Bosch: Lower demand limits growth

Analysts have cut earnings estimates but preparedness for BS-VI remains a positive

The stock of Bosch has fallen 15 per cent over three months because of muted revenue growth on the back of a weaker-than-expected demand for passenger vehicles, light commercial vehicles, and tractors. The fall in demand for diesel vehicles is also hurting. For the October-December quarter, while petrol-vehicle and aftermarket business grew in high double-digits, diesel vehicle segment grew at only five per cent. Motilal Oswal Securities has cut their earnings estimates for the next two financial years by five to nine per cent to factor in the continued pressure on the diesel segment.

About 41 per cent of Bosch’s revenues come from fuel-injection equipment, while injectors, nozzles/nozzle-holders account for 27 per cent.

The company has decided to sell the starters and generators business (which make up 12 per cent of revenues) to its German parent for Rs 486 crore. The announcement in the first week of February was not well-received by the Street, which thinks the company has not captured the value of starters and generators’ business. The management has justified the sale value as fair, given the low margins of the business. Moreover, Bosch decided to exit this segment globally.

Key triggers include the implementation of BS-VI emission norms from 2020, entailing installation of filters and converters in diesel vehicles. In addition, the norms would require petrol engines to be more fuel-efficient and carbon monoxide emission levels would have to be controlled, leading to a shift towards petrol direct-injection engines.

Kotak Securities says Bosch will be a key beneficiary as it is the leader in petrol direct-injection technology. Bosch has already indicated its readiness for BS-VI emission norms and plans to invest Rs 1,170 crore in India in 2016 in capacities, infrastructure, and research, to meet future regulations.

Though Bosch is a direct play on emission norms, given its product range (fuel-injection systems, after-treatment products), HSBC analysts say a direct leap to BS-VI from BS-IV is likely to attract many international firms to the Indian market. This will be a threat to Bosch’s positioning in the diesel segment. The analysts have a hold rating, as they feel the emission leap will result in lower localisation, which will impact profitability in the initial years. Bosch’s ability to maintain market share will be a positive, but any slip-up in the diesel-vehicle market share will be a negative signal for the Street.