Buyback could keep Bosch valuation elevated

Stock is trading at premium valuations but many positives ahead for the business

The stock of automobile component player Bosch was up 5.2 per cent after the company said its board would meet on Friday to discuss a proposal for the buy-back of equity shares. Given the limit of 25 per cent of combined paid-up capital and free reserves for buy-back, the company can utilise Rs 2,070 crore . It has Rs 1,800 crore of cash and bank balance and Rs 3,700 crore of investments, totalling about Rs 5,500 crore on its books.At the permissible limit, it will translate to about three per cent of current market capitalisation. However, if only non-promoters (28.82 per cent stake) participate, it could mean a 10 per cent reduction in the free-float, increasing the scarcity premium for the stock.

On the operational front, there are multiple triggers for the company, especially because of regulatory changes. The first is the mandatory implementation of anti-lock braking system from April 2018 for two-wheelers. Given the estimated size of two-wheelers, pegged at 25 million units by financial year 2019-20, ICRA estimates market potential for the new braking system to be Rs 4,000 crore (annually) by then. They say Bosch will be one of the key beneficiaries of this development, as it has developed low-cost solutions for markets such as India.

Further, the implementation of Bharat Stage-VI norms (bypassing BS-V) on emission by FY2020 should help Bosch as this will force automakers to use electronics and new technologies such as direct injection and particulate filters. The company should benefit by gaining market share over conventional players and by supplying higher content per car. The norms not only apply to diesel-powered vehicles but also call for petrol engines to be more fuel efficient, while limiting carbon monoxide emissions. This will lead to a shift towards petrol direct injection systems helping Bosch, which is a leader in the technology.

In the near term, the company should benefit from BS-IV norms (in place in most cities). This will allow Bosch to increase market share and realisations in the commercial vehicles segment, 54 per cent of revenues.

At the current price, the stock, which is up eight per cent in the past three trading session to Rs 22,657, is trading at 45 times its FY17 earnings. Analysts at UBS say the stock deserves a premium valuation and peg a target price of Rs 24,500, given a strong medium-term growth outlook.