Investors with a perspective of two to three years can consider exposure to the Wabco-TVS stock. The company is the market leader in the air and air-assisted brake systems for commercial vehicles and counts Tata Motors, Ashok Leyland, Mahindra and Volvo among its major clients.

Given that after two successive years of 26 per cent growth the auto industry may face a slowdown, the investment does carry an element of risk. However, the company's superior margins, efforts to diversify into new technologies and systems to increase its content per vehicle, and prospects for higher exports to the parent company lend promise.

At the current market price of Rs 982, the stock trades at a PE of about 12.5 times its estimated current year earnings and 10 times its estimated earnings for FY13.

Although headwinds in the form of slower GDP growth, high inflation and interest rates pose a threat, the auto industry is expected to face only a moderation in growth and not a slowdown of the order of 2008-09. As against a 0.71 per cent growth registered in 2008-09, SIAM expects the auto industry growth to come in at 12-15 per cent in the current year. Besides, robust agricultural produce, good export-import growth and the picking up of the infrastructure and construction industry in the last few months suggests that there is still room for growth in the CV industry.

This apart, the company will benefit from the launches planned by OEMs.

Ashok Leyland, for example, is launching about 25 vehicles in its new ‘U-Truck' platform that assures fuel efficiency and ride quality improvement. Wabco-TVS had inked an agreement with Mahindra-Navistar last year for the supply of air compressor technology for their braking systems. The latter is also coming out with new trucks in the higher tonnage segment.

Edge on technology

Rising fuel costs and increasing thrust on environment-friendly vehicles call for continuous improvements in technology. Having tied up with WABCO, which is the technology leader for braking, stability, and transmission automation systems, the company is on a strong wicket on this front. This favourable positioning also helps the company diversify its product offerings and increase its content supplied per vehicle.

In 2010, the company began supplying compressors to Cummins for engines that comply with the new emission norms introduced during the year. It also commenced supplies of new products like electronically controlled air suspension systems and clutch servos for few other OEMs. Ashok Leyland has also tied up with WABCO-TVS for development of transmission automation technology and the supply of automated manual transmission systems for its vehicles from 2010 to 2015.

Another product holding good potential is the higher-margin yielding Anti-lock Braking System (ABS) which is designed to prevent the wheels from locking while braking at turns and at high speeds. An expected change in regulatory norms, mandating all CVs to be fitted with ABS, would present a big opportunity for growth. The company currently derives only 6 per cent of its revenues from ABS supplies. Aside of this, increased sourcing by the parent company, WABCO, for its global clients from low cost countries, also lends promise on the export front.

For the year ended March 2011, net sales grew by 47 per cent to Rs 868 crore and net profits by 63 per cent to Rs 127 crore. Given its status as a tier-I supplier, its market leadership position and pricing power, the company has been able to maintain operating margins at a very healthy 22-24 per cent throughout the year.

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