After our earlier ‘buy’ recommendation in June 2011 at Rs 982, the Wabco India stock moved up by 82 per cent to touch a high of Rs 1,797 in April 2012. But market volatility coupled with a weakening commercial vehicle cycle has seen the stock lose a bit of steam after that.

The company, a supplier of air and air-assisted brake systems for commercial vehicles (CVs), also had a lacklustre June quarter. Net sales rose by a marginal 1.2 per cent year-on-year to Rs 238 crore; adjusted profits grew by 15 percent to Rs 39 crore.

Challenges

While lower raw material costs helped, profit growth was predominantly aided by an easing off in interest costs and higher other income.

After showing about 8 per cent growth (Y-o-Y) in 2011-12, medium and heavy CV volumes for the industry have lost sheen in recent times. It dropped by 12 per cent in April-June 2012 over the same period last year.

As per data from the IFTRT (Indian Foundation of Transport Research and Training) truck rentals in major routes too dropped by 8-11 per cent in this period, due to lower cargo offering.

With the economic uncertainty continuing, commercial vehicle off takes may remain sluggish for the next few months. Wabco, counting Tata Motors, Ashok Leyland, Mahindra and Volvo, among its clients, could continue to feel the impact of the slowdown.

At the current market price of Rs 1,534, the stock trades at about 18.5 times its trailing 12-month earnings and 15 times its estimated earnings for FY13. Though the valuations are not cheap, a few factors work in the company’s favour. Hence existing investors can hold on to the stock.

Positives

For one, unlike many mid-cap companies which feel the pressure of high interest costs when sales slow, Wabco India’s near-zero debt status is a positive. Two, Wabco consistently boasts of superior operating margins of around 20 per cent. In the just-concluded June quarter, operating margins came in at 22.6 per cent, bettering the 20.7 per cent achieved a year ago.

Pricing power arising from its status as the market leader and tier-I supplier and exposures to replacement markets (16 per cent of revenues) and exports (13 per cent of revenues) are the main reasons. Three, the company’s strong parentage gives it an edge on technology and helps widen its product offering per client. This, in turn, adds to the company’s bargaining power with CV makers.

Value additions

Rising fuel costs and increasing thrust on environment-friendly vehicles call for continuous improvements in technology.

Being a group company of the Brussels-based Wabco, a global technology leader for braking, stability, and transmission automation systems, the company is on a strong wicket .

A product holding good potential is the higher-margin yielding Anti-lock Braking System (ABS). ABS is designed to prevent the wheels from locking while braking at turns and at high speeds. The company currently derives 6 per cent of its revenues from ABS supplies.

It plans to introduce two new products — Automated Manual Transmission and Lift Axle Control Valve. The former optimises gear shifting, reduces fuel consumption and helps increase payload. It has already been introduced for Ashok Leyland’s buses.

The latter is used for lifting or lowering the axle based on the vehicle’s load. The shifting market preference for higher tonnage vehicles augur well for growth on this front.

This apart, increased sourcing by the parent company from low cost countries for its global clients, also lends promise for exports.

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