Stock Pick From Auto Parts & Equipment Sector

• Macro economic conditions in favour of auto parts and equipment industry.
• Government compulsion for anti-brake locking system segment increases demand scenario for its products.
• Wabco Holdings investing constantly (USD 10 million per year) in its Indian facility to grow as an export hub.

WABCO INDIA: ON THE FAST TRACK

The improving macro economic sentiments, interest rate cuts, higher industrial activity, and an array of new product launches will lead the automobile industry to expect double digit growth in sales. The medium and heavy commercial vehicle (MHCV) and large commercial vehicle (LCV) segment will see growth of 13-17 per cent and 3 per cent respectively in the current fiscal, according to India Ratings & Research. This scenario is favourable to auto parts and equipment manufacturing companies.

Wabco India (WIL) is in the business of designing, manufacturing and marketing conventional braking products, advanced braking systems, and other related air-assisted products and systems. The company has on board over 3,200 employees. It has five world-class manufacturing facilities, a software design centre and a test track in India. WIL has massive aftermarket network with more than 7,000 outlets and 250 service centers that provide access to original parts, repairs, expertise, diagnostics and service for customers.

The parent company, Wabco Holdings, has been investing constantly about USD 10 million a year for infrastructure, expansion of capacity as well as introduction of new production lines at WIL. The company is now finalising an assembly line for the new automated manual transmission (AMT) at its Chennai plant. WIL exports 40 per cent of manufactured products to its MNC parent company. Wabco Holdings wants its Indian facility to grow as an export hub.

On the financial front, the net sales of WIL rose by 21.36 per cent from Rs 1,110 crore in FY14 to Rs 1,348 crore in FY15 because of the expected active growth in commercial vehicles. The EBITDA of WIL boosted by 22.39 per cent from Rs 166 crore in FY14 to Rs 203 crore in FY15. Interestingly, the company’s EBITDA margins expanded by 13 basis points to 15.09 per cent in FY15. However, the PAT margin of WIL contracted by 163 basis points to 8.95 per cent in FY15 as tax expense increased by 28.4 per cent and remained at Rs 56 crore as compared to the previous financial year. The company is a zero-debt company as of FY15.

The MSCI Index added the WIL scrip, which got effective from May 29, 2015. This may help the the company to boost its net foreign inflows. Its FII holdings expanded by 8 basis points to 2.41 per cent in the March 2015 quarter. Meanwhile, the Ministry of Road Transport & Highways has anti-brake locking system (ABS) mandatory in new commercial vehicles above five tonnes from April 1, 2015 and for existing commercial vehicles from October 1, 2015. Further, Tata Motors’ buses will start implementing AMT by FY16. Tata Motors is in fact going to implement 50 per cent of its passenger vehicle portfolio with AMT technology in future models by 2020. 

Hence, the demand of WIL’s products is expected to increase in the near future. Considering the debt-free status and expected revival in the auto component market in the near future, we recommend buying this stock.