implementation of ABS in FY15E

Exhibit 18: Revenues

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


(Rs

m)

Total Sales YoY gr. (RHS)


We expect M&HCV volumes to decline by 8-10% in FY14E and improve by 12.0% in

FY15E. At the same time, we have incorporated that 20% of the M&HCVs would

comply with the ABS norms in the first year i.e. FY15E.

Wabco India


Exhibit 19: Our assumptions

Y/e March (Rs m) FY11 FY12 FY13 FY14E FY15E

Air assist & full air actuation system 5,563 6,697 5,114 4,801 5,727

as % of sales 64.1% 66.6% 55.7% 50.4% 48.1%

YoY gr. 42.0% 20.4% -23.2% -6.1% 19.3%

Spares 1,391 1,450 1,689 1,917 2,205

as % of sales 16.0% 14.4% 18.4% 20.1% 18.5%

YoY gr. 26.7% 4.2% 15.0% 13.5% 15.0%

Exports 1,178 1,481 1,988 2,346 2,627

as % of sales 13.6% 14.7% 21.7% 24.6% 22.1%

YoY gr. 113.2% 25.8% 34.2% 18.0% 12.0%

Anti lock braking system 545 422 382 458 1,337

as % of sales 6.3% 4.2% 4.2% 4.8% 11.2%

YoY gr. 58.6% -22.7% -10.0% 20.0% 291.7%

Total 8,678 10,050 9,173 9,523 11,896

YoY gr. 46.8% 15.8% -8.7% 3.8% 24.9%

Source: PL Research

Exhibit 20: ABS to account for 23.3% of CV sales

9.8%

6.3%7.5%

9.5%

23.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


ABS Air Assist & full air actuation system ABS Penetration

Source: PL Research

Wabco India


Exhibit 21: Realisation/unit

6,000

8,000

10,000

12,000

14,000



EBITDA to grow at 20.4% CAGR led by contribution of new products and recovery in M&HCV segment in FY15E

Exhibit 22: EBITDA

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

0

500

1,000

1,500

2,000

2,500

3,000


(Rs

m)

EBITDA Margin (RHS)


Wabco India


PAT to mirror EBITDA growth

Exhibit 23: PAT

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

-

500

1,000

1,500

2,000

2,500


(Rs

m)

PAT YoY gr. (RHS)


Exhibit 24: 1yr forward PE Band

25.0x

20.0x

15.0x

10.0x

5.0x

0

500

1,000

1,500

2,000

2,500

Ma

r-0

9

Jun

-09

Sep

-09

Dec

-09

Mar

-10

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Jun

-11

Sep

-11

Dec

-11

Mar

-12

Jun

-12

Sep

-12

Dec

-12

Mar

-13

Jun

-13

Sep

-13

Source: Company Data, Bloomberg, PL Research

Exhibit 25: 1yr forward PE

21.2

24.7

15.2

14.9

3.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Mar

-09

Jun

-09

Sep

-09

Dec

-09

Mar

-10

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Jun

-11

Sep

-11

Dec

-11

Ma

r-1

2

Jun

-12

Se

p-1

2

Dec

-12

Ma

r-1

3

Jun

-13

Sep

-13

P/E (x) Peak(x) Avg(x) Median(x) Min(x)


Wabco India


Exhibit 26: 1yr Forward P/BV

4.0

4.9

3.6

3.8

0.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Mar

-09

Jun

-09

Sep

-09

Dec

-09

Ma

r-1

0

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Jun

-11

Sep

-11

Dec

-11

Mar

-12

Jun

-12

Sep

-12

Dec

-12

Mar

-13

Jun

-13

Sep

-13

P/B (x) Peak(x) Avg(x) Median(x) Min(x)


Exhibit 27: 1yr forward EV/EBITDA

17.5x

13.5x

9.5x

5.5x

1.5x0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Mar

-09

Jun

-09

Sep

-09

De

c-0

9

Mar

-10

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Jun

-11

Se

p-1

1

Dec

-11

Mar

-12

Jun

-12

Sep

-12

De

c-1

2

Mar

-13

Jun

-13

Sep

-13


Exhibit 28: Peer Comparison

Sales (Rs bn) EBITDA (Rs m) PAT (Rs m) P/E (x) EV/ EBITDA (x) P/BV (x) ROE (%)

FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

WIL 10.1 12.5 1.9 2.8 1.4 1.9 22.4 15.8 15.0 10.2 4.0 3.2 19.3 22.6

Bosch 108.0 130.9 18.1 22.3 12.8 15.3 21.4 18.0 13.7 11.1 3.6 3.0 17.8 20.2


Wabco India


Income Statement (Rs m)

Y/e March 2012 2013 2014E 2015E

Net Revenue 10,457 9,658 10,077 12,535

Raw Material Expenses 5,723 5,172 5,356 6,607

Gross Profit 4,733 4,486 4,720 5,928

Employee Cost 943 1,070 1,192 1,314

Other Expenses 1,591 1,475 1,584 1,800

EBITDA 2,200 1,941 1,944 2,814

Depr. & Amortization 156 217 253 280

Net Interest 1 — — —

Other Income 121 126 210 170

Profit before Tax 2,163 1,850 1,901 2,704

Total Tax 628 542 532 757

Profit after Tax 1,535 1,308 1,369 1,947

Ex-Od items / Min. Int. — — — —

Adj. PAT 1,535 1,308 1,369 1,947

Avg. Shares O/S (m) 19.0 19.0 19.0 19.0

EPS (Rs.) 80.9 69.0 72.2 102.6

Cash Flow Abstract (Rs m)

Y/e March 2012 2013 2014E 2015E

C/F from Operations 1,528 982 1,576 1,577

C/F from Investing (728) (702) (939) (801)

C/F from Financing (104) (109) (130) (152)

Inc. / Dec. in Cash 696 172 507 624

Opening Cash 123 819 990 1,497

Closing Cash 819 990 1,497 2,121

FCFF 912 265 841 977

FCFE 915 265 841 977

Key Financial Metrics

Y/e March 2012 2013 2014E 2015E

Growth

Revenue (%) 16.5 (7.6) 4.3 24.4

EBITDA (%) 7.6 (11.8) 0.2 44.7

PAT (%) 20.4 (14.7) 4.6 42.2

EPS (%) 20.4 (14.7) 4.6 42.2

Profitability

EBITDA Margin (%) 21.0 20.1 19.3 22.4

PAT Margin (%) 14.7 13.5 13.6 15.5

RoCE (%) 33.5 22.2 19.2 22.6

RoE (%) 33.5 22.2 19.3 22.6

Balance Sheet

Net Debt : Equity (0.2) (0.2) (0.2) (0.2)

Net Wrkng Cap. (days) 58 93 88 92

Valuation

PER (x) 20.0 23.5 22.4 15.8

P / B (x) 5.8 4.7 4.0 3.2

EV / EBITDA (x) 13.6 15.3 15.0 10.2

EV / Sales (x) 2.9 3.1 2.9 2.3

Earnings Quality

Eff. Tax Rate 29.0 29.3 28.0 28.0

Other Inc / PBT 5.6 6.8 11.0 6.3

Eff. Depr. Rate (%) 4.5 5.2 5.2 5.1

FCFE / PAT 59.7 20.2 61.4 50.2

Source: Company Data, PL Research.

Balance Sheet Abstract (Rs m)

Y/e March 2012 2013 2014E 2015E

Shareholder's Funds 5,291 6,489 7,728 9,523

Total Debt 9 9 9 9

Other Liabilities 109 117 117 117

Total Liabilities 5,409 6,615 7,854 9,649

Net Fixed Assets 2,429 2,889 3,376 3,696

Goodwill — — — —

Investments 232 255 455 655

Net Current Assets 2,747 3,472 4,023 5,298

Cash & Equivalents 819 991 1,497 2,122

Other Current Assets 3,297 3,806 3,989 4,926

Current Liabilities 1,369 1,326 1,463 1,750

Other Assets — — — —

Total Assets 5,409 6,615 7,854 9,649

Quarterly Financials (Rs m)

Y/e March Q2FY13 Q3FY13 Q4FY13 Q1FY14

Net Revenue 2,509 2,213 2,445 2,628

EBITDA 509 397 464 447

% of revenue 20.3 17.9 19.0 17.0

Depr. & Amortization 45 50 76 66

Net Interest — — 1 —

Other Income 3 42 14 129

Profit before Tax 468 390 400 509

Total Tax 139 108 121 155

Profit after Tax 328 282 279 354

Adj. PAT 328 282 279 354

Source: Company Data, PL Research.

Wabco India


THIS PAGE IS INTENTIONALLY LEFT BLANK

Wabco India



Wabco India



Wabco India


Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage

27.6%

52.0%

17.3%

3.1%

0%

10%

20%

30%

40%

50%

60%

BUY Accumulate Reduce Sell

% o

f To

tal C

ove

rage

PL’s Recommendation Nomenclature

BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months

Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months

Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month

Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as

information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be

considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy

or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information,

statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The

suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an

independent expert/advisor.

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or

engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.

We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

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