Valuations, near-term headwinds keep brokerages cautious on Bosch

Auto component major Bosch reported a lower-than-expected performance in the June quarter (Q1FY25). While revenue growth was weak at 4 per cent over the year-ago quarter, margin performance was subpar.

Most brokerages are cautious on the outlook and have a ‘sell’ rating. Some have also cut their FY25 and FY26 earnings estimates to factor in the Q1 performance, cost pressures, and near-term headwinds.

Given the multiple concerns on the operating front as well as valuations, the stock has slipped 11 per cent since the beginning of this month. 

The sales growth of 4 per cent for the second-largest listed auto parts player by market capitalisation came from the mobility segment.

 

Within this, the replacement market grew 8 per cent led by demand for new-generation diesel components while the power solutions and two-wheeler segments registered gains of 2 per cent and 14 per cent respectively.

While higher sports utility vehicle growth powered gains for power solutions, the uptick in two-wheelers was on account of an increase in the sales of fuel injectors and supply modules. Mobility solutions account for 81 per cent of revenues. 

Among other segments, consumer goods grew by 5.1 per cent on higher demand for grinders, drills, and cutters while the building technologies business gained by 19 per cent on the volume uptick in security system installation orders.

In the domestic market, the company expects the overall growth to be in positive territory in the current year.

The two-wheeler segment is expected to get a boost from transition to BSVI onboard diagnostic systems or OBD 2 norms leading to a jump in the demand for advanced sensor solutions.

The company is eyeing an increase in the share of exports from 8.1 per cent in FY24 by being more competitive and increasing localisation efforts.

Given the expectations of rising localisation, increased content per vehicle, and emerging opportunities in the alternative powertrain segment, Sharekhan continues to maintain a positive stance on the company.

It has a ‘buy’ rating on the stock with an unchanged target price of Rs 35,968 a share. 

Gross margins were lower than expected at 35.4 per cent given the higher import mix. Say Basudeb Banerjee and Vishakha Maliwal of ICICI Securities: “Despite localisation efforts, hiving off lower margin businesses, gross margins continued to surprise negatively as has been for the past couple of years (barring Q3FY24).”

The operating profit margin fell 110 basis points on a sequential basis to 12 per cent due to higher other expenses.

While the management focuses on boosting localisation in the long term, it anticipates a rise in imports over the next four years due to the transition to common rail systems.

Analysts led by Aniket Mhatre of Motilal Oswal Research say that this will restrict any significant recovery in operating profit margin. 

The brokerage has cut its FY25-26 earnings by 7-8 per cent to reflect moderate demand in underlying industries and higher operating expenses. It has a neutral stance given that the stock is fairly valued with a target price of Rs 29,540.

ICICI Securities has a ‘reduce’ rating. With limited visibility of operating profit margins moving up beyond 14 per cent levels on a sustainable basis, and the company likely to face CV industry downcycle headwinds from mid-FY25, current valuation levels look inflated, says analysts at the brokerage.