Wabco India – Special Situations Opportunity?

Wabco India manufactures air-assisted and air brake systems for commercial vehicles (CVs) in India. Wabco is a market leader with an 85% market share in the OEM and 75% market share in the after-market. Wabco enjoys strong technology and market share moat.

German company ZF Group acquired US-based Wabco Holdings. The foreign promoter bought Wabco India shares at ₹7067 per share, totaling ₹3351 crore. The promoters holding went up from 75% to 93%. Read more: ZF Group to acquire 25% shares in Wabco India

Two things can happen:

Option 1: 
Promoters may reduce the holding to 75% within a year (as per SEBI guidelines). Stock prices may fall in the short-term and then may go up. Wabco may fail to reduce their stake (refer to risks).

Option 2: 
Promoters may delist the company and buy back the remaining 7% via open offer. The stock price may go up.

Risks: 
Wabco India may see a similar effect of Federal-Mogul.
Promoters of Federal-Mogul failed to reduce their stake through an open offer sale despite a floor price of ₹342, which was a 25% discount to the prevailing market price. Read more: Poor response to Federal-Mogul OFS

The CV segment is already facing tough times due to prolonged economic downturn and COVID-19. There is no crystal ball to say when the demand will pick up. Industry experts don’t believe the CV segment to recover any time soon. It may start seeing growth from 2022 beginning.

Valuation:
Wabco India is trading close to 52-week low. The current price is ₹4850 which is a 45% discount to the promoter’s buy price.

I think it’s P/E ratio is misleading. High P/E means stock is overpriced. Low P/E means stock is undervalued.

Current Price: ₹4850, EPS TTM: 39
P/E = Price / EPS = 124 (Very High)
P/E is high because EPS is down due to COVID

In 2018, 2019, the EPS was around 143 and 148 respectively.
If the EPS returns to 2019-level (pre-COVID), then the P/E will be 33.

According to ICICI Securities estimates, Wabco may have an EPS of 149 and P/E of 33 in FY23.

04-Nov-2020:
The outlook for the CV Segment remains ‘negative’ on the back of continuing challenges such as over-capacity, subdued freight availability, financing constraints, among others, all of which have compounded due to the pandemic, ICRA reported.

Did you know?
Berkshire Hathaway held 3.37 million shares of Wabco Holdings in 2016. Buffett unloaded 100% of his Wabco Holdings in 2017. He had an estimated gain of 98% on the holding.
Read more:
Warren Buffett sold Wabco Holdings

Wabco, the leading global supplier of commercial vehicle technologies, is the type of old-line, “easy-to-understand” business that Buffett traditionally likes.
Read more:
Warren Buffett Style Stock

Disclaimer: 
For educational purposes only. Please read the disclaimer below.

MyValuePicks.com is not a registered investment advisor or broker. This content is being made available for educational purposes only and should not be used for any other purpose. MyValuePicks.com does not accept responsibility for the consequences of financial decisions taken by users based on the information provided herein. The aim is to provide a reasonably accurate picture of the financial and related opportunities based on the information available with us.

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