Q4 showing, valuations to keep auto component major Bosch under stress

Auto component major Bosch posted a subdued performance in the March quarter leading to the selloff. The Q4FY24 revenue and operating profit came in at Rs 4,230 crore and Rs 560 crore, respectively, while the adjusted net profit (also Rs 560 crore) was boosted by low taxes and high other income.

A weak tractor demand dented growth, even as revenue, operating profit, and adjusted net profit rose 4 per cent, 7 per cent and 42 per cent year-on-year (Y-o-Y). The FY24 revenue, operating profit, and adjusted net profit grew 13 per cent, 21 per cent, and 25 per cent respectively Y-o-Y.

The mobility segment grew 2.7 per cent Y-o-Y in Q4FY24, due to 9.4 per cent growth in the aftermarket division and 17.6 per cent growth in two-wheelers. Power segment remained relatively flat. Consumer goods and building technologies grew 16 per cent and 17 per cent Y-o-Y respectively.

The gross margin contracted 150 basis points Y-o-Y (down 320 basis points Q-o-Q) to 34.5 per cent and this was partly offset by lower other expenses as operating profit margins grew 30 basis points Y-o-Y (down 60 basis points Q-o-Q) to 13.2 per cent. Operating cash flow and free cash flow for FY24 grew 3 per cent and 61 per cent Y-o-Y respectively.

In FY24, mobility segment grew 11 per cent Y-o-Y. The aftermarket segment grew 10.2 per cent Y-o-Y to record its highest-ever sales, led by demand for spark plugs, filters, and lubricants.

The independent aftermarket contributes 63 per cent of business with a footprint across 650 districts with 15,000 different parts. This division has also ventured into the home segment with the launch of inverter batteries for power backup. In FY24, the two-wheeler segment posted 19.2 per cent Y-o-Y growth. Consumer goods business grew 15.8 per cent Y-o-Y. The building technology solution posted 17 per cent Y-o-Y growth due to the installation of higher numbers of security systems. Bosch is looking at cordless tools, industrial tools, with a focus on medium and entry-level segments.

The original equipment supplier diagnostics business is being hived off and may be sold, as part of a restructuring exercise undertaken by the Dutch parent. The parent may also divest the building technology business in H1 FY25.

The management expects overall auto industry growth to moderate in CY24 due to a high base. FY25 revenue growth will be similar to FY24. Q1FY25 is expected to be slow but demand will pick up from Q2FY25. Hydrogen internal combustion technologies for commercial vehicles could catch on with up to 15 per cent penetration in this category by 2030. The company is looking at more content localisation.

The management said it has a good share of orders in two-wheeler electric vehicles (EV) and it is in discussions with multiple OEMs for the supply of e-axles, and electronics for EVs. 

Electrification of 2Ws/3Ws opens up new growth avenues. The contribution of exports stood at 8.1 per cent in FY24 and should increase in the future. The capex will sustain at Rs 400-600 crore per annum.

The operating profit margin may recover to nearly 15 per cent in FY25/FY26 from around 12.5 per cent in FY24. This could result in 24 per cent earnings growth over FY24-26 assuming 13 per cent revenue growth.  The stock is fully valued and the Q4 underperformance led to a drop of 1.9 per cent. Target prices are well below the current Rs 30,975 levels, implying a downside.