Key points:

Sundaram Clayton has finally decided to spin off its brake division into a subsidiary. The new entity will be called WABCO-TVS and will be listed on the stock exchange.

We believe that the demerger would help both the companies to focus on their core areas. WABCO would control the brake division while the TVS group would run the casting division. The higher control of WABCO in the brake division is in line with WABCO's strategy and may open new outsourcing opportunities for the brakes company as WABCO is scouting for a low-cost producer of brakes.

For FY2008, Sundaram Clayton has raised its capex plans to Rs200 crore, out of which Rs 90 crore would be spent on the brake business and Rs 110 crore on the die-casting business.

We are introducing our FY2009 estimates for Sundaram Clayton. We expect the company to record a revenue growth of 17% and a profit growth of 26% during the year. We expect its earnings to reach Rs 74.5 in FY2009.

Valuation and view:

We maintain our positive outlook on the company considering the strong performance that it has delivered in the past, its high productivity levels and strong future outlook. We also believe that a huge replacement demand for brakes would be triggered with the higher use of the anti-lock braking system in commercial vehicles. With the demerger, the focus of both the parents would increase on their respective business, which should yield substantial gains for the company. Also, this further opens the opportunity for WABCO-TVS to become an outsourcing hub for its parent, WABCO. The company is not witnessing any slowdown currently and expects the effect of the same to be more apparent from the second half of the year. We are introducing our FY2009 estimates for Sundaram Clayton. We expect the company to record a revenue growth of 17% in FY2009 and its margins to improve further to 16.5% on the back of better economies achieved due to high capacity utilisation and ramp-up in the newly added capacities. We expect the profits to grow at 26% during the year and the earnings to reach Rs 74.5 in FY2009. While computing the company's value, we have assumed a 75% discount to its total investment. After adjusting for the same, the stock is currently trading at 9.4x its stand-alone FY2009E earnings and 6.9x its EBIDTA. We maintain our Buy recommendation with a price target of Rs 1,350.