Brief India: WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF and more

In this briefing:

1. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
2. Memory Chips and the Elasticity Myth
3. Post Card from Bengaluru (India)
4. Dhanlaxmi Bank- Free from the PCA Stranglehold
5. Coromandel International: Doing the Fieldwork Before the Harvest.

1. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

• ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
• In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
• In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.

2. Memory Chips and the Elasticity Myth

During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase.  This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.

3. Post Card from Bengaluru (India)

With our Post Card Series, our aim is to bring on-ground realities & perspectives from cities across India. Our meetings are specifically set up with Small and Medium Scale Enterprises to understand the structural changes happening in their Industry. In this visit to Bangalore, we focus on the real estate sector and developer financing issues. In this Insight, we bring you highlights of our interactions with local entrepreneurs, IT Professionals, real estate brokers and developers to understand the state of consumption in the city, the primary drivers impacting real estate demand, and the current funding scenario for real estate developers.  

4. Dhanlaxmi Bank- Free from the PCA Stranglehold

Dhanlaxmi Bank (DHLBK IN) share price has surged by 10% today on the back of RBI move to take it out of Prompt Corrective Action (PCA) following improvement in its financial ratios. We have mentioned in our earlier reports (please click here, here and here) about the helplessness of the bank as it couldn’t lend due to restrictions from RBI.

Now as the grip is loosened, Dhanlaxmi can resume lending activities and improve its financial ratios without adding any new capital in the near term.

We analyze the implications post PCA through this report.

5. Coromandel International: Doing the Fieldwork Before the Harvest.

Coromandel International (CRIN IN) is an agri-solutions company that is the 5^th largest Agro-chemical company in the country. It is India’s largest private sector Phosphatic fertilizer company, India’s largest Single Super Phosphate (SSP) company, and India’s largest organic manure company. It is India’s fourth largest agro-chemical manufacturer and has an R&D base to create and refine its product offerings as well as a retail chain with over 800 stores to act as a one-stop-solution for farmers.

Key Growth Drivers:

• Strong Agri growth levers are driven by population growth, governmental policies, Indian soil composition, and nutrient deficiency. 
• Crop Protection segment has a growing export market as well as expiring agro-chemical patents present new market opportunities.
• Branding as well as a growing retail chain fuel growth in the domestic markets. 

Valuation:

Earnings Per Share is 22.57 in FY 17-18, 24.75 in FY 18-19E and 29 in FY 19-20E. P/E ratio is 23.33 in FY 17-18, 21 in FY 18-19E and 20.5 in FY 19-20E. EV/EBITDA is 13.69 in FY 17-18, 14.38 in FY 18-19E and 15.09 in FY 19-20E. The company is fairly valued given a high growth outlook, improving efficiencies and future market potential.