Bosch: Hold

Amidst the continuing slowdown in car and truck/bus sales, Bosch has put up a reasonably good first quarter (January-March 2014) performance. The company’s net sales grew by 11 per cent over the March 2013 quarter to ₹2,431 crore, thanks to strong growth in domestic tractor sales and exports. Cost-control efforts and higher other income pushed profits up by 25 per cent to ₹326 crore.

Although tractor sales may moderate in the coming quarters due to the high base of 2013, the expected recovery in the economy could boost commercial vehicle (CV) and car sales. The prospects appear sanguine for the company, which is a leading supplier of diesel fuel injection products to the auto industry. Bosch’s market leadership position, its technological superiority and debt-free status are added positives. Existing investors can continue to hold the stock.

But fresh exposures to the stock can be avoided for now, with the market touching new highs and valuations catapulting.

At its current price, the Bosch stock trades at 37 times its estimated earnings for CY2013-14 (January-December) and 30 times its estimated earnings for 2015 (January-December). The one-year forward valuation is at a slight premium to historical averages.

Bosch has over 70 per cent market share in India for diesel fuel injection products such as single/multi-cylinder pumps, distributor pumps and electronic injection control units (common rail systems). It derives more than half its revenues from supplies to diesel engines and caters to segments such as passenger cars, CVs, tractors and locomotives.

With trucks and buses forming a chunk of the diesel segment, the company has borne the brunt of the slowdown in domestic sales of these vehicles in the last two years.

After a dream run in the years following the 2008 crisis, the sales volumes of medium and heavy CVs dropped by about 25 per cent each year in 2012-13 and 2013-14. While light CV sales did hold up a bit initially, the sales of these vehicles also plunged in 2013-14.

But considering that CV sales have been at their longest-ever cyclical trough, a reversal can be expected sooner than later.

To help improve sentiment, the new government is likely to continue with the excise duty cuts for the auto industry announced during the interim budget. Besides, measures to kick-start investments should help increase freight requirements and, thus, truck sales.

The diesel passenger vehicle market will also help add to volumes for the company once car and utility vehicle sales pick up. Although the advantage over petrol vehicles has diminished after the decision to slowly link diesel prices to market rates, the share of diesel cars and utility vehicles in the passenger vehicle market is expected to remain steady at around 45 per cent.

Advances in diesel engine technology, such as the use of common rails, higher thrust and lower noise levels, will continue to attract customers. Even during a slowdown year, Bosch has tasted success through newly launched diesel vehicles such as the Honda Amaze.

On the operating front, the company should benefit from better margins due to greater localisation efforts, a thrust on exports and cost-control measures. From about 20 per cent, operating margin has dropped to the 16-17 per cent levels in last one-two years predominantly due to the depreciation of the rupee. While some of Bosch’s conventional products have 80-95 per cent localisation, its overall import content is still at 40 per cent, leaving enough room for reduction.

A move to BS IV + /BS V emission norms in 2015-16 could also help margin expansion for the company over the medium term.

A diversified revenue base also works in Bosch’s favour. While starters and generators, gasoline systems and car multimedia devices (which bring in a small portion of the revenues) are linked to auto sales, Bosch's wide distribution and service network in the automotive after-markets is a positive.

Revenues in this segment are independent of auto sales cycles. In addition, the company derives about 15 per cent of its revenues from the manufacture of packaging machines, power tools and electronic security systems (CCTV, fire-alarms, access control systems).

The company has also started assembling photovoltaic modules and producing thermal solar panels. While power tools, dependent as they are on the construction sector, have been sluggish in recent times, areas such as energy, security systems and packaging have done well in the first quarter. Bosch expects the strong growth in these segments to continue.