Wabco: Slow times continue

May 16, 2013

Wabco India announced the results for the quarter and year ended March 2013. During FY13, the company reported an 8% YoY decline in revenues and a 15% YoY decline in profits. Here is our analysis of the results.

Performance summary

• Net sales decline by 15% YoY during the quarter ended March 2013 (4QFY13).
• Operating profits decline by 17% YoY on an absolute basis while there was a marginal 0.4% YoY decline (to 19%) in operating margins.
• A poor operating performance coupled with higher depreciation costs lead to a sharper decline of 28% YoY in profits during the quarter.
• During FY13, net sales and profits decline by 8% YoY and 15% YoY respectively.
• Boards recommends dividend of Rs 5 per share (dividend yield of about 0.4%), subject to approval.

Financial snapshot

(Rs m)	4QFY12	4QFY13	Change	FY12	FY13	Change
Revenues	2,868	2,445	-14.7%	10,456	9,659	-7.6%
Expenditure	2,312	1,981	-14.3%	8,257	7,719	-6.5%
Operating profit (EBDITA)	555	463	-16.5%	2,199	1,940	-11.8%
Operating profit margin (%)	19.4%	19.0%		21.0%	20.1%
Other income	15	14	-6.3%	121	126	4.8%
Interest	0	0	-80.8%	1	0	-85.2%
Depreciation	43	76	76.4%	156	217	38.9%
Profit before tax	526	401	-23.8%	2,162	1,849	-14.5%
Tax	136	121	-10.9%	628	542	-13.8%
Profit after tax/(loss)	390	280	-28.3%	1,534	1,308	-14.7%
Net profit margin (%)	13.6%	11.4%		14.7%	13.5%
No. of shares (m)					19.0
Basic earnings per share (Rs)					69.0
P/E ratio (x) *					20.1

* trailing 12 months earnings

What has driven performance in 4QFY13 and FY13?

• Wabco's revenue decline continued during the quarter gone by on the back of poor sales of commercial vehicles which has led the original equipment manufacturers to take measures to lower inventories at their end. This has led to the demand for Wabco's products to dwindle. However, on a sequential basis, the company's revenues increased by 10% QoQ.

  (Rs m)	4QFY12	4QFY13	Change	FY12	FY13	Change
  Change in inventory/cost of material	1,621	1,328	-18%	5,723	5,172	-10%
  % of sales	56.5%	54.3%		54.7%	53.5%
  Employee benefit expenses	242	263	9%	943	1,070	13%
  % of sales	8.5%	10.8%		9.0%	11.1%
  Other expenses	449	391	-13%	1,591	1,477	-7%
  % of sales	15.6%	16.0%		15.2%	15.3%
  Total expenses	2,312	1,981	-14%	8,257	7,719	-7%

  Data Source: Company
  
• Wabco's operating profits declined by 17% YoY during the quarter ended March 2013. The company's margins contracted by 0.4% YoY to 19%. While input costs declined on a year on year basis - as a percentage of sales - the other two cost heads i.e. employee expenses and other expenses increased as a percentage of sales as compared to last year. It may be noted that the company changed its accounting policy during the current year wherein it started amortising vendor tooling costs over their useful lives as compared to taking them completely as part of expenses. According to the company, this change in policy has led to net profit after tax to be higher by Rs 41.5 m during the quarter.

• Wabco's net profits declined by 28% YoY during the quarter. Apart from a poor operating performance, higher depreciation costs added to the sharper decline in profits. Profits came in flat on a sequential basis i.e.in comparison to the quarter ended December 2012.

• During FY13, Wabco's revenues and profits declined by 8% YoY and 15% YoY respectively. The company's operating profits declined by 12% YoY on the back of a 0.9% contraction in margins to 20.1%. The key reason for the same was higher employee expenses (as a percentage of sales and in absolute terms as well). As per the company, had it not been for the accounting policy change (amortising vendor tools), net profits would have been lower by about Rs 125 m.

What to expect?

At the current price of Rs 1,386, the stock is trading at a multiple of about 20.1 times its trailing twelve month earnings and about 12.3 times our FY15 estimated earnings per share. We believe the commercial vehicle volumes are close to bottoming out and as such expect the demand scenario only to improve from here on. While catering to OEMs is one segment of the company's revenues, we believe the company's replacement market segment to contribute more towards its revenues and profits in the short to medium run. Nevertheless, the long term prospects of the company remain intact and as such, maintain our view of the stock being attractive at current levels. But we would like to reiterate that investors follow our asset allocation guide and make sure that no stock should form more than 5% of one's portfolio.