Indian automobile sector continues to witness strong growth across segments. Commercial vehicle (CV), in particular, has witnessed a phenomenal growth on the back of government’s focus on infrastructure, good monsoon and increase of mining activities. In fact, despite the new axle load norms, the momentum continues to be very strong.
The Indian automobile sector continues to witness strong growth across segments. Commercial vehicle (CV), in particular, witnessed a phenomenal growth backed by the government’s focus on infrastructure, good monsoon, and an increase in mining activities. In fact, despite the new axle load norms, the momentum continues to be very strong.
Against this backdrop, we endeavour to find companies from the ancillary pack with future linked to growth in CV segment. Wabco India (Wabco) and Bosch are two such companies. In this note, we analyse their latest quarterly financial performance and the outlook, going forward.
Quarter performance snapshot
It is a leading supplier of braking and advanced safety components and caters to CV manufacturers.
On the back of strong growth of CVs, Wabco poster a 42.2 percent year-on-year (YoY) growth in its net sales. Sales were supported by 34 percent YoY growth in the domestic market and 28.1 percent YoY growth in exports driven by strong demand from its parent.
What hampered the profitability of the company is the significant rise in raw material (RM) prices which, as a percentage of net sales, grew 545 bps (YoY). The company, however, arrested the impact by taking cost control measures. Overall, the EBITDA margin witnessed a YoY contraction of 170 bps. We believe that the company would be able to pass on a part of the RM prices to its customers with a time lag.
Company’s Profit-after-tax (PAT) grew by 37.9 percent (YoY) and PAT margin contracted by 31 bps.Bosch
The company manufactures automotive and non-automotive products. Within automotive segment, the company provides diesel and gasoline fuel injection systems, car multimedia systems, auto electrical and accessories, starters and generators, energy and body systems services. Non-automotive segment consists of industrial technology, consumer goods, and building technology.
In terms of quarterly performance, Bosch posted a YoY growth of 21.3 percent growth in net sales driven by 20.5 percent YoY in the automotive mobility solutions. The growth in the later came on the back of strong demand for the powertrain. In fact, the non-mobility segment also witnessed a strong growth of 48.9 percent.
On the profitability front, the company witnessed a significant YoY margin expansion of 298 bps. This was led by the reduced operating and employee costs. PAT witnessed 42.4 percent YoY growth with PAT margin expanding 199 bps YoY.
Growth driversRobust CV segment
Wabco and Bosch are focused, primarily, on CV segment and their fortunes are linked to the growth in CV segment. CV demand has been strong and is outperforming the industry growth. Domestic volume for CV registered a YoY growth of 19.9 percent in FY18, much higher than the overall industry growth of 14.2 percent.
The growth in CV has been supported by an increased focus on infra development, mining activity, and a good monsoon. Wabco management expects 12-13 percent annual growth in the CV market over FY18-20.Dominant position
Both Bosch and Wabco have dominant positions in the markets they cater to. Bosch has around 75 percent of the market share in automotive mobility and Wabco has 85 percent of market share in air braking system.
Further, Wabco continues to remain the preferred supplier to its parent as was evident from Q1 FY19 export revenue growth. Bosch, on the other hand, has technological leadership among auto ancillary companies and its technological prowess makes it one of a few companies which have bargaining power with OEMs.BSVI – an opportunity
With the technology support from its parent, Bosch is targeting to manufacture products compliant with the upcoming change in emission norms to BSVI from BSIV. Further, in order to expedite the product development, the company has also made acquisitions.
New emission norm is expected to open new avenues for Bosch in 2W space as carburetors would be replaced by an injection system. Additionally, pre-buying of vehicles ahead of BSVI implementation is expected to boost the financials of these companies.ICE continues to dominate
Bosch’s management has indicated that the internal combustion engine (ICE) would continue to be dominant despite electric vehicle disruption. In light of this, the company is making heavy investments to develop technology to reduce emission from ICE driven vehicles.Valuation at elevated levels – continue to accumulateBosch/ Wabco are trading at valuations of 36/36.8 and 31.3/29.3 times FY19 and FY20 projected earnings, which, we believe, are at an elevated level. Therefore, we advise investors to accumulate the stock on any weakness with an eye on the long term.
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