Wabco: Passing through a rough alley

Jan 21, 2013

Wabco India announced the third quarter results of financial year 2012-13 (3QFY13). The company reported a 12% YoY decline in revenues and a 14% YoY decline in profits. Here is our analysis of the results.

Performance summary

• Net sales decline by 12% YoY during 3QFY13.
• Operating profits decline by over 22% YoY as margins contract by 2.4% YoY. This is
• largely due to higher employee and material costs (both as a percentage of sales).
• Profits decline by 14% YoY on the back of a poor operating performance.
• Net sales and profits declined by 5% YoY and 10% YoY during the nine month period ended December 2012.

Standalone financial snapshot

(Rs m)	3QCY12	3QFY13	Change	9mFY12	9mFY13	Change
Revenues	2,509	2,213	-11.8%	7,589	7,215	-4.9%
Expenditure	2,000	1,816	-9.2%	5,939	5,738	-3.4%
Operating profit (EBDITA)	509	397	-22.1%	1,649	1,477	-10.5%
Operating profit margin (%)	20.3%	17.9%		21.7%	20.5%
Other income	3	42	1332.9%	101	113	12.1%
Interest	0	0	150.0%	1	0	-87.5%
Depreciation	45	50	11.7%	113	141	24.6%
Profit before tax	468	390	-16.7%	1,636	1,448	-11.5%
Tax	139	108	-22.6%	492	420	-14.6%
Profit after tax/(loss)	328	282	-14.2%	1,144	1,028	-10.1%
Net profit margin (%)	13.1%	12.7%		15.1%	14.3%
No. of shares (m)					19.0
Basic earnings per share (Rs)					74.8
P/E ratio (x) *					21.1

What has driven performance in 3QFY13?

• Wabco India reported revenues of Rs 2,213 m during the quarter ended December 2012. This figure is lower by 11.8% YoY as compared to the same quarter last year. The revenue decline is seemingly on the back of subdued commercial vehicles volumes - especially high tonnage vehicles - and inventory correction at the customers end, thereby reducing the overall demand for Wabco's products.

  (Rs m)	3QCY12	3QFY13	Change	9mFY12	9mFY13	Change
  Change in inventory/cost of material	1,326	1,201	-9%	4,102	3,844	-6%
  % of sales	52.8%	54.3%		54.1%	53.3%
  Employee benefit expenses	271	271	0%	701	807	15%
  % of sales	10.8%	12.2%		9.2%	11.2%
  Other expenses	403	344	-15%	1,137	1,086	-4%
  % of sales	16.1%	15.5%		15.0%	15.1%
  Total expenses	2,000	1,816	-9%	5,939	5,738	-3%

  
  
• Wabco's operating profits declined by 22% YoY during the quarter. Apart from the revenue decline, the relatively slower decline in expenses led to a 2.4% YoY contraction in margins. Operating margins declined to 17.9% as compared to 20.3%. It may be noted that Wabco began paying royalty to the parent company during the current year as well. Amongst the expenses, the material and the employee costs were the key reasons for higher expenses during the quarter. Wabco's net profits declined by 14% YoY on the back of a poor operating performance. The decline would have been sharper had it not been for the higher other income and lower effective tax rate.
  
  
• As for the performance during the nine month period ended December 2012, Wabco's revenues and profits declined by 5% YoY and 10% YoY respectively. Operating margins during the period stood at 20.5% as compared to 21.7% during the corresponding period last year.

What to expect?

At the current price of Rs 1,575, the stock is trading at a multiple of about 14 times our FY15 estimated earnings per share and at about 21.1 times its trailing twelve month earnings. Given that the company's customers - the commercial vehicle manufacturers - are facing tough times on the back of an overall subdued economic environment coupled with high interest rates in the market, we believe the short term may be a bit shaky for Wabco. However, we firmly believe that the company's long term prospects remain positive. We stick to our recommendation of waiting for the stock to correct by at least 14% to around Rs 1,350 before buying the stock.