Bosch India: Positives in the long term

Implementation of stricter emission norms and demand revival to boost the company

Bosch, the Indian arm of German automobile parts maker Robert Bosch, fell nearly five per cent in trade on Wednesday, after the parent said it delivered components to Volkswagen, which had falsified emissions data in the US. The parent said the responsibility of application and integration of the components was of Volkswagen. Exports from the Indian unit largely to Germany are 12 per cent of sales.

An e-mail questionnaire to the Indian unit went unanswered. The other auto parts supplier hit from the Volkswagen episode has been Motherson Sumi Systems, shares of which have fallen sharply recently.

The near term could see some volatility and pressure on the Indian Bosch stock. But there are positives. The first is the BS (Bharat Stage)-IV emission norms announced last month, to be implemented across the country from April 1, 2017. The norms are already applicable in key cities. More cities have been told to implement the norms from October 1, 2015, and April 1, 2016. Bosch India stands to gain, as the implementation of the norms will require more sophisticated engines and emission systems.

Analysts at HSBC say BS-IV will increase Bosch India's market share (and revenues) in commercial vehicles and boost realisations. Commercial vehicles account for 54 per cent of Bosch India’s revenues. The company has 70 per cent market share in the diesel engine parts’ business.

Analysts expect Bosch India's after-market segment to grow at over 20 per cent a year over the next couple of years. This growth will be on the back of product launches, better technology, and distribution base. (After-market is the market for spare parts, accessories, and components for automobiles). There is scope for the non-auto business, 12 per cent of Bosch India's revenues, to move up in line with that of the parent company, which gets 42 per cent of its revenues from the non-auto segment.

Motilal Oswal Securities Ltd (MOSL)'s analysts say the non-auto business is expected to benefit from the coming recovery in economic activity. For Bosch India, MOSL analysts expect a yearly revenue growth of 23 per cent over FY15-18.

Bosch India is down 23 per cent since August, due to demand concerns as well as high valuations. The stock is now available at 32 times the FY17 estimates as compared to 41 times in mid-August. Interestingly, the parent company's unlisted Indian entities are growing at double the pace of the listed company, Bosch India.