Bosch: Not taking a brake

Contributions from aftermarket, non-auto and exports helped steady parts maker amid slowing auto sales

Automobile component maker Bosch rose 1.6 per cent on better-than-expected June quarter results, while the broader markets remained volatile and ended lower by half a per cent. While most auto-related stocks are reeling from the slowdown, the company managed to grow its revenues six per cent year-on-year to Rs 2,300 crore, 8-10 per cent above Street estimates, and its margins by 60 basis points to 15.7 per cent. Net profit, too, was above estimates, up two per cent to Rs 250 crore.

The management expects the calendar year to be challenging due to reduction in demand and a falling rupee. At Rs 8,445, the stock is trading at 22 times its CY14 estimated earnings, higher than its 10-year historical average of 18.5 times. While most analysts have a positive long-term outlook, the near term, given the cyclical nature of the sector, may be tough.

Says Sandeep Pandya and Sumeet Jain of Goldman Sachs Equity Research: “We like the company’s differentiated technology position in the auto supplier industry, but believe it will continue to face cyclical pressures driven by Indian heavy truck and car and rupee depreciation.” The analysts have a neutral rating. While valuations are above historic levels and the short-term outlook unfavourable, given the Street’s current preference for quality scrips and long-term prospects, investors can buy when the stock falls.

Positive surprises
While analysts believed revenues could see a decline given the sharp fall in auto sales, the company reported a growth in the revenues on the back of 14 per cent jump in exports, 4.5 per cent in increase in aftermarket sales, 16 per cent rise in non-auto sales and price hike taken during the June 2013 quarter. While the after-market segment contributes about 22 per cent to revenues, the other two segments make up for 12 per cent each of revenues. What helped matters for the company were the increase in sales of tractors (22 per cent of revenues) and light commercial vehicles (26 per cent). Overall, automotive business saw a fall of 1.5 per cent year-on-year.

Earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins improved on better product mix and the fact that raw material costs as a percentage of revenues fell 131 basis points to 56 per cent. Margin improvement came in despite higher import costs due to rupee fall and rise in employee costs. Imports make up 40 per cent of raw material costs. Net profit growth was driven by higher-than-expected top line growth. The company expects to maintain margins on the back of localisation and cost reduction.

Outlook
Though the numbers put out by auto makers continue to point to a slowdown in most segments (with the exception of tractors), Batlivala and Karani Securities analysts Annamalai Jayaraj and Sailesh Raja, who have a buy on the Bosch stock, believe the company will continue to outperform the industry growth due to after-market, exports and increase in content per vehicle (as Bosch's supplies to original equipment manufacturers widens). The next trigger, according to them, is the implementation of emission norms.

Antique Stock Broking’s Ashish Nigam and Saksham Kaushal, who have a hold rating on the stock currently (due to valuations, additional triggers), say they remain constructive on Bosch’s future outlook, given the company’s monopolistic position in the diesel fuel injection equipment, which gives it relatively stronger pricing power, compared with other auto ancillary players. Further, they believe the car industry will continue to dieselise albeit at a slow pace, given that diesel vehicles are 25 per cent more fuel-efficient and the trend of most new vehicles coming with a diesel variant.