Bosch: Reversal in fortunes on the cards

Higher domestic demand, increasing exports and localisation should aid revenues, margins

The expected revival in the commercial vehicle (CV) cycle and opportunities from implementation of emission norms in 2016 should help Bosch reverse its muted revenue growth and volume cycle seen in the past two years. Given the lack of demand in the CV and tractor space which contributes about half of  revenues, sales growth for Bosch had come down to single digits in CY12 and CY13. This is expected to change with the expected CV cycle revival in the second half of FY15 and opportunities in the two wheeler/petrol segments as emission norms come into effect.

Over the medium term, higher dieselisation of passenger vehicles especially the lower-end hatchbacks should help the market leader in fuel injection systems. Though the share of diesel cars has shrunk over the past couple of quarters from about 50 per cent to about 42 per cent currently, analysts at Antique Stock Broking estimate that over the long term cars will continue to dieselise, given the 25 per cent higher fuel efficiency and the fact that most launches come with a diesel variant unlike the case earlier.

While the company’s revenue growth is linked to prospects of the CV/tractor segments, its focus on petrol engines and non-auto business will help diversify its revenue mix. From 11 per cent in CY12, non-auto as part of the revenues is expected to be 12.4 per cent in CY14.

The company is also banking on export revenues to mitigate the slowing in the domestic market. In the June quarter, while domestic revenues grew 2.5 per cent year-on-year, exports grew 17 per cent. Exports now constitute 13 per cent of revenues, against 11 per cent a year ago. In fact, it is the higher exports and lower import content due to increased localisation that helped Bosch improve its margins by 260 basis points year-on-year to 18.1 per cent. This despite revenue growth at only four per cent.

Most analysts have revised their earnings guidance on the back of higher revenue growth and margins. While revenues are expected to grow by 15 per cent annually over the next couple of years, margins are likely to move from under 15 per cent in CY13 to 17 per cent in CY15.

While a revival in the CV cycle and the emission norm change will drive volumes, the stock at Rs 14,278 is trading at 28 times its CY15 earnings ,which is at premium to its peers. However, most analysts justify the premium given the technology edge and bargaining power the company has with auto makers, owing to its 70 per cent share in the fuel injection segment. Given the Bloomberg consensus analyst estimates which peg the target price at Rs 15,017, there is little upside from these levels and investors will do well to pick the stock on dips.