Recovery in CV cycle, chip supply improvement to support Bosch stock

Margin expansion aided by localisation efforts is another trigger

Bosch’s operating performance in the December quarter (Q3FY22) was below street expectations. Higher raw material costs weighed on the gross margins which were down 283 basis points to 39.2 per cent. However, the company was able to limit the impact at the operating profit level to 30 basis points due to lower other expenses. 

Analysts at ICICI Securities have upgraded the stock to 'Add' from 'Sell' earlier on expectation of a pick up in the auto OEM or original equipment maker segment, semiconductor supply improvement, rising localisation and stabilisation in input commodity costs. They expect the company’s operating profit to witness a compounded annual growth rate of 33 per cent over FY22-24 after remaining flat over FY20-22.

Revenue recovery in the auto segment (87 per cent of overall revenues) is a key trigger for the stock. The company continues to outperform the broader market as auto segment revenues in Q3 were up 3.6 per cent YoY as compared to the revenue decline of automakers. Analysts led by Jinesh Gandhi of Motilal Oswal Research expect this outperformance to continue on account of a revival in commercial vehicle sales cycle, higher content and increase in exports. 

The auto revenues were driven by the aftermarket segment which posted a 29 per cent growth. The company highlighted that growth in the aftermarket was led by diesel products and revenues are higher than pre-Covid levels. The company is eyeing an expansion of the Bosch car service presence to 1,000 outlets as compared to 40 per cent of that number currently. 

In addition to the recovery in auto revenues, margin movement and traction in the electric vehicles (EV) will be keenly watched. The company, which has an order book of Rs 18,500 crore for BSVI products, is looking at increasing localisation of BSVI components. Higher volumes and local manufacturing is expected to improve margins. From levels of 11.9 per cent in FY21, analysts at Sharekhan expect margins to be at 16.6 per cent in FY23. Given the rising share of EVs, the company’s ability to benefit from multiple opportunities in the EV and connected vehicle space will be a medium term driver. 

The stock is currently trading at 27 times its FY23 earnings estimates and could be considered on dips.