CV growth worries, sustainable margin gains key concerns for Bosch

The stock of auto component major Bosch has been hitting its 52-week highs repeatedly over the past week. This is on the back of a better-than-expected operational performance in the December quarter. Further, hopes of an improved gross margin performance have led to an upward revision of earnings per share of the company.

While localisation efforts and margin improvement are medium-term positives, the immediate trigger is the healthy Q3 show. The company registered a strong beat on the operating profit margin front with the metric standing at 13.8 per cent, up 190 basis points sequentially and 280 basis points over the year-ago period.

The sequential gains were on the back of strong gross margins which were up 450 basis points. Higher other expenses limited the gains at the operating level. While other expenses were higher quarter on quarter (Q-o-Q) due to seasonality, it was lower than estimates on account of reduced warranty costs, higher forex gains and lower costs due to selling of mobility solutions business in the September quarter.

On the revenue front, the company’s mobility business revenue grew 17 per cent year on year Y-o-Y and this was led by a 20 per cent growth in its mainstay business of powertrain solutions while the automotive aftermarket saw a 9 per cent growth. The mobility or auto business accounts for more than 85 per cent of overall revenues for the company. The beyond mobility business saw a growth of 33 per cent led by a 31 per cent Y-o-Y growth in consumer goods while building technologies posted an 18 per cent growth. In the March quarter of FY24, the company expects a flattish to low single-digit growth led by the impact of general elections and the high base of last year due to pre-buying in the year-ago quarter.

Motilal Oswal Research expects Bosch to outperform the underlying auto industry growth with new order wins and content increases. However, they believe that visibility for margin recovery to over 15 per cent is low. More importantly, Bosch is yet to establish leadership in electric vehicle components in the two-wheeler and passenger vehicle segments.

The brokerage has a neutral rating on the stock. Analysts led by Aniket Mhatre say that valuations were de-rated due to the dilution in its competitive positioning and increasing risk of electric vehicles. While these negative factors are priced in, there are no material catalysts visible for a re-rating of the stock, they add.

ICICI Securities has downgraded the stock. Busudeb Banerjee and Vishakha Maliwal of the brokerage believe that with limited visibility of operating profit margins moving up beyond 14 per cent levels on a sustainable basis, and Bosch set to face the commercial vehicle (CV) industry down-cycle headwinds from mid-FY25 itself, current valuation levels look inflated. With a 35 per cent increase in the stock price in the last three months, we downgrade Bosch to sell from reduce, they add.

Investors should await revenue growth trends, given worries about the CV cycle and consistent margin improvement, as well as traction in the electric vehicle space before considering the stock.