CV growth prospects, regulatory tailwinds to drive gains for ZF India

Higher exports and improving margins on the back of softening input costs are other positives

Strong growth prospects in the domestic commercial vehicle (CV) segment, softening commodity prices, higher exports and regulatory tailwinds related to mandatory safety standards are positive for auto component major ZF Commercial Vehicle Control Systems or ZF India (formerly Wabco India). Increased sourcing by the German parent ZF Group is also expected to boost incremental revenue growth.

The key trigger is the domestic CV demand from original equipment makers or OEMs and growth in the replacement segment. The CV segment continues to be the best performer within the auto segment, with the trend sustaining in December. Even as most domestic companies reported a dip in sales, the medium and heavy commercial segment (M&HCV) saw double-digit growth led by Ashok Leyland, whose sales were up 45 per cent year on year.

Reliance Securities expects the automobile industry to witness low double-digit growth in FY23, while the M&HCV segment would outperform with 40 per cent plus volume growth in FY23. This should be aided by volume growth in Q4, which is seasonally the strongest quarter. Over the medium term, pick up in construction/mining activities and new infrastructure projects could drive further gains.

In addition to this, the adoption of new technology in CVs has been a positive trend, says Anand Rathi Research. ZF India is focussing on advanced driver-assistance systems, electronic stability/braking programs, telematics and connectivity and electronic compressors. The expected AIS 140 regulations (from FY24) for passenger commercial vehicle systems would help it improve its content per vehicle and deepen customer penetration, say Vijay Sarthy TS and Akshay Karwa of the brokerage. The company has an 85 per cent market share in air braking and safety systems.

In addition to air braking systems, improving demand for exports in intermediate light commercial vehicles and passenger vehicles augur well for ZFI helping it to achieve its portfolio diversification target, says ICICI Securities. It has started supplying compressors for electric vehicle buses to leading domestic OEMs and is gearing up to supply electronic stability control systems mandated for buses from FY23. ZFI continues to be a key beneficiary of the current CV upcycle in India, with input commodity softening and improving exports to aid scale and margin revival, say Basudeb Banerjee and Pratit Vajani of the brokerage.

ZFI’s plans of spending Rs 1,800 crore capex for higher exports and new product innovation is also expected to offer it revenue visibility. Geojit Retail Equity Research expects the company to post a 24 per cent growth in net profit annually over the FY23-25 period. They have an accumulate rating on the stock with a target price of Rs 10,043, which offers a 12 per cent upside from current levels. Investors could consider the stock which is trading at 45 times its FY24 earnings estimates on dips.