Wabco India: Book profits

Good profit margins, low debt, a market leadership position, and an edge in technology have helped the Wabco India stock sail through tough times for the auto industry. But with commercial vehicle (CV) sales continuing to be on a sticky wicket, it would be prudent for investors to book profits and exit the stock.

The company is a supplier of air and air-assisted brake systems for trucks and buses. The high-margin yielding Anti-lock Braking Systems (ABS) has been added to the product portfolio in the last few years.

Since our buy recommendation in June last year at Rs 982, the stock has shot up by 60 per cent to Rs 1,575 now. At this price, it trades at 20 times its trailing 12 month earnings and 18.5 times the estimated earnings for 2012-13. Considering the ongoing slowdown in the auto industry, near term upside for the stock seems limited.

Slowdown in CV sales

After slowing down to 12 per cent growth (year-on-year) in 2011-12, the overall volume growth in the auto industry weakened to 5 per cent in April-October 2012. Goods carriers among medium and heavy CVs (MHCVs) have been the worst hit, with volumes shrinking about 17.5 per cent in this period compared to previous period. High interest rates, price increases by CV manufacturers due to escalating raw material costs along with a general slowdown in economic activity have been the key reasons for the same. According to data from IFTRT (Indian Foundation of Transport Research and Training), truck rentals on major routes too, have shown a decreasing trend in the last few months, thanks to lower cargo offerings and hikes in tyre and diesel prices.

With the economic uncertainty remaining, CV offtake may remain sluggish for the next few months. The Society of Indian Automobile Manufacturers projects MHCV (goods carriers) volumes to shrink between 11 and 13 per cent for FY13. Wabco, counting Tata Motors, Ashok Leyland, Mahindra and Volvo among its clients, will continue to feel the impact of the downturn. Already, in the first half the company’s financial performance has been tepid. Net sales dropped by two per cent year-on-year to Rs 476 crore and net profits fell by about three per cent to Rs 74.6 crore. Operating margins remained at around 21.5 per cent. The company’s status as a tier-1 supplier and its sizeable exposures to the export and replacement markets (15 per cent of revenues each) could have helped hold margins.

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